TXRH

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 28, 2004, for Texas Roadhouse, Inc. (the "Company"). The financial statements presented are for Texas Roadhouse Holdings LLC and entities under common control prior to the Company's reorganization and Initial Public Offering (IPO) completed on October 8, 2004. As of the period end, the Company operated 182 restaurants (99 company-owned, 83 franchise) across 34 states. The historical data does not reflect the tax implications of the reorganization into a "C" corporation or the elimination of minority interests, which are addressed in pro forma disclosures.

Key Financial Metrics

Note: Historical Net Income excludes income taxes as the entity was an LLC. Pro forma net income for the 13 weeks ended Sep 28, 2004, adjusted for taxes, was $5.0 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 27.4% year-over-year for the quarter (from $72.4M to $92.2M) and 26.1% year-over-year for the 39-week period. This was driven by the opening of new restaurants and comparable restaurant sales growth of 6.8% for the quarter.
• Cost of Sales: Restaurant cost of sales increased to 34.8% of sales in Q3 2004 from 33.1% in Q3 2003, primarily due to higher beef costs, partially offset by menu price increases.
• Labor Efficiency: Labor expenses decreased as a percentage of sales to 27.6% in Q3 2004 from 28.2% in Q3 2003, benefiting from sales growth outpacing wage inflation.
• Interest Expense: Interest expense decreased to $1.1 million in Q3 2004 from $1.4 million in Q3 2003, despite higher debt levels, due to lower average interest rates on the credit facility.
• Minority Interest: Minority interest increased to $1.7 million in Q3 2004 from $1.6 million in Q3 2003 due to improved results from consolidated subsidiaries. This line item is expected to be eliminated post-IPO.

Guidance, Outlook, and Risks

• Corporate Reorganization: On October 8, 2004, the Company completed its IPO and reorganization into a "C" corporation. This transition subjects the Company to federal and state income taxes. A one-time charge of approximately $4.9 million for deferred tax liabilities is expected in Q4 2004.
• Debt Refinancing: Proceeds from the IPO were used to repay $68.9 million of existing debt. The Company entered a new $150 million revolving credit facility with improved terms (LIBOR + 0.75% to 1.50%).
• Capital Expenditures: The Company expects capital expenditures of $45.0 million to $50.0 million in 2004 and $50.0 million to $55.0 million in 2005, primarily for new restaurant openings.
• Cost Outlook: Management anticipates cost of sales to be 150 to 160 basis points higher in Q4 2004 versus Q4 2003 due to food cost inflation, despite a 2% menu price increase implemented in November 2004.
• Risks: Key risks include volatility in beef and commodity prices, labor shortages, the ability to successfully execute growth strategies, and the impact of general economic conditions on consumer spending.

Investor Verification Checklist

• Pro Forma Adjustments: Verify the impact of the $4.9 million deferred tax charge and the elimination of minority interest on future earnings per share (EPS) calculations.
• Debt Covenants: Review the new $150 million credit facility terms, specifically the minimum fixed charge coverage ratio (1.50:1.00) and maximum leverage ratio (3.00:1.00).
• Food Cost Inflation: Monitor the effectiveness of the November 2004 menu price increases in offsetting rising beef and pork costs.
• Related Party Transactions: Note the significant historical transactions with entities controlled by founder W. Kent Taylor (e.g., Buffalo Construction, Inc.), which were largely resolved or restructured in connection with the IPO.
• Restaurant Count: Confirm the post-IPO restaurant count of 100 wholly-owned company restaurants and 82 franchise restaurants.