DEL TACO RESTAURANTS, INC., 10-Q filed on 7/29/2019
Quarterly Report
v3.19.2
Document and Entity Information - shares
6 Months Ended
Jun. 18, 2019
Jul. 25, 2019
Document Information [Line Items]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Jun. 18, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q2  
Entity Registrant Name Del Taco Restaurants, Inc.  
Entity Central Index Key 0001585583  
Current Fiscal Year End Date --12-31  
Entity Filer Category Accelerated Filer  
Entity Common Stock, Shares Outstanding   37,056,452
Entity Emerging Growth Company false  
Entity Small Business false  
Entity Current Reporting Status Yes  
Entity Shell Company false  
v3.19.2
Consolidated Balance Sheets - USD ($)
$ in Thousands
Jun. 18, 2019
Mar. 26, 2019
Jan. 02, 2019
Jan. 01, 2019
Jun. 19, 2018
Mar. 27, 2018
Jan. 02, 2018
Current assets:              
Cash and cash equivalents $ 5,250   $ 7,153 $ 7,153 $ 13,146   $ 6,559
Accounts and other receivables, net 2,269   3,167 3,167      
Inventories 2,831   2,932 2,932      
Prepaid expenses and other current assets 2,960   2,371 4,935      
Assets held for sale 0   14,794 14,794      
Total current assets 13,310   30,417 32,981      
Property and equipment, net 153,498   147,590 161,429      
Operating lease right-of-use assets 228,763   218,855 0      
Goodwill 324,120   321,531 321,531      
Trademarks 220,300   220,300 220,300      
Intangible assets, net 11,370   10,931 18,507      
Other assets, net 3,994   4,208 4,208      
Total assets 955,355   953,832 758,956      
Current liabilities:              
Accounts payable 19,688   19,877 19,877      
Other accrued liabilities 35,094   34,360 34,785      
Current portion of finance lease obligations, other debt and deemed landlord financing liabilities 423   486 1,033      
Current portion of operating lease liabilities 19,861   17,303 0      
Total current liabilities 75,066   72,026 55,695      
Long-term debt, finance lease obligations, other debt and deemed landlord financing liabilities, excluding current portion, net 146,587   159,624 178,664      
Operating lease liabilities, excluding current portion 225,100   213,313 0      
Deferred income taxes 69,958   70,179 69,471      
Other non-current liabilities 15,336   14,504 32,852      
Total liabilities 532,047   529,646 336,682      
Commitments and contingencies        
Shareholders’ equity:              
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding 0   0 0      
Common stock, $0.0001 par value; 400,000,000 shares authorized; 36,795,532 shares issued and outstanding at June 18, 2019; 37,305,342 shares issued and outstanding at January 1, 2019 4   4 4      
Additional paid-in capital 332,769   336,941 336,941      
Accumulated other comprehensive (loss) income (43)   180 180      
Retained earnings 90,578   87,061 85,149      
Total shareholders’ equity 423,308 $ 422,696 424,186 422,274 $ 421,172 $ 420,160 $ 416,249
Total liabilities and shareholders’ equity $ 955,355   $ 953,832 $ 758,956      
v3.19.2
Consolidated Balance Sheets (Parenthetical) - $ / shares
Jun. 18, 2019
Jan. 01, 2019
Preferred stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Preferred stock, shares authorized (in shares) 1,000,000 1,000,000
Preferred stock, shares issued (in shares) 0 0
Preferred stock, shares outstanding (in shares) 0 0
Common stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Common stock, shares authorized (in shares) 400,000,000 400,000,000
Common stock, shares issued (in shares) 36,795,532 37,305,342
Common stock, shares outstanding (in shares) 36,795,532 37,305,342
v3.19.2
Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 18, 2019
Jun. 19, 2018
Jun. 18, 2019
Jun. 19, 2018
Revenue:        
Total revenue $ 121,460 $ 117,813 $ 235,657 $ 230,367
Restaurant operating expenses:        
Cost, Direct Material 30,855 30,082 59,673 59,055
Labor and related expenses 36,338 35,422 72,238 70,240
Occupancy and other operating expenses 23,703 22,627 48,136 44,613
General and administrative 10,849 10,321 21,314 20,750
Cooperative Advertising Expense 3,459 3,136 6,590 6,072
Depreciation and amortization 5,813 5,847 11,720 11,761
Occupancy and other - franchise subleases and other 993 651 1,847 1,289
Pre-opening costs 155 199 255 641
Impairment of long-lived assets 3,694 1,661 3,694 1,661
Restaurant closure charges, net 490 (24) 1,130 (37)
Loss on disposal of assets, net 594 87 884 180
Total operating expenses 116,943 110,009 227,481 216,225
Income from operations 4,517 7,804 8,176 14,142
Other expense (income), net        
Interest expense 1,722 2,012 3,506 3,922
Other Nonoperating Income (97) 0 (201) 0
Total other expense, net 1,625 2,012 3,305 3,922
Income from operations before provision for income taxes 2,892 5,792 4,871 10,220
Provision for income taxes 800 1,582 1,354 2,781
Net income 2,092 4,210 3,517 7,439
Other comprehensive (loss) income:        
Change in fair value of interest rate cap, net of tax (131) 115 (270) 289
Reclassification of interest rate cap amortization included in net income 26 10 47 16
Total other comprehensive (loss) income, net (105) 125 (223) 305
Comprehensive income $ 1,987 $ 4,335 $ 3,294 $ 7,744
Earnings per share:        
Basic (in dollars per share) $ 0.06 $ 0.11 $ 0.10 $ 0.19
Diluted (in dollars per share) $ 0.06 $ 0.11 $ 0.09 $ 0.19
Weighted-average shares outstanding        
Basic (in shares) 36,821,728 38,299,483 36,988,853 38,370,595
Diluted (in shares) 37,083,799 38,643,873 37,215,059 38,938,106
Product [Member]        
Revenue:        
Revenue $ 112,180 $ 109,800 $ 218,083 $ 214,909
Franchise [Member]        
Revenue:        
Revenue 4,638 4,149 8,703 7,941
Franchise Advertising Contribution [Member]        
Revenue:        
Revenue 3,459 3,136 6,590 6,072
Franchise Sublease Income [Member]        
Revenue:        
Revenue $ 1,183 $ 728 $ 2,281 $ 1,445
v3.19.2
Consolidated Statements of Shareholders' Equity - USD ($)
$ in Thousands
Total
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Loss
Retained Earnings (Accumulated Deficit)
Beginning Balance, Shares at Jan. 02, 2018   38,434,274      
Beginning Balance at Jan. 02, 2018 $ 416,249        
Net income (loss) 3,229       $ 3,229
Other comprehensive income (loss), net of tax 180     $ 180  
Comprehensive income (loss) 3,409        
Stock-based compensation 1,274   $ 1,274    
Issuance of vested restricted stock, net of shares withheld for tax withholding, shares   9,892      
Issuance of vested restricted stock, net of shares withheld for tax withholding (79)   (79)    
Exercise of stock options, shares   4,750      
Exercise of stock options 48   48    
Repurchase of common stocks and warrants, shares   0      
Repurchase of common stocks and warrants (34)   (34)    
Ending Balance, Shares at Mar. 27, 2018   38,448,916      
Ending Balance at Mar. 27, 2018 420,160 $ 4 350,543 194 69,419
Beginning Balance, Shares at Jan. 02, 2018   38,434,274      
Beginning Balance at Jan. 02, 2018 416,249        
Net income (loss) 7,439        
Other comprehensive income (loss), net of tax 305        
Comprehensive income (loss) 7,744        
Issuance of vested restricted stock, net of shares withheld for tax withholding (79)        
Ending Balance, Shares at Jun. 19, 2018   38,091,165      
Ending Balance at Jun. 19, 2018 421,172 $ 4 347,220 319 73,629
Beginning Balance, Shares at Mar. 27, 2018   38,448,916      
Beginning Balance at Mar. 27, 2018 420,160 $ 4 350,543 194 69,419
Net income (loss) 4,210       4,210
Other comprehensive income (loss), net of tax 125     125  
Comprehensive income (loss) 4,335        
Stock-based compensation 1,359   1,359    
Issuance of vested restricted stock, net of shares withheld for tax withholding, shares   42,570      
Exercise of stock options, shares   7,500      
Exercise of stock options 75   75    
Repurchase of common stocks and warrants, shares   (407,821)      
Repurchase of common stocks and warrants (4,757)   (4,757)    
Ending Balance, Shares at Jun. 19, 2018   38,091,165      
Ending Balance at Jun. 19, 2018 421,172 $ 4 347,220 319 73,629
Adjustment for adoption of accounting standards, net of tax 1,912       1,912
Beginning Balance, Shares at Jan. 01, 2019   37,305,342      
Beginning Balance at Jan. 01, 2019 422,274 $ 4 336,941 180 85,149
Net income (loss) 1,425       1,425
Other comprehensive income (loss), net of tax (118)     (118)  
Comprehensive income (loss) 1,307        
Stock-based compensation 1,577   1,577    
Issuance of vested restricted stock, net of shares withheld for tax withholding, shares   13,172      
Issuance of vested restricted stock, net of shares withheld for tax withholding (84)   (84)    
Exercise of stock options, shares   1,500      
Exercise of stock options 16   16    
Repurchase of common stocks and warrants, shares   (270,874)      
Repurchase of common stocks and warrants (4,306)   (4,306)    
Ending Balance, Shares at Mar. 26, 2019   37,049,140      
Ending Balance at Mar. 26, 2019 422,696 $ 4 334,144 62 88,486
Beginning Balance, Shares at Jan. 01, 2019   37,305,342      
Beginning Balance at Jan. 01, 2019 422,274 $ 4 336,941 180 85,149
Net income (loss) 3,517        
Other comprehensive income (loss), net of tax (223)        
Comprehensive income (loss) 3,294        
Issuance of vested restricted stock, net of shares withheld for tax withholding (84)        
Ending Balance, Shares at Jun. 18, 2019   36,795,532      
Ending Balance at Jun. 18, 2019 423,308 $ 4 332,769 (43) 90,578
Beginning Balance, Shares at Mar. 26, 2019   37,049,140      
Beginning Balance at Mar. 26, 2019 422,696 $ 4 334,144 62 88,486
Net income (loss) 2,092       2,092
Other comprehensive income (loss), net of tax (105)     (105)  
Comprehensive income (loss) 1,987        
Stock-based compensation 1,677   1,677    
Issuance of vested restricted stock, net of shares withheld for tax withholding, shares   48,499      
Exercise of stock options, shares   1,500      
Exercise of stock options 15   15    
Repurchase of common stocks and warrants, shares   (303,607)      
Repurchase of common stocks and warrants (3,067)   (3,067)    
Ending Balance, Shares at Jun. 18, 2019   36,795,532      
Ending Balance at Jun. 18, 2019 $ 423,308 $ 4 $ 332,769 $ (43) $ 90,578
v3.19.2
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
6 Months Ended
Jun. 18, 2019
Jun. 19, 2018
Operating activities    
Net income $ 3,517 $ 7,439
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 11,720 11,761
Amortization of favorable and unfavorable lease assets and liabilities, net 0 (250)
Amortization of deferred financing costs, debt discount and interest rate cap 244 194
Amortization of operating lease assets 9,915 0
Stock-based compensation 3,254 2,634
Impairment of long-lived assets 3,694 1,661
Deferred income taxes (138) 471
Loss on disposal of assets, net 884 180
Restaurant closure charges 118 65
Changes in operating assets and liabilities:    
Accounts and other receivables, net 904 1,272
Inventories 101 2
Prepaid expenses and other current assets 1,003 4,117
Other assets (67) (41)
Accounts payable 543 (2,867)
Operating lease liabilities (9,316) 0
Other accrued liabilities (1,446) 1,890
Other non-current liabilities 865 1,195
Net cash provided by operating activities 25,795 29,723
Investing activities    
Purchases of property and equipment (17,895) (17,504)
Proceeds from disposal of property and equipment, net 12,696 573
Purchases of other assets (776) (743)
Acquisition of franchisees (3,120) 0
Proceeds from sale of company-operated restaurants 2,090 0
Net cash used in investing activities (7,005) (17,674)
Financing activities    
Repurchase of common stock and warrants (7,373) (4,791)
Payment of tax withholding related to restricted stock vesting (84) (79)
Payments on finance leases, other debt and deemed landlord financing (267) (714)
Proceeds from revolving credit facility 14,000 5,000
Payments on revolving credit facility (27,000) (5,000)
Proceeds from exercise of stock options 31 122
Net cash used in financing activities (20,693) (5,462)
(Decrease) increase in cash and cash equivalents (1,903) 6,587
Cash and cash equivalents at beginning of period 7,153 6,559
Cash and cash equivalents at end of period 5,250 13,146
Supplemental cash flow information:    
Cash paid during the period for interest 3,008 3,412
Cash paid during the period for income taxes 1,764 666
Supplemental schedule of non-cash activities:    
Accrued property and equipment purchases 5,939 1,833
Write-offs of accounts receivables 21 6
Reclassification of interest rate cap amortization included in net income 47 16
Change in other asset for fair value of interest rate cap recorded to other comprehensive (loss) income, net of tax (270) 289
Operating lease right-of-use assets obtained in exchange for lease obligations 252,440 0
Finance lease right-of-use assets obtained in exchange for lease obligations 1,185 0
Impairment on operating lease right-of-use assets related to the adoption of new accounting pronouncement $ 3,116 $ 0
v3.19.2
Description of Business
6 Months Ended
Jun. 18, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Description of Business
Description of Business
Del Taco Restaurants, Inc. is a Delaware corporation headquartered in Lake Forest, California. The consolidated financial statements include the accounts of Del Taco Restaurants, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Del Taco”). The Company develops, franchises, owns, and operates Del Taco quick-service Mexican-American restaurants. At June 18, 2019, there were 310 company-operated and 273 franchise-operated Del Taco restaurants located in 14 states, including one franchise-operated unit in Guam. At June 19, 2018, there were 315 company-operated and 251 franchise-operated Del Taco restaurants located in 14 states, including one franchise-operated unit in Guam.
v3.19.2
Basis of Presentation and Summary of Significant Accounting Policies
6 Months Ended
Jun. 18, 2019
Accounting Policies [Abstract]  
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). For additional information, these unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 1, 2019 ("2018 Form 10-K").
 
The Company’s fiscal year ends on the Tuesday closest to December 31. Fiscal year 2019 is a fifty-two week period ending December 31, 2019. Fiscal year 2018 is a fifty-two week period ended January 1, 2019. In a fifty-two week fiscal year, the first, second and third quarters each include twelve weeks of operations and the fourth quarter includes sixteen weeks of operations. For fiscal year 2019, the Company’s accompanying financial statements reflect the twelve weeks ended June 18, 2019. For fiscal year 2018, the Company’s accompanying financial statements reflect the twelve weeks ended June 19, 2018.
Effective January 2, 2019 (the first day of fiscal year 2019), the Company adopted the requirements of Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), as discussed below in Note 2, using the modified retrospective method of transition. Current year results have been prepared in accordance with the new standard.
In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full fiscal year.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include estimates for impairment of goodwill, intangible assets and property and equipment, valuations provided in business combinations, insurance reserves, restaurant closure reserves, stock-based compensation, contingent liabilities, certain leasing activities and income tax valuation allowances.
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which clarifies the accounting implementation costs in cloud computing arrangements. The standard is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements.
Recently Adopted Accounting Standards
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, and issued additional clarifications and improvements during 2018. This guidance amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. There was no material impact on the Company's consolidated financial statements and related disclosures as a result of adopting this standard.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), along with related clarifications and improvements. This guidance results in key changes to lease accounting and aims to bring leases onto balance sheets to give investors, lenders, and other financial statement users a more comprehensive view of a company's long-term financial obligations as well as the assets it owns versus leases. The pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The Company adopted the requirements of the new lease standard effective January 2, 2019, the first day of fiscal year 2019, electing the optional transition method to apply the standard as of the effective date and therefore will not apply the standard to the comparative periods presented in the Company's financial statements. During the process of adoption, the Company made the following elections:

The Company elected the package of practical expedients which allowed the Company to not reassess:
Whether existing or expired contracts contain leases under the new definition of a lease;
Lease classification for existing or expired leases; and
Initial direct costs for any expired or existing leases to determine if they would qualify for capitalization under ASC 842.
The Company did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets.
The Company did not elect the land easement practical expedient, which permits an entity to continue applying its current policy for accounting for land easements that existed as of, or expired before, the effective date of Topic 842.
The Company elected to make the accounting policy election for short-term leases, permitting the Company to not apply the recognition requirements of this standard to short-term leases with terms of 12 months or less.

Upon adoption of ASU 2016-02, the Company recorded operating lease right-of-use assets and operating lease liabilities and derecognized all landlord funded assets, deemed landlord financing liabilities, deferred rent liabilities and favorable lease assets and unfavorable lease liabilities upon transition. Upon adoption, the Company recorded operating lease liabilities of approximately $230.6 million based on the present value of the remaining rental payments using discount rates as of the effective date. In addition, the Company recorded corresponding operating lease right-of-use assets of approximately $218.9 million, calculated as the initial amount of the Company's operating lease liabilities adjusted for prepaid and deferred rent, unamortized favorable lease assets and unamortized unfavorable lease liabilities, liabilities associated with lease termination costs and impairment of right-of-use assets recognized in retained earnings as of January 2, 2019. At the beginning of the period of adoption, the Company recorded the cumulative effect of adoption to retained earnings. Beginning in fiscal 2019, leases historically treated as deemed landlord financing liabilities will be treated as operating leases resulting in an increase in occupancy and other expense and a decrease to depreciation expense and interest expense.
The impact on the consolidated balance sheet was as follows:
 
January 1, 2019
 
Effect of Adoption of Topic 842
(Leases)
 
January 2, 2019
Assets
 
 
(Unaudited)
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
7,153

 
$

 
$
7,153

Accounts and other receivables, net
3,167

 

 
3,167

Inventories
2,932

 

 
2,932

Prepaid expenses and other current assets
4,935

 
(2,564
)
 
2,371

Assets held for sale
14,794

 

 
14,794

Total current assets
32,981

 
(2,564
)
 
30,417

Property and equipment, net
161,429

 
(13,839
)
 
147,590

Operating lease right-of-use assets

 
218,855

 
218,855

Goodwill
321,531

 

 
321,531

Trademarks
220,300

 

 
220,300

Intangible assets, net
18,507

 
(7,576
)
 
10,931

Other assets, net
4,208

 

 
4,208

Total assets
$
758,956

 
$
194,876

 
$
953,832

Liabilities and shareholders’ equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
19,877

 
$

 
$
19,877

Other accrued liabilities
34,785

 
(425
)
 
34,360

Current portion of finance lease obligations and deemed landlord financing liabilities
1,033

 
(547
)
 
486

Current portion of operating lease liabilities

 
17,303

 
17,303

Total current liabilities
55,695

 
16,331

 
72,026

Long-term debt, finance lease obligations and deemed landlord financing liabilities, excluding current portion, net
178,664

 
(19,040
)
 
159,624

Operating lease liabilities

 
213,313

 
213,313

Deferred income taxes
69,471

 
708

 
70,179

Other non-current liabilities
32,852

 
(18,348
)
 
14,504

Total liabilities
336,682

 
192,964

 
529,646

 

 

 

Shareholders’ equity:
 
 
 
 
 
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding

 

 

Common stock, $0.0001 par value; 400,000,000 shares authorized; 37,305,342 shares issued and outstanding at January 1, 2019
4

 

 
4

Additional paid-in capital
336,941

 

 
336,941

Accumulated other comprehensive income
180

 

 
180

Retained earnings
85,149

 
1,912

 
87,061

Total shareholders’ equity
422,274

 
1,912

 
424,186

Total liabilities and shareholders’ equity
$
758,956

 
$
194,876

 
$
953,832



Revenue Recognition
The adoption of Topic 606 in Fiscal 2018 changed the timing of the recognition of initial franchise fees, including franchise and development fees, and renewal fees, both included in franchise revenue in the consolidated statements of comprehensive income. Franchise and renewal fees are deferred and recognized over the term of the related franchise agreement for the respective restaurant. Franchise agreements typically have a term of twenty years. 
During the twelve and twenty-four weeks ended June 18, 2019, the Company recognized approximately $20,000 and $41,000, respectively, in franchise revenue related to the amortization of the deferred franchise fees recognized at January 1, 2019. During the twelve and twenty-four weeks ended June 19, 2018, the Company recognized approximately $15,000 and $28,000, respectively, in franchise revenue related to the amortization of the deferred franchise fees recognized at January 2, 2018.
Deferred franchise fees are recognized straight-line over the term of the underlying agreement and the amount expected to be recognized in franchise revenue for amounts in deferred franchise fees as of June 18, 2019 is as follows (in thousands):
FY 2019
 
$
65

FY 2020
 
118

FY 2021
 
116

FY 2022
 
116

FY 2023
 
112

Thereafter
 
1,315

Total Deferred Franchise Fees
 
$
1,842


Summary of Significant Accounting Policies
Except for the accounting policies for leases discussed in Note 7 that were updated as a result of adopting Topic 842, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended January 1, 2019, filed with the SEC on March 18, 2019, that have had a material impact on our consolidated financial statements and related notes.
v3.19.2
Restaurant Closure Charges, Net
6 Months Ended
Jun. 18, 2019
Restructuring and Related Activities [Abstract]  
Restaurant Closure Charges, Net
Restaurant Closure Charges
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company considers a triggering event to have occurred related to a specific restaurant if the restaurant’s cash flows are less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets.  Long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. The Company evaluates such cash flows for individual restaurants and franchise agreements on an undiscounted basis. If it is determined that the carrying amounts of such long-lived assets are not recoverable, the assets are written down to their estimated fair values. We generally estimate fair value using the discounted value of the estimated cash flows associated with the respective restaurant or agreement, using Level 3 inputs. The impairment charges represent the excess of each operating lease asset, furniture, fixtures and equipment and leasehold improvements carrying amount over its estimated fair value.
In connection with the adoption of Topic 842, the Company evaluated the operating lease right-of-use assets for impairment indicating the carrying amount of the operating lease assets for certain restaurants may not be recoverable and recorded an impairment charge totaling $3.1 million at January 2, 2019 based on the estimates of future recoverable cash flows.
During the twelve and twenty-four weeks ended June 18, 2019, the Company evaluated certain restaurants having indicators of impairment based on operating performance and recorded an additional impairment charge totaling $3.7 million related to two restaurants. The Company wrote-off a portion of the operating lease right-of-use assets, furniture, fixtures and equipment and leasehold improvements based on the estimate of future recoverable cash flows. During the twenty-four weeks ended June 19, 2018, the Company evaluated certain restaurants having indicators of impairment based on operating performance and recorded an impairment charge totaling $1.7 million related to two restaurants. The Company wrote-off the value of leasehold improvements and other equipment based on the estimate of future recoverable cash flows.
Restaurant Closure Charges, Net
At June 18, 2019 and January 1, 2019, the restaurant closure liability was $0.1 million and $2.4 million, respectively. The details of the restaurant closure activities are discussed below.
Restaurant Closures and Lease Reserves
At January 1, 2019, the restaurant closure liability balance was $0.3 million related to restaurant closures prior to 2015. During the twenty-four weeks ended June 18, 2019, in connection with the adoption of Topic 842, the Company reclassified the $0.3 million restaurant closure liability to offset the respective operating lease right-of-use assets.
Restaurant Closure and Other Related Charges for 12 Underperforming Restaurants
During the fourth fiscal quarter of 2015, the Company closed 12 company-operated restaurants. During the twenty-four weeks ended June 18, 2019, in connection with the adoption of Topic 842, the Company reclassified approximately $1.9 million of the lease related restaurant closure liability to offset the respective operating lease right-of-use assets. A summary of the restaurant closure liability activity for these 12 closed restaurants consisted of the following (in thousands):
 
 
Total
Balance at January 1, 2019
 
$
2,092

Reclassified to operating lease right-of-use assets
 
(1,900
)
Cash payments
 
(192
)
Adjustments to estimates based on current activity
 
118

Balance at June 18, 2019
 
$
118


The current portion of the restaurant closure liability is $0.1 million at June 18, 2019 and $0.5 million at January 1, 2019, respectively, and is included in other accrued liabilities in the consolidated balance sheets. The non-current portion of the restaurant closure liability is zero and $1.6 million at June 18, 2019 and January 1, 2019, respectively, and is included in other non-current liabilities in the consolidated balance sheets.
Upon adoption of Topic 842, rent expense and non lease executory costs for these previously closed restaurants are now recorded to restaurant closure charges as incurred.
v3.19.2
Summary of Refranchising and Franchise Acquisitions
6 Months Ended
Jun. 18, 2019
Franchise Acquisitions [Abstract]  
Summary of Refranchising and Franchise Acquisitions
Summary of Refranchising and Franchise Acquisitions
In connection with the sale of company-operated restaurants to franchisees, the Company typically enters into several agreements, in addition to an asset purchase agreement, with franchisees including franchise and lease agreements. The Company typically sells restaurants’ inventory and equipment and retains ownership of the leasehold interest to the real estate to sublease to the franchisee. The Company has determined that its restaurant dispositions usually represent multiple-element arrangements, and as a result, the cash consideration received is allocated to the separate elements based on their relative selling price. Cash consideration generally includes up-front consideration for the sale of the restaurants and franchise fees and future cash consideration for royalties and lease payments. The Company considers the future lease payments in allocating the initial cash consideration received. The Company compares the stated rent under the lease and/or sublease agreements with comparable market rents and the Company records favorable lease assets or unfavorable lease liabilities with a corresponding offset to the gain or loss on the sale of the company-operated restaurants. The cash consideration per restaurant for franchise fees is consistent with the amounts stated in the related franchise agreements which are charged for separate standalone arrangements. The Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement. Future royalty income is also recognized in revenue as earned.
The Company sold thirteen company-operated restaurants to franchisees during the twenty-four weeks ended June 18, 2019. There was no refranchising activity during the twenty-four weeks ended June 19, 2018. The following table summarizes the related net loss recognized during the twenty-four weeks ended June 18, 2019 (dollars in thousands):
 
 
24 Weeks Ended
June 18, 2019
Company-operated restaurants sold to franchisees
 
13

 
 
 
Proceeds from the sale of company-operated restaurants
 
$
2,090

Net assets sold (primarily furniture, fixtures and equipment) (a)
 
(2,051
)
Goodwill related to the company-operated restaurants sold to franchisees
 
(83
)
Allocation to deferred franchise fees
 
(281
)
Favorable sublease assets, net (b)
 
260

Loss on sale of company-operated restaurants (c)
 
$
(65
)

(a) Included in assets held for sale at January 1, 2019.
(b) Comprised of favorable sublease assets of $1.0 million and unfavorable lease liabilities of $0.7 million.
(c) Included in loss on disposal of assets, net on the consolidated statements of comprehensive income.
The Company acquired three franchise-operated restaurants during the twenty-four weeks ended June 18, 2019. The Company accounts for the acquisition of franchise-operated restaurants using the acquisition method of accounting for business combinations. The purchase price allocations were based on fair value estimates determined using significant unobservable inputs (Level 3). The goodwill recorded primarily relates to the market position and future growth potential of the markets acquired and is expected to be deductible for income tax purposes. There were no franchise acquisitions during the twenty-four weeks ended June 19, 2018. The following table provides detail of the combined acquisitions for the twenty-four weeks ended June 18, 2019 (dollars in thousands):
 
 
June 18, 2019
Franchise-operated restaurants acquired from franchisees
 
3
 
 
 
Goodwill
 
$
2,672

Restaurant and other equipment and leasehold improvements
 
578

Operating lease right-of-use assets
 
858

Operating lease liabilities
 
(858
)
Unfavorable lease liabilities (a)
 
(130
)
Total consideration
 
$
3,120

(a) The unfavorable lease liabilities of $0.1 million was recorded as an adjustment to the respective operating lease right-of-use asset.
v3.19.2
Goodwill and other Intangible Assets
6 Months Ended
Jun. 18, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and other Intangible Assets
Goodwill and other Intangible Assets
Goodwill was $324.1 million at June 18, 2019 compared to $321.5 million at January 1, 2019. The change is due to the sale of 13 company-operated restaurants and the purchase of three franchise-operated restaurants as described in more detail in Note 4.
There have been no changes in the carrying amount of trademarks since January 1, 2019.
The Company’s other intangible assets at June 18, 2019 and January 1, 2019 consisted of the following (in thousands):
 
 
June 18, 2019
 
January 1, 2019
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Favorable lease assets
 
$

 
$

 
$

 
$
13,118

 
$
(5,542
)
 
$
7,576

Favorable sublease assets
 
1,090

 
(39
)
 
1,051

 

 

 

Franchise rights
 
14,562

 
(4,891
)
 
9,671

 
15,032

 
(4,411
)
 
10,621

Reacquired franchise rights
 
800

 
(152
)
 
648

 
417

 
(107
)
 
310

Total amortized other intangible assets
 
$
16,452

 
$
(5,082
)
 
$
11,370

 
$
28,567

 
$
(10,060
)
 
$
18,507



During the twenty-four weeks ended June 18, 2019, the Company recorded $1.0 million of favorable sublease assets in connection with the sale of company-operated restaurants (see Note 4 for more information). Favorable sublease assets represents favorable subleases with franchisees recorded in connection with the sale of company-operated restaurants to franchisees.

In connection with the adoption of Topic 842, the Company reclassified $7.6 million of favorable lease assets, net to operating lease right-of-use assets (see Note 2 for more information) as of January 2, 2019. During the twenty-four weeks ended June 18, 2019, the Company reclassified $0.4 million of franchise rights as reacquired franchise rights related to the Company's acquisition of three franchise-operated restaurants and wrote off $11,000 of franchise rights associated with the closure of one franchise-operated restaurant.
v3.19.2
Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
6 Months Ended
Jun. 18, 2019
Debt Disclosure [Abstract]  
Debt, Obligations Under Capital Leases and Deemed Landlord Financing Liabilities
Debt, Obligations Under Finance Leases and Deemed Landlord Financing Liabilities
The Company’s long-term debt, finance lease obligations, other debt and deemed landlord financing liabilities at June 18, 2019 and January 1, 2019 consisted of the following (in thousands):
 
 
 
June 18, 2019
 
January 1, 2019
2015 Senior Credit Facility, net of debt discount of $326 and $459 and deferred financing costs of $110 and $155 at June 18, 2019 and January 1, 2019, respectively
 
$
145,564

 
$
158,386

Total outstanding indebtedness
 
145,564

 
158,386

Obligations under finance lease, other debt and deemed landlord financing
        liabilities
 
1,446

 
21,311

Total debt
 
147,010

 
179,697

Less: amounts due within one year
 
423

 
1,033

Total amounts due after one year, net
 
$
146,587

 
$
178,664

 
At June 18, 2019 and January 1, 2019, the Company assessed the amounts recorded under the 2015 Senior Credit Facility and determined that such amounts approximated fair value.
2015 Revolving Credit Facility
On August 4, 2015, the Company refinanced its existing senior credit facility and entered into a new credit agreement (the “Credit Agreement”). The Credit Agreement, which matures on August 4, 2020, provides for a $250 million revolving credit facility (the “2015 Senior Credit Facility”).

The Credit Agreement contains certain financial covenants, including the maintenance of a consolidated total lease adjusted leverage ratio and a consolidated fixed charge coverage ratio. The Company was in compliance with the financial covenants as of June 18, 2019. Substantially all of the assets of the Company are pledged as collateral under the 2015 Senior Credit Facility.
At June 18, 2019, the weighted-average interest rate on the outstanding balance of the 2015 Senior Credit Facility was 4.2%. At June 18, 2019, the Company had a total of $87.7 million of availability for additional borrowings under the 2015 Senior Credit Facility as the Company had $146.0 million of outstanding borrowings and letters of credit outstanding of $16.3 million which reduce availability under the 2015 Senior Credit Facility.
v3.19.2
Leases
6 Months Ended
Jun. 18, 2019
Leases [Abstract]  
Leases, Finance
Leases
The Company's material leases consist of restaurant locations and its executive offices with expiration dates through 2044. In general, the leases have remaining terms of 1-20 years, most of which include options to extend the leases for additional five-year periods. The lease term is generally the minimum noncancelable period of the lease. The Company does not include option periods unless the Company determines that it is reasonably certain of exercising the option at inception or when a triggering event occurs.
The Company determines if an arrangement is a lease at inception. The right-of-use assets and lease liabilities are recognized at the lease commencement date. In determining the Company’s right-of-use assets and lease liabilities, the Company applies a discount rate to the lease payments within each lease agreement. As most of the Company’s lease agreements do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The right-of-use asset also includes any lease payments made and is reduced by lease incentives, initial direct costs incurred and impairment of operating lease right-of-use assets and adjusted by favorable lease assets and unfavorable lease liabilities.
Some of the Company's lease agreements contain rent escalation clauses (including adjustments based on changes in indexes), rent holidays, capital improvement funding or other lease concessions. The Company recognizes rental expense on a straight-line basis based on fixed components of a lease arrangement and the Company amortizes this expense over the term of the lease beginning with the date of initial possession. Variable lease components represent amounts that are not fixed in nature and are recognized in expense as incurred.
The Company has subleased certain properties to other third parties where the Company remains primarily liable to the landlord for the performance of all obligations in the event that the sub-lessee does not perform its obligations under the lease. As a result of the sublease arrangements, future rental commitments under operating leases will be offset by sublease amounts to be paid by the sub-lessee. In general, the terms of the sublease are similar to the terms of the master lease.
The components of lease cost were as follows (in thousands):
 
 
Twelve Weeks Ended June 18, 2019
 
Twenty-Four Weeks Ended June 18, 2019
Operating lease cost
 
$
8,733

 
$
17,404

Finance lease cost:
 
 
 
 
Amortization of right of use assets
 
110

 
243

Interest on lease liabilities
 
24

 
51

Short-term lease cost
 
77

 
178

Variable lease cost
 
448

 
838

Sublease income
 
(1,134
)
 
(2,136
)
Total lease cost
 
$
8,258

 
$
16,578



Supplemental balance sheet information related to the Company's operating and finance leases (noting the financial statement caption each is included with) as of June 18, 2019 and January 1, 2019 was as follows (in thousands):
 
June 18, 2019
 
January 1, 2019
Operating lease assets:
 
 
 
  Operating lease right-of-use assets
$
228,763

 
$

Operating lease liabilities:
 
 
 
Current portion of operating lease liabilities
$
19,861

 
$

Operating lease liabilities, excluding current portion
225,100

 

Total operating lease liabilities
$
244,961

 
$

 
 
 
 
Finance lease assets:
 
 
 
Buildings under finance leases
$
1,061

 
$
3,370

Accumulated depreciation
(228
)
 
(2,193
)
Finance lease asset, net
$
833

 
$
1,177

Finance lease obligations:
 
 
 
Current portion of finance lease obligations, other debt and deemed landlord financing liabilities
$
369

 
$
510

Long-term debt, finance lease obligations, other debt and deemed landlord
     financing liabilities, excluding current portion, net
554

 
757

Total finance lease obligations
$
923

 
$
1,267



Weighted Average Remaining Lease Term (in years)
 
June 18, 2019
Operating leases
 
11.7
Finance leases
 
3.5

Weighted Average Discount Rate
 
June 18, 2019
Operating leases
 
6.93
%
Finance leases
 
10.44
%

Supplemental cash flow information related to leases was as follows (in thousands):
 
 
Twenty-Four Weeks Ended June 18, 2019
Cash paid for amounts in the measurement of lease liabilities:
 
 
Operating cash flows used for operating leases
 
$
14,238

Operating cash flows used for finance leases
 
$
51

Financing cash flows used for finance leases
 
$
243



The estimated future lease payments as of June 18, 2019, are as follows (in thousands):

 
 
Finance Lease Liabilities
 
Operating Lease Liabilities
 
Operating Subleases
 
Net Lease Commitments
2019
 
$
277

 
$
18,040

 
$
(1,739
)
 
$
16,578

2020
 
335

 
36,269

 
(3,383
)
 
33,221

2021
 
200

 
35,069

 
(3,484
)
 
31,785

2022
 
79

 
33,948

 
(3,465
)
 
30,562

2023
 
79

 
31,233

 
(3,291
)
 
28,021

Thereafter
 
132

 
211,457

 
(26,969
)
 
184,620

Total lease payments
 
$
1,102

 
$
366,016

 
$
(42,331
)
 
$
324,787

Amounts representing interest
 
(179
)
 
(121,055
)
 
 
 
(121,234
)
Present value of lease obligations
 
$
923

 
$
244,961

 
 
 
$
203,553



Rental commitments and sublease rental receipts as of January 1, 2019, under finance and operating leases having an initial non-cancelable term of one year or more are shown in the following table (in thousands):

 
Finance Lease and Deemed Landlord Financing Liabilities
 
Operating Leases
 
Operating Subleases
 
Net Lease Commitments
2019
 
$
3,561

 
$
33,951

 
$
(2,564
)
 
$
34,948

2020
 
3,317

 
32,071

 
(2,403
)
 
32,985

2021
 
3,186

 
30,794

 
(2,409
)
 
31,571

2022
 
3,056

 
29,362

 
(2,392
)
 
30,026

2023
 
3,123

 
26,414

 
(2,274
)
 
27,263

Thereafter
 
34,071

 
153,675

 
(16,844
)
 
170,902

Total lease payments
 
$
50,314

 
$
306,267

 
$
(28,886
)
 
$
327,695

Imputed interest
 
(29,003
)
 
 
 
 
 
 
Present value of payments
 
$
21,311

 
 
 
 
 
 


As of June 18, 2019, we have legally binding lease payments related to restaurant leases that have not yet commenced of $22.5 million.
During the twenty-four weeks ended June 18, 2019, the Company entered into three sale leaseback arrangements with third party private investors, with two arrangements occurring during the first quarter 2019 and one during the second quarter 2019. These sale-leaseback transactions do not provide for any continuing involvement by the Company other than normal leases where the Company intends to use the property during the lease term. The leases have been accounted for as operating leases. The net proceeds from the transactions totaled approximately $12.7 million. Under two of the arrangements, the Company sold the land and buildings related to restaurants constructed during 2018 and leased them back for a term of 20 years. Under one of the arrangements, the Company sold the land related to a restaurant constructed during 2018 and leased it back for a term of 20 years. The sale of these properties resulted in a loss of approximately $0.2 million which is included in loss on disposal of assets, net in the consolidated statements of comprehensive income. The assets sold were included in assets held for sale as of January 1, 2019.
Leases, Operating
Leases
The Company's material leases consist of restaurant locations and its executive offices with expiration dates through 2044. In general, the leases have remaining terms of 1-20 years, most of which include options to extend the leases for additional five-year periods. The lease term is generally the minimum noncancelable period of the lease. The Company does not include option periods unless the Company determines that it is reasonably certain of exercising the option at inception or when a triggering event occurs.
The Company determines if an arrangement is a lease at inception. The right-of-use assets and lease liabilities are recognized at the lease commencement date. In determining the Company’s right-of-use assets and lease liabilities, the Company applies a discount rate to the lease payments within each lease agreement. As most of the Company’s lease agreements do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The right-of-use asset also includes any lease payments made and is reduced by lease incentives, initial direct costs incurred and impairment of operating lease right-of-use assets and adjusted by favorable lease assets and unfavorable lease liabilities.
Some of the Company's lease agreements contain rent escalation clauses (including adjustments based on changes in indexes), rent holidays, capital improvement funding or other lease concessions. The Company recognizes rental expense on a straight-line basis based on fixed components of a lease arrangement and the Company amortizes this expense over the term of the lease beginning with the date of initial possession. Variable lease components represent amounts that are not fixed in nature and are recognized in expense as incurred.
The Company has subleased certain properties to other third parties where the Company remains primarily liable to the landlord for the performance of all obligations in the event that the sub-lessee does not perform its obligations under the lease. As a result of the sublease arrangements, future rental commitments under operating leases will be offset by sublease amounts to be paid by the sub-lessee. In general, the terms of the sublease are similar to the terms of the master lease.
The components of lease cost were as follows (in thousands):
 
 
Twelve Weeks Ended June 18, 2019
 
Twenty-Four Weeks Ended June 18, 2019
Operating lease cost
 
$
8,733

 
$
17,404

Finance lease cost:
 
 
 
 
Amortization of right of use assets
 
110

 
243

Interest on lease liabilities
 
24

 
51

Short-term lease cost
 
77

 
178

Variable lease cost
 
448

 
838

Sublease income
 
(1,134
)
 
(2,136
)
Total lease cost
 
$
8,258

 
$
16,578



Supplemental balance sheet information related to the Company's operating and finance leases (noting the financial statement caption each is included with) as of June 18, 2019 and January 1, 2019 was as follows (in thousands):
 
June 18, 2019
 
January 1, 2019
Operating lease assets:
 
 
 
  Operating lease right-of-use assets
$
228,763

 
$

Operating lease liabilities:
 
 
 
Current portion of operating lease liabilities
$
19,861

 
$

Operating lease liabilities, excluding current portion
225,100

 

Total operating lease liabilities
$
244,961

 
$

 
 
 
 
Finance lease assets:
 
 
 
Buildings under finance leases
$
1,061

 
$
3,370

Accumulated depreciation
(228
)
 
(2,193
)
Finance lease asset, net
$
833

 
$
1,177

Finance lease obligations:
 
 
 
Current portion of finance lease obligations, other debt and deemed landlord financing liabilities
$
369

 
$
510

Long-term debt, finance lease obligations, other debt and deemed landlord
     financing liabilities, excluding current portion, net
554

 
757

Total finance lease obligations
$
923

 
$
1,267



Weighted Average Remaining Lease Term (in years)
 
June 18, 2019
Operating leases
 
11.7
Finance leases
 
3.5

Weighted Average Discount Rate
 
June 18, 2019
Operating leases
 
6.93
%
Finance leases
 
10.44
%

Supplemental cash flow information related to leases was as follows (in thousands):
 
 
Twenty-Four Weeks Ended June 18, 2019
Cash paid for amounts in the measurement of lease liabilities:
 
 
Operating cash flows used for operating leases
 
$
14,238

Operating cash flows used for finance leases
 
$
51

Financing cash flows used for finance leases
 
$
243



The estimated future lease payments as of June 18, 2019, are as follows (in thousands):

 
 
Finance Lease Liabilities
 
Operating Lease Liabilities
 
Operating Subleases
 
Net Lease Commitments
2019
 
$
277

 
$
18,040

 
$
(1,739
)
 
$
16,578

2020
 
335

 
36,269

 
(3,383
)
 
33,221

2021
 
200

 
35,069

 
(3,484
)
 
31,785

2022
 
79

 
33,948

 
(3,465
)
 
30,562

2023
 
79

 
31,233

 
(3,291
)
 
28,021

Thereafter
 
132

 
211,457

 
(26,969
)
 
184,620

Total lease payments
 
$
1,102

 
$
366,016

 
$
(42,331
)
 
$
324,787

Amounts representing interest
 
(179
)
 
(121,055
)
 
 
 
(121,234
)
Present value of lease obligations
 
$
923

 
$
244,961

 
 
 
$
203,553



Rental commitments and sublease rental receipts as of January 1, 2019, under finance and operating leases having an initial non-cancelable term of one year or more are shown in the following table (in thousands):

 
Finance Lease and Deemed Landlord Financing Liabilities
 
Operating Leases
 
Operating Subleases
 
Net Lease Commitments
2019
 
$
3,561

 
$
33,951

 
$
(2,564
)
 
$
34,948

2020
 
3,317

 
32,071

 
(2,403
)
 
32,985

2021
 
3,186

 
30,794

 
(2,409
)
 
31,571

2022
 
3,056

 
29,362

 
(2,392
)
 
30,026

2023
 
3,123

 
26,414

 
(2,274
)
 
27,263

Thereafter
 
34,071

 
153,675

 
(16,844
)
 
170,902

Total lease payments
 
$
50,314

 
$
306,267

 
$
(28,886
)
 
$
327,695

Imputed interest
 
(29,003
)
 
 
 
 
 
 
Present value of payments
 
$
21,311

 
 
 
 
 
 


As of June 18, 2019, we have legally binding lease payments related to restaurant leases that have not yet commenced of $22.5 million.
During the twenty-four weeks ended June 18, 2019, the Company entered into three sale leaseback arrangements with third party private investors, with two arrangements occurring during the first quarter 2019 and one during the second quarter 2019. These sale-leaseback transactions do not provide for any continuing involvement by the Company other than normal leases where the Company intends to use the property during the lease term. The leases have been accounted for as operating leases. The net proceeds from the transactions totaled approximately $12.7 million. Under two of the arrangements, the Company sold the land and buildings related to restaurants constructed during 2018 and leased them back for a term of 20 years. Under one of the arrangements, the Company sold the land related to a restaurant constructed during 2018 and leased it back for a term of 20 years. The sale of these properties resulted in a loss of approximately $0.2 million which is included in loss on disposal of assets, net in the consolidated statements of comprehensive income. The assets sold were included in assets held for sale as of January 1, 2019.
v3.19.2
Derivative Instruments
6 Months Ended
Jun. 18, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
2016 Interest Rate Cap Agreement
In June 2016, the Company entered into an interest rate cap agreement that became effective July 1, 2016, to hedge cash flows associated with interest rate fluctuations on variable rate debt, with a termination date of March 31, 2020 ("2016 Interest Rate Cap Agreement"). The 2016 Interest Rate Cap Agreement had an initial notional amount of $70.0 million of the 2015 Senior Credit Facility that effectively converted that portion of the outstanding balance of the 2015 Senior Credit Facility from variable rate debt to capped variable rate debt, resulting in a change in the applicable interest rate from an interest rate of one-month LIBOR plus the applicable margin (as provided by the 2015 Senior Credit Facility) to a capped interest rate of 2.00% plus the applicable margin. As of June 18, 2019, one-month LIBOR was 2.44%. During the twelve and twenty-four weeks ended June 18, 2019, the Company received payments totaling approximately $0.1 million and $0.2 million, respectively, related to the 2016 Interest Rate Cap Agreement. During the period from July 1, 2016 through June 18, 2019, the 2016 Interest Rate Cap Agreement had no hedge ineffectiveness.
To ensure the effectiveness of the 2016 Interest Rate Cap Agreement, the Company elected the one-month LIBOR rate option for its variable rate interest payments on term balances equal to or in excess of the applicable notional amount of the interest rate cap agreement as of each reset date. The reset dates and other critical terms on the term loans perfectly match with the interest rate cap reset dates and other critical terms during the twenty-four weeks ended June 18, 2019.
During the twelve weeks and twenty-four weeks ended June 18, 2019, the Company reclassified approximately $37,000 and $0.1 million, respectively, of interest expense related to the hedges of these transactions into earnings. As of June 18, 2019, the Company was hedging forecasted transactions expected to occur through March 31, 2020. Assuming interest rates at June 18, 2019 remain constant, $0.2 million of interest expense related to hedges of these transactions is expected to be reclassified into earnings over the next 9 months. The Company intends to ensure that this hedge remains effective, therefore, approximately $0.2 million is expected to be reclassified into interest expense over the next 9 months.
The effective portion of the 2016 Interest Rate Cap Agreement through June 18, 2019 was included in accumulated other comprehensive income.
v3.19.2
Fair Value Measurements
6 Months Ended
Jun. 18, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
The fair values of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate their carrying amounts due to their short maturities. The carrying value of the 2015 Senior Credit Facility approximated fair value. The 2016 Interest Rate Cap Agreement is recorded at fair value in the Company’s consolidated balance sheets.
As of June 18, 2019 and January 1, 2019, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. For both periods, this included a derivative instrument related to interest rates. The Company determined the fair value of the interest rate cap contract based on counterparty quotes, with appropriate adjustments for any significant impact of nonperformance risk of the parties to the interest rate cap contract. Therefore, the Company categorized this interest rate cap contract as Level 2 fair value measurements. The fair value of the 2016 Interest Rate Cap Agreement was $0.1 million and $0.5 million at June 18, 2019 and January 1, 2019, respectively, and is included in other assets in the consolidated balance sheets.

The Company's assets and liabilities measured at fair value on a recurring basis as of June 18, 2019 and January 1, 2019 were as follows (in thousands):

 
June 18, 2019 (Unaudited)
 
Markets for Identical Assets
(Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
127

 
$

 
$
127

 
$

Total assets measured at fair value
$
127

 
$

 
$
127

 
$

 
 
 
 
 
 
 
 
 
January 1, 2019
 
Markets for Identical Assets (Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
2016 Interest Rate Cap Agreement
$
499

 
$

 
$
499

 
$

Total assets measured at fair value
$
499

 
$

 
$
499

 
$

v3.19.2
Other Accrued Liabilities and Other Non-current Liabilities
6 Months Ended
Jun. 18, 2019
Other Liabilities Disclosure [Abstract]  
Other Accrued Liabilities and Other Non-current Liabilities
Other Accrued Liabilities and Other Non-current Liabilities
A summary of other accrued liabilities follows (in thousands):
 
 
 
June 18, 2019
 
January 1, 2019
Employee compensation and related items
 
$
10,746

 
$
12,888

Accrued sales tax
 
5,654

 
3,952

Accrued insurance
 
5,412

 
5,664

Accrued property and equipment purchases
 
4,177

 
3,196

Accrued advertising
 
2,079

 
1,578

Accrued real property tax
 
1,651

 
1,420

Other
 
5,375

 
6,087

 
 
$
35,094

 
$
34,785


 
On January 2, 2019, the first day of Fiscal 2019, the Company reclassified $0.4 million of current restaurant closure liabilities to operating lease right-of-use assets in connection with the adoption of Topic 842 (see Note 2 for more information).

A summary of other non-current liabilities follows (in thousands):
 
 
 
June 18, 2019
 
January 1, 2019
Insurance reserves
 
9,190

 
8,794

Deferred development and initial franchise fees
 
3,164

 
2,742

Deferred gift card income
 
798

 
1,290

Unearned trade discount, non-current
 
549

 
739

Unfavorable lease liabilities
 

 
11,975

Deferred rent liability
 

 
4,594

Restaurant closure liability
 
24

 
1,788

Other
 
1,611

 
930

 
 
$
15,336

 
$
32,852



On January 2, 2019, the first day of Fiscal 2019, the Company reclassified $12.0 million of unfavorable lease liabilities, $4.6 million of deferred rent liabilities and $1.8 million of restaurant closure liabilities to the respective operating lease right-of-use assets in connection with the adoption of Topic 842 (see Note 2 for more information).
v3.19.2
Income Taxes
6 Months Ended
Jun. 18, 2019
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The effective income tax rates were 27.7% and 27.3% for the twelve weeks ended June 18, 2019 and June 19, 2018, respectively. The provision for income taxes was $0.8 million and $1.6 million for the twelve weeks ended June 18, 2019 and June 19, 2018, respectively. The effective income tax rates were 27.8% and 27.2% for the twenty-four weeks ended June 18, 2019 and June 19, 2018, respectively. The provision for income taxes was $1.4 million and $2.8 million for the twenty-four weeks ended June 18, 2019 and June 19, 2018, respectively.
The income tax expense for the twelve weeks ended June 18, 2019 is driven by the estimated effective income tax rate of 27.7% which primarily consists of statutory federal and state tax rates based on apportioned income and the impact of non-tax deductible compensation to executives, partially offset by federal targeted job credits. The income tax expense for the twelve weeks ended June 19, 2018 is driven by the estimated effective income tax rate of 27.3% which primarily consists of statutory federal and state tax rates based on apportioned income and the impact of non-tax deductible compensation to executives, partially offset by federal targeted job credits.
The income tax expense for the twenty-four weeks ended June 18, 2019 is driven by the estimated effective income tax rate of 27.8% which primarily consists of statutory federal and state tax rates based on apportioned income and the impact of non-tax deductible compensation to executives, partially offset by federal targeted job credits. The income tax expense for the twenty-four weeks ended June 19, 2018 is driven by the estimated effective income tax rate of 27.2% which primarily consists of statutory federal and state tax rates based on apportioned income and the impact of non-tax deductible compensation to executives, partially offset by federal targeted job credits.
Management believes it is more likely than not that all deferred tax assets will be realized and therefore no valuation allowance as of June 18, 2019 and January 1, 2019 is required.
v3.19.2
Stock-Based Compensation
6 Months Ended
Jun. 18, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-Based Compensation
Stock-Based Compensation
In connection with the approval of the Business Combination, the Del Taco Restaurants, Inc. 2015 Omnibus Incentive Plan (the “2015 Plan”) was approved by shareholders to offer eligible employees, directors and consultants cash and stock-based incentive awards. Awards under the 2015 Plan are generally not restricted to any specific form or structure and could include, without limitation, stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards, other cash-based compensation and performance awards. Under the plan, there were 3,300,000 shares of common stock reserved and authorized. At June 18, 2019, there were 803,701 shares of common stock available for grant under the 2015 Plan.
Stock-Based Compensation Expense
The total compensation expense related to the 2015 Plan was $1.7 million and $1.4 million for the twelve weeks ended June 18, 2019 and June 19, 2018, respectively and $3.3 million and $2.6 million for the twenty-four weeks ended June 18, 2019 and June 19, 2018, respectively.
Restricted Stock Awards
A summary of outstanding and unvested restricted stock activity as of June 18, 2019 and changes during the period from January 1, 2019 through June 18, 2019 are as follows:
 
 
 
Shares
 
Weighted-Average
Grant Date
Fair Value
Nonvested at January 1, 2019
 
1,234,531

 
$
12.87

Granted
 
113,853

 
10.56

Vested
 
(69,749
)
 
11.62

Nonvested at June 18, 2019
 
1,278,635

 
$
12.73


For both the twenty-four weeks ended June 18, 2019 and June 19, 2018, the Company made payments of $0.1 million related to tax withholding obligations for the vesting of restricted stock awards in exchange for 13,172 and 9,892 shares withheld, respectively. As of June 18, 2019, there was $8.6 million of unrecognized stock compensation expense, net of estimated forfeitures, related to restricted stock awards that is expected to be recognized over a weighted-average remaining period of 2.1 years. The fair value of these awards was determined based on the Company’s stock price on the grant date.
Stock Options
A summary of stock option activity as of June 18, 2019 and changes during the period from January 1, 2019 through June 18, 2019 are as follows: