Einstein Bros 2012 Annual Report Download - page 37

10-K
http://www.sec.gov/Archives/edgar/data/949373/000119312513085036/d445565d10k.htm[9/11/2014 10:07:50 AM]
Economic Environment and Commodity Volatility
Our results depend on discretionary consumer spending, which is influenced by consumer confidence and disposable income. Declining home
values and sales, the negative impact of the changes in the subprime mortgage and credit markets, high unemployment rates and lower consumer
confidence as a result of the changes within the economic environment have caused the consumer to experience a real and perceived reduction in
disposable income. We believe that this has negatively impacted consumer spending in most segments of the restaurant industry, including the
segment in which we compete. Any material decline in the amount of discretionary spending could have a material adverse effect on our sales and
income.
We believe our current strategy for dealing with inflation, which is to maintain operating margins through a combination of menu price
increases, cost controls, efficient purchasing practices and careful evaluation of property and equipment needs, has been an effective tool for
dealing with increased costs. However, the impact of inflation on labor and occupancy costs could, in the future, affect our operations. We pay
many of our associates based on hourly rates slightly above the applicable minimum federal, state or municipal “living wage” rates. Recent changes
in minimum wage laws may create pressure to increase the pay scale for our associates, which would increase our labor costs. Costs for
construction, taxes, repairs, maintenance and insurance impact our occupancy costs.
Inflation on food costs also can also increase our cost of goods sold, which includes food and product costs, compensation costs and other
operating costs. Wheat, coffee, butter and cheese are our primary agricultural commodities. Chicken and turkey are other major agricultural
commodities which are included in our cost of goods sold. Utilizing a third party, we attempt to lock our food and product costs over an extended
period of time. We believe that this strategy has been effective in dealing with increases to our food and product costs.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements set forth in Item 8 of this Form 10-K for a detailed description of recent accounting
pronouncements. We do not expect these recently issued accounting pronouncements to have a material impact on our results of operations,
financial condition, or liquidity in future periods.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates based on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. Additionally, any estimates for contingent liabilities that arise as result of any
legal proceedings are discussed in Item 3 of this report.
Our significant accounting policies are discussed in Note 2 to our consolidated financial statements set forth in Item 8 of this Form 10-K.
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Income Taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective
tax bases of our assets and liabilities. Deferred tax assets and liabilities are measured using current enacted tax rates expected to apply to taxable
income in the years in which we expect the temporary differences to reverse. We routinely evaluate the likelihood of realizing the benefit of our
deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will
not be realized.
In addition, our income tax returns are periodically audited by federal and state tax authorities. These audits include questions regarding our
tax filing positions, including the timing and amount of deductions taken and the allocation of income amongst various tax jurisdictions. We
evaluate our exposures associated with our various tax filing positions and record a related liability. We adjust our liability for unrecognized tax
benefits and income tax provision in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the
relevant taxing authority to examine the tax position or when more information becomes available.
As of January 1, 2013, we have not recorded a valuation allowance on our deferred tax assets. The valuation allowance that we had recorded
as of January 3, 2012 was applied against net operating losses that will expire prior to their utilization. During fiscal 2012, we eliminated these net
operating losses and accordingly eliminated the related valuation allowance. We have also recorded a liability for unrecognized tax benefits of $0.7
million. The recording of these amounts requires significant management judgment regarding the interpretation of applicable statutes, the status of
various income tax audits, and our particular facts and circumstances. We believe that our estimates are reasonable; however, actual results could