Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For thequarterly period ended September 28, 2010**

 

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For thetransition period from              to              **

 

**CommissionFile Number 000-50972**

 

**TexasRoadhouse, Inc.**

(Exact name of registrant specified in its charter)

 

| **Delaware**                    | ** ** | **20-1083890**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (IRS Employer          |
| incorporation or organization)  |       | Identification Number) |

 

**6040Dutchmans Lane, Suite 200**

**Louisville,Kentucky 40205**

(Address of principal executive offices) (Zip Code)

 

**(502)426-9984**

(Registrant’s telephone number, including area code)

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulations S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o  No o.

 

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

 

| Large accelerated filer o |   | Accelerated filer x    |
|--------------------------------|--------|-----------------------------|
|                           |   |                        |
| Non-accelerated filer o   |   | Smaller reporting company o |

 

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

 

Thenumber of shares of common stock outstanding were 71,767,290 on October 29,2010.

 

 

 

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Table of Contents

 

**TABLEOF CONTENTS**

 
| PART I. FINANCIAL INFORMATION                                                                                                              |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                            |   |
| Item 1 — Financial Statements — Texas  Roadhouse, Inc. and Subsidiaries                                                          | 3      |
| Condensed Consolidated Balance Sheets —  September 28, 2010 and December 29, 2009                                                | 3      |
| Condensed Consolidated Statements of Income — For the  13 and 39 Weeks Ended September 28, 2010 and September 29, 2009           | 4      |
| Condensed Consolidated Statements of Stockholders’  Equity and Comprehensive Income — For the 39 Weeks Ended September 28,  2010 | 5      |
| Condensed  Consolidated Statements of Cash Flows — For the 39 Weeks Ended  September 28, 2010 and September 29, 2009             | 6      |
| Notes to Condensed Consolidated Financial Statements                                                                                            | 7      |
| Item  2 — Management’s Discussion and Analysis of Financial Condition and Results  of Operations                                      | 14     |
| Item 3 — Quantitative and Qualitative Disclosures  About Market Risk                                                                       | 23     |
| Item 4 — Controls and Procedures                                                                                                           | 23     |
|                                                                                                                                            |   |
| PART II.  OTHER INFORMATION                                                                                                                |   |
|                                                                                                                                            |   |
| Item  1 — Legal Proceedings                                                                                                                | 24     |
| Item  1A — Risk Factors                                                                                                                    | 24     |
| Item 2 — Unregistered Sales of Equity Securities and  Use of Proceeds                                                                      | 24     |
| Item 3 — Defaults Upon Senior Securities                                                                                                   | 24     |
| Item 4 — (Removed and Reserved)                                                                                                            | 24     |
| Item  5 — Other Information                                                                                                                | 24     |
| Item 6 — Exhibits                                                                                                                          | 24     |
|                                                                                                                                            |   |
| Signatures                                                                                                                                      | 25     |

 

2

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Table of Contents

 

**PART I — FINANCIAL INFORMATION**

 

**ITEM 1 — FINANCIAL STATEMENTS**

 

**TexasRoadhouse, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

**(inthousands, except share and per share data)**

 
| ** **                                                                                                                                                                                     | ** ** | **(unaudited)**                  | ** ** | ** **                      | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **September 28, 2010** | ** ** | **December 29, 2009** | ** ** |
| **Assets**                                                                                                                                                                                     |       |                             |       |                            |       |
| Current assets:                                                                                                                                                                                |       |                             |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                      |       | $                                | 55,425     |                            | $          | 46,858 |   |
| Receivables, net of allowance for doubtful  accounts of $255 at September 28, 2010 and $911 at December 29,  2009                                                                    |       | 12,027                           |       | 12,312                          |       |
| Inventories, net                                                                                                                                                                               |       | 7,549                            |       | 8,004                           |       |
| Prepaid expenses                                                                                                                                                                               |       | 4,569                            |       | 5,611                           |       |
| Deferred tax assets                                                                                                                                                                            |       | 3,022                            |       | 1,531                           |       |
| Total current assets                                                                                                                                                                           |       | 82,592                           |       | 74,316                          |       |
| Property and equipment, net                                                                                                                                                                    |       | 456,473                          |       | 456,281                         |       |
| Goodwill                                                                                                                                                                                       |       | 113,465                          |       | 113,465                         |       |
| Intangible asset, net                                                                                                                                                                          |       | 10,387                           |       | 11,194                          |       |
| Fair value of derivative financial instruments                                                                                                                                                 |       | —                           |       | 31                              |       |
| Other assets                                                                                                                                                                                   |       | 7,630                            |       | 6,786                           |       |
| Total assets                                                                                                                                                                                   |       | $                                | 670,547    |                            | $          | 662,073 |   |
|                                                                                                                                                                                           |       |                             |       |                            |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                 |       |                             |       |                            |       |
| Current liabilities:                                                                                                                                                                           |       |                             |       |                            |       |
| Current maturities of long-term debt and  obligations under capital leases                                                                                                                     |       | $                                | 267        |                            | $          | 247 |   |
| Accounts payable                                                                                                                                                                               |       | 24,597                           |       | 27,882                          |       |
| Deferred revenue — gift cards/certificates                                                                                                                                                |       | 14,611                           |       | 34,443                          |       |
| Accrued wages                                                                                                                                                                                  |       | 20,664                           |       | 20,186                          |       |
| Income tax payable                                                                                                                                                                             |       | 4,646                            |       | 6,194                           |       |
| Accrued taxes and licenses                                                                                                                                                                     |       | 12,198                           |       | 8,579                           |       |
| Other accrued liabilities                                                                                                                                                                      |       | 11,683                           |       | 10,672                          |       |
| Total current liabilities                                                                                                                                                                      |       | 88,666                           |       | 108,203                         |       |
| Long-term debt and obligations under capital  leases, excluding current maturities                                                                                                             |       | 61,977                           |       | 101,179                         |       |
| Stock option and other deposits                                                                                                                                                                |       | 3,906                            |       | 3,653                           |       |
| Deferred rent                                                                                                                                                                                  |       | 13,834                           |       | 12,089                          |       |
| Deferred tax liabilities                                                                                                                                                                       |       | 7,564                            |       | 6,660                           |       |
| Fair value of derivative financial instruments                                                                                                                                                 |       | 4,365                            |       | —                          |       |
| Other liabilities                                                                                                                                                                              |       | 9,410                            |       | 7,339                           |       |
| Total liabilities                                                                                                                                                                              |       | 189,722                          |       | 239,123                         |       |
| Texas Roadhouse, Inc. and subsidiaries  stockholders’ equity:                                                                                                                        |       |                             |       |                            |       |
| Preferred stock ($0.001 par value, 1,000,000  shares authorized; no shares issued or outstanding)                                                                                              |       | —                           |       | —                          |       |
| Common stock, ($0.001 par value, 100,000,000  shares authorized, 71,727,456 and 70,384,915 shares issued and outstanding at  September 28, 2010 and December 29, 2009, respectively) |       | 72                               |       | 70                              |       |
| Additional paid in capital                                                                                                                                                                     |       | 243,784                          |       | 231,564                         |       |
| Retained earnings                                                                                                                                                                              |       | 236,948                          |       | 188,719                         |       |
| Accumulated other comprehensive (loss) gain                                                                                                                                                    |       | (2,681                           | )          | 19                              |       |
| Total Texas Roadhouse, Inc. and subsidiaries  stockholders’ equity                                                                                                                   |       | 478,123                          |       | 420,372                         |       |
| Noncontrolling interests                                                                                                                                                                       |       | 2,702                            |       | 2,578                           |       |
| Total equity                                                                                                                                                                                   |       | 480,825                          |       | 422,950                         |       |
| Total liabilities and equity                                                                                                                                                                   |       | $                                | 670,547    |                            | $          | 662,073 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

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**TexasRoadhouse, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Income**

**(inthousands, except per share data)**

**(unaudited)**

** **
| ** **                                                                           | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                           | ** ** | **September 28,  2010** | ** ** | **September 29,  2009** | ** ** | **September 28,  2010** | ** ** | **September 29,  2009** | ** ** |
| Revenue:                                                                             |       |                         |       |                         |       |   |   |   |   |
| Restaurant sales                                                                     |       | $                            | 243,405    |                         | $          | 224,417 |   | $ | 753,582 |   | $ | 708,808 |   |
| Franchise royalties and fees                                                         |       | 2,208                        |       | 2,050                        |       | 6,817 |   | 6,155 |   |
|                                                                                 |       |                         |       |                         |       |   |   |   |   |
| Total revenue                                                                        |       | 245,613                      |       | 226,467                      |       | 760,399 |   | 714,963 |   |
|                                                                                 |       |                         |       |                         |       |   |   |   |   |
| Costs and expenses:                                                                  |       |                         |       |                         |       |   |   |   |   |
| Restaurant operating costs:                                                          |       |                         |       |                         |       |   |   |   |   |
| Cost of sales                                                                        |       | 79,101                       |       | 74,489                       |       | 244,560 |   | 237,844 |   |
| Labor                                                                                |       | 71,835                       |       | 67,630                       |       | 221,241 |   | 210,203 |   |
| Rent                                                                                 |       | 5,329                        |       | 5,029                        |       | 15,886 |   | 14,870 |   |
| Other operating                                                                      |       | 43,476                       |       | 38,778                       |       | 128,841 |   | 119,450 |   |
| Pre-opening                                                                          |       | 2,150                        |       | 1,194                        |       | 4,562 |   | 4,411 |   |
| Depreciation and amortization                                                        |       | 10,262                       |       | 10,395                       |       | 30,861 |   | 31,482 |   |
| Impairment and closures                                                              |       | 44                           |       | (201                         | )          | 302 |   | (273 | ) |
| General and administrative                                                           |       | 11,968                       |       | 11,872                       |       | 39,263 |   | 35,918 |   |
|                                                                                 |       |                         |       |                         |       |   |   |   |   |
| Total costs and expenses                                                             |       | 224,165                      |       | 209,186                      |       | 685,516 |   | 653,905 |   |
|                                                                                 |       |                         |       |                         |       |   |   |   |   |
| Income from operations                                                               |       | 21,448                       |       | 17,281                       |       | 74,883 |   | 61,058 |   |
|                                                                                 |       |                         |       |                         |       |   |   |   |   |
| Interest expense, net                                                                |       | 644                          |       | 784                          |       | 2,078 |   | 2,517 |   |
| Equity income from investments in unconsolidated  affiliates                         |       | (155                         | )          | (36                          | )          | (355 | ) | (185 | ) |
|                                                                                 |       |                         |       |                         |       |   |   |   |   |
| Income before taxes                                                                  |       | 20,959                       |       | 16,533                       |       | 73,160 |   | 58,726 |   |
| Provision for income taxes                                                           |       | 6,478                        |       | 5,431                        |       | 23,133 |   | 18,582 |   |
| Net income including noncontrolling interests                                        |       | $                            | 14,481     |                         | $          | 11,102 |   | $ | 50,027 |   | $ | 40,144 |   |
| Less: Net income attributable to noncontrolling  interests                           |       | 529                          |       | 407                          |       | 1,798 |   | 1,374 |   |
|                                                                                 |       |                         |       |                         |       |   |   |   |   |
| Net income attributable to Texas  Roadhouse, Inc. and subsidiaries              |       | $                            | 13,952     |                         | $          | 10,695 |   | $ | 48,229 |   | $ | 38,770 |   |
|                                                                                 |       |                         |       |                         |       |   |   |   |   |
| Net income per common share attributable to Texas  Roadhouse, Inc. and subsidiaries: |       |                         |       |                         |       |   |   |   |   |
| Basic                                                                                |       | $                            | 0.19       |                         | $          | 0.15 |   | $ | 0.68 |   | $ | 0.56 |   |
|                                                                                 |       |                         |       |                         |       |   |   |   |   |
| Diluted                                                                              |       | $                            | 0.19       |                         | $          | 0.15 |   | $ | 0.66 |   | $ | 0.54 |   |
|                                                                                 |       |                         |       |                         |       |   |   |   |   |
| Weighted-average shares outstanding:                                                 |       |                         |       |                         |       |   |   |   |   |
| Basic                                                                                |       | 71,660                       |       | 70,204                       |       | 71,273 |   | 69,847 |   |
|                                                                                 |       |                         |       |                         |       |   |   |   |   |
| Diluted                                                                              |       | 73,002                       |       | 71,550                       |       | 72,727 |   | 71,151 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

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**TexasRoadhouse, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income**

**(inthousands, except share data)**

**(unaudited)**

** **
| ** **                                                  | ** ** | **Shares** | ** ** | **Par  Value** | ** ** | **Paid in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total Texas  Roadhouse, Inc. and  subsidiaries** | ** ** | **Noncontrolling  Interests** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|----------------|------------|---------------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------|------------|-----------|------------|
|                                                        |       |       |       |           |       |                      |       |                   |       |                                                      |       |                                                              |       |                          |       |      |       |
| Balance, December 29, 2009                             |       | 70,384,915 |       | $              | 70         |                      | $          | 231,564                |       | $                                                         | 188,719    |                                                              | $          | 19                            |       | $         | 420,372    |   | $ | 2,578 |   | $ | 422,950 |   |
|                                                        |       |       |       |           |       |                      |       |                   |       |                                                      |       |                                                              |       |                          |       |      |       |
| Comprehensive income:                                       |       |       |       |           |       |                      |       |                   |       |                                                      |       |                                                              |       |                          |       |      |       |
| Unrealized loss on derivatives, net of tax of $1.7 million  |       | —     |       | —         |       | —                    |       | —                 |       | (2,700                                                    | )          | (2,700                                                            | )          | —                        |       | (2,700    | )          |
| Net income                                                  |       | —     |       | —         |       | —                    |       | 48,229                 |       | —                                                    |       | 48,229                                                            |       | 1,798                         |       | 50,027    |       |
|                                                        |       |       |       |           |       |                      |       |                   |       |                                                      |       |                                                              |       |                          |       |      |       |
| Total comprehensive income                                  |       |       |       |           |       |                      |       |                   |       |                                                      |       | 45,529                                                            |       |                          |       | 47,327    |       |
|                                                        |       |       |       |           |       |                      |       |                   |       |                                                      |       |                                                              |       |                          |       |      |       |
| Distributions to noncontrolling interests                   |       | —     |       | —         |       | —                    |       | —                 |       | —                                                    |       | —                                                            |       | (1,674                        | )          | (1,674    | )          |
| Shares issued under stock option plan including tax effects |       | 970,155    |       | 1              |       | 8,744                     |       | —                 |       | —                                                    |       | 8,745                                                             |       | —                        |       | 8,745     |       |
| Settlement of restricted stock units, net of tax            |       | 372,386    |       | 1              |       | (2,229                    | )          | —                 |       | —                                                    |       | (2,228                                                            | )          | —                        |       | (2,228    | )          |
| Share-based compensation                                    |       | —     |       | —         |       | 5,705                     |       | —                 |       | —                                                    |       | 5,705                                                             |       | —                        |       | 5,705     |       |
|                                                        |       |       |       |           |       |                      |       |                   |       |                                                      |       |                                                              |       |                          |       |      |       |
| Balance, September 28, 2010                            |       | 71,727,456 |       | $              | 72         |                      | $          | 243,784                |       | $                                                         | 236,948    |                                                              | $          | (2,681                        | )          | $         | 478,123    |   | $ | 2,702 |   | $ | 480,825 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

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**TexasRoadhouse, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                  | ** ** | **39 Weeks Ended**     | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **September 28, 2010** | ** ** | **September 29, 2009** | ** ** |
| **Cash  flows from operating activities:**                                  |       |                             |       |   |   |
| Net income including noncontrolling interests                               |       | $                                | 50,027     |   | $ | 40,144 |   |
| Depreciation and amortization                                               |       | 30,861                           |       | 31,482 |   |
| Deferred income taxes                                                       |       | 1,109                            |       | 3,526 |   |
| Loss on disposition of assets                                               |       | 1,036                            |       | 918 |   |
| Impairment and closures                                                     |       | 141                              |       | (305 | ) |
| Equity income from investments in unconsolidated  affiliates                |       | (355                             | )          | (185 | ) |
| Distributions received from investments in  unconsolidated affiliates       |       | 299                              |       | 261 |   |
| Provision for doubtful accounts                                             |       | (656                             | )          | 286 |   |
| Share-based compensation expense                                            |       | 5,705                            |       | 5,642 |   |
| Excess tax benefits from share-based compensation                           |       | (2,326                           | )          | (1,671 | ) |
| Changes in operating working capital:                                       |       |                             |       |   |   |
| Receivables                                                                 |       | 941                              |       | 1,165 |   |
| Inventories                                                                 |       | 455                              |       | 1,094 |   |
| Prepaid expenses and other current assets                                   |       | 1,042                            |       | 2,160 |   |
| Other assets                                                                |       | (760                             | )          | (1,860 | ) |
| Accounts payable                                                            |       | (3,285                           | )          | (12,367 | ) |
| Deferred revenue — gift cards/certificates                             |       | (19,832                          | )          | (18,962 | ) |
| Accrued wages                                                               |       | 478                              |       | 3,572 |   |
| Prepaid income taxes and income taxes payable                               |       | 976                              |       | 8,288 |   |
| Accrued taxes and licenses                                                  |       | 3,619                            |       | 2,590 |   |
| Other accrued liabilities                                                   |       | 1,011                            |       | (740 | ) |
| Deferred rent                                                               |       | 1,745                            |       | 1,614 |   |
| Other liabilities                                                           |       | 2,071                            |       | 1,644 |   |
|                                                                        |       |                             |       |   |   |
| Net cash provided by operating activities                                   |       | $                                | 74,302     |   | $ | 68,296 |   |
|                                                                        |       |                             |       |   |   |
| **Cash  flows from investing activities:**                                  |       |                             |       |   |   |
| Capital expenditures — property and equipment                          |       | (31,598                          | )          | (34,814 | ) |
| Acquisitions of franchise restaurants, net of cash  acquired                |       | —                           |       | 25 |   |
| Proceeds from sale of property and equipment,  including insurance proceeds |       | 175                              |       | 2,329 |   |
|                                                                        |       |                             |       |   |   |
| Net cash used in investing activities                                       |       | $                                | (31,423    | ) | $ | (32,460 | ) |
|                                                                        |       |                             |       |   |   |
| **Cash  flows from financing activities:**                                  |       |                             |       |   |   |
| Repayments of revolving credit facility, net                                |       | (39,000                          | )          | (6,000 | ) |
| Investments in unconsolidated affiliates                                    |       | (28                              | )          | (19 | ) |
| Distributions to noncontrolling interest holders                            |       | (1,674                           | )          | (1,656 | ) |
| Excess tax benefits from share-based compensation                           |       | 2,326                            |       | 1,671 |   |
| Repayments of stock option and other deposits                               |       | (694                             | )          | (1,182 | ) |
| Proceeds from stock option and other deposits                               |       | 947                              |       | 925 |   |
| Settlement of restricted stock units, net of tax                            |       | (2,229                           | )          | (1,366 | ) |
| Principal payments on long-term debt and capital  lease obligations         |       | (182                             | )          | (227 | ) |
| Proceeds from exercise of stock options                                     |       | 6,222                            |       | 2,593 |   |
|                                                                        |       |                             |       |   |   |
| Net cash used in financing activities                                       |       | $                                | (34,312    | ) | $ | (5,261 | ) |
|                                                                        |       |                             |       |   |   |
| Net increase in cash and cash equivalents                                   |       | 8,567                            |       | 30,575 |   |
| Cash and cash equivalents — beginning of period                        |       | 46,858                           |       | 5,258 |   |
| Cash and cash equivalents — end of period                              |       | $                                | 55,425     |   | $ | 35,833 |   |
|                                                                        |       |                             |       |   |   |
| Supplemental disclosures of cash flow information:                          |       |                             |       |   |   |
| Interest, net of amounts capitalized                                        |       | $                                | 2,035      |   | $ | 2,603 |   |
| Income taxes, net of refunds                                                |       | $                                | 21,048     |   | $ | 6,784 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

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**TexasRoadhouse, Inc. and Subsidiaries**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Tabulardollar amounts in thousands, except per share data)**

**(unaudited)**

 

**(1)   Basis ofPresentation**

 

Theaccompanying unaudited condensed consolidated financial statements include theaccounts of Texas Roadhouse, Inc. (the “Company”, “we” and/or “our”), ourwholly-owned subsidiaries and subsidiaries in which we own more than 50 percentinterest, as of and for the 13 and 39 weeks ended September 28, 2010 and September 29,2009.  Our wholly-owned subsidiariesinclude: Texas Roadhouse Holdings LLC (“Holdings”), Texas Roadhouse DevelopmentCorporation (“TRDC”), Texas Roadhouse Management Corp. (“Management Corp.”) andAspen Creek, LLC (“Aspen Creek”).  We and our subsidiaries operaterestaurants under the names Texas Roadhouse and Aspen Creek. Holdings alsoprovides supervisory and administrative services for certain other franchiseand license restaurants. TRDC sells franchise rights and collects the franchiseroyalties and fees.  Management Corp. provides management services to theCompany, Holdings, Aspen Creek and certain other license and franchiserestaurants.  All material balances andtransactions between the consolidated entities have been eliminated.

 

Asof September 28, 2010 and September 29, 2009, we owned 5.0% to 10.0%equity interest in 21 franchise restaurants. While we exercise significant control over these franchise restaurants,we do not consolidate their financial position, results of operations or cashflows as it is immaterial to our consolidated financial position, results ofoperations and/or cash flows. Our investment in these unconsolidated affiliatesis included in Other assets in our condensed consolidated balance sheets and werecord our percentage share of net income earned by these unconsolidatedaffiliates on our condensed consolidated statements of income under Equityincome from investments in unconsolidated affiliates.

 

Wehave made a number of estimates and assumptions relating to the reporting ofassets and liabilities, the disclosure of contingent assets and liabilities atthe date of the condensed consolidated financial statements and the reportingof revenue and expenses during the period to prepare these condensedconsolidated financial statements in conformity with U.S. generally acceptedaccounting principles (“GAAP”). Significant items subject to such estimates andassumptions include the carrying amount of property and equipment, goodwill,obligations related to insurance reserves, income taxes and share-basedcompensation expense. Actual results could differ from those estimates.

 

Inthe opinion of management, the accompanying unaudited financial statementsreflect all adjustments, consisting only of normal recurring adjustments,necessary to present fairly our financial position, results of operations andcash flows for the periods presented.  The financial statements have beenprepared in accordance with GAAP, except that certain information and footnoteshave been condensed or omitted pursuant to rules and regulations of theSecurities and Exchange Commission (“SEC”).  Operating results for the 39weeks ended September 28, 2010 are not necessarily indicative of theresults that may be expected for the year ending December 28, 2010. The financial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in our Annual Report onForm 10-K for the year ended December 29, 2009.

 

Oursignificant interim accounting policies include the recognition of income taxesusing an estimated annual effective tax rate.

 

**(2)   Share-basedCompensation**

 

Wemay grant incentive and non-qualified stock options to purchase shares ofcommon stock, stock bonus awards (restricted stock unit awards (“RSUs”)) andrestricted stock awards under the Texas Roadhouse, Inc. 2004 EquityIncentive Plan (the “Plan”).  Beginningin 2008, we changed the method by which we provide share-based compensation toour employees by eliminating stock option grants and, instead, granting RSUs asa form of share-based compensation.   AnRSU is the conditional right to receive one share of common stock uponsatisfaction of the vesting requirement.

 

Thefollowing table summarizes the share-based compensation recorded in theaccompanying condensed consolidated statements of income:

 
| ** **                             | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **September 28,  2010** | ** ** | **September 29,  2009** | ** ** | **September 28,  2010** | ** ** | **September 29,  2009** | ** ** |
|                                   |       |                         |       |                         |       |   |   |   |   |
| Labor expense                          |       | $                            | 876        |                         | $          | 694 |   | $ | 2,479 |   | $ | 2,116 |   |
| General and administrative expense     |       | 1,093                        |       | 1,134                        |       | 3,226 |   | 3,526 |   |
| Total share-based compensation expense |       | $                            | 1,969      |                         | $          | 1,828 |   | $ | 5,705 |   | $ | 5,642 |   |

 

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A summary of share-based compensation activity bytype of grant as of September 28, 2010 and changes during the period thenended is presented below.

 

*SummaryDetails for Plan Share Options*

 
| ** **                             | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-Average  Remaining Contractual  Term (years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|------------|------------|---------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------|------------|
|                                   |       |       |       |                                        |       |                                                                |       |                            |       |
| Outstanding at December 29, 2009  |       | 5,439,030  |       | $                                           | 10.86      |                                                                |       |                            |       |   |
| Granted                                |       | —     |       | —                                      |       |                                                                |       |                            |       |
| Forfeited                              |       | (32,266    | )          | 14.30                                       |       |                                                                |       |                            |       |
| Exercised                              |       | (970,155   | )          | 6.41                                        |       |                                                                |       |                            |       |
| Outstanding at September 28, 2010 |       | 4,436,609  |       | $                                           | 11.81      |                                                                | 4.83       |                            | $          | 13,669 |   |
|                                   |       |       |       |                                        |       |                                                                |       |                            |       |
| Exercisable at September 28, 2010 |       | 4,223,984  |       | $                                           | 11.72      |                                                                | 4.74       |                            | $          | 13,401 |   |

 

Nostock options were granted during the 39 weeks ended September 28, 2010.

 

Thetotal intrinsic value of options exercised during the 13 weeks ended September 28,2010 and September 29, 2009 was $0.6 million and $0.8 million,respectively.  The total intrinsic valueof options exercised during the 39 weeks ended September 28, 2010 and September 29,2009 was $7.2 million and $4.9 million, respectively.  As of September 28, 2010, with respectto unvested stock options, there was an immaterial amount of unrecognizedcompensation cost that is expected to be recognized over a weighted-averageperiod of less than a year.  The totalgrant date fair value of stock options vested for both 13 week periods ended September 28,2010 and September 29, 2009 was $0.1 million and $0.2 million,respectively.  The total grant date fairvalue of stock options vested for the 39 week periods ended September 28,2010 and September 29, 2009 was $1.1 million and $1.0 million,respectively.

 

*SummaryDetails for RSUs*

 
| ** **                             | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|
|                                   |       |       |       |                                                     |       |
| Outstanding at December 29, 2009  |       | 1,362,427  |       | $                                                        | 9.90       |   |
| Granted                                |       | 419,244    |       | 13.88                                                    |       |
| Forfeited                              |       | (20,841    | )          | 10.66                                                    |       |
| Vested                                 |       | (546,385   | )          | 9.87                                                     |       |
| Outstanding at September 28, 2010 |       | 1,214,445  |       | $                                                        | 11.23      |   |

 

Asof September 28, 2010, with respect to unvested RSUs, there was $7.9million of unrecognized compensation cost that is expected to be recognizedover a weighted-average period of 1.5 years. The vesting terms of the RSUs range from approximately 1.0 to 5.0years.  The total grant date fair valueof RSUs vested for the 13 week periods ended September 28, 2010 and September 29,2009 was $1.2 million and $0.8 million, respectively.  The total grant date fair value of RSUsvested for the 39 week periods ended September 28, 2010 and September 29,2009 was $5.4 million and $4.2 million, respectively.

 

**(3)   Long-termDebt and Obligations Under Capital Leases**

 

Long-termdebt and obligations under capital leases consisted of the following:

 
| ** **                              | ** ** | **September 28, 2010** | ** ** | **December 29, 2009** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Installment loans, due 2010 — 2020 |       | $                                | 1,907      |                            | $          | 2,030 |   |
| Obligations under capital leases        |       | 337                              |       | 396                             |       |
| Revolver                                |       | 60,000                           |       | 99,000                          |       |
|                                    |       | 62,244                           |       | 101,426                         |       |
| Less current maturities                 |       | 267                              |       | 247                             |       |
|                                    |       | $                                | 61,977     |                            | $          | 101,179 |   |

 

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Theweighted-average interest rate for installment loans outstanding at September 28,2010 and December 29, 2009 was 10.58%. The debt is secured by certain land and buildings.

 

Wehave a $250.0 million five-year revolving credit facility with a syndicate ofcommercial lenders led by Bank of America, N.A., Banc of America Securities LLCand PNC Bank.  The facility expires on May 31,2012.  The terms of the facility requireus to pay interest on outstanding borrowings at LIBOR plus a margin of 0.50% to0.875%, depending on our leverage ratio, or the Base Rate, which is the higherof the issuing bank’s prime lending rate or the Federal Funds rate plus0.50%.  We are also required to pay acommitment fee of 0.10% to 0.175% per year on any unused portion of thefacility, depending on our leverage ratio. The weighted-average interest rate for the revolver at September 28,2010 and December 29, 2009 was 3.24% and 2.36%, respectively, includinginterest rate swaps.  At September 28,2010, we had $60.0 million outstanding under the credit facility and $186.4million of availability, net of $3.6 million of outstanding letters of credit.

 

Thelenders’ obligation to extend credit under the facility depends on usmaintaining certain financial covenants, including a minimum consolidated fixedcharge coverage ratio of 2.00 to 1.00 and a maximum consolidated leverage ratioof 3.00 to 1.00.  The credit facilitypermits us to incur additional secured or unsecured indebtedness outside thefacility, except for the incurrence of secured indebtedness that in theaggregate exceeds 20% of our consolidated tangible net worth or circumstanceswhere the incurrence of secured or unsecured indebtedness would prevent us fromcomplying with our financial covenants. We were in compliance with all covenants as of September 28, 2010.

 

**(4)   Derivative and Hedging Activities**

 

We enter into derivative instruments for riskmanagement purposes only, including derivatives designated as hedginginstruments under Financial Accounting Standards Board (“FASB”) AccountingStandards Codification (“ASC”) 815, *Derivatives and Hedging*(“ASC815”)*. *Weuse interest rate-related derivative instruments to manage our exposure tofluctuations of interest rates.  By usingthese instruments, we expose ourselves, from time to time, to credit risk andmarket risk.  Credit risk is the failureof the counterparty to perform under the terms of the derivative contract. Whenthe fair value of a derivative contract is positive, the counterparty owes us,which creates credit risk for us.  Weminimize the credit risk by entering into transactions with high-qualitycounterparties whose credit rating is evaluated on a quarterly basis.  Our counterparty in the interest rate swapsis J.P. Morgan Chase, N.A.  Market riskis the adverse effect on the value of a financial instrument that results froma change in interest rates, commodity prices or the market price of our commonstock.  We minimize market risk byestablishing and monitoring parameters that limit the types and degree ofmarket risk that may be taken.

 

*Interest Rate Swaps*

 

OnOctober 22, 2008, we entered into an interest rate swap, starting on November 7,2008, with a notional amount of $25.0 million to hedge a portion of the cashflows of our variable rate credit facility. We have designated the interest rate swap as a cash flow hedge of ourexposure to variability in future cash flows attributable to interest paymentson a $25.0 million tranche of floating rate debt borrowed under our revolvingcredit facility.  Under the terms of theswap, we pay a fixed rate of 3.83% on the $25.0 million notional amount andreceive payments from the counterparty based on the 1-month LIBOR rate for aterm ending on November 7, 2015, effectively resulting in a fixed rateLIBOR component of the $25.0 million notional amount.

 

OnJanuary 7, 2009, we entered into an interest rate swap, starting on February 7,2009, with a notional amount of $25.0 million to hedge a portion of the cashflows of our variable rate credit facility. We have designated the interest rate swap as a cash flow hedge of ourexposure to variability in future cash flows attributable to interest paymentson a $25.0 million tranche of floating rate debt borrowed under our revolvingcredit facility.  Under the terms of theswap, we pay a fixed rate of 2.34% on the $25.0 million notional amount andreceive payments from the counterparty based on the 1-month LIBOR rate for aterm ending on January 7, 2016, effectively resulting in a fixed rateLIBOR component of the $25.0 million notional amount.

 

Weentered into the above interest rate swaps with the objective of eliminatingthe variability of our interest cost that arises because of changes in thevariable interest rate for the designated interest payments.  Changes in the fair value of the interestrate swap will be reported as a component of accumulated other comprehensiveincome.  We will reclassify any gain orloss from accumulated other comprehensive income, net of tax, on ourconsolidated balance sheet to interest expense on our consolidated statement ofincome when the interest rate swap expires or at the time we choose toterminate the swap.  See note 10 for fairvalue discussion of these interest rate swaps.

 

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Thefollowing table summarizes the fair value and presentation in the condensedconsolidated balance sheets for derivatives designated as hedging instrumentsunder FASB ASC 815:

 
| ** **                                                            | ** ** | **Balance**         | ** ** | **Derivative Assets**   | ** ** | **Derivative Liabilities** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                            | ** ** | **Sheet  Location** | ** ** | **September 28,  2010** | ** ** | **December 29,  2009**     | ** ** | **September 28,  2010** | ** ** | **December 29,  2009** | ** ** |
|                                                                  |       |                |       |                         |       |                            |       |   |   |   |   |
| Derivative Contracts Designated as Hedging  Instruments under ASC 815 |       |                | (1)        |                         |       |                            |       |   |   |   |   |
| Interest rate swaps                                                   |       |                |       | $                            | —     |                            | $          | 31 |   | $ | 4,365 |   | $ | — |   |
|                                                                  |       |                |       |                         |       |                            |       |   |   |   |   |
| Total Derivative Contracts                                            |       |                |       | $                            | —     |                            | $          | 31 |   | $ | 4,365 |   | $ | — |   |

 

----

(1)                             Derivative assets and liabilities are included in fair value ofderivative financial instruments on the condensed consolidated balance sheets.

 

The following table summarizes the effect ofderivative instruments on the condensed consolidated statements of income forthe 39 weeks ended September 28, 2010 and September 29, 2009:

 
| ** **           | ** ** | **Amount of (Loss) Gain  Recognized in AOCI  (effective portion)** | ** ** | **Location of  Gain (Loss)  Reclassified  from AOCI ** | ** ** | **Amount of Gain (Loss)  Reclassified from AOCI  to Income (effective  portion)** | ** ** | **Location of  Gain (Loss)  Recognized  in Income  (ineffective** | ** ** | **Amount of Gain (Loss)  Recognized in Income  (ineffective portion)** | ** ** |
|----------------------|------------|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **2010**                                                                                         | ** ** | **2009**                                                                   | ** ** | **Income**                                                                                                           | ** ** | **2010**                                                                         | ** ** | **2009**                                                                                             | ** ** | **portion)** | ** ** | **2010** | ** ** | **2009** | ** ** |
|                 |       |                                                                                             |       |                                                                       |       |                                                                                                                 |       |                                                                             |       |                                                                                                 |       |   |   |   |   |   |   |
| Interest  rate swaps |       | $                                                                                                | (2,700     | )                                                                          | $          | 1,203                                                                                                                |       | —                                                                           |       | $                                                                                                    | —     |   | $ | — |   | — |   | $ | — |   | $ | — |   |
|                      |            |                                                                                                  |            |                                                                            |            |                                                                                                                      |            |                                                                                  |            |                                                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(5)****          ****RecentAccounting Pronouncements**

 

***Fair Value Measures and Disclosures***

*(Accounting Standards Update (“ASU”) 2010-06)*

 

In January 2010, the FASB issued ASU 2010-06which amends Accounting Standards Codification (“ASC”) topic 820, *Fair Value Measures and Disclosures*.  ASU No. 2010-06 amends the ASC torequire disclosure of transfer into and out of Level 1 and Level 2 fair valuemeasurements, and also requires more detailed disclosure about the activitywithin Level 3 fair value measurements. The changes as a result of this update are effective for annual andinterim reporting periods beginning after December 15, 2009 (our 2010fiscal year), except for requirements related to Level 3 disclosures, which areeffective for annual and interim reporting periods beginning after December 15,2010 (our 2011 fiscal year).  Thisguidance requires new disclosures only, and will have no impact on ourconsolidated financial position, results of operations or cash flows.

 

***Consolidationof Variable Interest Entities — Amended***

*(To beincluded in ASC 810, “Consolidation”, previously SFAS 167, “Amendments to FASBInterpretation No. 46(R)”)*

 

ASC810 provides guidance for determining the primary beneficiary of a variableinterest entity.  In addition, ASC 810requires ongoing assessments of whether an enterprise is the primarybeneficiary of a variable interest entity. ASC 810 is effective for the first annual and interim reporting periodsthat begin after November 15, 2009 (our fiscal year 2010).  The adoption of ASC 810 had no impact on ourconsolidated financial position, results of operations and cash flows.

 

**(6)****          ****Commitmentsand Contingencies**

 

Theestimated cost of completing capital project commitments at September 28,2010 and December 29, 2009 was approximately $24.1 million and $18.5million, respectively.

 

Weentered into real estate lease agreements for franchise restaurants located inEverett, MA, Longmont, CO, Montgomeryville, PA, Fargo, ND and Logan, UT beforegranting franchise rights for those restaurants. We have subsequently assignedthe leases to the franchisees, but remain contingently liable if a franchiseedefaults under the terms of a lease.  The Longmont lease was assigned inOctober 2003 and expires in May 2014, the Everett lease was assignedin September 2002 and expires in February 2018, the Montgomeryvillelease was assigned in October 2004 and expires in June 2021, theFargo lease was assigned in February 2006 and expires in July 2016and the Logan lease was assigned in January 2009 and expires in August 2019.  As the fair value of the guarantees is notconsidered significant, no liability has been recorded.  As discussed in note 7, the Everett, MA,Longmont, CO, and Fargo, ND restaurants are owned, in whole or part, by certainof our officers, directors or 5% shareholders.

 

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Wecurrently buy most of our beef from two to four suppliers. Although there are alimited number of beef suppliers, management believes that other supplierscould provide a similar product on comparable terms. A change in suppliers,however, could cause supply shortages and a possible loss of sales, which wouldaffect operating results adversely. We have no material minimum purchasecommitments with our vendors that extend beyond a year.

 

OnOctober 8, 2010, the U.S. Equal Employment Opportunity Commission (“EEOC”)for the Boston Area Office issued a determination letter in Charge No. 523-2009-00643alleging that we engaged in a pattern and practice of age discrimination inhiring for certain restaurant positions in violation of the Age Discriminationin Employment Act.  The determinationalleges that applicants over the age of 40 were denied employment in ourrestaurants in host, server and server assistant positions solely due to theirage.  The EEOC is seeking remedialactions and the payment of damages to the disaffected applicants.  We have denied the allegation and intend tovigorously defend against the charge. The EEOC has invited us to participate in its conciliation process, andwe have agreed to do so.  Based on thepreliminary status of this matter, we cannot estimate the possible amount orrange of loss, if any, associated with this matter.

 

Weare involved in various other claims and legal actions arising in the normalcourse of business. In the opinion of management, the ultimate disposition ofthese matters will not have a material effect on our consolidated financialposition, results of operations or cash flows.

 

**(7)   RelatedParty Transactions**

 

TheLongview, Texas restaurant, which was acquired by us in connection with thecompletion of our initial public offering, leases the land and restaurantbuilding from an entity controlled by Steven L. Ortiz, our Chief OperatingOfficer. The lease term is 15 years and will terminate inNovember 2014. The lease can be renewed for two additional terms of fiveyears each. Rent is approximately $19,000 per month. The lease can beterminated if the tenant fails to pay the rent on a timely basis, fails tomaintain the insurance specified in the lease, fails to maintain the buildingor property or becomes insolvent. Total rent payments were approximately$55,000 and $50,000 for the 13 week periods ending September 28, 2010 and September 29,2009, respectively.   For the 39 weekperiods ended September 28, 2010 and September 29, 2009, rentpayments were $0.2 million and $0.1 million, respectively.

 

TheBossier City, Louisiana restaurant, of which Steven L. Ortiz owns 65.0% and weown 5.0%, leases the land and building from an entity owned by Mr. Ortiz.  The lease term is 15 years and will terminateon March 31, 2020.  The lease can berenewed for three additional terms of five years each.    Rent is approximately $16,600 per month andescalates 10% each five year period during the term.  The next rent escalation is in the secondquarter of 2015.  The lease can beterminated if the tenant fails to pay rent on a timely basis, fails to maintaininsurance, abandons the property or becomes insolvent.  Total rent payments were approximately$50,000 and $45,000 for the 13 week periods ended September 28, 2010 and September 29,2009, respectively.  For each of the 39week periods ended September 28, 2010 and September 29, 2009, rentpayments were $0.1 million.

 

Wehave 14 franchise and license restaurants owned, in whole or part, by certainof our officers, directors or 5% shareholders at September 28, 2010 and September 29,2009. These entities paid us fees of approximately $0.5 million during each ofthe 13 week periods ended September 28, 2010 and September 29, 2009,respectively.  For each of the 39 weekperiods ended September 28, 2010 and September 29, 2009, theseentities paid us fees of $1.5 million. As disclosed in note 6, we are contingently liable on leases which arerelated to three of these restaurants.

 

**(8)   Earnings PerShare**

 

Theshare and net income per share data for all periods presented are based on thehistorical weighted-average shares outstanding.  The diluted earnings pershare calculations show the effect of the weighted-average stock options, RSUsand restricted stock awards outstanding from our equity incentive plan asdiscussed in note 2.

 

Thefollowing table summarizes the options and nonvested stock that wereoutstanding but not included in the computation of diluted earnings per sharebecause their inclusion would have had an anti-dilutive effect:

 
| ** **      | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|-----------------|------------|------------------------------|------------|------------------------------|------------|
| ** **      | ** ** | **September 28,  2010** | ** ** | **September 29,  2009** | ** ** | **September 28,  2010** | ** ** | **September 29,  2009** | ** ** |
|            |       |                         |       |                         |       |   |   |   |   |
| Options         |       | 2,175,208                    |       | 2,841,558                    |       | 2,188,869 |   | 3,057,085 |   |
| Nonvested stock |       | 7,957                        |       | 20,027                       |       | 1,713 |   | 30,345 |   |
|            |       |                         |       |                         |       |   |   |   |   |
| Total           |       | 2,183,165                    |       | 2,861,585                    |       | 2,190,582 |   | 3,087,430 |   |

 

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Thefollowing table sets forth the calculation of weighted-average shares outstanding(in thousands) as presented in the accompanying condensed consolidatedstatements of income:

 
| ** **                                                              | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                              | ** ** | **September 28,  2010** | ** ** | **September 29,  2009** | ** ** | **September 28,  2010** | ** ** | **September 29,  2009** | ** ** |
| Net income attributable to Texas Roadhouse, Inc.  and subsidiaries |       | $                            | 13,952     |                         | $          | 10,695 |   | $ | 48,229 |   | $ | 38,770 |   |
|                                                                    |       |                         |       |                         |       |   |   |   |   |
| Basic EPS:                                                              |       |                         |       |                         |       |   |   |   |   |
| Weighted-average common shares outstanding                              |       | 71,660                       |       | 70,204                       |       | 71,273 |   | 69,847 |   |
|                                                                    |       |                         |       |                         |       |   |   |   |   |
| Basic EPS                                                               |       | $                            | 0.19       |                         | $          | 0.15 |   | $ | 0.68 |   | $ | 0.56 |   |
|                                                                    |       |                         |       |                         |       |   |   |   |   |
| Diluted EPS:                                                            |       |                         |       |                         |       |   |   |   |   |
| Weighted-average common shares outstanding                              |       | 71,660                       |       | 70,204                       |       | 71,273 |   | 69,847 |   |
| Dilutive effect of stock options and restricted  stock                  |       | 1,342                        |       | 1,346                        |       | 1,454 |   | 1,304 |   |
| Shares — diluted                                                   |       | 73,002                       |       | 71,550                       |       | 72,727 |   | 71,151 |   |
|                                                                    |       |                         |       |                         |       |   |   |   |   |
| Diluted EPS                                                             |       | $                            | 0.19       |                         | $          | 0.15 |   | $ | 0.66 |   | $ | 0.54 |   |

 

**(9)  Acquisitions**

 

Duringthe fourth quarter of 2009, we terminated our franchise agreement with afranchisee which operated one restaurant. Pursuant to the terms of the franchise agreement, we acquired therestaurant from the franchisee for an immaterial amount.  As a result, there was no purchase priceallocation or subsequent goodwill associated with this acquisition.  We now operate the restaurant as a jointventure.

 

**(10)  Fair Value Measurement**

 

ASC 820, *Fair Value Measurementsand Disclosures* (“ASC 820”), establishes a framework for measuringfair value and expands disclosures about fair value measurements.  ASC 820 establishes a three-level hierarchy,which requires an entity to maximize the use of observable inputs and minimizethe use of unobservable inputs in measuring fair value.  The valuation hierarchy is based upon thetransparency of inputs to the valuation of an asset or liability on themeasurement date.

 

Level 1                                  Inputsbased on quoted prices in active markets for identical assets.

Level 2                                  Inputs other than quoted prices included within Level 1 that areobservable for the assets, either directly or indirectly.

Level 3                                  Inputsthat are unobservable for the asset.

 

There were no transfers among levels within the fairvalue hierarchy during the 13 and 39 week periods ended September 28,2010.

 

Thefollowing table presents the fair values for our financial assets andliabilities measured on a recurring basis:

 
| ** **                               | ** ** | **Fair Value Measurements** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **Level**                             | ** ** | **September 28, 2010** | ** ** | **December 29, 2009** | ** ** |
|                                     |       |                                  |       |   |   |   |   |
| Interest rate swaps                      |       | 2                                     |       | $ | (4,365 | ) | $ | 31 |   |
| Deferred compensation plan — assets |       | 1                                     |       | 4,829 |   | 3,390 |   |
| Deferred compensation plan - liabilities |       | 1                                     |       | (4,802 | ) | (3,389 | ) |
|                                     |       |                                  |       |   |   |   |   |
| Total                                    |       |                                  |       | $ | (4,338 | ) | $ | 32 |   |

 

Thefair value of our interest rate swaps were determined based on the presentvalue of expected future cash flows considering the risks involved, includingnonperformance risk, and using discount rates appropriate for the duration. Seenote 4 for discussion of our interest rate swaps.

 

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TheSecond Amended and Restated Deferred Compensation Plan of Texas RoadhouseManagement Corp., as amended, (the “Deferred Compensation Plan”) is anonqualified deferred compensation plan which allows highly compensatedemployees to defer receipt of a portion of their compensation and contributesuch amounts to one or more investment funds held in a rabbi trust. We reportthe accounts of the rabbi trust in our condensed consolidated financialstatements. These investments are considered trading securities and arereported at fair value based on third-party broker statements.  The realized and unrealized holding gains andlosses related to these investments, as well as the offsetting compensationexpense, are recorded in general and administrative expense on the condensedconsolidated statements of income.

 

Thefollowing table presents the fair values for our financial assets andliabilities measured on a nonrecurring basis:

 
| ** **                      | ** ** | **Fair Value Measurements** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **Level**                             | ** ** | **September 28, 2010** | ** ** | **December 29, 2009** | ** ** |
|                            |       |                                  |       |   |   |   |   |
| Long-lived assets held for sale |       | 2                                     |       | $ | 1,598 |   | $ | 1,598 |   |
| Long-lived assets held for use  |       | 2                                     |       | 1,145 |   | 1,230 |   |
| Goodwill                        |       | 3                                     |       | 651 |   | 651 |   |
|                            |       |                                  |       |   |   |   |   |
| Total                           |       |                                  |       | $ | 3,394 |   | $ | 3,479 |   |

 

Long-lived assets held for sale include land andbuilding and are valued using Level 2 inputs, primarily an independent thirdparty appraisal.  These assets areincluded in Property and equipment in our condensed consolidated balance sheetsas we do not expect to sell these assets in the next 12 months.  Costs to market and/or sell the assets arefactored into the estimates of fair value.

 

Long-lived assets held for use include building,equipment and furniture and fixtures and are valued using Level 2 inputs,primarily independent third party appraisal. These assets are included in Property and equipment in our condensedconsolidated balance sheets.

 

Goodwill in the table above relates to twounderperforming restaurants in which the carrying value of the associatedgoodwill was reduced to fair value, based on their historical results andanticipated future trends of operations.

 

At September 28, 2010 and December 29,2009, the fair value of cash and cash equivalents, accounts receivable andaccounts payable approximated their carrying value based on the short-termnature of these instruments. The fair value of our long-term debt is estimatedbased on the current rates offered to us for instruments of similar terms andmaturities. The carrying amounts and related estimated fair values for our debtare as follows:

 
| ** **        | ** ** | **September 28, 2010** | ** ** | **December 29, 2009** | ** ** |
|-------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **        | ** ** | **Carrying  Amount**             | ** ** | **Fair Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Installment loans |       | $                                | 1,907      |                            | $          | 1,949 |   | $ | 2,030 |   | $ | 2,592 |   |
| Revolver          |       | 60,000                           |       | 60,000                          |       | 99,000 |   | 99,000 |   |
|                   |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

**(11)  Stock Repurchase Program**

 

OnFebruary 14, 2008, our Board of Directors approved a stock repurchaseprogram under which it authorized us to repurchase up to $25.0 million of ourcommon stock.  On July 8, 2008, ourBoard of Directors approved a $50.0 million increase in our stock repurchaseprogram.  Our total stock repurchaseauthorization increased to $75.0 million. Under this program, we were authorized to repurchase outstanding sharesof our common stock from time to time in open market transactions through February 14,2010.  On November 19, 2009, theBoard of Directors extended the expiration date on the stock repurchase programto February 14, 2011.  The timingand the amount of any repurchases will be determined by management underparameters established by our Board of Directors, based on its evaluation ofour stock price, market conditions and other corporate considerations.

 

Forthe 39 weeks ended September 28, 2010 and September 29, 2009, we didnot repurchase any shares of our common stock. The approximate dollar value of shares that may yet be purchased underthe plan is $18.2 million.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

TexasRoadhouse is a growing, moderately priced, full-service restaurant chain. Ourfounder and chairman, W. Kent Taylor, started the business in 1993. Our missionstatement is “Legendary Food, Legendary Service®.” Our operating strategy isdesigned to position each of our restaurants as the local hometown destinationfor a broad segment of consumers seeking high quality, affordable meals servedwith friendly, attentive service. As of September 28, 2010, there were 338restaurants operating in 46 states, including:

 

·  267 “company restaurants,” of which 256 were wholly-owned and11 were majority-owned.  The results of operations of company restaurantsare included in our condensed consolidated statements of income. The portion ofincome attributable to minority interests in company restaurants that are notwholly-owned is reflected in the line item entitled “Net income attributable tononcontrolling interests” in our condensed consolidated statements of income.

 

·  71 “franchiserestaurants,” of which 68 were franchise restaurants and three were licenserestaurants. We have a 5.0% to 10.0% ownership interest in 21 franchiserestaurants.  The income derived from ourminority interests in these franchise restaurants is reported in the line itementitled “Equity income from investments in unconsolidated affiliates” inour condensed consolidated statements of income. Additionally, we providevarious management services to these franchise restaurants, as well as fiveadditional franchise restaurants in which we have no ownership interest.

 

Wehave contractual arrangements which grant us the right to acquire atpre-determined valuation formulas (i) the remaining equity interests innine of the 11 majority-owned company restaurants, and (ii) 65 of thefranchise restaurants.

 

**Presentation of Financial andOperating Data**

 

Throughoutthis report, the 13 weeks ended September 28, 2010 and September 29,2009 are referred to as Q3 2010 and Q3 2009, respectively, and the 39 weeksended September 28, 2010 and September 29, 2009 are referred to as2010 YTD and 2009 YTD.

 

**Long-term Strategies to GrowEarnings Per Share**

 

Ourlong-term strategies with respect to increasing net income and earnings pershare include the following:

 

*Expanding Our Restaurant Base.*   We will continue to evaluate opportunities to developTexas Roadhouse restaurants in existing and new domestic and internationalmarkets. Domestically, we will remain focused primarily on mid-sized marketswhere we believe a significant demand for our restaurants exists because ofpopulation size, income levels, the presence of shopping and entertainmentcenters and a significant employment base. Our ability to expand our restaurant base is influenced by many factorsbeyond our control and therefore we may not be able to achieve our anticipatedgrowth.  We moderated our restaurantdevelopment plans for 2009 and 2010 due, in part, to increasing restaurantdevelopment costs, particularly during 2006 to 2009.  Throughout 2010, we have focused on reducingour average capital investment for developing our prototype restaurant by makingbuilding design modifications and lowering site work costs.  As a result of these changes, we expect ouraverage capital investment for developing our prototype restaurant to decreaseby $0.2 million to $0.4 million from our $4.0 million average in 2009.  Based on the decreased restaurant developmentcosts we are experiencing and improving sales through 2010 YTD, we areincreasing our restaurant development plans for 2011 to approximately 20restaurants from 14 planned restaurants in 2010.  Additionally, we will also be evaluating aslightly smaller prototype late in the fourth quarter of 2010 and possibly morein 2011, which could further reduce our restaurant development costs.

 

Wemay, at our discretion, add franchise restaurants, domestically and/or internationally,primarily with franchisees who have demonstrated prior success with the TexasRoadhouse or other restaurant concepts and in markets in which the franchiseedemonstrates superior knowledge of the demographics and restaurant operatingconditions.  In conjunction with thisstrategy, we signed our first international franchise agreement on April 26,2010 for the development of Texas Roadhouse restaurants in eight countries inthe Middle East over the next ten years, the first of which is expected to openin 2011.  We may also look to acquirefranchise restaurants under terms favorable to us and our stockholders.  Additionally, from time to time, we mayevaluate potential mergers, acquisitions, joint ventures or other strategicinitiatives to acquire or develop additional concepts.  Of the 267 restaurants we owned and operatedat September 28, 2010, 265 operated as Texas Roadhouse restaurants, whiletwo operated under the name of Aspen Creek. The majority of our restaurant growth in 2010 will be Texas Roadhouserestaurants; however, we plan to open one additional Aspen Creek restaurantduring the fourth quarter of 2010 as we continue testing the viability of theconcept.

 

*Maintaining and/or Improving Restaurant Level Profitability.*   We plan to maintain, or possibly increase, restaurantlevel profitability through a combination of increased comparable restaurantsales and operating cost management.

 

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*Leveraging Our Scalable Infrastructure.*   To support our growth, we continue to make investmentsin our infrastructure.  Over the pastseveral years, we have made significant investments in our infrastructure,including information systems, real estate, human resources, legal, marketingand operations. Historically, general and administrative costs have increasedat a slower growth rate than our revenue. Whether we are able to leverage our infrastructure in the future willdepend, in part, on our new restaurant openings and our comparable restaurantsales growth rate going forward.

 

*StockRepurchase Program. *We continue to look at opportunities to repurchase our common stock atfavorable market prices under our stock repurchase program.  Currently, our Board of Directors hasauthorized us to repurchase up to $75.0 million of our common stock.  As of September 28, 2010, $18.2 millionworth of common stock remains authorized for repurchase.  We made no purchases of our common stockduring the 39 weeks ended September 28, 2010.

 

**Key Measures We Use to EvaluateOur Company**

 

Keymeasures we use to evaluate and assess our business include the following:

 

*Number of Restaurant Openings.*   Number of restaurant openings reflects the number ofrestaurants opened during a particular fiscal period. For company restaurantopenings we incur pre-opening costs, which are defined below, before therestaurant opens. Typically new restaurants open with an initial start-upperiod of higher than normalized sales volumes, which decrease to a steadylevel approximately three to six months after opening. However, although salesvolumes are generally higher, so are initial costs, resulting in restaurantoperating margins that are generally lower during the start-up period ofoperation and increase to a steady level approximately three to six monthsafter opening.

 

*Comparable Restaurant Sales Growth. *  Comparable restaurant sales growth reflects the change inyear-over-year sales for all company restaurants for the comparable restaurantbase. We define the comparable restaurant base to include those restaurantsopen for a full 18 months before the beginning of the current interim periodexcluding restaurants closed during the period. Comparable restaurant salesgrowth can be impacted by changes in guest traffic counts or by changes in theper person average check amount. Menu price changes and the mix of menu itemssold can affect the per person average check amount.

 

*Average Unit Volume.*   Averageunit volume represents the average annual restaurant sales for all companyrestaurants open for a full six months before the beginning of the periodmeasured. Average unit volume excludes sales on restaurants closed during theperiod.  Growth in average unit volumesin excess of comparable restaurant sales growth is generally an indication thatnewer restaurants are operating with sales levels in excess of the companyaverage. Conversely, growth in average unit volumes less than growth incomparable restaurant sales growth is generally an indication that newerrestaurants are operating with sales levels lower than the company average.

 

*Store Weeks.*   Storeweeks represent the number of weeks that our company restaurants were openduring the reporting period.

 

**Other Key Definitions**

 

*Restaurant Sales.*   Restaurantsales include gross food and beverage sales, net of promotions anddiscounts.  Sales taxes collected fromcustomers and remitted to governmental authorities are accounted for on a netbasis and therefore are excluded from restaurant sales in the condensedconsolidated statements of income.

 

*Franchise Royalties and Fees.*   Domesticfranchisees typically pay a $40,000 initial franchise fee for each newrestaurant and a one-time fee payable for each renewal period equal to thegreater of 30% of the then-current initial franchise fee or $10,000 to $15,000.Franchise royalties consist of royalties in an amount up to 4.0% of grosssales, as defined in our franchise agreement, paid to us by our domesticfranchisees.

 

*Restaurant Cost of Sales.*   Restaurantcost of sales consists of food and beverage costs.

 

*Restaurant Labor Expenses.*   Restaurantlabor expenses include all direct and indirect labor costs incurred inoperations except for profit sharing incentive compensation expenses earned byour restaurant managers. These profit sharing expenses are reflected inrestaurant other operating expenses. Restaurant labor expenses also include share-based compensation expenserelated to restaurant-level employees.

 

*Restaurant Rent Expense.*   Restaurantrent expense includes all rent associated with the leasing of real estate andincludes base, percentage and straight-line rent expense.

 

*Restaurant Other Operating Expenses.*   Restaurant other operating expenses consist of allother restaurant-level operating costs, the major components of which areutilities, supplies, advertising, repair and maintenance, property taxes,credit card fees and general liability insurance. Profit sharing allocations tomanaging partners and market partners are also included in restaurant otheroperating expenses.

 

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*Pre-opening Expenses.*   Pre-openingexpenses, which are charged to operations as incurred, consist of expensesincurred before the opening of a new restaurant and are comprised principallyof opening team and training salaries, travel expenses, rent, and food,beverage and other initial supplies and expenses.

 

*Depreciation and Amortization Expenses.*   Depreciation and amortization expenses (“D&A”)includes the depreciation of fixed assets and amortization of intangibles withdefinite lives.

 

*Impairment and closure costs. *Impairment and closure costs include any impairmentof long-lived assets associated with restaurants where the carrying amount ofthe asset is not recoverable and exceeds the fair value of the asset andexpenses associated with the closure of a restaurant.  Closure costs also include any gains orlosses associated with the sale of a closed restaurant and/or assets held forsale.

 

*General and Administrative Expenses.*   General and administrative expenses (“G&A”) arecomprised of expenses associated with corporate and administrative functionsthat support development and restaurant operations and provide aninfrastructure to support future growth.  Supervision and accounting fees received from certain franchiserestaurants and license restaurants are offset against G&A.  G&A also includes share-basedcompensation expense related to executive officers, support center employeesand area managers, including market partners.

 

*Interest Expense, Net.*   Interestexpense includes the cost of our debt obligations including the amortization ofloan fees, reduced by interest income and capitalized interest.  Interest income includes earnings on cash andcash equivalents.

 

*Equity Income from Unconsolidated Affiliates.*   As of September 28, 2010 and September 29,2009, we owned a 5.0% to 10.0% equity interest in 21 franchise restaurants.Equity income from unconsolidated affiliates represents our percentage share ofnet income earned by these unconsolidated affiliates.

 

*Net Income Attributable to Noncontrolling Interests.*   Net income attributable to noncontrolling interestsrepresents the portion of income attributable to the other owners of themajority-owned or controlled restaurants. Our consolidated subsidiaries at September 28, 2010 and September 29,2009 included 11 and 10 majority-owned restaurants, respectively, all of whichwere open.

 

*ManagingPartners and Market Partners.*  Managing partners are single unit operatorswho have primary responsibility for the day-to-day operations of the entirerestaurant and are responsible for maintaining the standards of quality andperformance we establish.  Marketpartners, generally, have supervisory responsibilities for up to 12 to 15restaurants.  In addition to supervisingthe operations of our restaurants, they are also responsible for the hiring anddevelopment of each restaurant’s management team and assist in the newrestaurant site selection process.

 

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**Resultsof Operations**

** **
| ** **                                                              | ** ** | **13 Weeks Ended**     | ** ** | **39 Weeks Ended**     | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **September 28, 2010** | ** ** | **September 29, 2009** | ** ** | **September 28, 2010** | ** ** | **September 29, 2009** | ** ** |
| **($ in thousands)**                                          | ** ** | **$**                            | ** ** | **%**                            | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
|                                                                    |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue:                                                                |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Restaurant sales                                                        |       | 243,405                          |       | 99.1                             |       | 224,417 |   | 99.1 |   | 753,582 |   | 99.1 |   | 708,808 |   | 99.1 |   |
| Franchise royalties and fees                                            |       | 2,208                            |       | 0.9                              |       | 2,050 |   | 0.9 |   | 6,817 |   | 0.9 |   | 6,155 |   | 0.9 |   |
|                                                                    |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenue                                                           |       | 245,613                          |       | 100.0                            |       | 226,467 |   | 100.0 |   | 760,399 |   | 100.0 |   | 714,963 |   | 100.0 |   |
|                                                                    |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Costs and expenses:                                                     |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *(As a percentage of restaurant sales)*                                 |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Restaurant operating costs:                                             |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales                                                           |       | 79,101                           |       | 32.5                             |       | 74,489 |   | 33.2 |   | 244,560 |   | 32.5 |   | 237,844 |   | 33.6 |   |
| Labor                                                                   |       | 71,835                           |       | 29.5                             |       | 67,630 |   | 30.1 |   | 221,241 |   | 29.4 |   | 210,203 |   | 29.7 |   |
| Rent                                                                    |       | 5,329                            |       | 2.2                              |       | 5,029 |   | 2.2 |   | 15,886 |   | 2.1 |   | 14,870 |   | 2.1 |   |
| Other operating                                                         |       | 43,476                           |       | 17.9                             |       | 38,778 |   | 17.3 |   | 128,841 |   | 17.1 |   | 119,450 |   | 16.9 |   |
| *(As a percentage of total revenue)*                                    |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Pre-opening                                                             |       | 2,150                            |       | 0.9                              |       | 1,194 |   | 0.5 |   | 4,562 |   | 0.6 |   | 4,411 |   | 0.6 |   |
| Depreciation and amortization                                           |       | 10,262                           |       | 4.2                              |       | 10,395 |   | 4.6 |   | 30,861 |   | 4.1 |   | 31,482 |   | 4.4 |   |
| Impairment and closure                                                  |       | 44                               |       | NM                               |       | (201 | ) | NM |   | 302 |   | NM |   | (273 | ) | NM |   |
| General and administrative                                              |       | 11,968                           |       | 4.9                              |       | 11,872 |   | 5.2 |   | 39,263 |   | 5.2 |   | 35,918 |   | 5.0 |   |
|                                                                    |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total costs and expenses                                                |       | 224,165                          |       | 91.3                             |       | 209,186 |   | 92.4 |   | 685,516 |   | 90.2 |   | 653,905 |   | 91.5 |   |
| Income from operations                                                  |       | 21,448                           |       | 8.7                              |       | 17,281 |   | 7.6 |   | 74,883 |   | 9.8 |   | 61,058 |   | 8.5 |   |
| Interest expense, net                                                   |       | 644                              |       | 0.3                              |       | 784 |   | 0.3 |   | 2,078 |   | 0.3 |   | 2,517 |   | 0.4 |   |
| Equity income from investments in unconsolidated  affiliates            |       | (155                             | )          | (0.1                             | )          | (36 | ) | NM |   | (355 | ) | NM |   | (185 | ) | NM |   |
|                                                                    |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income before taxes                                                     |       | 20,959                           |       | 8.5                              |       | 16,533 |   | 7.3 |   | 73,160 |   | 9.6 |   | 58,726 |   | 8.2 |   |
| Provision for income taxes                                              |       | 6,478                            |       | 2.6                              |       | 5,431 |   | 2.4 |   | 23,133 |   | 3.0 |   | 18,582 |   | 2.6 |   |
| Net income including noncontrolling interests                           |       | 14,481                           |       | 5.9                              |       | 11,102 |   | 4.9 |   | 50,027 |   | 6.6 |   | 40,144 |   | 5.6 |   |
| Net income attributable to noncontrolling  interests                    |       | 529                              |       | 0.2                              |       | 407 |   | 0.2 |   | 1,798 |   | 0.2 |   | 1,374 |   | 0.2 |   |
| Net income attributable to Texas  Roadhouse, Inc. and subsidiaries |       | 13,952                           |       | 5.7                              |       | 10,695 |   | 4.7 |   | 48,229 |   | 6.3 |   | 38,770 |   | 5.4 |   |

 

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NM— Not meaningful

 

**RestaurantUnit Activity**

** **
| ** **                         | ** ** | **Company** | ** ** | **Franchise** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------|------------|---------------|------------|-----------|------------|
| Balance at December 29, 2009  |       | 261         |       | 70            |       | 331       |       |
| Openings                           |       | 7           |       | 1             |       | 8         |       |
| Acquisitions (Dispositions)        |       | —      |       | —        |       | —    |       |
| Closures                           |       | (1          | )          | —        |       | (1        | )          |
|                               |       |        |       |          |       |      |       |
| Balance at September 28, 2010 |       | 267         |       | 71            |       | 338       |       |

 

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**Q3 2010 (13 weeks) Comparedto Q3 2009 (13 weeks) and 2010 YTD (39 weeks) Compared to 2009 YTD (39 weeks)**

 

*Restaurant Sales.*   Restaurantsales increased by 8.5% in Q3 2010 as compared to Q3 2009 and by 6.3% in 2010YTD compared to 2009 YTD.  Theseincreases were primarily attributable to the opening of new restaurants and anincrease in average unit volumes and comparable restaurant sales.

 

Thefollowing table summarizes certain key drivers and/or attributes of restaurantsales at company restaurants for the periods presented.

 
| ** **                                   | ** ** | **Q3 2010** | ** ** | **Q3 2009** | ** ** | **2010 YTD** | ** ** | **2009 YTD** | ** ** |
|----------------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                   | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | ** **        | ** ** |
| Increase  in store weeks                     |       | 3.6              | %          | 11.0             | %          | 4.1               | %          | 16.8              | %          |
| Increase/(decrease)  in average unit volumes |       | 4.5              | %          | (5.7             | )%         | 1.6               | %          | (4.4              | )%         |
| Other(1)                                     |       | 0.4              | %          | (1.3             | )%         | 0.6               | %          | (1.5              | )%         |
| Total  increase in restaurant sales          |       | 8.5              | %          | 4.0              | %          | 6.3               | %          | 10.9              | %          |
| ** **                                   | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | ** **        | ** ** |
| Store weeks                                  |       | 3,450            |       | 3,331            |       | 10,294            |       | 9,893             |       |
| Comparable restaurant sales growth           |       | 4.3              | %          | (4.6             | )%         | 2.1               | %          | (3.0              | )%         |
| Average unit volume (in thousands)           |       | $                | 913        |             | $          | 874               |       | $                 | 2,836      |   | $ | 2,792 |   |
|                                              |            |                  |            |                  |            |                   |            |                   |            |  |  |  |  |

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| (1) |   | Includes the impact of the  year-over-year change in sales volume of restaurants open less than six  months before the beginning of the period measured and, if applicable, the  impact of restaurants closed during the period. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The increases in store weeks for Q3 2010 and 2010YTD were primarily attributable to the opening of new restaurants.  The increases in store weeks for Q3 2009 and2009 YTD were primarily attributable to the opening of new restaurants and theacquisition of franchise restaurants in 2008 YTD.

 

The increases in average unit volumes for Q3 2010compared to Q3 2009 and 2010 YTD compared to 2009 YTD were primarily driven bya combination of positive comparable restaurant sales and higher year-over-yearsales at newer restaurants.  For Q3 2010and Q3 2009, comparable restaurants sales increased 4.3% and decreased 4.6%,respectively.  The increase in Q3 2010was generated by an increase in guest traffic counts, partially offset by aslight decline in our per person average check. The decrease in Q3 2009 was generated primarily by a decrease in guesttraffic counts, while our per person average check remained fairly constant.

 

We have implemented certain menu pricing increasesto partially offset impacts from higher operating costs and other inflationarypressures.  The following tablesummarizes our menu pricing actions for the periods shown.

 
| ** **                 | ** ** | **Increased Menu  Pricing** | ** ** |
|----------------------------|------------|----------------------------------|------------|
|                       |       |                             |       |
| April 2009            |       | 1.4                              | %          |
| May/June 2008         |       | 1.5                              | %          |
| January/February 2008 |       | 1.1                              | %          |

 

As some guests are purchasing fewer alcoholicbeverages and/or shifting their selections to lower priced menu items, averageguest check has not increased in line with the menu price increases above.  While we have not taken any pricing increasesin 2010 due to the favorable commodities environment, we will continue toevaluate the need for and test further menu price increases as we assess thecurrent inflationary and competitive environment.

 

In 2010, we plan to open 14 company restaurants,seven of which opened during 2010 YTD. We have begun construction for all of the remaining restaurants.  In addition, we will continue to evaluateopportunities for international development and possibly acquire additionalfranchise restaurants in the future.

 

*Franchise Royalties and Fees.*   Franchiseroyalties and fees increased by $0.2 million, or by 7.7% in Q3 2010 from Q32009 and by $0.7 million, or by 10.8% in 2010 YTD from 2009 YTD.  These increases were primarily attributableto an increase in average unit volumes, increasing royalty rates in conjunctionwith the renewal of certain franchise agreements, and the opening of a newrestaurant in the second quarter of fiscal 2010.  Franchise comparable restaurant salesincreased 4.4% and 2.4% in Q3 2010 and 2010 YTD, respectively.  Franchise restaurant count activity is shownin the restaurant unit activity table above.

 

*Restaurant Cost of Sales.*   Restaurantcost of sales, as a percentage of restaurant sales, decreased to 32.5% in Q32010 from 33.2% in Q3 2009 and to 32.5% in 2010 YTD from 33.6% in 2009YTD.  These decreases were primarilyattributable to the benefit of lower beef costs and lower food costs on itemssuch as wheat and oil-based ingredients. We expect commodity cost deflation of approximately 2.5% in 2010.  For the remainder of 2010, we have fixedprice contracts for approximately 75% of our overall food costs with theremainder subject to fluctuating market prices. We expect commodity costinflation of approximately 2.0%-3.0% in 2011.

 

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*Restaurant Labor Expenses.*  Restaurantlabor expenses, as a percentage of restaurant sales, decreased to 29.5% in Q32010 from 30.1% in Q3 2009 and to 29.4% in 2010 YTD from 29.7% in 2009YTD.  These decreases were primarilyattributable to an increase in average unit volumes and lower stateunemployment tax expense, partially offset by higher average wage rates.  Additionally, lower workers’ compensationclaims experience resulted in lower year-over-year workers’ compensationexpense for Q3 2010.  Higher averagehourly wage rates resulted from several state-mandated increases in minimum andtip wage rates throughout 2009, including increases in federal minimum wagerate in July 2009.  While we haveexperienced lower state unemployment tax expense throughout 2010 YTD comparedto 2009 YTD, we expect to experience higher expense in the fourth quarter of2010 compared to the fourth quarter of 2009, due to a credit of $1.2 millionrecorded in the fourth quarter of 2009 related to refunds of unemployment taxesrelated to fiscal 2009 for various states. We anticipate our labor costs will continue to be pressured by inflation,which is primarily caused by federal and state-mandated increases in minimumand tip wage rates.  These increases mayor may not be offset by additional menu price adjustments.

 

*Restaurant Rent Expense.*   Restaurant rent expense, as a percentage of restaurantsales, remained the same at 2.2% in Q3 2010 compared to Q3 2009 and 2.1% in2010 YTD compared to 2009 YTD.  Thebenefit from an increase in average unit volumes was offset by the impact ofleasing more land and buildings than we have in the past.

 

*Restaurant Other Operating Expenses**. ****** ***Restaurant other operating expenses, as a percentage of restaurant sales,increased to 17.9% in Q3 2010 from 17.3% in Q3 2009 and to 17.1% in 2010 YTDfrom 16.9% in 2009 YTD.  The increase inQ3 2010 was primarily attributable to higher general liability insurance costsand higher costs for managing partner and market partner bonuses, as apercentage of sales, partially offset by an increase in average unitvolumes.  In 2010 YTD, higher costs formanaging partner and market partner bonuses, as a percentage of sales, andhigher general liability insurance costs were offset by an increase in averageunit volumes and lower costs for utilities and supplies.  Managing partner and market partner bonusexpenses were higher in Q3 2010 and 2010 YTD as a result of improved restaurantsales and margins.  General liabilityinsurance costs were $0.8 million higher in Q3 2010 primarily due to changes inour claims development history based on our Q3 2010 actuarial report.

 

*Restaurant Pre-opening Expenses.*   Pre-opening expenses increased to $2.2 million in Q32010 from $1.2 million in Q3 2009 and increased to $4.6 million in 2010 YTDfrom $4.4 million in 2009 YTD.  Theseincreases were primarily attributable to more restaurants in the developmentpipeline during the third quarter of 2010 as compared to the third quarter of2009, primarily driven by our plan to open approximately 20 company restaurantsin 2011 as compared to 14 company restaurants in 2010.  Pre-opening costs will fluctuate from periodto period based on the number and timing of restaurant openings and the numberand timing of restaurant managers hired. Based on our increased restaurant development plans, we expectpre-opening expense to be higher in 2011.

 

*Depreciation and Amortization Expense (“D&A”).*   D&A, as a percentage of total revenue, decreased to4.2% in Q3 2010 from 4.6% in Q3 2009 and to 4.1% in 2010 YTD from 4.4% in 2009YTD.  These decreases were primarilyattributable to an increase in average unit volumes and lower depreciationexpense on older restaurants, partially offset by higher construction costs andother capital spending on new restaurants.

 

*Impairmentand Closure Expenses.*  Impairment and closure expenses increased to$44,000 in Q3 2010 compared to ($0.2) million in Q2 2009 and $0.3 million in2010 YTD compared to ($0.3) million in 2009 YTD.  The costs in Q3 2010 are primarilyattributable to various restaurant closures, while 2010 YTD also includesimpairment expense of $0.1 million related to the write-down of equipmentassociated with one restaurant, which was closed in Q2 2010.  In Q3 2009, we closed two restaurants andrecorded a gain of $0.6 million due to the sale of one of these restaurants,which was partially offset by closure costs of $0.4 million related to thesecond restaurant.

 

*General and Administrative Expenses (“G&A”)**.***** **G&A,as a percentage of total revenue, decreased to 4.9% in Q3 2010 from 5.2% in Q32009 and increased to 5.2% in 2010 YTD from 5.0% in 2009 YTD.  The decrease in Q3 2010 was primarilyattributable to lower performance-based bonus expense recorded in Q3 2010compared to the performance-based bonus expense recorded in Q3 2009. Werecorded additional bonus expense for executives and other support centeremployees of $0.6 million in Q3 2010 compared to $1.2 million in Q3 2009.  For the remainder of 2010, we expect bonusexpense to be more comparable to the same period in 2009.  The increase in 2010 YTD was primarilyattributable to higher costs related to our annual managing partner conferencein Q2 2010.  Costs associated with ourannual conference were $3.4 million in 2010 YTD compared to $2.0 million in2009 YTD.  The majority of these costswere incurred during our second fiscal quarter in each year.  We anticipate that the costs associated withour 2011 annual conference will be approximately $2.0-$2.5 million.

 

*Interest Expense, Net.*   Interestexpense decreased to $0.6 million in Q3 2010 from $0.8 million in Q3 2009 and$2.1 million in 2010 YTD from $2.5 million in 2009 YTD.  These decreases were primarily attributableto the decrease in outstanding borrowings under our credit facility and lowerinterest rates, partially offset by lower capitalized interest.  Lower capitalized interest was primarily dueto slower restaurant development in 2010 YTD compared to 2009 YTD.

 

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*Income Tax Expense. * We account for income taxes in accordancewith Financial Accounting Standards Board (“FASB”) Accounting StandardsCodification (“ASC”) 740, *Income Taxes (“ASC 740”). *Our effective tax rate decreasedto 31.7% in Q3 2010 from 33.7% in Q3 2009, and remained the same at 32.4% in2010 YTD compared to 2009 YTD.

 

Thedecrease in Q3 2010 was primarily attributable to higher work opportunity taxcredits and lower non-deductible stock compensation expense.  The decrease was partially offset by theimpact of higher profitability, which led to a lower benefit, on a percentagebasis, of federal tax credits and an increase in the non-deductibility ofofficer’s compensation.  The higher workopportunity tax credits resulted from the expansion of the federal program fordisconnected youth.

 

In2010 YTD, the increase in work opportunity tax credits and lower non-deductiblestock compensation expense was offset by the impact of higher profitability,which led to a lower benefit, on a percentage basis, of federal tax credits andan increase in the non-deductibility of officer’s compensation.

 

Weexpect the effective tax rate to be approximately 32.4% for fiscal 2010.

 

**Liquidity and Capital Resources**

 

Thefollowing table presents a summary of our net cash provided by (used in)operating, investing and financing activities:

 
| ** **                                | ** ** | **39 Weeks Ended**     | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **September 28, 2010** | ** ** | **September 29, 2009** | ** ** |
| ** **                                | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net cash provided by operating activities |       | $                                | 74,302     |   | $ | 68,296 |   |
| Net cash used in investing activities     |       | (31,423                          | )          | (32,460 | ) |
| Net cash used in financing activities     |       | (34,312                          | )          | (5,261 | ) |
|                                      |       |                             |       |   |   |
| Net increase in cash and cash equivalents |       | $                                | 8,567      |   | $ | 30,575 |   |

 

Netcash provided by operating activities was $74.3 million in 2010 YTD compared to$68.3 million in 2009 YTD.  This increasewas primarily due to higher net income, partially offset by other changes inworking capital and deferred income taxes. Net income was $9.9 million higher as a result of having morerestaurants open, average unit volume growth and higher margins.

 

Ouroperations have not required significant working capital and, like manyrestaurant companies, we have been able to operate with negative workingcapital.  Sales are primarily for cash,and restaurant operations do not require significant inventories orreceivables.  In addition, we receivetrade credit for the purchase of food, beverages and supplies, thereby reducingthe need for incremental working capital to support growth.

 

Netcash used in investing activities was $31.4 million in 2010 YTD compared to$32.5 million in 2009 YTD.  This slightdecrease was primarily due to spending on capital expenditures.  While we opened seven company restaurants in2010 YTD compared to 12 company restaurants in 2009 YTD, we have morerestaurants in the development pipeline during 2010 YTD as compared to 2009YTD.  As a result, spending on capitalexpenditures only decreased slightly in 2010 YTD.

 

Werequire capital principally for the development of new company restaurants andthe refurbishment of existing restaurants.  We either lease our restaurantsite locations under operating leases for periods of five to 30 years(including renewal periods) or purchase the land where it is cost effective. Asof September 28, 2010, 117 of the 267 company restaurants had beendeveloped on land which we owned.

 

Ourfuture capital requirements will primarily depend on the number of newrestaurants we open and the timing of those openings and the restaurantprototype developed in a given fiscal year. These requirements will includecosts directly related to opening new restaurants and may also include costsnecessary to ensure that our infrastructure is able to support a largerrestaurant base. In fiscal 2010, we expect our capital expenditures to beapproximately $50.0 million, the majority of which will relate to plannedrestaurant openings.  This amountexcludes any cash used for franchise acquisitions.  We intend to satisfy our capital requirementsover the next 12 months with cash on hand, net cash provided by operatingactivities and, if needed, funds available under our credit facility.  For 2010, we anticipate net cash provided byoperating activities will exceed capital expenditures, which we currently planto use to repay borrowings under our credit facility and/or increase our cashbalance. Currently, our intent is to retain our future earnings, if any,primarily to finance the future development and operation of our business.

 

Netcash used in financing activities was $34.3 million in 2010 YTD as compared to$5.3 million in 2009 YTD.  This increasewas primarily due to paying down more on borrowings under our credit facility.

 

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On February 14, 2008, our Board of Directorsapproved a stock repurchase program to repurchase up to $25.0 million of commonstock.  On July 8, 2008, our Boardof Directors approved a $50.0 million increase in our stock repurchase program,thereby increasing our total stock repurchase authorization to $75.0 million.  Under this program, we were authorized torepurchase outstanding shares from time to time in open market transactionsthrough February 14, 2010.  On November 19,2009, our Board of Directors approved the extension of this date to February 14,2011.  No repurchases were made during2010 YTD or 2009 YTD.  The timing and theamount of any repurchases will be determined by our management under parametersestablished by our Board of Directors, based on its evaluation of our stockprice, market conditions and other corporate considerations. The approximatedollar value of shares that may yet be purchased under the plan is $18.2million.

 

In2010 YTD, we paid distributions of $1.7 million to equity holders of ten of ourmajority-owned company restaurants.  In2009 YTD, we paid distributions of $1.7 million to equity holders of nine ofour majority-owned company restaurants.

 

Wehave a $250.0 million five-year revolving credit facility with a syndicate ofcommercial lenders led by Bank of America, N.A., Banc of America Securities LLCand PNC Bank.  The facility expires on May 31,2012.  The terms of the facility requireus to pay interest on outstanding borrowings at LIBOR plus a margin of 0.50% to0.875%, depending on our leverage ratio, or the Base Rate, which is the higherof the issuing bank’s prime lending rate or the Federal funds rate plus0.50%.  We are also required to pay acommitment fee of 0.10% to 0.175% per year on any unused portion of thefacility, depending on our leverage ratio. The weighted-average interest rate for the revolver at September 28,2010 and December 29, 2009 was 3.24% and 2.36%, respectively, includinginterest rate swaps.

 

Thelenders’ obligation to extend credit under the facility depends on usmaintaining certain financial covenants, including a minimum consolidated fixedcharge coverage ratio of 2.00 to 1.00 and a maximum consolidated leverage ratioof 3.00 to 1.00.  The credit facilitypermits us to incur additional secured or unsecured indebtedness outside thefacility, except for the incurrence of secured indebtedness that in theaggregate exceeds 20% of our consolidated tangible net worth or circumstanceswhere the incurrence of secured or unsecured indebtedness would prevent us fromcomplying with our financial covenants. We were in compliance with all covenants as of September 28, 2010.

 

AtSeptember 28, 2010, we had $60.0 million of outstanding borrowings underour credit facility and $186.4 million of availability net of $3.6 million ofoutstanding letters of credit.  In addition, we had various other notespayable totaling $1.9 million with interest rates ranging from 10.46% to10.80%.  Each of these notes related to the financing of specificrestaurants. Our total weighted-average effective interest rate at September 28,2010 was 3.46%, including interest rate swaps.

 

OnOctober 22, 2008, we entered into an interest rate swap, starting on November 7,2008, with a notional amount of $25.0 million to hedge a portion of the cashflows of our variable rate credit facility. We have designated the interest rate swap as a cash flow hedge of ourexposure to variability in future cash flows attributable to interest paymentson a $25.0 million tranche of floating rate debt borrowed under our revolvingcredit facility.  Under the terms of theswap, we pay a fixed rate of 3.83% on the $25.0 million notional amount andreceive payments from the counterparty based on the 1-month LIBOR rate for aterm ending on November 7, 2015, effectively resulting in a fixed rateLIBOR component of the $25.0 million notional amount. Our counterparty in thisinterest rate swap is J.P. Morgan Chase, N.A.

 

OnJanuary 7, 2009, we entered into another interest rate swap, starting on February 7,2009, with a notional amount of $25.0 million to hedge a portion of the cashflows of our variable rate credit facility. We have designated the interest rate swap as a cash flow hedge of ourexposure to variability in future cash flows attributable to interest paymentson a $25.0 million tranche of floating rate debt borrowed under our revolvingcredit facility.  Under the terms of theswap, we pay a fixed rate of 2.34% on the $25.0 million notional amount andreceive payments from the counterparty based on the 1-month LIBOR rate for aterm ending on January 7, 2016, effectively resulting in a fixed rateLIBOR component of the $25.0 million notional amount.  Our counterparty in this interest rate swapis J.P. Morgan Chase, N.A.

 

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**Contractual Obligations**

 

Thefollowing table summarizes the amount of payments due under specifiedcontractual obligations as of September 28, 2010:

 
| ** **                        | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More than  5 years** | ** ** |
| ** **                        | ** ** | **(in thousands)**                   | ** ** |
| Long-term debt obligations        |       | $                                         | 61,907     |   | $ | 180 |   | $ | 60,423 |   | $ | 523 |   | $ | 781 |   |
| Capital lease obligations         |       | 337                                       |       | 87 |   | 202 |   | 48 |   | — |   |
| Interest (1)                      |       | 12,270                                    |       | 2,406 |   | 4,071 |   | 3,940 |   | 1,853 |   |
| Operating lease obligations       |       | 213,393                                   |       | 16,123 |   | 40,832 |   | 39,675 |   | 116,763 |   |
| Capital obligations               |       | 24,098                                    |       | 24,098 |   | — |   | — |   | — |   |
| Total contractual obligations (2) |       | $                                         | 312,005    |   | $ | 42,894 |   | $ | 105,528 |   | $ | 44,186 |   | $ | 119,397 |   |

 

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(1)          Assumesconstant rate until maturity for our fixed and variable rate debt and capitallease obligations.

 

Usesinterest rates as of September 28, 2010 for our variable rate debt.  Interest payments on our variable-raterevolving credit facility balance at September 28, 2010 are calculatedbased on the assumption that debt relating to the interest rate swaps coveringnotional amounts totaling $50.0 million remains outstanding until theexpiration of the respective swap arrangements. The interest rates used in determining interest payments to be madeunder the interest rate swap agreements were determined by taking theapplicable fixed rate of each swap plus the 0.75% margin, which was in effectas of September 28, 2010. Additionally, we have assumed $10.0 million in revolving credit facilityborrowings not covered by interest rate swaps is outstanding until the end ofthe 2010 fiscal year and have calculated interest payments using the weightedaverage interest rate of 3.24%, which is the interest rate associated with ourrevolving credit facility as of September 28, 2010.

 

(2)            Thisamount excludes approximately $21,000 of unrecognized tax benefits under FASBASC 740, *Income Taxes*.

 

TheCompany has no material minimum purchase commitments with its vendors thatextend beyond a year.  See note 6 to thecondensed consolidated financial statements for details of contractualobligations.

 

**Off-Balance Sheet Arrangements**

 

Exceptfor operating leases (primarily restaurant leases), we do not have anyoff-balance sheet arrangements.

 

**Guarantees**

 

Weentered into real estate lease agreements for franchise restaurants located inEverett, MA, Longmont, CO, Montgomeryville, PA, Fargo, ND and Logan, UT priorto our granting franchise rights for those restaurants. We have subsequentlyassigned the leases to the franchisees, but we remain contingently liable if afranchisee defaults under the terms of a lease. The Longmont lease expires inMay 2014, the Everett lease expires in February 2018, theMontgomeryville lease expires in June 2021, the Fargo lease expires in July 2016and the Logan lease expires in August 2019.  As the fair value of these guarantees is notconsidered significant, no liability value has been recorded.

 

**RecentlyIssued Accounting Standards**

 

***Fair Value Measures and Disclosures***

*(Accounting Standards Update (“ASU”) 2010-06)*

 

In January 2010, the FASB issued ASU 2010-06which amends Accounting Standards Codification (“ASC”) topic 820, *Fair Value Measures and Disclosures*.  ASU No. 2010-06 amends the ASC torequire disclosure of transfer into and out of Level 1 and Level 2 fair valuemeasurements, and also require more detailed disclosure about the activitywithin Level 3 fair value measurements. The changes as a result of this update are effective for annual andinterim reporting periods beginning after December 15, 2009 (our 2010fiscal year), except for requirements related to Level 3 disclosures, which areeffective for annual and interim reporting periods beginning after December 15,2010 (our 2011 fiscal year).  Thisguidance requires new disclosures only, and will have no impact on ourconsolidated financial position, results of operations or cash flows.

 

***Consolidationof Variable Interest Entities — Amended***

*(To beincluded in ASC 810, “Consolidation”, previously SFAS 167, “Amendments to FASBInterpretation No. 46(R)”)*

 

ASC810 provides guidance for determining the primary beneficiary of a variableinterest entity.  In addition, ASC 810requires ongoing assessments of whether an enterprise is the primarybeneficiary of a variable interest entity. ASC 810 is effective for the first annual and interim reporting periodsthat begin after November 15, 2009 (our fiscal year 2010).  The adoption of ASC 810 had no impact on ourconsolidated financial position, results of operations and cash flows.

 

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**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Weare exposed to market risk from changes in interest rates on debt and changesin commodity prices. Our exposure to interest rate fluctuations is limited toour outstanding bank debt and dependent on the interest rate option we chooseto utilize under our revolving line of credit. Our options for the rate are the Base Rate, which is the higher of theissuing bank’s prime lending rate or the Federal Funds rate plus 0.50%, or theLondon Interbank Offered Rate (“LIBOR”) plus an applicable margin.  At September 28, 2010 there was $60.0million outstanding under our revolving line of credit which bears interest atapproximately 50 to 87.5 basis points (depending on our leverage ratios) overLIBOR.   Our various other notes payable totaled $1.9 million at September 28,2010 and had fixed rates ranging from 10.46% to 10.80%.  Should interestrates on our variable rate borrowings increase by one percentage point, ourestimated annual interest expense would increase by $0.6 million.

 

On October 22, 2008, we entered into aninterest rate swap, starting on November 7, 2008, with a notional amountof $25.0 million to hedge a portion of the cash flows of our variable rateborrowings. We have designated the interest rate swap as a cash flow hedge ofour exposure to variability in future cash flows attributable to interestpayments on a $25.0 million tranche of floating rate debt borrowed underour revolving credit facility. Under the terms of the swap, we pay a fixed rateof 3.83% on the $25.0 million notional amount and receive payments fromthe counterparty based on the 1-month LIBOR rate for a term ending on November 7,2015, effectively resulting in a fixed rate on the LIBOR component of the$25.0 million notional amount.

 

On January 7, 2009, we entered into anotherinterest rate swap, starting February 7, 2009, with a notional amount of$25.0 million to hedge a portion of the cash flows of our variable rate creditfacility.  We have designated theinterest rate swap as a cash flow hedge of our exposure to variability infuture cash flows attributable to interest payments on a $25.0 million trancheof floating rate debt borrowed under our revolving credit facility.  Under the terms of the swap, we pay a fixedrate of 2.34% on the $25.0 million notional amount and receive payments fromthe counterparty based on the 1-month LIBOR rate for a term ending on January 7,2016, effectively resulting in a fixed rate LIBOR component of the $25.0million notional amount.

 

By using derivative instruments to hedge exposuresto changes in interest rates, we expose ourselves to credit risk. Credit riskis the failure of the counterparty to perform under the terms of the derivativecontract. We minimize the credit risk by entering into transactions withhigh-quality counterparties whose credit rating is evaluated on a quarterlybasis.  Our counterparty in the interestrate swaps is J.P. Morgan Chase, N.A.

 

Manyof the ingredients used in the products sold in our restaurants are commoditiesthat are subject to unpredictable price volatility. Currently, we do notutilize fixed price contracts for certain commodities such as produce andcheese, therefore, we are subject to prevailing market conditions whenpurchasing those types of commodities. For other commodities, we employ variouspurchasing and pricing contract techniques in an effort to minimize volatility,including fixed price contracts for terms of generally one year or less andnegotiating prices with vendors with reference to fluctuating marketprices.  We currently do not usefinancial instruments to hedge commodity prices, but we will continue toevaluate their effectiveness. Extreme and/or long term increases in commodityprices could adversely affect our future results, especially if we are unable,primarily due to competitive reasons, to increase menu prices. Additionally, ifthere is a time lag between the increasing commodity prices and our ability toincrease menu prices or if we believe the commodity price increase to be shortin duration and we choose not to pass on the cost increases, our short-termfinancial results could be negatively affected.

 

Weare subject to business risk as our beef supply is highly dependent upon two tofour vendors.  If these vendors wereunable to fulfill their obligations under their contracts, we may encountersupply shortages and incur higher costs to secure adequate supplies, any ofwhich would harm our business.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluationof disclosure controls and procedures**

 

Wehave evaluated the effectiveness of the design and operation of our disclosure controlsand procedures pursuant to, and as defined in Exchange ActRules 13a-15(e) and 15d-15(e) as of the end of the periodcovered by this report. Based on the evaluation, performed under thesupervision and with the participation of our management, including the ChiefExecutive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), ourmanagement, including the CEO and CFO, concluded that our disclosure controlsand procedures were effective as of the end of the period covered by thisreport.

 

**Changes ininternal control**

 

Duringthe period covered by this report, there were no changes with respect to ourinternal control over financial reporting that materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II — OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

Occasionally,we are a defendant in litigation arising in the ordinary course of ourbusiness, including “slip and fall’ accidents, employment related claims andclaims from guests or employees alleging illness, injury or food quality,health or operational concerns.  None of these types of litigation, mostof which are covered by insurance, has had a material effect on us and, as ofthe date of this report, we are not party to any litigation that we believewould have a material adverse effect on our business.

 

OnOctober 8, 2010, the U.S. Equal Employment Opportunity Commission (“EEOC”)for the Boston Area Office issued a determination letter in Charge No. 523-2009-00643alleging that we engaged in a pattern and practice of age discrimination inhiring for certain restaurant positions in violation of the Age Discriminationin Employment Act.  The determinationalleges that applicants over the age of 40 were denied employment in ourrestaurants in host, server and server assistant positions solely due to theirage.  The EEOC is seeking remedialactions and the payment of damages to the disaffected applicants.  We have denied the allegation and intend tovigorously defend against the charge. The EEOC has invited us to participate in its conciliation process, andwe have agreed to do so.  Based on thepreliminary status of this matter, we cannot estimate the possible amount orrange of loss, if any, associated with this matter.

 

**ITEM1A.  RISK FACTORS**

 

Information regarding risk factors appears in ourAnnual Report on Form 10-K for the year ended December 29, 2009,under the heading “Special Note Regarding Forward-looking Statements” and inthe Form 10-K Part I, Item 1A, Risk Factors.  There have been no material changes from therisk factors previously disclosed in our Form 10-K.

 

**ITEM 2.  UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS**

 

OnFebruary 14, 2008, our Board of Directors approved a stock repurchaseprogram under which it authorized us to repurchase up to $25.0 million of ourcommon stock through February 14, 2010.  On July 8, 2008, our Board of Directors approved a $50.0 millionincrease in our stock repurchase program. On November 19, 2009, our Board of Directors extended theexpiration date on the stock repurchase program to February 14, 2011.  We made no repurchases of common stock duringthe 39 weeks ended September 28, 2010. The approximate dollar value of shares that may yet be purchased underthe plan is $18.2 million.

 

**ITEM 3.  DEFAULTS UPONSENIOR SECURITIES**

 

None.

 

**ITEM 4.  (Removed andReserved)**

 

None.

 

**ITEM 5.  OTHER INFORMATION.**

 

None.

 

**ITEM 6. EXHIBITS.**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                 |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                     |
| 31.2                 |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                     |
| 32.1                 |       | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2                 |       | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                    | TEXAS  ROADHOUSE, INC. |
|-------------------------|------------------------|
|                    |                   |   |
| Date:  November 5, 2010 | By:                    | /s/  G.J. Hart |
|                    |                   | G.J.  Hart |
|                    |                   | President,  Chief Executive Officer |
|                    |                   | (principal  executive officer) |
|                    |                   |   |
| Date:  November 5, 2010 | By:                    | /s/  Scott M. Colosi |
|                    |                   | Scott  M. Colosi |
|                    |                   | Chief  Financial Officer |
|                    |                   | (principal  financial officer) |
|                    |                   | (chief  accounting officer) |

 

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