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EX-32 - EX-32 - BJs RESTAURANTS INCbjri-ex32_6.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q  

(Mark One)

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

  For the Quarterly Period Ended July 3, 2018

 

OR

 

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

 

For the transition period from _______________ to ______  

Commission file number 0-21423

BJ’S RESTAURANTS, INC.

(Exact name of registrant as specified in its charter)  

 

California

33‑0485615

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

7755 Center Avenue, Suite 300

Huntington Beach, California 92647

(714) 500-2400

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

 

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

 

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

 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer (do not check if smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

 

As of August 3, 2018, there were 21,018,930 shares of Common Stock of the Registrant outstanding.  

 


BJ’S RESTAURANTS, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets –
   July 3, 2018 (Unaudited) and January 2, 2018

1

 

 

 

 

 

 

Unaudited Consolidated Statements of Income –
   Thirteen and Twenty-Six Weeks Ended July 3, 2018 and July 4, 2017

2

 

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows –
   Thirteen and Twenty-Six Weeks Ended July 3, 2018 and July 4, 2017

3

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

4

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

20

 

 

 

 

Item 4.

 

Controls and Procedures

21

 

 

 

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

21

 

 

 

 

Item 1A.

 

Risk Factors

21

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

21

 

 

 

 

Item 6.

 

Exhibits

22

 

 

 

 

 

 

 

 

 

 

SIGNATURES

23

 

 

 


 

 

PART I. FINANCIAL INFORMATION

 

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

 

BJ’S RESTAURANTS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

July 3, 2018

 

 

January 2, 2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,363

 

 

$

24,335

 

Accounts and other receivables, net

 

 

16,888

 

 

 

13,865

 

Inventories, net

 

 

10,147

 

 

 

10,514

 

Prepaid expenses and other current assets

 

 

9,736

 

 

 

11,615

 

Total current assets

 

 

56,134

 

 

 

60,329

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

582,108

 

 

 

589,844

 

Goodwill

 

 

4,673

 

 

 

4,673

 

Other assets, net

 

 

30,621

 

 

 

30,112

 

Total assets

 

$

673,536

 

 

$

684,958

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable (1)

 

$

18,287

 

 

$

25,275

 

Accrued expenses

 

 

110,194

 

 

 

97,266

 

Total current liabilities

 

 

128,481

 

 

 

122,541

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

18,541

 

 

 

21,694

 

Deferred rent

 

 

33,766

 

 

 

32,487

 

Deferred lease incentives

 

 

55,172

 

 

 

52,843

 

Long-term debt

 

 

110,000

 

 

 

163,500

 

Other liabilities

 

 

32,528

 

 

 

33,164

 

Total liabilities

 

 

378,488

 

 

 

426,229

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, 5,000 shares authorized, none issued or outstanding

 

 

 

 

 

 

Common stock, no par value, 125,000 shares authorized and 20,996

   and 20,485 shares issued and outstanding as of July 3, 2018 and

   January 2, 2018, respectively

 

 

 

 

 

 

Capital surplus

 

 

65,621

 

 

 

68,904

 

Retained earnings

 

 

229,427

 

 

 

189,825

 

Total shareholders’ equity

 

 

295,048

 

 

 

258,729

 

Total liabilities and shareholders’ equity

 

$

673,536

 

 

$

684,958

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

(1)

Included in accounts payable as of July 3, 2018 and January 2, 2018 is $2,165 and $6,537, respectively, of related party trade payables. See Note 5 for further information.

1

 


 

BJ’S RESTAURANTS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

 

 

For the Thirteen Weeks Ended

 

 

For the Twenty-Six Weeks Ended

 

 

 

July 3, 2018

 

 

July 4, 2017

 

 

July 3, 2018

 

 

July 4, 2017

 

Revenues

 

$

287,634

 

 

$

265,817

 

 

$

566,157

 

 

$

523,633

 

Restaurant operating costs (excluding depreciation and amortization):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (1)

 

 

72,026

 

 

 

69,517

 

 

 

141,997

 

 

 

134,912

 

Labor and benefits

 

 

101,986

 

 

 

94,113

 

 

 

202,419

 

 

 

186,496

 

Occupancy and operating (1)

 

 

59,073

 

 

 

54,872

 

 

 

116,576

 

 

 

108,816

 

General and administrative

 

 

15,851

 

 

 

14,205

 

 

 

30,982

 

 

 

28,501

 

Depreciation and amortization

 

 

17,620

 

 

 

17,052

 

 

 

35,074

 

 

 

33,801

 

Restaurant opening

 

 

835

 

 

 

1,258

 

 

 

1,432

 

 

 

2,671

 

Loss on disposal and impairment of assets

 

 

1,123

 

 

 

2,411

 

 

 

2,184

 

 

 

3,098

 

Total costs and expenses

 

 

268,514

 

 

 

253,428

 

 

 

530,664

 

 

 

498,295

 

Income from operations

 

 

19,120

 

 

 

12,389

 

 

 

35,493

 

 

 

25,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,381

)

 

 

(1,113

)

 

 

(2,768

)

 

 

(2,001

)

Other income (expense), net

 

 

81

 

 

 

266

 

 

 

(19

)

 

 

1,051

 

Total other expense

 

 

(1,300

)

 

 

(847

)

 

 

(2,787

)

 

 

(950

)

Income before income taxes

 

 

17,820

 

 

 

11,542

 

 

 

32,706

 

 

 

24,388

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

875

 

 

 

1,903

 

 

 

1,097

 

 

 

5,483

 

Net income

 

$

16,945

 

 

$

9,639

 

 

$

31,609

 

 

$

18,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.81

 

 

$

0.45

 

 

$

1.52

 

 

$

0.87

 

Diluted

 

$

0.79

 

 

$

0.44

 

 

$

1.49

 

 

$

0.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,880

 

 

 

21,573

 

 

 

20,733

 

 

 

21,752

 

Diluted

 

 

21,477

 

 

 

22,074

 

 

 

21,282

 

 

 

22,202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.11

 

 

$

 

 

$

0.22

 

 

$

 

 

See accompanying notes to unaudited consolidated financial statements.

 

(1)

Related party costs included in cost of sales are $22,279 and $21,812 for the thirteen weeks ended July 3, 2018 and July 4, 2017, respectively, and $43,581 and $41,889 for the twenty-six weeks ended July 3, 2018 and July 4, 2017, respectively.  Related party costs included in occupancy and operating are $2,472 and $2,310 for the thirteen weeks ended July 3, 2018 and July 4, 2017, respectively, and $4,934 and $4,543 for the twenty-six weeks ended July 3, 2018 and July 4, 2017, respectively. See Note 5 for further information.

2

 


 

BJ’S RESTAURANTS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

For the Twenty-Six Weeks Ended

 

 

 

July 3, 2018

 

 

July 4, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

31,609

 

 

$

18,905

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

35,074

 

 

 

33,801

 

Deferred income taxes

 

 

(3,153

)

 

 

1,574

 

Stock-based compensation expense

 

 

4,081

 

 

 

3,530

 

Loss on disposal and impairment of assets

 

 

2,184

 

 

 

3,098

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts and other receivables

 

 

829

 

 

 

(8,480

)

Landlord contribution for tenant improvements

 

 

(3,257

)

 

 

(1,356

)

Inventories, net

 

 

367

 

 

 

(434

)

Prepaid expenses and other current assets

 

 

1,434

 

 

 

2,260

 

Other assets, net

 

 

(1,272

)

 

 

(2,609

)

Accounts payable

 

 

(6,983

)

 

 

(1,324

)

Accrued expenses

 

 

8,208

 

 

 

(315

)

Deferred rent

 

 

1,279

 

 

 

1,188

 

Deferred lease incentives

 

 

2,329

 

 

 

1,422

 

Other liabilities

 

 

(636

)

 

 

360

 

Net cash provided by operating activities

 

 

72,093

 

 

 

51,620

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(28,752

)

 

 

(45,170

)

Net cash used in investing activities

 

 

(28,752

)

 

 

(45,170

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings on line of credit

 

 

670,500

 

 

 

1,060,100

 

Payments on line of credit

 

 

(724,000

)

 

 

(1,035,600

)

Taxes paid on vested stock units under employee plans

 

 

(365

)

 

 

(237

)

Proceeds from exercise of stock options

 

 

16,843

 

 

 

1,062

 

Cash dividends paid

 

 

(4,600

)

 

 

 

Repurchases of common stock

 

 

(6,691

)

 

 

(31,861

)

Net cash used in financing activities

 

 

(48,313

)

 

 

(6,536

)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(4,972

)

 

 

(86

)

Cash and cash equivalents, beginning of period

 

 

24,335

 

 

 

22,761

 

Cash and cash equivalents, end of period

 

$

19,363

 

 

$

22,675

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

6,726

 

 

$

4,611

 

Cash paid for interest, net of capitalized interest

 

$

2,464

 

 

$

1,836

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment acquired and included in accounts payable

 

$

3,871

 

 

$

5,201

 

Stock-based compensation capitalized

 

$

162

 

 

$

143

 

 

See accompanying notes to unaudited consolidated financial statements.

3

 


 

BJ’S RESTAURANTS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of BJ’s Restaurants, Inc. (referred to herein as the “Company,” “we,” “us” and “our”) and our wholly owned subsidiaries. The consolidated financial statements presented herein include all material adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of our financial condition, results of operations and cash flows for the period. Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures normally included in consolidated financial statements in accordance with U.S. GAAP have been omitted pursuant to the U.S. Securities and Exchange Commission (“SEC”) rules.

The preparation of financial statements in conformity with U.S. GAAP requires us to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual amounts could differ from these estimates.

A description of our accounting policies and other financial information is included in our audited consolidated financial statements filed with the SEC on Form 10-K for the year ended January 2, 2018. The disclosures included in our accompanying interim consolidated financial statements and footnotes should be read in conjunction with our consolidated financial statements and notes thereto included in the Annual Report on Form 10-K and our other reports filed from time to time with the Securities and Exchange Commission.  

 

Recently Issued Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). This guidance requires the recognition of most leases on the balance sheet 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. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We will adopt ASU 2016-02 during the first quarter of fiscal 2019. Currently, all of our restaurant and our restaurant support center leases are accounted for as operating leases, and therefore are not recorded within our balance sheet. We expect this adoption will result in a material increase in the assets and liabilities on our consolidated balance sheets, but will likely have an insignificant impact on our consolidated statements of income or consolidated statements of cash flows. In preparation for the adoption of the guidance, we are implementing controls and key system changes to enable the preparation of financial information.

 

Recently Adopted Accounting Standards

 

In April 2016, the FASB issued ASU 2016-10, an amendment to ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). ASU 2014-09 provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services and expands related disclosure requirements. ASU 2016-10 clarified ASU 2014-09 to address the potential for diversity in practice at the adoption. The standard also requires gift card breakage to be recognized as revenue in proportion to the pattern of gift card redemptions exercised by our customers. ASUs 2016-10 and 2014-09 were effective for annual and interim reporting periods beginning after December 15, 2017 and were permitted to be applied retrospectively to each prior period presented or retrospectively with the cumulative adjustment to opening retained earnings as of the date of adoption (modified retrospective approach).

 

We adopted ASU 2016-10 on January 3, 2018, and elected the modified retrospective adoption method. As a result, we recorded a net cumulative adjustment of $4.6 million to opening retained earnings. We now allocate loyalty member transaction amounts between the goods delivered and the future goods that will be delivered, on a relative standalone selling price basis. For the twenty-six weeks ended July 3, 2018, approximately $1.3 million of revenues have been deferred until those loyalty points are redeemed in the future and approximately $0.9 million of gift card breakage has been recorded as revenues.  

 

Under the previous standard, we estimated the cost of the loyalty reward based on the equivalent cost of the food and beverage earned and recorded this cost as a marketing expense included in “Occupancy and operating” on our Consolidated Statements

4

 


 

of Income. Additionally, under the previous standard we recorded gift card breakage as other income included within “Other (expense) income, net” on our Consolidated Statements of Income. ASU 2016-10 does not impact the calculation of our comparable restaurant sales or how we calculate gift card breakage.

 

2.  REVENUE RECOGNITION

Our revenues are comprised of food and beverage sales at our restaurants. Revenues from restaurant sales are recognized when payment is tendered at the point of sale. Amounts paid with a credit card are recorded in accounts and other receivables until payment is collected. Gift card sales are recorded as a liability and recognized as revenues upon redemption in our restaurants. Estimated gift card breakage is recorded as revenue and recognized in proportion to our historical redemption pattern. The estimated gift card breakage is based on when the likelihood of redemption becomes remote, which has typically been 24 months after the original gift card issuance date.

 

We offer a “BJ’s Premier Rewards” customer loyalty program, which enables participants to earn points for qualifying purchases that can be redeemed for goods in the future. We allocate the transaction price between the goods delivered and the future goods that will be delivered, on a relative standalone selling price basis, and defer the revenues allocated to the points until such points are redeemed.

 

The liability related to our gift card and loyalty program, included in accrued expenses, on our Consolidated Balance Sheets is as follows (in thousands):

 

 

 

July 3, 2018

 

 

January 2, 2018

 

Gift card liability

 

$

10,601

 

 

$

14,955

 

Deferred loyalty revenue (post-adoption of ASU 2016-10)

 

$

10,458

 

 

$

 

Estimated future loyalty costs (pre-adoption of ASU 2016-10)

 

$

 

 

$

3,080

 

 

Revenue recognized on our Consolidated Statements of Income for the redemption of gift cards and loyalty rewards deferred at the beginning of each respective fiscal year is as follows (in thousands):

 

  

 

For the Thirteen Weeks Ended

 

 

For the Twenty-Six Weeks Ended

 

 

 

 

July 3, 2018

 

 

July 4, 2017

 

 

July 3, 2018

 

 

July 4, 2017

 

 

Revenue recognized from gift card liability

 

$

1,754

 

 

$

1,370

 

 

$

7,686

 

 

$

6,117

 

(1)

Revenue recognized from customer loyalty program

 

$

2,722

 

 

$

 

 

$

5,053

 

 

$

 

(2)

 

 

(1)

Prior to the adoption of ASU 2016-10, gift card breakage was recorded as other income and included within “Other (expense) income, net” on our Consolidated Statements of Income and therefore not recognized as revenue.

 

(2)

Prior to the adoption of ASU 2016-10, loyalty rewards were recorded as marketing expense and included in “Occupancy and operating” on our Consolidated Statements of Income.

 

3.  LONG-TERM DEBT

 

Line of Credit

Our Credit Facility, which matures on November 18, 2021, provides us with revolving loan commitments totaling $250 million, of which $50 million may be used for the issuance of letters of credit. Availability under the Credit Facility is reduced by outstanding letters of credit, which are used to support our self-insurance programs. Our obligations under the Credit Facility are unsecured. As of July 3, 2018, there were borrowings of $110.0 million and letters of credit totaling approximately $14.5 million outstanding under the Credit Facility. Available borrowings under the Credit Facility were $125.5 million as of July 3, 2018. The Credit Facility bears interest at our choice of LIBOR plus a percentage not to exceed 1.75%, or at a rate ranging from Bank of America’s prime rate to 0.75% above Bank of America’s prime rate, based on our level of lease and debt obligations as compared to EBITDA plus lease expenses. The weighted average interest rate during the twenty-six weeks ended July 3, 2018 was approximately 3.2%.

The Credit Facility contains provisions requiring us to maintain compliance with certain covenants, including a Fixed Charge Coverage Ratio and a Lease Adjusted Leverage Ratio. At July 3, 2018, we were in compliance with these covenants.

 

5

 


 

Interest expense and commitment fees under the Credit Facility for the twenty-six weeks ended July 3, 2018 and July 4, 2017 were approximately $2.8 million and $2.0 million, respectively. We also capitalized approximately $0.07 million and $0.09 million of interest expense related to new restaurant construction during the twenty-six weeks ended July 3, 2018 and July 4, 2017, respectively.  

 

4.  NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if in-the-money stock options issued by us to sell common stock at set prices were exercised and if restrictions on restricted stock units (“RSUs”) issued by us were to lapse (collectively, equity awards) using the treasury stock method. Performance-based RSUs are considered contingent shares; therefore, at each reporting date we determine the probable number of shares that will vest and we include these contingently issuable shares in our diluted net income calculation. Once theses performance-based RSUs vest, they are included in our basic net income per share calculation.

The following table presents a reconciliation of basic and diluted net income per share, including the number of dilutive equity awards that were included in the dilutive net income per share computation (in thousands):

 

 

 

For the Thirteen Weeks Ended

 

 

For the Twenty-Six Weeks Ended

 

 

 

July 3, 2018

 

 

July 4, 2017

 

 

July 3, 2018

 

 

July 4, 2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16,945

 

 

$

9,639

 

 

$

31,609

 

 

$

18,905

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding – basic

 

 

20,880

 

 

 

21,573

 

 

 

20,733

 

 

 

21,752

 

Dilutive effect of equity awards

 

 

597

 

 

 

501

 

 

 

549

 

 

 

450

 

Weighted-average shares outstanding – diluted

 

 

21,477

 

 

 

22,074

 

 

 

21,282

 

 

 

22,202

 

 

For the thirteen weeks ended July 3, 2018 and July 4, 2017, there were approximately 0.02 million and 0.5 million shares of common stock equivalents, respectively, that were excluded from the calculation of diluted net income per share because they are anti-dilutive. For the twenty-six weeks ended July 3, 2018 and July 4, 2017, there were approximately 0.3 million and 0.5 million shares of common stock equivalents, respectively, that were excluded from the calculation of diluted net income per share because they are anti-dilutive.

 

5.  RELATED PARTY

James Dal Pozzo, the Chairman of the Board of the Jacmar Companies (“Jacmar”), is a member of our Board of Directors. Jacmar, through its affiliation with Distribution Market Advantage (“DMA”), a consortium of large, regional food distributors located throughout the United States, is currently our largest distributor of food, beverage, paper products and supplies. In 2006, we began using DMA to deliver the majority of our food products to our restaurants. In July 2017, after conducting a market evaluation, we entered into a new five-year agreement with DMA. The new agreement expires in June 2022.

Jacmar services our restaurants in California and Nevada, while other DMA distributors service our restaurants in all other states. Under the terms of our agreement with DMA, Jacmar is required to sell products to us at the same prices as the other DMA distributors. Jacmar does not provide us with any produce, liquor, wine or beer products, all of which are provided by other third party vendors and are included in “Cost of sales” on the Consolidated Statements of Income.

6

 


 

The cost of food, beverage, paper products and supplies provided by Jacmar included within cost of sales and occupancy and operating expenses consisted of the following (in thousands):

 

 

 

For the Thirteen Weeks Ended

 

 

For the Twenty-Six Weeks Ended

 

 

 

July 3, 2018

 

 

July 4, 2017

 

 

July 3, 2018

 

 

July 4, 2017

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third party suppliers

 

$

49,747

 

 

 

69.1

%

 

$

47,705

 

 

 

68.6

%

 

$

98,416

 

 

 

69.3

%

 

$

93,023

 

 

 

69.0

%

Jacmar

 

 

22,279

 

 

 

30.9

 

 

 

21,812

 

 

 

31.4

 

 

 

43,581

 

 

 

30.7

 

 

 

41,889

 

 

 

31.0

 

Total cost of sales

 

$

72,026

 

 

 

100.0

%

 

$

69,517

 

 

 

100.0

%

 

$

141,997

 

 

 

100.0

%

 

$

134,912

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy and operating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third party suppliers

 

$

56,601

 

 

 

95.8

%

 

$

52,562

 

 

 

95.8

%

 

$

111,642

 

 

 

95.8

%

 

$

104,273

 

 

 

95.8

%

Jacmar

 

 

2,472

 

 

 

4.2

 

 

 

2,310

 

 

 

4.2

 

 

 

4,934

 

 

 

4.2

 

 

 

4,543

 

 

 

4.2

 

Total occupancy and operating

 

$

59,073

 

 

 

100.0

%

 

$

54,872

 

 

 

100.0

%

 

$

116,576

 

 

 

100.0

%

 

$

108,816

 

 

 

100.0

%

 

The amounts included in trade payables related to Jacmar consisted of the following (in thousands):

 

 

 

July 3, 2018

 

 

January 2, 2018

 

Third party suppliers

 

$

16,122

 

 

$

18,738

 

Jacmar

 

 

2,165

 

 

 

6,537

 

Total accounts payable

 

$

18,287

 

 

$

25,275

 

 

6.  STOCK-BASED COMPENSATION

Our current shareholder approved stock-based compensation plan is the 2005 Equity Incentive Plan (as amended from time to time, “the Plan”). Under the Plan, we may issue shares of our common stock to employees, officers, directors and consultants. We have granted incentive stock options, non-qualified stock options, and performance and time-based restricted stock units. Stock options and stock appreciation rights, if any, are charged against the Plan share reserve on the basis of one share for each share granted. Other types of grants, including RSUs, are currently charged against the Plan share reserve on the basis of 1.5 shares for each share granted. The Plan also contains other limits on the terms of incentive grants such as limits on the number that can be granted to an employee during any fiscal year. All options granted under the Plan expire within 10 years of their date of grant.

Under the Plan, we issue non-qualified stock options as well as time-based and performance-based RSUs to vice presidents and above. We issue time-based RSUs and/or non-qualified stock options to other support employees. We also issue RSUs, and previously issued non-qualified stock options, in connection with the BJ’s Gold Standard Stock Ownership Program (the “GSSOP”). The GSSOP is a long-term equity incentive program for our restaurant general managers, executive kitchen mangers, directors of operations and directors of kitchen operations. GSSOP grants are dependent on the length of each participant’s service with us and position. All GSSOP participants are required to remain in good standing during their service period.

The Plan permits our Board of Directors to set the vesting terms and exercise period for awards at their discretion. Stock options and time-based RSUs vest ratably over three or five years for non-GSSOP participants and either cliff vest at five years or cliff vest at 33% on the third anniversary and 67% on the fifth anniversary for GSSOP participants. Performance-based RSUs generally cliff vest on the third anniversary of the grant date in an amount from 0% to 150% of the grant quantity, dependent on the level of performance target achievement.

The following table presents the stock-based compensation recognized within our consolidated financial statements (in thousands):  

 

 

 

For the Thirteen Weeks Ended

 

 

For the Twenty-Six Weeks Ended

 

 

 

July 3, 2018

 

 

July 4, 2017

 

 

July 3, 2018

 

 

July 4, 2017

 

Labor and benefits

 

$

544

 

 

$

530

 

 

$

1,122

 

 

$

999

 

General and administrative

 

$

1,254

 

 

$

1,363

 

 

$

2,959

 

 

$

2,531

 

Capitalized (1)

 

$

69

 

 

$

78

 

 

$

162

 

 

$

143

 

7

 


 

 

 

(1)

Capitalized stock-based compensation relates to our restaurant development personnel and is included in “Property and equipment, net” on the Consolidated Balance Sheets.

Stock Options

The fair value of each stock option was estimated on the grant date using the Black‑Scholes option-pricing model with the following weighted average assumptions:

 

 

 

For the Twenty-Six Weeks Ended

 

 

 

July 3, 2018

 

 

July 4, 2017

 

Expected volatility

 

 

33.6

%

 

 

34.7

%

Risk free interest rate

 

 

2.3

%

 

 

1.9

%

Expected option life

 

5 years

 

 

5 years

 

Dividend yield

 

 

1.5

%

 

 

0

%

Fair value of options granted

 

$

10.77

 

 

$

12.13

 

 

U.S. GAAP requires us to make certain assumptions and judgments regarding the grant date fair value. These judgments include expected volatility, risk free interest rate, expected option life, and dividend yield. These estimations and judgments are determined by us using assumptions that, in many cases, are outside of our control. The changes in these variables or trends, including stock price volatility, dividend yield and risk free interest rate, may significantly impact the fair value of future grants, resulting in a significant impact to our financial results.

The exercise price of our stock options under our stock-based compensation plan is required to equal or exceed the market close fair value of our shares on the option grant date or the most recent trading day when grants take place on market holidays. The following table presents stock option activity:

 

 

 

Options Outstanding

 

 

Options Exercisable

 

 

 

Shares

(in thousands)

 

 

Weighted

Average

Exercise

Price

 

 

Shares

(in thousands)

 

 

Weighted

Average

Exercise

Price

 

Outstanding at January 2, 2018

 

 

1,311

 

 

$

32.68

 

 

 

926

 

 

$

30.02

 

Granted

 

 

177

 

 

 

37.77

 

 

 

 

 

 

 

 

 

Exercised

 

 

(620

)

 

 

27.34

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(22

)

 

 

39.36

 

 

 

 

 

 

 

 

 

Outstanding at July 3, 2018

 

 

846

 

 

$

37.48

 

 

 

436

 

 

$

36.50

 

 

As of July 3, 2018, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $3.5 million, which is generally expected to be recognized over the next five years.

Restricted Stock Units

Time-Based Restricted Stock Units

The following table presents time-based restricted stock unit activity:

 

 

 

Shares

(in thousands)

 

 

Weighted

Average

Fair Value

 

Outstanding at January 2, 2018

 

 

500

 

 

$

37.72

 

Granted

 

 

104

 

 

 

39.77

 

Vested or released

 

 

(68

)

 

 

37.94

 

Forfeited

 

 

(28

)

 

 

37.84

 

Outstanding at July 3, 2018

 

 

508

 

 

$

38.10

 

 

8

 


 

The fair value of our time-based RSUs is equal to the fair value of our common stock at market close on the date of grant or the most recent trading day when grants take place on market holidays. The fair value of each time-based RSU is expensed over the vesting period (e.g., three or five years). As of July 3, 2018, total unrecognized stock-based compensation expense related to non-vested RSUs was approximately $9.7 million, which is generally expected to be recognized over the next five years.  

Performance-Based Restricted Stock Units

The following table presents performance-based restricted stock unit activity:

 

 

 

Shares

(in thousands)

 

 

Weighted

Average

Fair Value

 

Outstanding at January 2, 2018

 

 

68

 

 

$

38.68

 

Granted

 

 

39

 

 

 

37.70

 

Vested or released

 

 

 

 

 

 

Forfeited

 

 

(1

)

 

 

38.66

 

Outstanding at July 3, 2018

 

 

106

 

 

$

38.32

 

 

The fair value of our performance-based RSUs is equal to the fair value of our common stock at market close on the date of grant or the most recent trading day when grants take place on market holidays. The fair value of each performance-based RSU is expensed based on management’s current estimate of the level that the performance goal will be achieved. As of July 3, 2018, based on the target level of performance, the total unrecognized stock-based compensation expense related to non-vested performance-based RSUs was approximately $1.8 million, which is generally expected to be recognized over the next three years.  

 

7.  INCOME TAXES  

We calculate our interim income tax provision in accordance with ASC Topic 270, “Interim Reporting” and ASC Topic 740, “Accounting for Income Taxes.” At the end of each interim period, we estimate the annual effective tax rate and apply that rate to our ordinary year to date earnings. The related tax expense or benefit is recognized in the interim period in which it occurs. The effect of changes in enacted tax laws, rates or tax status is recognized in the interim period in which the change is effective. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including the expected operating income for the year, permanent and temporary differences as a result of differences between amounts measured and recognized in accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets generated in the current fiscal year. The accounting estimates used to compute income tax expense may change as new events occur, additional information is obtained or the tax environment changes.

 

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law substantially amending the Internal Revenue Code of 1986. The TCJA made significant changes to the taxation of corporations such as the reduction of the highest corporate marginal tax rate from 35% to 21%, additional limitations on certain deductions for executive compensation, introducing an additional capital investment deduction, modifying rules for the deduction of interest expense, and modifying the rules regarding the utilization of net operating loss carryforwards. All relevant tax law changes have been and will be incorporated into this and subsequent interim provision calculations. We have made provisional estimates of the impacts of the TCJA, principally with respect to executive compensation deduction limitations. We will continue to monitor the legislation and its impact on our business, and we will make adjustments to the recorded provisional amounts either the earlier of the period in which additional guidance is obtained and analyzed or by year end.

As of July 3, 2018, we had unrecognized tax benefits of approximately $1.6 million, of which approximately $1.1 million, if reversed, would impact our effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is the following (in thousands):

 

 

 

For the Twenty-Six Weeks Ended

 

 

 

July 3, 2018

 

 

July 4, 2017

 

Gross unrecognized tax benefits at beginning of year

 

$

1,516

 

 

$

1,245

 

Decreases for tax positions taken in prior years

 

 

 

 

 

(1

)

Increases for tax positions taken in the current year

 

 

44

 

 

 

65

 

Gross unrecognized tax benefits at end of year

 

$

1,560

 

 

$

1,309

 

9

 


 

 

Our uncertain tax positions are related to tax years that remain subject to examination by tax agencies. As of July 3, 2018, the earliest tax year still subject to examination by the Internal Revenue Service is 2014. The earliest year still subject to examination by a significant state or local taxing jurisdiction is 2013.

 

8.  LEGAL PROCEEDINGS

We are subject to lawsuits, administrative proceedings and demands that arise in the ordinary course of our business and which typically involve claims from customers, employees and others related to operational, employment, real estate and intellectual property issues common to the foodservice industry. A number of these claims may exist at any given time. We are self-insured for a portion of our general liability, our employee workers’ compensation and our employment practice requirements. We maintain coverage with a third party insurer to limit our total exposure. We believe that most of our customer claims will be covered by our general liability insurance, subject to coverage limits and the portion of such claims that are self-insured. Punitive damages awards and employee unfair practice claims, however, are not covered by our general liability insurance. To date, we have not been ordered to pay punitive damages with respect to any claims, but there can be no assurance that punitive damages will not be awarded with respect to any future claims. We could be affected by adverse publicity resulting from allegations in lawsuits, claims and proceedings, regardless of whether these allegations are valid or whether we are ultimately determined to be liable. We currently believe that the final disposition of these types of lawsuits, proceedings and claims will not have a material adverse effect on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings or claims.

 

9.  SHAREHOLDERS’ EQUITY

Stock Repurchases

During the twenty-six weeks ended July 3, 2018, we repurchased and retired approximately 0.2 million shares of our common stock at an average price of $42.31 per share for a total of $6.7 million, which is recorded as a reduction in common stock, with any excess charged to retained earnings. As of July 3, 2018, we have approximately $35.9 million remaining under the current $400 million share repurchase plan approved by our Board of Directors.

Cash Dividends

On April 24, 2018, our Board of Directors authorized and declared a quarterly cash dividend of $0.11 per share of common stock payable on May 28, 2018, to shareholders of record at the close of business on May 14, 2018. While we intend to pay quarterly cash dividends, any future decisions to pay, increase or decrease cash dividends will be reviewed quarterly and declared by the Board of Directors at its discretion. Debt instruments that we enter into in the future may contain covenants that place limitations on the amount of dividends we may pay.