Texas Roadhouse(TXRH) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1 — Financial Statements (Unaudited) The company's unaudited financial statements for Q2 2020 reflect significant operational and financial impacts from the COVID-19 pandemic Condensed Consolidated Balance Sheets The balance sheet shows a significant increase in cash and total liabilities, primarily due to increased borrowings on the revolving credit facility Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------- | :-------------- | :---------------- | | Cash and cash equivalents | $282,493 | $107,879 | | Total current assets | $359,377 | $247,899 | | Total assets | $2,130,484 | $1,983,565 | | Total current liabilities | $402,242 | $417,220 | | Total liabilities | $1,247,765 | $1,052,396 | | Total equity | $882,719 | $931,169 | - Cash and cash equivalents significantly increased to $282.5 million as of June 30, 2020, from $107.9 million at December 31, 2019, primarily due to increased borrowings on the revolving credit facility[12] Condensed Consolidated Statements of Income (Loss) The income statement reflects a substantial revenue decrease and a shift from net income to a net loss due to the COVID-19 pandemic's impact Key Income Statement Data (in thousands, except per share data) | Metric | 13 Weeks Ended June 30, 2020 | 13 Weeks Ended June 25, 2019 | 26 Weeks Ended June 30, 2020 | 26 Weeks Ended June 25, 2019 | | :----------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total revenue | $476,425 | $689,828 | $1,128,949 | $1,380,436 | | (Loss) income from operations | $(47,318) | $53,283 | $(31,528) | $113,728 | | Net (loss) income attributable to Texas Roadhouse, Inc. and subsidiaries | $(33,553) | $44,845 | $(17,524) | $95,235 | | Basic EPS | $(0.48) | $0.63 | $(0.25) | $1.33 | | Diluted EPS | $(0.48) | $0.63 | $(0.25) | $1.32 | - Total revenue decreased by 30.9% for the 13 weeks ended June 30, 2020, and by 18.2% for the 26 weeks ended June 30, 2020, compared to the prior year periods, primarily due to the impact of the COVID-19 pandemic[13] - The company reported a net loss of $33.6 million for Q2 2020 and $17.5 million for 2020 YTD, a significant decline from net income in the prior year periods, resulting in negative basic and diluted EPS[13] Condensed Consolidated Statement of Stockholders' Equity Total equity decreased due to a net loss and declared dividends, with dividend and share repurchase programs suspended to preserve cash Changes in Stockholders' Equity (in thousands) | Metric | 13 Weeks Ended June 30, 2020 | 26 Weeks Ended June 30, 2020 | | :----------------------------------------- | :--------------------------- | :--------------------------- | | Balance, March 31, 2020 / December 31, 2019 | $910,743 | $931,169 | | Net (loss) income | $(33,553) | $(17,524) | | Dividends declared | — | $(24,989) | | Repurchase of shares of common stock | — | $(12,621) | | Balance, June 30, 2020 | $882,719 | $882,719 | - Total equity decreased from $931.2 million at December 31, 2019, to $882.7 million at June 30, 2020, primarily due to the net loss and dividends declared in 2020 YTD[14][16] - The company suspended quarterly cash dividends after March 27, 2020, and share repurchase activity on March 17, 2020, to preserve cash flow due to the pandemic[16] Condensed Consolidated Statements of Cash Flows Operating cash flow decreased significantly, while financing cash flow increased due to borrowings under the revolving credit facility Cash Flow Summary (in thousands) | Activity | 26 Weeks Ended June 30, 2020 | 26 Weeks Ended June 25, 2019 | | :---------------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $61,845 | $187,016 | | Net cash used in investing activities | $(79,666) | $(87,782) | | Net cash provided by (used in) financing activities | $192,435 | $(164,520) | | Net increase (decrease) in cash and cash equivalents | $174,614 | $(65,286) | | Cash and cash equivalents—end of period | $282,493 | $144,839 | - Net cash provided by operating activities decreased significantly to $61.8 million in 2020 YTD from $187.0 million in 2019 YTD, primarily due to a decrease in net income[18][151] - Net cash provided by financing activities increased to $192.4 million in 2020 YTD, compared to cash used in financing activities of $164.5 million in 2019 YTD, driven by increased borrowings under the revolving credit facility and decreased share repurchases and dividends[18][158] Notes to Condensed Consolidated Financial Statements The notes detail the basis of presentation, accounting changes, debt, revenue, taxes, and other financial statement components (1) Basis of Presentation The company details its operational status, including restaurant re-openings and the new hybrid To-Go and dining model - As of June 30, 2020, the company owned and operated 521 restaurants and franchised 96, with 499 company-owned restaurants having re-opened dining rooms under limited capacity due to the COVID-19 pandemic[21][27] - The company has developed a hybrid operating model combining limited capacity dining with enhanced To-Go services, including curbside and drive-up options, and implemented safety measures like booth partitions and increased sanitation[28] - Operating results are significantly impacted by reduced traffic and capacity restrictions, with To-Go sales not expected to generate similar profit margins or cash flows as the normal operating model[29] (2) Recent Accounting Pronouncements The company adopted several new accounting standards with no significant impact and is assessing others - The company adopted ASU 2016-13 (Financial Instruments – Credit Losses), ASU 2017-04 (Goodwill Impairment), and ASU 2018-13 (Fair Value Measurement) as of the beginning of its 2020 fiscal year, none of which had a significant impact on the financial statements[30][33][34] - The company is currently assessing the impact of ASU 2019-12 (Income Taxes) and ASU 2020-04 (Reference Rate Reform) on its consolidated financial statements[35][36] (3) Long-term Debt The company amended its credit facility to increase borrowings, maintaining compliance with all financial covenants - On May 11, 2020, the revolving credit facility was amended to provide an incremental facility of up to $82.5 million, reducing the total available increase option to $200.0 million[37] - As of June 30, 2020, the company had $190.0 million outstanding on the original revolving credit facility (long-term debt) and $50.0 million outstanding on the incremental facility (current maturities of long-term debt)[38][40] - The weighted-average interest rate for the combined $240.0 million borrowings on the revolving credit facility was 2.01% as of June 30, 2020, and the company was in compliance with all financial covenants[41] (4) Revenue Revenue from restaurant sales and franchise royalties declined, while deferred revenue from gift cards also decreased Revenue Disaggregation (in thousands) | Revenue Source | 13 Weeks Ended June 30, 2020 | 13 Weeks Ended June 25, 2019 | 26 Weeks Ended June 30, 2020 | 26 Weeks Ended June 25, 2019 | | :------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Restaurant and other sales | $473,090 | $684,373 | $1,120,716 | $1,369,490 | | Franchise royalties | $2,766 | $4,814 | $7,054 | $9,671 | | Franchise fees | $569 | $641 | $1,179 | $1,275 | | Total revenue | $476,425 | $689,828 | $1,128,949 | $1,380,436 | - Deferred revenue from gift cards decreased from $209.3 million at December 31, 2019, to $156.4 million at June 30, 2020, with $12.6 million and $86.1 million recognized as sales for the 13 and 26 weeks ended June 30, 2020, respectively[42] (5) Income Taxes The effective tax rate shifted from an expense to a benefit due to pre-tax losses amplifying the impact of tax credits Effective Tax Rate | Period | Effective Tax Rate | | :------------------------ | :----------------- | | 13 Weeks Ended June 30, 2020 | 31.2% (benefit) | | 13 Weeks Ended June 25, 2019 | 13.7% (expense) | | 26 Weeks Ended June 30, 2020 | 51.4% (benefit) | | 26 Weeks Ended June 25, 2019 | 14.3% (expense) | - The effective tax rate shifted to a benefit in Q2 2020 and 2020 YTD, primarily due to a pre-tax loss in both periods, which significantly amplified the impact of FICA tip and Work Opportunity Tax Credits[43][44] (6) Commitments and Contingencies The company has significant capital project commitments and contingent liabilities for lease guarantees - Estimated capital project commitments were $133.2 million at June 30, 2020, with construction delayed on all restaurants not substantially complete at the onset of the pandemic[46] - The company is contingently liable for $13.5 million for seven lease guarantees as of June 30, 2020, primarily for assigned restaurant leases where the company remains liable if the franchisee defaults[47][48] - No material liabilities have been recorded for lease guarantees as the likelihood of default is deemed less than probable[47] (7) Related Party Transactions A small number of restaurants are partly owned by company officers, generating minor fee revenue - As of June 30, 2020, six franchise restaurants and one majority-owned company restaurant were partly owned by company officers, generating fees of $0.2 million (Q2 2020) and $0.5 million (2020 YTD) from these entities[51] (8) Earnings Per Share The company reported a net loss per share, with certain nonvested stock excluded from diluted EPS calculations as their effect was anti-dilutive Earnings Per Share and Weighted-Average Shares Outstanding (in thousands) | Metric | 13 Weeks Ended June 30, 2020 | 13 Weeks Ended June 25, 2019 | 26 Weeks Ended June 30, 2020 | 26 Weeks Ended June 25, 2019 | | :----------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net (loss) income attributable to Texas Roadhouse, Inc. and subsidiaries | $(33,553) | $44,845 | $(17,524) | $95,235 | | Basic EPS | $(0.48) | $0.63 | $(0.25) | $1.33 | | Diluted EPS | $(0.48) | $0.63 | $(0.25) | $1.32 | | Weighted-average common shares outstanding (Basic) | 69,361 | 71,362 | 69,391 | 71,558 | | Weighted-average common shares outstanding (Diluted) | 69,361 | 71,733 | 69,391 | 71,961 | - For the 13 and 26 weeks ended June 30, 2020, 367,968 and 400,291 shares of nonvested stock, respectively, were excluded from diluted EPS calculations as their effect would have been anti-dilutive due to the company's net loss position[53] (9) Fair Value Measurements The company reports fair value measurements for its deferred compensation plan and nonrecurring impairment losses Fair Value Measurements (in thousands) | Asset/Liability | Level | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :---- | :------------ | :---------------- | | Deferred compensation plan—assets | 1 | $45,542 | $44,623 | | Deferred compensation plan—liabilities | 1 | $(45,473) | $(44,679) | - Nonrecurring fair value measurements for 2020 YTD included a $0.5 million loss from the impairment of operating lease right-of-use assets for a closed and a relocated store, and a $0.5 million loss from reducing a China joint venture investment to fair value[59][60] (10) Share Based Compensation Share-based compensation expense decreased, and no expense was recognized for unvested PSUs due to a zero estimated payout ratio Share-Based Compensation Expense (in thousands) | Expense Category | 13 Weeks Ended June 30, 2020 | 13 Weeks Ended June 25, 2019 | 26 Weeks Ended June 30, 2020 | 26 Weeks Ended June 25, 2019 | | :---------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Labor expense | $2,532 | $2,213 | $4,920 | $4,349 | | General and administrative expense | $4,711 | $5,528 | $9,570 | $12,524 | | Total share-based compensation expense | $7,243 | $7,741 | $14,490 | $16,873 | - The total intrinsic value of PSUs vested during the 26 weeks ended June 30, 2020, was $5.4 million, down from $8.8 million in the prior year period[64] - No expense was recognized for unvested PSUs at June 30, 2020, as the estimated payout ratio was zero[65] (11) Stock Repurchase Program The company suspended its stock repurchase program in March 2020 to preserve cash flow during the pandemic - The Board of Directors approved a $250.0 million stock repurchase program on May 31, 2019, replacing a previous program[66] - The company repurchased 252,409 shares for $12.6 million in 2020 YTD but suspended all share repurchase activity on March 17, 2020, to preserve cash flow due to the pandemic[67] - As of June 30, 2020, $147.8 million remained authorized under the stock repurchase program[67] Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impact of the COVID-19 pandemic on financial condition, operational results, and liquidity for Q2 2020 CAUTIONARY STATEMENT The report contains forward-looking statements subject to risks and uncertainties, particularly regarding the COVID-19 pandemic - The report contains forward-looking statements subject to risks and uncertainties, particularly regarding the COVID-19 pandemic's impact, and advises readers to consider risk factors from SEC filings[68] RECENT DEVELOPMENTS The company details its operational and financial responses to the COVID-19 pandemic, including dining room re-openings and liquidity measures - The COVID-19 pandemic led to temporary dining room closures and a shift to To-Go/curbside service by March 31, 2020, with 499 of 521 company-owned restaurants re-opening dining rooms at limited capacity by June 30, 2020[69] - The company implemented a hybrid operating model with enhanced To-Go services, design changes for increased To-Go sales, expanded outdoor seating, booth partitions, increased sanitation, and daily employee health checks[70] - Financial flexibility measures included decreasing planned new restaurants, suspending quarterly cash dividends and share repurchases, expanding the revolving credit facility by $240 million, and reducing executive compensation[75] OVERVIEW The company operates 617 restaurants globally and holds minority equity interests in several domestic and international locations - Texas Roadhouse, Inc. operates 617 restaurants across 49 states and ten foreign countries as of June 30, 2020, including 521 company-owned (489 Texas Roadhouse, 30 Bubba's 33, 2 other) and 96 franchised restaurants[75][76] - The company holds minority equity interests in 24 domestic franchise restaurants (5.0% to 10.0%) and a 40% equity interest in four non-Texas Roadhouse restaurants in China[76] Presentation of Financial and Operating Data This section defines the reporting periods for Q2 2020 and 2020 YTD - Q2 2020 refers to the 13 weeks ended June 30, 2020, and 2020 YTD refers to the 26 weeks ended June 30, 2020[79] Long-Term Strategies to Grow Earnings Per Share and Create Shareholder Value The company's long-term strategies focus on restaurant expansion, profitability, and returning capital, though some activities are currently suspended - Long-term strategies include expanding the restaurant base, maintaining/improving restaurant-level profitability, leveraging scalable infrastructure, and returning capital to shareholders (dividends, stock repurchases)[80][87][88][89] - In 2020 YTD, eight company restaurants opened, and construction was delayed on others due to the pandemic, with 14 restaurants resuming or approved to resume construction by June 30, 2020[81] - The company suspended quarterly cash dividends and share repurchase activity after March 27, 2020, to preserve cash flow, and does not expect to resume them until cash flows from operations stabilize[89][90] Key Measures We Use to Evaluate Our Company The company evaluates performance using metrics such as restaurant openings, comparable sales growth, and restaurant margin - Key measures include Number of Restaurant Openings, Comparable Restaurant Sales Growth, Average Unit Volume, Store Weeks, and Restaurant Margin (a non-GAAP measure reflecting restaurant-level operating efficiency)[91][92][93][94][95] Other Key Definitions This section provides definitions for key financial line items used throughout the report - Definitions are provided for key financial line items such as Restaurant and Other Sales, Franchise Royalties and Fees, Restaurant Cost of Sales, Restaurant Labor Expenses, Restaurant Rent Expense, Restaurant Other Operating Expenses, Pre-opening Expenses, Depreciation and Amortization Expenses, Impairment and Closure Costs, Net, General and Administrative Expenses, Interest Expense (Income), Net, Equity (Loss) Income from Unconsolidated Affiliates, and Net Income Attributable to Noncontrolling Interests[96][97][99][100][101][102][103][104][105][106][107][108][111] Q2 2020 Financial Highlights The company experienced significant declines in revenue, restaurant margin, and net income in Q2 2020 compared to the prior year Q2 2020 Financial Highlights (in millions, except per share data) | Metric | Q2 2020 | Q2 2019 | Change ($) | Change (%) | | :--------------------- | :----------- | :----------- | :----------- | :----------- | | Total revenue | $476.4 | $689.8 | $(213.4) | (30.9)% | | Restaurant margin dollars | $11.8 | $120.8 | $(108.9) | (90.2)% | | Restaurant margin (% of sales) | 2.5% | 17.6% | (15.1) pp | | | Net (loss) income | $(33.6) | $44.8 | $(78.4) | (174.8)% | | Diluted (loss) earnings per share | $(0.48) | $0.63 | $(1.11) | (177.4)% | - Comparable restaurant sales decreased by 32.8% in Q2 2020, primarily due to temporary dining room closures and subsequent limited capacity re-openings caused by the pandemic[112] Results of Operations This section provides a detailed analysis of the company's operational results, including income statements and restaurant activity Consolidated Statements of Income (Loss) The consolidated income statement shows a shift to an operating loss, with costs as a percentage of sales increasing significantly Consolidated Statements of Income (Loss) Summary (in thousands) | Metric | 13 Weeks Ended June 30, 2020 | 13 Weeks Ended June 25, 2019 | 26 Weeks Ended June 30, 2020 | 26 Weeks Ended June 25, 2019 | | :----------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total revenue | $476,425 | $689,828 | $1,128,949 | $1,380,436 | | Cost of sales (% of restaurant sales) | 34.7% | 32.3% | 33.4% | 32.5% | | Labor (% of restaurant sales) | 41.1% | 32.9% | 38.9% | 32.8% | | Rent (% of restaurant sales) | 2.8% | 1.9% | 2.4% | 1.9% | | Other operating (% of restaurant sales) | 18.9% | 15.2% | 17.3% | 15.0% | | General and administrative (% of total revenue) | 6.2% | 5.8% | 5.5% | 5.5% | | (Loss) income from operations | $(47,318) | $53,283 | $(31,528) | $113,728 | | Net (loss) income attributable to Texas Roadhouse, Inc. and subsidiaries | $(33,553) | $44,845 | $(17,524) | $95,235 | Reconciliation of (Loss) Income from Operations to Restaurant Margin Restaurant margin, a non-GAAP measure, declined sharply in both absolute dollars and as a percentage of sales Restaurant Margin Reconciliation (in thousands) | Metric | 13 Weeks Ended June 30, 2020 | 13 Weeks Ended June 25, 2019 | 26 Weeks Ended June 30, 2020 | 26 Weeks Ended June 25, 2019 | | :----------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | (Loss) income from operations | $(47,318) | $53,283 | $(31,528) | $113,728 | | Restaurant margin | $11,828 | $120,755 | $90,435 | $243,350 | | Restaurant margin $/store week | $1,754 | $18,692 | $6,717 | $18,943 | | Restaurant margin (% of restaurant and other sales) | 2.5% | 17.6% | 8.1% | 17.8% | - Restaurant margin dollars decreased by 90.2% in Q2 2020 and 62.9% in 2020 YTD, with the margin percentage significantly declining due to lower sales and higher operating costs[119] Restaurant Unit Activity The total restaurant count increased by a net of six units in the first half of 2020 Restaurant Unit Activity | Category | Balance at Dec 31, 2019 | Openings | Closings | Balance at Jun 30, 2020 | | :---------------------------- | :---------------------- | :------- | :------- | :---------------------- | | Total | 611 | 9 | (3) | 617 | | Company - Texas Roadhouse | 581 | 6 | (1) | 585 | | Company - Bubba's 33 | 28 | 2 | — | 30 | | Franchise - Texas Roadhouse - U.S. | 70 | 1 | — | 70 | | Franchise - Texas Roadhouse - International | 23 | — | (2) | 26 | - The total restaurant count increased from 611 at December 31, 2019, to 617 at June 30, 2020, with 8 company openings and 1 domestic franchise opening, offset by 1 company closing and 2 international franchise closings[123] Q2 2020 vs. Q2 2019 and 2020 YTD vs. 2019 YTD Analysis This section provides a detailed comparative analysis of revenue and expense line items for Q2 and YTD periods Restaurant and Other Sales Restaurant sales decreased significantly due to a sharp decline in average unit volume and comparable sales, despite an increase in store weeks Company Restaurant Sales Drivers | Metric | Q2 2020 | Q2 2019 | 2020 YTD | 2019 YTD | | :----------------------------------------- | :-------- | :-------- | :-------- | :-------- | | Increase in store weeks | 4.4 % | 5.2 % | 4.8 % | 5.4 % | | (Decrease) increase in average unit volume | (32.5)% | 4.2 % | (20.4)% | 4.4 % | | Total (decrease) increase in restaurant sales | (31.0)% | 9.8 % | (18.2)% | 10.0 % | | Comparable restaurant sales growth | (32.8)% | 4.7 % | (20.5)% | 5.0 % | - Restaurant and other sales decreased by 30.9% in Q2 2020 and 18.2% in 2020 YTD, primarily due to a decline in comparable restaurant sales driven by the pandemic's impact on dining room operations[124][126] - Comparable restaurant sales improved monthly in Q2 2020, decreasing 46.7% in April, 41.9% in May, and 14.1% in June, as dining rooms gradually re-opened[129] Franchise Royalties and Fees Franchise revenue declined due to lower sales at franchise locations, with the company providing some royalty waivers and deferrals - Franchise royalties and fees decreased by 38.9% in Q2 2020 and 24.8% in 2020 YTD, driven by lower average unit volumes and comparable sales decreases at domestic and international franchise stores[132] - The company waived $0.1 million in royalties for international franchisees in Q2 2020 and $0.3 million in 2020 YTD due to the pandemic, and made royalty deferral arrangements for many franchisees[133] Restaurant Cost of Sales Cost of sales as a percentage of sales increased due to menu mix changes and commodity inflation, particularly in beef costs - Restaurant cost of sales, as a percentage of restaurant and other sales, increased to 34.7% in Q2 2020 (from 32.3%) and 33.4% in 2020 YTD (from 32.5%), primarily due to menu item mix changes and 2.9% commodity inflation in Q2 2020, driven by higher beef costs[135] Restaurant Labor Expenses Labor expenses as a percentage of sales rose sharply due to higher wage rates for To-Go staff and increased pandemic-related benefits - Restaurant labor expenses, as a percentage of sales, increased to 41.1% in Q2 2020 (from 32.9%) and 38.9% in 2020 YTD (from 32.8%), mainly due to higher wage rates (employees shifting to non-tipped roles for To-Go), increased pandemic-related benefits ($4.7M in Q2, $15.4M in YTD), and higher health insurance costs[136][137] Restaurant Rent Expense Rent expense as a percentage of sales increased as a result of decreased average unit volume - Restaurant rent expense, as a percentage of sales, increased to 2.8% in Q2 2020 (from 1.9%) and 2.4% in 2020 YTD (from 1.9%), driven by decreased average unit volume and higher rent expense at newer restaurants[140] Restaurant Other Operating Expenses Other operating expenses as a percentage of sales grew due to lower sales volumes and higher costs for supplies and PPE - Restaurant other operating expenses, as a percentage of sales, increased to 18.9% in Q2 2020 (from 15.2%) and 17.3% in 2020 YTD (from 15.0%), due to lower average unit volumes, higher To-Go supplies, PPE costs, and fixed expenses (utilities, property taxes) increasing as a percentage of reduced sales[141] Restaurant Pre-opening Expenses Pre-opening expenses increased slightly due to the timing of new restaurant openings - Pre-opening expenses increased slightly to $4.3 million in Q2 2020 (from $4.2 million) and $9.4 million in 2020 YTD (from $8.1 million), primarily due to the timing of restaurant openings[142] Depreciation and Amortization Expense Depreciation as a percentage of revenue increased due to lower sales volumes and higher depreciation from new restaurants - Depreciation and amortization, as a percentage of total revenue, increased to 6.1% in Q2 2020 (from 4.1%) and 5.1% in 2020 YTD (from 4.1%), mainly due to decreased average unit volume and higher depreciation at new restaurants[143] Impairment and Closure Costs, Net The company recorded a net gain in Q2 from a lease settlement, though it incurred net costs for the year-to-date period - Impairment and closure costs, net, was a gain of $0.4 million in Q2 2020 due to a favorable lease settlement, but a cost of $0.2 million in 2020 YTD, including impairment of operating lease right-of-use assets for a closed and a relocated restaurant[144] General and Administrative Expenses G&A expenses as a percentage of revenue increased due to lower sales and a legal settlement, despite cost-saving measures - General and administrative expenses, as a percentage of total revenue, increased to 6.2% in Q2 2020 (from 5.8%), driven by lower average unit volume and a $1.5 million legal settlement, partially offset by reduced conference, salary, incentive, and travel costs[145] - Executive and leadership teams voluntarily reduced salaries and bonuses, and non-employee Board members forgave fees for fiscal year 2020 due to the pandemic[146] Interest Expense (Income), Net The company incurred net interest expense due to increased borrowings on its credit facility - Interest expense increased to $1.0 million in Q2 2020 (from $0.7 million income) and $1.1 million in 2020 YTD (from $1.4 million income), primarily due to additional borrowings on the credit facility and reduced earnings on cash[147] Equity (Loss) Income from Unconsolidated Affiliates Equity income shifted to a loss, primarily due to an impairment charge on a foreign joint venture investment - Equity income shifted to a loss of $0.1 million in Q2 2020 (from $0.1 million income) and $0.6 million in 2020 YTD (from $0.3 million income), mainly due to an impairment charge related to a foreign joint venture investment in Q1 2020[148][149] Income Tax (Benefit) Expense The effective tax rate became a benefit due to pre-tax losses amplifying the value of tax credits - The effective tax rate was a benefit of 31.2% in Q2 2020 (vs. 13.7% expense) and 51.4% in 2020 YTD (vs. 14.3% expense), primarily due to the significant decrease in pre-tax income, which amplified the impact of FICA tip and Work Opportunity Tax Credits[150] Liquidity and Capital Resources The company's liquidity was impacted by lower operating cash flow but bolstered by significant borrowings from its credit facility Summary of Cash Flows (in thousands) | Activity | 26 Weeks Ended June 30, 2020 | 26 Weeks Ended June 25, 2019 | | :---------------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $61,845 | $187,016 | | Net cash used in investing activities | $(79,666) | $(87,782) | | Net cash provided by (used in) financing activities | $192,435 | $(164,520) | | Net increase (decrease) in cash and cash equivalents | $174,614 | $(65,286) | - Net cash provided by operating activities decreased significantly due to lower net income, and the company expects cash from operations to remain below historic levels until dining rooms re-open at full capacity[151][152] - Net cash provided by financing activities increased due to $240.0 million in borrowings from the revolving credit facility to bolster cash and enhance financial flexibility, alongside suspended share repurchases and dividends[158][159][160][161] Contractual Obligations as of June 30, 2020 (in thousands) | Obligation Category | Total | Less than 1 year | 1 - 3 Years | 3 - 5 Years | More than 5 years | | :------------------------ | :----------- | :--------------- | :----------- | :----------- | :---------------- | | Long-term debt obligation | $240,000 | $50,000 | $190,000 | $— | $— | | Operating lease obligations | $1,018,189 | $54,071 | $110,946 | $110,465 | $742,707 | | Capital obligations | $133,244 | $133,244 | $— | $— | $— | | Total contractual obligations | $1,406,522 | $242,292 | $304,985 | $111,036 | $748,209 | Item 3 — Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate changes on its variable-rate debt and fluctuations in commodity prices - The company is exposed to interest rate risk on its variable-rate revolving credit facility, with $240.0 million outstanding as of June 30, 2020, at a weighted-average interest rate of 2.01%; a one percentage point increase in interest rates would increase annual interest expense by $2.4 million[175][176][177] - Commodity price risk, especially for beef, is managed through purchasing and pricing contract techniques, but the company does not currently use financial instruments to hedge these prices[179] - The company faces business risk due to high dependency on three beef vendors; disruptions could lead to supply shortages, higher costs, or lost sales[180] Item 4 — Controls and Procedures Management concluded that disclosure controls and procedures were effective and reported no significant changes in internal control - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[181] - There were no significant changes in the company's internal control over financial reporting during the period covered by the report[182] PART II. OTHER INFORMATION Item 1 — Legal Proceedings The company is involved in ordinary course litigation that is not expected to have a material adverse effect - The company is a defendant in ordinary course litigation (e.g., 'slip and fall,' employment claims, alcohol service, food quality), most of which are covered by insurance[185] - No current litigation is believed to have a material adverse effect on the business[185] Item 1A — Risk Factors The COVID-19 pandemic continues to pose significant risks to the company's business, financial condition, and operational results - The COVID-19 pandemic has significantly disrupted operations, leading to temporary dining room closures and limited capacity re-openings, impacting traffic and operating results[188][190] - The pandemic has adversely affected the ability to open new restaurants, with construction delays, and may require further increases to the credit facility or other liquidity sources if impacts persist[193][194] - Risks include potential supply chain disruptions, challenges in retaining experienced staff due to reduced staffing levels and compensation actions, and further operational disruptions if employees are diagnosed with COVID-19[195][196][197] Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds The company's stock repurchase program was suspended in March 2020 to enhance financial flexibility - The Board of Directors approved a $250.0 million stock repurchase program on May 31, 2019, with $147.8 million remaining authorized as of June 30, 2020[198] - In 2020 YTD, the company repurchased 252,409 shares for $12.6 million, but suspended all share repurchase activity on March 17, 2020, to enhance financial flexibility during the pandemic[198] Item 3 — Defaults Upon Senior Securities This section states that there were no defaults upon senior securities - No defaults upon senior securities were reported[199] Item 4 — Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[201] Item 5 — Other Information This section states that there is no other information to report - No other information was reported[202] Item 6 — Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements, certifications, and XBRL documents - Exhibits include amendments to employment agreements, the First Amendment to the Amended and Restated Credit Agreement, Section 302 and 906 certifications, and various XBRL documents[203] Signatures The report is certified by the signatures of the principal executive and financial officers - The report is signed by W. Kent Taylor, Chairman, Chief Executive Officer and President, and Tonya R. Robinson, Chief Financial Officer, on August 7, 2020[207]