Attached files
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EX-31.1 - EXHIBIT 31.1 - CKE RESTAURANTS INC | ex311.htm |
EX-32.1 - EXHIBIT 32.1 - CKE RESTAURANTS INC | ex321.htm |
EX-31.2 - EXHIBIT 31.2 - CKE RESTAURANTS INC | ex312.htm |
EX-32.2 - EXHIBIT 32.1 - CKE RESTAURANTS INC | ex322.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the quarterly period ended November 2, 2009
|
|
OR
|
|
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the transition period
from
to .
|
Commission
file number 1-11313
CKE
RESTAURANTS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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33-0602639
|
(State
or Other Jurisdiction of
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(I.R.S.
Employer
|
Incorporation
or Organization)
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Identification
No.)
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6307
Carpinteria Avenue, Ste. A, Carpinteria, California
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93013
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(Address
of Principal Executive Offices)
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(Zip
Code)
|
Registrant’s telephone number,
including area code: (805) 745-7500
Former Name, Former Address and
Former Fiscal Year, if changed since last report.
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No £
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes £ No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer £
|
Accelerated
filer R
|
Non-accelerated
filer £
|
Smaller
reporting company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No R
As of
December 3, 2009, 55,186,442 shares of the registrant’s common stock were
outstanding.
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
|
Page No.
|
Part
I. Financial Information
|
|
Part
II. Other Information
|
|
Exhibit 31.2 | |
Exhibit 32.1 | |
Exhibit 32.2 |
Part I. Financial
Information
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
AS
OF NOVEMBER 2, 2009 AND JANUARY 31, 2009
(In
thousands, except par values)
(Unaudited)
|
November 2, 2009
|
January 31, 2009
|
||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 20,068 | $ | 17,869 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $348 as of November
2, 2009 and $720 as of January 31, 2009
|
35,859 | 40,738 | ||||||
Related
party trade receivables
|
5,220 | 4,923 | ||||||
Inventories,
net
|
22,319 | 24,215 | ||||||
Prepaid
expenses
|
14,041 | 13,445 | ||||||
Assets
held for sale
|
232 | 805 | ||||||
Advertising
fund assets, restricted
|
19,527 | 16,340 | ||||||
Deferred
income tax assets, net
|
17,510 | 20,781 | ||||||
Other
current assets
|
2,903 | 1,843 | ||||||
Total
current assets
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137,679 | 140,959 | ||||||
Notes
receivable, net of allowance for doubtful accounts of $365 as of November
2, 2009 and $529 as of January 31, 2009
|
1,293 | 3,259 | ||||||
Property
and equipment, net of accumulated depreciation and amortization of
$439,999 as of November 2, 2009 and $420,375 as of January 31,
2009
|
559,964 | 543,770 | ||||||
Property
under capital leases, net of accumulated amortization of $45,978 as of
November 2, 2009 and $48,341 as of January 31, 2009
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33,658 | 23,403 | ||||||
Deferred
income tax assets, net
|
41,377 | 57,832 | ||||||
Goodwill
|
24,106 | 23,688 | ||||||
Intangible
assets, net
|
2,369 | 2,508 | ||||||
Other
assets, net
|
8,503 | 9,268 | ||||||
Total
assets
|
$ | 808,949 | $ | 804,687 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Current
portion of bank indebtedness and other long-term debt
|
$ | 2,709 | $ | 4,341 | ||||
Current
portion of capital lease obligations
|
7,696 | 6,389 | ||||||
Accounts
payable
|
55,528 | 60,903 | ||||||
Advertising
fund liabilities
|
19,527 | 16,340 | ||||||
Other
current liabilities
|
100,727 | 91,765 | ||||||
Total
current liabilities
|
186,187 | 179,738 | ||||||
Bank
indebtedness and other long-term debt, less current
portion
|
274,929 | 310,447 | ||||||
Capital
lease obligations, less current portion
|
43,895 | 36,273 | ||||||
Other
long-term liabilities
|
82,249 | 83,953 | ||||||
Total
liabilities
|
587,260 | 610,411 | ||||||
Commitments
and contingencies (Notes 5 and 7)
|
||||||||
Subsequent
events (Notes 8 and 15)
|
||||||||
Stockholders’
equity:
|
||||||||
Preferred
stock, $.01 par value; 5,000 shares authorized; none issued or
outstanding
|
— | — | ||||||
Series
A Junior Participating Preferred stock, $.01 par value; 1,500 shares
authorized; none issued or outstanding
|
— | — | ||||||
Common
stock, $.01 par value; 100,000 shares authorized; 55,179 shares issued and
outstanding as of November 2, 2009; 54,653 shares issued and outstanding
as of January 31, 2009
|
552 | 546 | ||||||
Additional
paid-in capital
|
280,506 | 276,068 | ||||||
Accumulated
deficit
|
(59,369 | ) | (82,338 | ) | ||||
Total
stockholders’ equity
|
221,689 | 194,276 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 808,949 | $ | 804,687 |
CKE RESTAURANTS, INC. AND
SUBSIDIARIES
(In thousands, except per share
amounts)
(Unaudited)
|
Twelve Weeks Ended
|
Forty Weeks Ended
|
||||||||||||||
|
November 2, 2009
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November 3, 2008
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November 2, 2009
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November 3, 2008
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||||||||||||
Revenue:
|
||||||||||||||||
Company-operated
restaurants
|
$ | 246,696 | $ | 255,545 | $ | 847,654 | $ | 880,858 | ||||||||
Franchised
and licensed restaurants and other
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77,521 | 81,050 | 259,334 | 274,398 | ||||||||||||
Total
revenue
|
324,217 | 336,595 | 1,106,988 | 1,155,256 | ||||||||||||
Operating
costs and expenses:
|
||||||||||||||||
Restaurant
operating costs:
|
||||||||||||||||
Food
and packaging
|
69,665 | 76,785 | 242,066 | 262,214 | ||||||||||||
Payroll
and other employee benefits
|
71,386 | 71,237 | 241,142 | 250,349 | ||||||||||||
Occupancy
and other
|
60,874 | 61,841 | 201,461 | 199,687 | ||||||||||||
Total
restaurant operating costs
|
201,925 | 209,863 | 684,669 | 712,250 | ||||||||||||
Franchised
and licensed restaurants and other
|
58,854 | 61,474 | 196,680 | 210,131 | ||||||||||||
Advertising
|
15,679 | 15,105 | 51,451 | 51,902 | ||||||||||||
General
and administrative
|
30,977 | 31,156 | 103,061 | 108,037 | ||||||||||||
Facility
action charges, net
|
520 | 1,242 | 3,022 | 2,666 | ||||||||||||
Total
operating costs and expenses
|
307,955 | 318,840 | 1,038,883 | 1,084,986 | ||||||||||||
Operating
income
|
16,262 | 17,755 | 68,105 | 70,270 | ||||||||||||
Interest
expense
|
(6,430 | ) | (9,363 | ) | (14,834 | ) | (16,330 | ) | ||||||||
Other
income, net
|
704 | 769 | 1,991 | 2,290 | ||||||||||||
Income
before income taxes
|
10,536 | 9,161 | 55,262 | 56,230 | ||||||||||||
Income
tax expense
|
4,379 | 3,773 | 22,460 | 21,882 | ||||||||||||
Net
income
|
$ | 6,157 | $ | 5,388 | $ | 32,802 | $ | 34,348 | ||||||||
Income
per common share:
|
||||||||||||||||
Basic
|
$ | 0.11 | $ | 0.10 | $ | 0.60 | $ | 0.65 | ||||||||
Diluted
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$ | 0.11 | $ | 0.10 | $ | 0.60 | $ | 0.63 | ||||||||
Dividends
per common share
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$ | 0.06 | $ | 0.06 | $ | 0.18 | $ | 0.18 | ||||||||
CKE RESTAURANTS, INC. AND
SUBSIDIARIES
(In
thousands)
(Unaudited)
Forty Weeks Ended
|
||||||||
|
November 2, 2009
|
November 3, 2008
|
||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 32,802 | $ | 34,348 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
54,317 | 48,141 | ||||||
Amortization
of deferred loan fees
|
799 | 948 | ||||||
Share-based
compensation expense
|
6,216 | 9,515 | ||||||
(Recovery
of) provision for losses on accounts and notes receivable
|
(346 | ) | 15 | |||||
Loss
on sale of property and equipment and capital leases
|
1,352 | 1,914 | ||||||
Facility
action charges, net
|
3,022 | 2,666 | ||||||
Deferred
income taxes
|
19,078 | 17,723 | ||||||
Other
non-cash charges
|
24 | 28 | ||||||
Net
changes in operating assets and liabilities:
|
||||||||
Receivables,
inventories, prepaid expenses and other current and non-current
assets
|
4,859 | 6,226 | ||||||
Estimated
liability for closed restaurants and estimated liability for
self-insurance
|
(2,782 | ) | (4,470 | ) | ||||
Accounts
payable and other current and long-term liabilities
|
(805 | ) | (8,680 | ) | ||||
Net
cash provided by operating activities
|
118,536 | 108,374 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property and equipment
|
(69,399 | ) | (82,658 | ) | ||||
Proceeds
from sale of property and equipment
|
3,836 | 21,042 | ||||||
Collections
of non-trade notes receivable
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2,330 | 2,799 | ||||||
Acquisition
of restaurants, net of cash acquired
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(485 | ) | — | |||||
Other
investing activities
|
111 | 68 | ||||||
Net
cash used in investing activities
|
(63,607 | ) | (58,749 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Net
change in bank overdraft
|
876 | (13,911 | ) | |||||
Borrowings
under revolving credit facility
|
98,000 | 133,500 | ||||||
Repayments
of borrowings under revolving credit facility
|
(131,500 | ) | (135,000 | ) | ||||
Repayments
of credit facility term loan
|
(3,633 | ) | (15,815 | ) | ||||
Repayments
of other long-term debt
|
(17 | ) | (131 | ) | ||||
Repayments
of capital lease obligations
|
(5,637 | ) | (4,493 | ) | ||||
Payment
of deferred loan fees
|
— | (399 | ) | |||||
Repurchase
of common stock
|
(1,690 | ) | (4,296 | ) | ||||
Exercise
of stock options
|
569 | 1,626 | ||||||
Excess
tax benefits from exercise of stock options and vesting of restricted
stock awards
|
131 | 174 | ||||||
Dividends
paid on common stock
|
(9,829 | ) | (9,449 | ) | ||||
Net
cash used in financing activities
|
(52,730 | ) | (48,194 | ) | ||||
Net
increase in cash and cash equivalents
|
2,199 | 1,431 | ||||||
Cash
and cash equivalents at beginning of period
|
17,869 | 19,993 | ||||||
Cash
and cash equivalents at end of period
|
$ | 20,068 | $ | 21,424 |
See
Accompanying Notes to Condensed Consolidated Financial Statements
5
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
(Unaudited)
CKE
Restaurants, Inc. (“CKE” or the “Company”), through its wholly-owned
subsidiaries, owns, operates, franchises and licenses the Carl’s Jr.®,
Hardee’s®,
Green Burrito® and
Red Burrito™ concepts. References to CKE Restaurants, Inc. throughout these
Notes to Condensed Consolidated Financial Statements are made using the first
person notations of “we,” “us” and “our.”
Carl’s
Jr. restaurants are primarily located in the Western United States. Hardee’s
restaurants are located throughout the Southeastern and Midwestern United
States. Green Burrito restaurants are primarily located in dual-branded Carl’s
Jr. restaurants. The Red Burrito concept is located in dual-branded Hardee’s
restaurants. Generally, our franchisees are domestic and our licensees are
international. As of November 2, 2009, our system-wide restaurant portfolio
consisted of:
Carl’s Jr.
|
Hardee’s
|
Other
|
Total
|
|||||||||||||
Company-operated
|
421 | 476 | 1 | 898 | ||||||||||||
Franchised
|
667 | 1,232 | 12 | 1,911 | ||||||||||||
Licensed
|
133 | 205 | — | 338 | ||||||||||||
Total
|
1,221 | 1,913 | 13 | 3,147 |
Our
accompanying unaudited Condensed Consolidated Financial Statements include the
accounts of CKE, our wholly-owned subsidiaries, and certain variable interest
entities (“VIEs”) for which we are the primary beneficiary and have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”), the instructions to Form 10-Q, and Article 10
of Regulation S-X. CKE does not have any non-controlling interests in other
entities. These financial statements should be read in conjunction with the
audited Consolidated Financial Statements presented in our Annual Report on Form
10-K for the fiscal year ended January 31, 2009. In our opinion, all adjustments
considered necessary for a fair presentation of financial position and results
of operations for this interim period have been included. The results of
operations for such interim period are not necessarily indicative of results for
the full year or for any future period.
We
operate on a retail accounting calendar. Our fiscal year has 13 four-week
accounting periods and ends on the last Monday in January. The first quarter of
our fiscal year has four periods, or 16 weeks. All other quarters have three
periods, or 12 weeks. For clarity of presentation, we generally label all fiscal
year ends as if the fiscal year ended January 31.
Variable
Interest Entities
We
consolidate one national and approximately 80 local co-operative advertising
funds (“Hardee’s Funds”) as we have concluded that they are VIEs for which we
are the primary beneficiary. We have included $19,527 and $16,340 of advertising
fund assets, restricted, and advertising fund liabilities in our accompanying
Condensed Consolidated Balance Sheets as of November 2, 2009 and January 31,
2009, respectively. Consolidation of the Hardee’s Funds had no impact on our
accompanying Condensed Consolidated Statements of Income and Cash Flows. We have
no rights to the assets, nor do we have any obligation with respect to the
liabilities, of the Hardee’s Funds, and none of our assets serve as collateral
for the creditors of these VIEs.
Certain
of our franchisees, which combine to operate approximately 5.8% of all our
franchised and licensed restaurants, are VIEs in which we hold a significant
variable interest, but for which we are not the primary beneficiary. As of
November 2, 2009, we have exposures of $12,197 related to these VIEs, which
relate to the collection of accounts receivable and our lease obligations for
properties subleased to these entities.
Note 2 — Accounting Pronouncements
Not Yet Adopted and Adoption of New Accounting
Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued guidance on the
Accounting Standards Codification (“ASC” or “Codification”) and the Hierarchy of
GAAP which establishes the Codification as the
single source of authoritative guidance for nongovernmental financial statements
prepared in accordance with GAAP, except for the Securities and Exchange
Commission (“SEC”) rules and interpretive releases, which is also
authoritative guidance for SEC registrants. This guidance is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009 and supersedes existing non-SEC accounting and reporting
standards. We adopted the Codification during the quarter ended November 2,
2009, and there was no impact on our unaudited Condensed Consolidated Financial
Statements other than the removal of specific references to GAAP accounting
pronouncements.
6
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
(Unaudited)
In
September 2006, the FASB issued authoritative guidance for fair value
measurements and disclosures which defines fair value, establishes a framework
for measuring fair value and expands disclosures related to assets and
liabilities measured at fair value. In February 2008, the FASB issued additional
authoritative guidance which delayed the effective date for fair value
measurements to fiscal years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. We
adopted all provisions of the authoritative guidance as of the beginning of
fiscal 2009 except for the guidance applicable to non-recurring nonfinancial
assets and nonfinancial liabilities. As of the beginning of fiscal 2010, we
adopted the remaining provisions of the authoritative guidance and there was no
impact on our consolidated financial position or results of
operations.
In
December 2007, the FASB issued revised authoritative guidance for business
combinations which establishes principles and requirements for how an acquirer
in a business combination transaction recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date. The provisions
of the guidance also establish disclosure requirements which will enable
financial statement users to evaluate the nature and financial effects of the
business combination. In April 2009, the FASB issued additional authoritative
guidance for business combinations relating to the initial recognition and
measurement, subsequent measurement and accounting and disclosures of assets and
liabilities that arise from contingencies in a business combination. The
effective date of the authoritative guidance is for fiscal years beginning after
December 15, 2008. We adopted the provisions of the authoritative guidance as of
the beginning of fiscal 2010 and there was no material impact on our
consolidated financial position or results of operations.
In March
2008, the FASB issued authoritative guidance for derivatives and hedging which
requires companies with derivative instruments to disclose information that
should enable financial statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under the guidance, and how derivative instruments and related
hedged items affect a company’s financial position, financial performance and
cash. This guidance is effective for fiscal years and interim periods beginning
after November 15, 2008. We adopted the authoritative guidance as of the
beginning of fiscal 2010 and provided the required expanded disclosures (see
Notes 5 and 6).
In June
2008, the FASB issued authoritative guidance for earnings per share. The
guidance addresses whether instruments granted in share-based payment
transactions may be participating securities prior to vesting and, therefore,
need to be included in the earnings allocation in computing basic earnings per
share pursuant to the two-class method of the guidance for earnings per share.
This guidance is effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods within those years.
We adopted the authoritative guidance as of the beginning of fiscal 2010 and
presented income per share for the current and prior periods in accordance with
the guidance (see Note 12).
In April
2009, the FASB issued authoritative guidance for interim disclosures for
financial instruments. This guidance amends prior authoritative guidance by
requiring disclosures of the fair value of financial instruments included within
the scope of the prior guidance whenever a public company issues summarized
financial information for interim reporting periods. This guidance is effective
for interim reporting periods ending after June 15, 2009. We adopted the
authoritative guidance during the quarter ended August 10, 2009 and have
included the required additional disclosures (see Note 6).
In May
2009, the FASB issued authoritative guidance for subsequent events which
provides rules on recognition and disclosure for events and transactions
occurring after the balance sheet date but before the financial statements are
issued or available to be issued. In addition, the guidance requires a reporting
entity to disclose the date through which
subsequent events have been evaluated, as well as whether that date is the date
the financial statements are issued or the date the financial statements are
available to be issued. This guidance is effective for interim and annual
periods ending after June 15, 2009. We adopted the authoritative guidance
during the quarter ended August 10, 2009 and have included the required
additional disclosures (see Note 15).
7
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
(Unaudited)
In June
2009, the FASB issued authoritative guidance that changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated and
requires companies to more frequently assess whether they must consolidate VIEs.
The determination of whether a reporting entity is required to consolidate
another entity is based on, among other things, the other entity’s purpose and
design and the reporting entity’s ability to direct the activities that most
significantly impact the other entity’s economic performance. The provisions are
effective for annual periods beginning after November 15, 2009, which for us is
fiscal 2011. We have not yet evaluated the impact of adopting the requirements
of the authoritative guidance on our consolidated financial position or results
of operations.
Note 3 — Assets Held For
Sale
Surplus
restaurant properties and company-operated restaurants that we expect to sell
within one year are classified in our accompanying Condensed Consolidated
Balance Sheets as assets held for sale. As of November 2, 2009, total assets
held for sale were $232 and were comprised of two surplus properties in our
Hardee’s operating segment. As of January 31, 2009, total assets held for sale
were $805 and were comprised of four surplus properties in our Hardee’s
operating segment.
Note 4 — Purchase and Sale of
Assets
Purchase of Assets
During
the forty weeks ended November 2, 2009, we purchased one Carl’s Jr. restaurant
from one of our franchisees for $485. As a result of this transaction, we
recorded property and equipment of $64 and goodwill of $418 in our Carl’s Jr.
segment. We did not purchase any restaurants from franchisees during the forty
weeks ended November 3, 2008.
Related
Party Transactions
During
the forty weeks ended November 2, 2009, we sold three company-operated Carl’s
Jr. restaurants and related real property with a net book value of $965 to a
former executive and new franchisee. In connection with this transaction, we
received aggregate consideration of $1,300, including $100 in initial franchise
fees, which is included in franchised and licensed restaurants and other
revenue, and we recognized a net gain of $233, which is included in facility
action charges, net, in our accompanying Condensed Consolidated Statements of
Income for the forty weeks ended November 2, 2009, in our Carl’s Jr. segment. As
part of this transaction, the franchisee acquired the real property and/or
subleasehold interest in the real property related to the restaurant
locations.
During
the forty weeks ended November 3, 2008, we sold three company-operated Carl’s
Jr. restaurants and related real property with a net book value of $1,068 to a
former executive and new franchisee. In connection with this transaction, we
received aggregate consideration of $2,173, including $100 in initial franchise
fees, which is included in franchised and licensed restaurants and other
revenue, and we recognized a net gain of $983, which is included in facility
action charges, net, in our accompanying Condensed Consolidated Statements of
Income for the forty weeks ended November 3, 2008, in our Carl’s Jr. segment. As
part of this transaction, the franchisee acquired the real property and/or
subleasehold interest in the real property related to the restaurant
locations.
Hardee’s Refranchising
Program
During
the twelve weeks ended November 3, 2008, we sold 23 company-operated Hardee’s
restaurants and related real property with a net book value of $2,560 to one
franchisee. In connection with this transaction, we received aggregate
consideration of $4,075, including $605 in initial franchise fees, which is
included in franchised and licensed restaurants and other revenue, and we
recognized a net loss of $1,070, which is included in facility action
charges, net, in our accompanying Condensed Consolidated Statement of Income for
the twelve weeks ended November 3, 2008, in our Hardee’s segment. During the
forty weeks ended November 3, 2008, we sold 88 company-operated Hardee’s
restaurants and related real property with a net book value of $12,682 to three
franchisees. In connection with these transactions, we received aggregate
consideration of $16,428, including $2,290 in initial franchise fees, which is
included in franchised and licensed restaurants and other revenue, and we
recognized a net loss of $1,682, which is included in facility action charges,
net, in our accompanying Condensed Consolidated Statement of Income for the
forty weeks ended November 3, 2008, in our Hardee’s segment. As part of these
transactions, the franchisees acquired the real property and/or subleasehold
interest in the real property related to the restaurant locations. We completed
our refranchising program for our Hardee’s concept during fiscal
2009.
8
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
(Unaudited)
Note 5 — Indebtedness and Interest
Expense
As of
November 2, 2009, we had borrowings outstanding under the term loan portion of
our senior credit facility (“Facility”) of $248,103 and under the revolving
portion of our Facility of $28,500. We also had outstanding letters of credit
under the revolving portion of our Facility of $35,363, with remaining
availability of $136,137 under the revolving portion of our
Facility.
As of
November 2, 2009, the applicable interest rate on the term loan was the London
Inter Bank Offered Rate (“LIBOR”) plus 1.38% per annum. Our outstanding
borrowings under the revolving loan portion of our Facility bore interest at
rates that were locked in for fixed terms of approximately 30 days, at LIBOR
plus 1.50% per annum, at November 2, 2009 and January 31, 2009. As of November
2, 2009 and January 31, 2009, borrowings under the revolving loan bore interest
at weighted-average rates of 1.79% and 1.93% per annum, respectively. We also
incur fees on outstanding letters of credit under our Facility at a per annum
rate equal to 1.50% times the stated amounts.
The
principal amount of the term loan is scheduled to be repaid in the following
manner: quarterly installments of $671 through January 1, 2012; three quarterly
payments of $63,762, beginning on April 1, 2012; and a final payment of $50,778
due on January 1, 2013. Our Facility also requires additional principal payments
on the term loan based on annual excess cash flows, as defined, which are
determined at the end of each fiscal year. During the twelve and forty weeks
ended November 2, 2009, we made aggregate principal payments of $671 and $3,633
on the term loan, respectively, which included a payment during the first
quarter of fiscal 2010 of $1,616 based on excess cash flows for fiscal 2009, as
required by the terms of our Facility. The revolving credit facility
matures on March 27,
2012.
We
utilize derivative instruments to manage interest rate risk. We have fixed rate
swap agreements with various counterparties to effectively fix future interest
payments on $200,000 of our term loan debt at 6.12%. These agreements will
expire on March 12, 2012. These derivative instruments were not designated as
cash flow hedges in accordance with the authoritative guidance. Accordingly, the
change in the fair value of the interest rate swap agreements is recognized as
interest expense in our accompanying Condensed Consolidated Statements of
Income. During the twelve weeks ended November 2, 2009 and November 3, 2008, we
recorded interest expense of $3,631 and $4,911, respectively, under these
interest rate swap agreements to adjust their carrying value to fair value.
During the twelve weeks ended November 2, 2009 and November 3, 2008, we paid
$1,595 and $1,474 respectively, for net settlements under our interest rate swap
agreements. During the forty weeks ended November 2, 2009 and November 3, 2008,
we recorded interest expense of $4,948 and $658, respectively, under these
interest rate swap agreements to adjust their carrying value to fair value.
During the forty weeks ended November 2, 2009 and November 3, 2008, we paid
$6,658 and $1,690, respectively, for net settlements under our interest rate
swap agreements. As a matter of policy, we do not enter into
derivative instruments unless there is an underlying exposure.
9
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
(Unaudited)
The
following table identifies our derivative instruments and their location in our
accompanying Condensed Consolidated Balance Sheets:
|
November 2, 2009
|
January 31, 2009
|
||||||||
Balance Sheet
Location
|
Fair Value
|
Balance Sheet
Location
|
Fair Value
|
|||||||
Derivatives
not designated as hedging instruments:
|
||||||||||
Interest
rate swap agreements
|
Other
current liabilities
|
$ | 8,284 |
Other
current liabilities
|
$ | 7,234 | ||||
Interest
rate swap agreements
|
Other
long-term liabilities
|
7,596 |
Other
long-term liabilities
|
10,356 | ||||||
$ | 15,880 | $ | 17,590 |
Our
Facility permits us to make annual capital expenditures in the amount of
$85,000, plus 80% of the amount of actual Adjusted EBITDA (as defined in our
Facility) in excess of $150,000. In addition, we may reinvest proceeds from the
sale of assets and carry forward certain unused capital expenditure amounts to
the following year. Our Facility also contains financial performance covenants,
which include a maximum leverage ratio, and certain restrictive covenants. Our
Facility is collateralized by a lien on all of our personal property assets and
liens on certain restaurant properties.
Interest
expense consisted of the following:
Twelve Weeks Ended
|
Forty Weeks Ended
|
|||||||||||||||
|
November 2, 2009
|
November 3, 2008
|
November 2, 2009
|
November 3, 2008
|
||||||||||||
Facility
|
$ | 1,124 | $ | 2,864 | $ | 4,137 | $ | 10,216 | ||||||||
Interest
rate swap agreements
|
3,631 | 4,911 | 4,948 | 658 | ||||||||||||
Capital
lease obligations
|
1,281 | 1,039 | 4,069 | 3,418 | ||||||||||||
Amortization
of deferred loan fees
|
234 | 244 | 782 | 847 | ||||||||||||
2023
Convertible Notes
|
— | 81 | — | 404 | ||||||||||||
Letter
of credit fees and other
|
160 | 224 | 898 | 787 | ||||||||||||
$ | 6,430 | $ | 9,363 | $ | 14,834 | $ | 16,330 |
Note
6 — Fair Value of Financial Instruments
The
following table presents information on our financial instruments as
of:
November
2, 2009
|
January
31, 2009
|
|||||||||||||||
|
Carrying
Value
|
Estimated
Fair Value
|
Carrying
Value
|
Estimated
Fair Value
|
||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 20,068 | $ | 20,068 | $ | 17,869 | $ | 17,869 | ||||||||
Notes
receivable
|
2,598 | 2,816 | 5,406 | 5,171 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Long-term
debt and bank indebtedness, including current portion
|
277,638 | 254,294 | 314,788 | 269,186 |
The fair
value of cash and cash equivalents approximates its carrying value due to its
short maturity. The estimated fair value of notes receivable was determined by
discounting future cash flows using current rates at which similar loans might
be made to borrowers with similar credit ratings. The estimated fair
value of long-term debt was determined by discounting future cash flows using
rates currently available to us for debt with similar terms and remaining
maturities.
10
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
(Unaudited)
In
accordance with the authoritative guidance, fair value is defined as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability
in an orderly transaction between market participants on the measurement date.
The authoritative guidance also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. There are three levels of
inputs that may be used to measure fair value:
Level 1
—
|
Quoted
prices in active markets for identical assets or
liabilities;
|
Level 2
—
|
Observable
inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities;
and
|
Level 3
—
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or
liabilities.
|
The
following table summarizes the financial liabilities measured at fair value on a
recurring basis as of November 2, 2009:
Total
|
Quoted
Prices in Active Markets for Identical Assets
(Level 1)
|
Significant
Other Observable Inputs
(Level 2)
|
Significant
Unobservable Inputs
(Level 3)
|
|||||||||||||
Interest
rate swap agreements
|
$ | 15,880 | $ | — | $ | 15,880 | $ | — |
The interest rate swap agreements are recorded at fair value based upon valuation models which utilize relevant factors such as the contractual terms of our interest rate swap agreements, credit spreads for the contracting parties and interest rate curves.
Note 7 — Commitments and Contingent
Liabilities
Under
various past and present refranchising programs, we have sold restaurants to
franchisees, some of which were on leased sites. We entered into sublease
agreements with these franchisees but remained principally liable for the lease
obligations. We account for the sublease payments received as franchising rental
income in franchised and licensed restaurants and other revenue, and the
payments on the leases as rental expense in franchised and licensed restaurants
and other expense, in our accompanying Condensed Consolidated Statements of
Income. As of November 2, 2009, the present value of the lease obligations under
the remaining master leases’ primary terms is $113,716. Franchisees may, from
time to time, experience financial hardship and may cease payment on their
sublease obligations to us. The present value of the exposure to us from
franchisees characterized as under financial hardship is $1,152, of which $8 is
included in our estimated liability for closed restaurants in our accompanying
Condensed Consolidated Balance Sheet as of November 2, 2009.
Pursuant
to our Facility, a letter of credit sub-facility in the amount of $85,000 was
established (see Note 5). Several standby letters of credit are outstanding
under this sub-facility, which primarily secure our potential workers’
compensation, general and auto liability obligations. We are required to provide
letters of credit each year, or set aside a comparable amount of cash or
investment securities in a trust account, based on our existing claims
experience. As of November 2, 2009, we had outstanding letters of credit of
$35,363, expiring at various dates through November 2010.
As of
November 2, 2009, we had unconditional purchase obligations in the amount of
$62,260, which consisted primarily of contracts for goods and services related
to restaurant operations and contractual commitments for marketing and
sponsorship arrangements.
We have
employment agreements with certain key executives (“Agreements”). These
Agreements include provisions for lump sum payments to the executives that may
be triggered by the termination of employment under certain conditions, as set
forth in each Agreement. If such provisions were triggered, each affected
executive would receive an amount equal to his base salary for the remainder of
his employment term. In addition, depending on the executive that has been
terminated, the executive may be entitled to additional cash payments ranging
from a pro-rata portion of the current year bonus to, in the case of the Chief
Executive Officer, an additional payment equal to his base
salary for the remainder of his employment term. Furthermore, all options
awarded to the affected executives which have not vested as of the date of
termination would vest immediately. For certain of the key executives, all
unvested restricted stock awards as of the date of termination would vest
immediately and restricted stock awards which have not yet been awarded would be
awarded and would vest immediately. If all of these Agreements had been
triggered as of November 2, 2009, we would have been required to make cash
payments of approximately $15,229.
11
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
(Unaudited)
We are,
from time to time, the subject of complaints or litigation from customers
alleging illness, injury or other food quality, health or operational concerns.
Adverse publicity resulting from such allegations may materially adversely
affect us and our restaurants, regardless of whether such allegations are valid
or whether we are liable. We are also, at times, the subject of complaints or
allegations from current or former employees, franchisees, vendors, landlords
and others.
As of
November 2, 2009, our accrued liability for litigation contingencies was $150.
We are currently involved in legal matters related to employment, real estate
and other business disputes. The matters for which we maintain an
accrued liability for litigation pose risk of loss significantly above the
accrued amounts. In addition, as of November 2, 2009, we estimated the
contingent liability of those losses related to other litigation claims that, in
accordance with the authoritative guidance, are not accrued, but that we believe
are reasonably possible to result in an adverse outcome, to be in the range of
$905 to $2,995.
Note 8 — Stockholders’
Equity
During
the forty weeks ended November 2, 2009, we declared cash dividends of $0.18 per
share of common stock, for a total of $9,861. Dividends payable of $3,311 and
$3,279 have been included in other current liabilities in our accompanying
Condensed Consolidated Balance Sheets as of November 2, 2009 and January 31,
2009, respectively. The dividends declared during the twelve weeks ended
November 2, 2009 were subsequently paid on November 23, 2009.
Subsequent
to November 2, 2009, we declared cash dividends of $0.06 per share of common
stock, payable to the stockholders of record as of January 25,
2010.
Note 9 — Share-Based
Compensation
We have
various share-based compensation plans that provide restricted stock awards and
stock options for certain employees, non-employee directors and external service
providers to acquire shares of our common stock. The total number of shares
available under all of our stock incentive plans was 2,934,730 as of November 2,
2009.
Total
share-based compensation expense and associated tax benefits recognized were as
follows:
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
|
November 2, 2009
|
November 3, 2008
|
November 2, 2009
|
November 3, 2008
|
||||||||||||
Share-based
compensation expense related to performance-vested restricted stock
awards
|
$ | 322 | $ | 993 | $ | 1,301 | $ | 3,271 | ||||||||
All
other share-based compensation expense
|
1,678 | 1,665 | 4,941 | 6,253 | ||||||||||||
Total
share-based compensation expense
|
$ | 2,000 | $ | 2,658 | $ | 6,242 | $ | 9,524 | ||||||||
Associated
tax benefits
|
$ | 656 | $ | 760 | $ | 2,121 | $ | 2,794 |
12
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
(Unaudited)
Note 10 — Facility Action Charges,
Net
The
components of facility action charges, net are as follows:
Twelve Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
|
November 2, 2009
|
November 3, 2008
|
November 2, 2009
|
November 3, 2008
|
||||||||||||
Estimated
liability for new restaurant closures
|
$ | — | $ | 10 | $ | 525 | $ | 601 | ||||||||
Adjustments
to estimated liability for closed restaurants
|
323 | 370 | 5 | 73 | ||||||||||||
Impairment
of assets to be disposed of
|
— | 35 | — | 1,150 | ||||||||||||
Impairment
of assets to be held and used
|
97 | 96 | 2,143 | 876 | ||||||||||||
Loss
(gain) on sales of restaurants and surplus properties, net
|
25 | 627 | 47 | (393 | ) | |||||||||||
Amortization
of discount related to estimated liability for closed
restaurants
|
75 | 104 | 302 | 359 | ||||||||||||
$ | 520 | $ | 1,242 | $ | 3,022 | $ | 2,666 |
When an
analysis of estimated future cash flows associated with a long-lived asset or
asset group indicates that our long-lived assets might be impaired, we recognize
an impairment loss equal to the amount by which the carrying value exceeds the
fair value of the assets. We typically estimate fair value based on the
forecasted cash flows for the long-lived asset or asset group, discounted at a
weighted-average cost of capital. This fair value measurement is dependent upon
level 3 significant unobservable inputs, as described by the authoritative
guidance (see Note 6). Impairment charges recognized in facility action charges,
net were recorded against the following asset categories:
Twelve Weeks Ended
|
Forty Weeks Ended
|
|||||||||||||||
|
November 2, 2009
|
November 3, 2008
|
November 2, 2009
|
November 3, 2008
|
||||||||||||
Property
and equipment:
|
||||||||||||||||
Carl’s
Jr.
|
$ | 97 | $ | 96 | $ | 1,976 | $ | 212 | ||||||||
Hardee’s
|
— | 35 | 46 | 1,814 | ||||||||||||
97 | 131 | 2,022 | 2,026 | |||||||||||||
Property
under capital leases:
|
||||||||||||||||
Carl’s
Jr.
|
— | — | 40 | — | ||||||||||||
Hardee’s
|
— | — | 81 | — | ||||||||||||
— | — | 121 | — | |||||||||||||
Total:
|
||||||||||||||||
Carl’s
Jr.
|
97 | 96 | 2,016 | 212 | ||||||||||||
Hardee’s
|
— | 35 | 127 | 1,814 | ||||||||||||
$ | 97 | $ | 131 | $ | 2,143 | $ | 2,026 |
Note 11 — Income
Taxes
Income
tax expense consisted of the following:
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
|
November 2, 2009
|
November 3, 2008
|
November 2, 2009
|
November 3, 2008
|
||||||||||||
Federal
and state income taxes
|
$ | 4,118 | $ | 3,384 | $ | 21,696 | $ | 20,642 | ||||||||
Foreign
income taxes
|
261 | 389 | 764 | 1,240 | ||||||||||||
Income
tax expense
|
$ | 4,379 | $ | 3,773 | $ | 22,460 | $ | 21,882 | ||||||||
Effective
income tax rate
|
41.6 | % | 41.2 | % | 40.6 | % | 38.9 | % |
Our
effective income tax rates for the twelve and forty weeks ended November 2, 2009
and November 3, 2008 differ from the federal statutory rate primarily as a
result of state income taxes and certain expenses that are nondeductible for
income tax purposes. We had $4,027 of unrecognized tax benefits as of January
31, 2009, that, if recognized, would affect our effective income tax rate. There
were no material changes in the unrecognized tax benefits for the twelve and
forty weeks ended November 2, 2009. We believe that it is reasonably possible
that decreases
in unrecognized tax benefits of up to $4,060 may be necessary within the next
twelve months as a result of statutes closing on such items. In addition, we
believe that it is reasonably possible that our unrecognized tax benefits may
increase as a result of tax positions that may be taken during fiscal
2010.
13
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
(Unaudited)
As of
November 2, 2009, we maintained a valuation allowance of $27,128 for state
capital loss carryforwards, certain state net operating loss and income tax
credit carryforwards and other temporary differences related to various states
in which one or more of our entities file separate income tax returns.
Realization of the tax benefit of such deferred income tax assets may remain
uncertain for the foreseeable future, even though we expect to generate taxable
income, since they are subject to various limitations and may only be used to
offset income of certain entities or of a certain character.
Note 12 — Income Per
Share
The table
below presents the computation of basic and diluted income per
share:
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
|
November 2, 2009
|
November 3, 2008
|
November 2, 2009
|
November 3, 2008
|
||||||||||||
(In
thousands except per share amounts)
|
||||||||||||||||
Numerator:
|
||||||||||||||||
Net
income
|
$ | 6,157 | $ | 5,388 | $ | 32,802 | $ | 34,348 | ||||||||
Less:
Distributed and undistributed income attributable to unvested restricted
stock awards
|
(104 | ) | (106 | ) | (538 | ) | (577 | ) | ||||||||
Income
attributable to common shareholders for basic income per
share
|
6,053 | 5,282 | 32,264 | 33,771 | ||||||||||||
Add:
Interest and amortization costs for 2023 Convertible Notes, net of related
tax effect
|
— | 56 | — | 292 | ||||||||||||
Add:
Undistributed income attributable to unvested restricted stock
awards
|
52 | 36 | 383 | 410 | ||||||||||||
Less:
Undistributed income reallocated to unvested restricted stock
awards
|
(51 | ) | (35 | ) | (380 | ) | (393 | ) | ||||||||
Income
attributable to common shareholders for diluted income per
share
|
$ | 6,054 | $ | 5,339 | $ | 32,267 | $ | 34,080 | ||||||||
Denominator:
|
||||||||||||||||
Weighted-average
shares for computation of basic income per share
|
53,779 | 52,574 | 53,738 | 51,898 | ||||||||||||
Dilutive
effect of stock options
|
438 | 484 | 427 | 701 | ||||||||||||
Dilutive
effect of 2023 Convertible Notes
|
— | 1,004 | — | 1,545 | ||||||||||||
Weighted-average
shares for computation of diluted income per share
|
54,217 | 54,062 | 54,165 | 54,144 | ||||||||||||
Basic
income per share
|
$ | 0.11 | $ | 0.10 | $ | 0.60 | $ | 0.65 | ||||||||
Diluted income per share
|
$ | 0.11 | $ | 0.10 | $ | 0.60 | $ | 0.63 |
14
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
(Unaudited)
Note 13 — Segment
Information
We are
principally engaged in developing, operating, franchising and licensing our
Carl’s Jr. and Hardee’s quick-service restaurant concepts, each of which is
considered an operating segment that is managed and evaluated separately. The
accounting policies of the segments are the same as those described in our
summary of significant accounting policies (see Note 1 of Notes to Consolidated
Financial Statements in our Annual Report on Form 10-K for the fiscal year ended
January 31, 2009).
Twelve Weeks Ended November 2,
2009
|
Carl’s Jr.
|
Hardee’s
|
Other
|
Total
|
||||||||||||
Revenue
|
$ | 193,748 | $ | 130,231 | $ | 238 | $ | 324,217 | ||||||||
Operating
income
|
10,512 | 5,624 | 126 | 16,262 | ||||||||||||
Income
(loss) before income taxes
|
10,152 | 4,995 | (4,611 | ) | 10,536 |
Twelve Weeks Ended November 3,
2008
|
Carl’s Jr.
|
Hardee’s
|
Other
|
Total
|
||||||||||||
Revenue
|
$ | 199,314 | $ | 137,066 | $ | 215 | $ | 336,595 | ||||||||
Operating
income
|
12,871 | 4,801 | 83 | 17,755 | ||||||||||||
Income
(loss) before income taxes
|
12,769 | 3,773 | (7,381 | ) | 9,161 |
Forty Weeks Ended November 2,
2009
|
Carl’s Jr.
|
Hardee’s
|
Other
|
Total
|
||||||||||||
Revenue
|
$ | 662,782 | $ | 443,472 | $ | 734 | $ | 1,106,988 | ||||||||
Operating
income
|
44,519 | 23,225 | 361 | 68,105 | ||||||||||||
Income
(loss) before income taxes
|
43,411 | 20,648 | (8,797 | ) | 55,262 |
Forty Weeks Ended November 3,
2008
|
Carl’s Jr.
|
Hardee’s
|
Other
|
Total
|
||||||||||||
Revenue
|
$ | 686,380 | $ | 468,195 | $ | 681 | $ | 1,155,256 | ||||||||
Operating
income
|
53,594 | 16,394 | 282 | 70,270 | ||||||||||||
Income
(loss) before income taxes
|
52,912 | 12,692 | (9,374 | ) | 56,230 |
Note 14 — Supplemental Cash Flow
Information
|
Forty Weeks Ended
|
|||||||
|
November 2, 2009
|
November 3, 2008
|
||||||
Cash
paid for:
|
||||||||
Interest,
net of amounts capitalized
|
$ | 15,070 | $ | 17,476 | ||||
Income
taxes, net of refunds received
|
7,611 | 1,863 | ||||||
Non-cash
investing and financing activities:
|
||||||||
Dividends
declared, not paid
|
3,311 | 3,279 | ||||||
Capital
lease obligations incurred to acquire assets
|
15,235 | 761 | ||||||
Accrued
property and equipment purchases at quarter-end
|
5,149 | 5,802 |
Note
15 – Subsequent Events
We
evaluated the period from November 3, 2009 through December 8, 2009, the date
that our unaudited Condensed Consolidated Financial Statements were issued, and
noted that there have been no material subsequent events or transactions which
would impact our accompanying unaudited Condensed Consolidated Financial
Statements for the twelve and forty weeks ended November 2, 2009, other than as
disclosed in Note 8.
15
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
Introduction
and Safe Harbor Disclosure
CKE
Restaurants, Inc. and its subsidiaries (collectively referred to herein as the
“Company”, “we”, “us” or “our”) is comprised of the operations of Carl’s Jr.,
Hardee’s, Green Burrito (which is primarily operated as a dual-branded concept
with Carl’s Jr. quick-service restaurants) and Red Burrito (which is operated as
a dual-branded concept with Hardee’s quick-service restaurants). The following
Management’s Discussion and Analysis should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements contained herein, and our
Annual Report on Form 10-K for the fiscal year ended January 31,
2009.
Matters
discussed in this Form 10-Q contain forward-looking statements relating to
future plans and developments, financial goals and operating performance and are
based on our current beliefs and assumptions. Such statements are subject to
risks and uncertainties that are often difficult to predict and are beyond our
control. Factors that could cause our results to differ materially from those
described include, but are not limited to, our ability to compete with other
restaurants, supermarkets and convenience stores; changes in economic conditions
which may affect our business and stock price; the effect of restrictive
covenants in our credit facility on our business; our ability to attract and
retain key personnel; our franchisees’ willingness to participate in our
strategy; the operational and financial success of our franchisees; changes in
consumer preferences and perceptions; changes in the price or availability of
commodities; changes in our suppliers’ ability to provide quality products to us
in a timely manner; the effect of the media’s reports regarding food-borne
illnesses and other health-related issues on our reputation and our ability to
obtain products; the seasonality of our operations; increased insurance and/or
self-insurance costs; our ability to select appropriate restaurant locations,
construct new restaurants, complete remodels of existing restaurants and renew
leases with favorable terms; our ability to comply with existing and future
health, employment, environmental and other government regulations; and other
factors as discussed in our filings with the Securities and Exchange Commission
(“SEC”).
Forward-looking
statements speak only as of the date they are made. We undertake no obligation
to publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise, except as required by law or the
rules of the New York Stock Exchange.
New Accounting
Pronouncements Not Yet Adopted and Adoption of New Accounting Pronouncements
See Note
2 of Notes to Condensed Consolidated Financial Statements for a description of
the new accounting pronouncements that we have and have not yet
adopted.
Critical
Accounting Policies
Our
reported results are impacted by the application of certain accounting policies
that require us to make subjective or complex judgments. These judgments involve
making estimates about the effect of matters that are inherently uncertain and
may significantly impact our consolidated financial position and results of
operations. See our Annual Report on Form 10-K for the year ended January 31,
2009 for a description of our critical accounting policies. Specific risks
associated with these critical accounting policies are described in the
following paragraphs.
Impairment of
Property and Equipment and Other Amortizable Long-Lived Assets Held and Used,
Held for Sale or To Be Disposed of Other Than By Sale
In
connection with analyzing long-lived assets to determine if they have been
impaired, we estimate future cash flows for each of our restaurants based upon
experience gained, current intentions about refranchising restaurants and
closures, expected sales trends, internal plans and other relevant information.
These estimates utilize key assumptions, such as same-store sales and the rates
at which restaurant operating costs will increase in the future. If our
same-store sales do not perform at or above our forecasted level, or if
restaurant operating cost increases exceed our forecast and we are unable to
recover such costs through price increases, the carrying value of certain of our
restaurants may prove to be unrecoverable and we may incur additional impairment
charges in the future.
16
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
Impairment
of Goodwill
During
the first quarter of fiscal 2010, we evaluated our goodwill at the Carl’s Jr.
and Hardee’s brands. As a result of our annual impairment test, we concluded
that the fair value of the Carl’s Jr. and Hardee’s reporting units exceeded the
carrying value, and thus no impairment charge was required. As of November 2,
2009 and January 31, 2009, we had $24,106 and $23,688, respectively, of goodwill
recorded in our accompanying Condensed Consolidated Balance Sheets.
Estimated
Liability for Closed Restaurants
In
determining the amount of the estimated liability for closed restaurants, we
estimate the cost to maintain leased vacant properties until the lease can be
abated. If the costs to maintain properties increase, or it takes longer than
anticipated to sublease or terminate leases, we may need to record additional
estimated liabilities. If the leases on the vacant restaurants are not
terminated or subleased on the terms that we used to estimate the liabilities,
we may be required to record losses in future periods. Conversely, if the leases
on the vacant restaurants are terminated or subleased on more favorable terms
than we used to estimate the liabilities, we reverse previously established
estimated liabilities, resulting in an increase in operating
income.
Estimated
Liability for Self-Insurance
If we
experience a higher than expected number of claims or the costs of claims rise
more than the estimates used by management, developed with the assistance of our
actuary, our reserves would require adjustment and we would be required to
adjust the expected losses upward and increase our future self-insurance
expense.
Our
actuary provides us with estimated unpaid losses for each loss category, upon
which our analysis is based. As of November 2, 2009 and January 31, 2009, our
estimated liability for self-insured workers’ compensation, general and auto
liability losses was $37,171 and $36,972, respectively.
Franchised
and Licensed Operations
We have
sublease agreements with some of our franchisees on properties for which we
remain principally liable for the lease obligations. If sales trends or economic
conditions worsen for our franchisees, their financial health may worsen, our
collection rates may decline and we may be required to assume the responsibility
for additional lease payments on franchised restaurants. The likelihood of
needing to increase the estimated liability for future lease obligations is
primarily related to the success of our Hardee’s concept, although we can
provide no assurance that our Carl’s Jr. franchisees will not experience a
similar level of financial difficulties as our Hardee’s
franchisees.
Income
Taxes
When
necessary, we record a valuation allowance to reduce our net deferred tax assets
to the amount that is more likely than not to be realized. In considering the
need for a valuation allowance against some portion or all of our deferred tax
assets, we must make certain estimates and assumptions regarding future taxable
income, the feasibility of tax planning strategies and other factors. Changes in
facts and circumstances or in the estimates and assumptions that are involved in
establishing and maintaining a valuation allowance against deferred tax assets
could result in adjustments to the valuation allowance in future quarterly or
annual periods.
We use an
estimate of our annual income tax rate to recognize a provision for income taxes
in financial statements for interim periods. However, changes in facts and
circumstances could result in adjustments to our effective tax rate in future
quarterly or annual periods.
17
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
Significant Known
Events, Trends, or Uncertainties Expected to Impact Fiscal 2010 Comparisons
with Fiscal 2009
The
factors discussed below impact comparability of operating performance for the
twelve and forty weeks ended November 2, 2009 and November 3, 2008, or could
impact comparisons for the remainder of fiscal 2010.
Fiscal
Year and Seasonality
We
operate on a retail accounting calendar. Our fiscal year has 13 four-week
accounting periods and ends the last Monday in January. The first quarter of our
fiscal year has four periods, or 16 weeks. All other quarters have three
periods, or 12 weeks.
Our
restaurant sales, and therefore our profitability, are subject to seasonal
fluctuations and are traditionally higher during the spring and summer months
because of factors such as increased travel upon school vacations and improved
weather conditions, which affect the public’s dining habits.
Operating
Review
The
following table sets forth the percentage relationship to total revenue, unless
otherwise indicated, of certain items included in our accompanying Condensed
Consolidated Statements of Income:
Twelve Weeks Ended
|
Forty Weeks Ended
|
|||||||||||||||
|
November 2, 2009
|
November 3, 2008
|
November 2, 2009
|
November 3, 2008
|
||||||||||||
Revenue:
|
||||||||||||||||
Company-operated
restaurants
|
76.1 | % | 75.9 | % | 76.6 | % | 76.2 | % | ||||||||
Franchised
and licensed restaurants and other
|
23.9 | 24.1 | 23.4 | 23.8 | ||||||||||||
Total
revenue
|
100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
Operating
costs and expenses:
|
||||||||||||||||
Restaurant
operating costs (1):
|
||||||||||||||||
Food
and packaging
|
28.2 | 30.0 | 28.6 | 29.8 | ||||||||||||
Payroll
and other employee benefits
|
28.9 | 27.9 | 28.4 | 28.4 | ||||||||||||
Occupancy
and other
|
24.7 | 24.2 | 23.8 | 22.7 | ||||||||||||
Total
restaurant operating costs
|
81.9 | 82.1 | 80.8 | 80.9 | ||||||||||||
Franchised
and licensed restaurants and other (2)
|
75.9 | 75.8 | 75.8 | 76.6 | ||||||||||||
Advertising
(1)
|
6.4 | 5.9 | 6.1 | 5.9 | ||||||||||||
General
and administrative
|
9.6 | 9.3 | 9.3 | 9.4 | ||||||||||||
Facility
action charges, net
|
0.2 | 0.4 | 0.3 | 0.2 | ||||||||||||
Operating
income
|
5.0 | 5.3 | 6.2 | 6.1 | ||||||||||||
Interest
expense
|
(2.0 | ) | (2.8 | ) | (1.3 | ) | (1.4 | ) | ||||||||
Other
income, net
|
0.2 | 0.2 | 0.2 | 0.2 | ||||||||||||
Income
before income taxes
|
3.2 | 2.7 | 5.0 | 4.9 | ||||||||||||
Income
tax expense
|
1.4 | 1.1 | 2.0 | 1.9 | ||||||||||||
Net
income
|
1.9 | % | 1.6 | % | 3.0 | % | 3.0 | % |
____________
(1)
|
As
a percent of company-operated restaurants
revenue.
|
(2)
|
As
a percent of franchised and licensed restaurants and other
revenue.
|
18
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
The
following table is presented to facilitate Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
|
November 2, 2009
|
November 3, 2008
|
November 2, 2009
|
November 3, 2008
|
||||||||||||
Company-operated
restaurants revenue
|
$ | 246,696 | $ | 255,545 | $ | 847,654 | $ | 880,858 | ||||||||
Restaurant
operating costs:
|
||||||||||||||||
Food
and packaging
|
69,665 | 76,785 | 242,066 | 262,214 | ||||||||||||
Payroll
and other employee benefits
|
71,386 | 71,237 | 241,142 | 250,349 | ||||||||||||
Occupancy
and other
|
60,874 | 61,841 | 201,461 | 199,687 | ||||||||||||
Total
restaurant operating costs
|
201,925 | 209,863 | 684,669 | 712,250 | ||||||||||||
Franchised
and licensed restaurants and other revenue:
|
||||||||||||||||
Royalties
|
19,641 | 19,592 | 65,608 | 64,757 | ||||||||||||
Distribution
centers
|
49,421 | 51,858 | 165,986 | 178,693 | ||||||||||||
Rent
|
7,911 | 8,257 | 25,858 | 26,105 | ||||||||||||
Franchise
fees
|
548 | 1,343 | 1,882 | 4,843 | ||||||||||||
Total
franchised and licensed restaurants and other revenue
|
77,521 | 81,050 | 259,334 | 274,398 | ||||||||||||
Franchised
and licensed restaurants and other expenses:
|
||||||||||||||||
Administrative
expense (including provision for bad debts)
|
3,686 | 3,236 | 11,533 | 11,145 | ||||||||||||
Distribution
centers
|
48,807 | 51,955 | 163,671 | 178,518 | ||||||||||||
Rent
and other occupancy
|
6,361 | 6,283 | 21,476 | 20,468 | ||||||||||||
Total
franchised and licensed restaurants and other expenses
|
58,854 | 61,474 | 196,680 | 210,131 | ||||||||||||
Advertising
expense
|
15,679 | 15,105 | 51,451 | 51,902 | ||||||||||||
General
and administrative expense
|
30,977 | 31,156 | 103,061 | 108,037 | ||||||||||||
Facility
action charges, net
|
520 | 1,242 | 3,022 | 2,666 | ||||||||||||
Operating
income
|
$ | 16,262 | $ | 17,755 | $ | 68,105 | $ | 70,270 |
The
following table shows the change in our restaurant portfolio for the trailing-13
periods ended November 2, 2009:
|
Company-operated
|
Franchised
and
licensed
|
Total
|
|||||||||
Open
at November 3,
2008
|
903 | 2,207 | 3,110 | |||||||||
New
|
20 | 66 | 86 | |||||||||
Closed
|
(14 | ) | (35 | ) | (49 | ) | ||||||
Divested
|
(17 | ) | (6 | ) | (23 | ) | ||||||
Acquired
|
6 | 17 | 23 | |||||||||
Open
at November 2, 2009
|
898 | 2,249 | 3,147 |
19
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
Carl’s
Jr.
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
|
November 2, 2009
|
November 3, 2008
|
November 2, 2009
|
November 3, 2008
|
||||||||||||
Company-operated
restaurants revenue
|
$ | 136,682 | $ | 140,307 | $ | 472,301 | $ | 482,669 | ||||||||
Restaurant
operating costs:
|
||||||||||||||||
Food
and packaging
|
38,122 | 41,319 | 132,894 | 141,753 | ||||||||||||
Payroll
and other employee benefits
|
37,396 | 36,842 | 127,719 | 128,343 | ||||||||||||
Occupancy
and other
|
34,653 | 34,024 | 113,511 | 110,130 | ||||||||||||
Total
restaurant operating costs
|
110,171 | 112,185 | 374,124 | 380,226 | ||||||||||||
Franchised
and licensed restaurants and other revenue:
|
||||||||||||||||
Royalties
|
7,616 | 7,623 | 24,903 | 26,003 | ||||||||||||
Distribution
centers
|
43,964 | 45,984 | 147,920 | 159,876 | ||||||||||||
Rent
|
5,151 | 4,957 | 16,620 | 16,315 | ||||||||||||
Franchise
fees
|
335 | 443 | 1,038 | 1,517 | ||||||||||||
Total
franchised and licensed restaurants and other revenue
|
57,066 | 59,007 | 190,481 | 203,711 | ||||||||||||
Franchised
and licensed restaurants and other expenses:
|
||||||||||||||||
Administrative
expense (including provision for bad debts)
|
1,878 | 1,677 | 5,805 | 5,553 | ||||||||||||
Distribution
centers
|
43,313 | 45,966 | 145,725 | 159,297 | ||||||||||||
Rent
and other occupancy
|
4,402 | 4,326 | 14,616 | 14,191 | ||||||||||||
Total
franchised and licensed restaurants and other expenses
|
49,593 | 51,969 | 166,146 | 179,041 | ||||||||||||
Advertising
expense
|
9,107 | 8,436 | 29,426 | 28,557 | ||||||||||||
General
and administrative expense
|
14,052 | 13,524 | 46,505 | 45,802 | ||||||||||||
Facility
action charges, net
|
313 | 329 | 2,062 | (840 | ) | |||||||||||
Operating
income
|
$ | 10,512 | $ | 12,871 | $ | 44,519 | $ | 53,594 | ||||||||
Company-operated
average unit volume (trailing-13 periods)
|
$ | 1,468 | $ | 1,529 | ||||||||||||
Franchise-operated
average unit volume (trailing-13 periods)
|
$ | 1,135 | $ | 1,192 | ||||||||||||
Company-operated
same-store sales (decrease) increase
|
(5.2 | )% | 0.5 | % | (5.5 | )% | 2.9 | % | ||||||||
Franchise-operated
same-store sales decrease
|
(4.8 | )% | (2.2 | )% | (5.7 | )% | (1.0 | )% | ||||||||
Company-operated
same-store transaction decrease
|
(2.7 | )% | (4.3 | )% | (4.1 | )% | (0.6 | )% | ||||||||
Average
check (actual $)
|
$ | 6.85 | $ | 7.07 | $ | 6.94 | $ | 7.02 | ||||||||
Restaurant
operating costs as a percentage of company-operated restaurants
revenue:
|
||||||||||||||||
Food
and packaging
|
27.9 | % | 29.4 | % | 28.1 | % | 29.4 | % | ||||||||
Payroll
and other employee benefits
|
27.4 | % | 26.3 | % | 27.0 | % | 26.6 | % | ||||||||
Occupancy
and other
|
25.4 | % | 24.2 | % | 24.0 | % | 22.8 | % | ||||||||
Total
restaurant operating costs
|
80.6 | % | 80.0 | % | 79.2 | % | 78.8 | % | ||||||||
Advertising
expense as a percentage of company-operated restaurants
revenue
|
6.7 | % | 6.0 | % | 6.2 | % | 5.9 | % |
20
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
The
following table shows the change in our restaurant portfolio for the trailing-13
periods ended November 2, 2009:
|
Company-operated
|
Franchised and
licensed
|
Total
|
|||||||||
Open
at November 3, 2008
|
412 | 773 | 1,185 | |||||||||
New
|
16 | 37 | 53 | |||||||||
Closed
|
(5 | ) | (12 | ) | (17 | ) | ||||||
Divested
|
(3 | ) | (1 | ) | (4 | ) | ||||||
Acquired
|
1 | 3 | 4 | |||||||||
Open
at November 2, 2009
|
421 | 800 | 1,221 |
Company-Operated
Restaurants
Revenue
from company-operated Carl’s Jr. restaurants decreased $3,625, or 2.6%, to
$136,682 during the twelve weeks ended November 2, 2009, as compared to the
twelve weeks ended November 3, 2008. This decrease was primarily due to the 5.2%
decrease in same-store sales for the quarter. This decrease was partially offset
by a net increase of 9 company-operated restaurants since the end of the third
quarter of fiscal 2009.
Revenue
from company-operated Carl’s Jr. restaurants decreased $10,368, or 2.1%, to
$472,301 during the forty weeks ended November 2, 2009, as compared to the prior
year period. This decrease was primarily due to the 5.5% decrease in same-store
sales from the comparable prior year period. This decrease was partially offset
by a net increase of 9 company-operated restaurants since the end of the third
quarter of fiscal 2009.
The
changes in the restaurant operating costs as a percentage of company-operated
restaurants revenue are explained as follows:
|
Twelve
Weeks
|
Forty
Weeks
|
||||||
Restaurant
operating costs as a percentage of company-operated restaurants revenue
for the period ended November 3, 2008
|
80.0 | % | 78.8 | % | ||||
Decrease
in food and packaging costs
|
(1.5 | ) | (1.3 | ) | ||||
Increase
in labor costs, excluding workers’ compensation
|
0.9 | 0.4 | ||||||
Increase
in depreciation and amortization expense
|
0.8 | 0.7 | ||||||
Decrease
in utilities expense
|
(0.2 | ) | (0.3 | ) | ||||
Increase
in rent expense
|
0.2 | 0.3 | ||||||
Increase
in workers’ compensation expense
|
0.2 | — | ||||||
Increase
in property tax expense
|
0.2 | 0.1 | ||||||
Other,
net
|
— | 0.5 | ||||||
Restaurant
operating costs as a percentage of company-operated restaurants revenue
for the period ended November 2, 2009
|
80.6 | % | 79.2 | % |
Food and
packaging costs decreased as a percent of company-operated restaurants revenue
during the twelve and forty weeks ended November 2, 2009, as compared to the
prior year periods, due primarily to decreased commodity costs for beef, cheese
and oil products, and reduced distribution costs related to lower fuel and
administrative costs.
Labor
costs, excluding workers’ compensation, increased as a percent of
company-operated restaurants revenue during the twelve and forty weeks ended
November 2, 2009, from the comparable prior year periods, primarily due to the
deleveraging impact of the decrease in same-store sales and the relatively fixed
cost of restaurant management.
Depreciation
and amortization expense increased as a percent of company-operated restaurants
revenue during the twelve and forty weeks ended November 2, 2009, from the
comparable prior year periods, mainly due to asset additions related to
remodels, new store openings and equipment upgrades as well as the deleveraging
impact from the decrease in same-store sales and the relatively fixed nature of
depreciation and amortization expense.
21
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
Utilities
expense decreased as a percent of company-operated restaurants revenue during
the forty weeks ended November 2, 2009, from the comparable prior year period,
mainly due to natural gas and electricity rate decreases.
Rent
expense increased as a percent of company-operated restaurants revenue during
the forty weeks ended November 2, 2009, from the comparable prior year period
due primarily to an increase in rent expense for CPI adjustments, as well as the
deleveraging impact of the decrease in same-store sales and the relatively fixed
nature of rent expense.
Franchised
and Licensed Restaurants
Total
franchised and licensed restaurants revenue decreased $1,941, or 3.3%, to
$57,066 during the twelve weeks ended November 2, 2009, as compared to the
twelve weeks ended November 3, 2008. Distribution center sales of food, paper
and supplies to franchisees decreased by $2,020, or 4.4%, primarily due to the
4.8% decline in franchisee same-store sales and a decrease in the cost of food
upon which the sales price of those items is based. These decreases
were partially offset by an increase in the number of franchised restaurants.
Royalty revenues remained consistent as compared to the twelve weeks ended
November 3, 2008 due to the lower international royalties resulting from
declines in foreign currency exchange rates and lower domestic royalties related
to a drop in same-store sales being offset by an increase in the franchise store
base over the comparable prior year period.
Total
franchised and licensed restaurants revenue decreased $13,230, or 6.5%, to
$190,481 during the forty weeks ended November 2, 2009, as compared to the forty
weeks ended November 3, 2008. Distribution center sales of food, paper and
supplies to franchisees decreased by $11,956 or 7.5%, primarily due to the 5.7%
decline in franchisee same-store sales and a decrease in the cost of food upon
which the sales price of those items is based. These decreases were partially
offset by an increase in the number of franchised restaurants. Royalty revenues
decreased by $1,100, or 4.2%, due to lower international royalties primarily
resulting from declines in foreign currency exchange rates and lower domestic
royalties related to the decline in same-store sales. These decreases were
partially offset by an increase in the franchise store base over the comparable
prior year period. Additionally, franchise fee revenues decreased by $479, or
31.6%, due to a reduction in new store franchise fees and development
fees.
Franchised
and licensed operating and other expenses decreased $2,376, or 4.6%, to $49,593
during the twelve weeks ended November 2, 2009, as compared to the prior year
period. This decrease is mainly due to a decrease in distribution center sales
to franchisees and the relatively proportional decrease in the cost of food,
paper and supplies sold.
Franchised
and licensed operating and other expenses decreased $12,895, or 7.2%, to
$166,146 during the forty weeks ended November 2, 2009, as compared to the prior
year period. This decrease is mainly due to a decrease in distribution center
sales to franchisees and the relatively proportional decrease in the cost of
food, paper and supplies sold, partially offset by an increase in rent and other
occupancy costs. This increase in rent and other occupancy costs is
due primarily to increases in rent for CPI adjustments and additional
leases.
As of
November 2, 2009, approximately 84.3% of Carl’s Jr. franchised and licensed
restaurants purchase food, paper and other supplies from us.
Advertising
Expense
Advertising
expense increased $671, or 8.0%, to $9,107, during the twelve weeks ended
November 2, 2009, and increased $869, or 3.0%, to $29,426 during the forty weeks
ended November 2, 2009, as compared to the prior year
periods. Advertising expense as a percentage of company-operated
restaurants revenue increased 0.7% to 6.7% during the twelve weeks ended
November 2, 2009 and increased 0.3% to 6.2% during the forty weeks ended
November 2, 2009 as compared to the prior year periods. These
increases were mainly due to incremental media spending incurred during the
twelve weeks ended November 2, 2009 in connection with a marketing campaign in
selected markets emphasizing the value-for-the-money of Carl’s Jr. premium
products.
22
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
Hardee’s
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
|
November 2, 2009
|
November 3, 2008
|
November 2, 2009
|
November 3, 2008
|
||||||||||||
Company-operated
restaurants revenue
|
$ | 109,957 | $ | 115,171 | $ | 375,160 | $ | 397,967 | ||||||||
Restaurant
operating costs:
|
||||||||||||||||
Food
and packaging
|
31,521 | 35,438 | 109,104 | 120,383 | ||||||||||||
Payroll
and other employee benefits
|
33,960 | 34,365 | 113,324 | 121,904 | ||||||||||||
Occupancy
and other
|
26,199 | 27,796 | 87,870 | 89,486 | ||||||||||||
Total
restaurant operating costs
|
91,680 | 97,599 | 310,298 | 331,773 | ||||||||||||
Franchised
and licensed restaurants and other revenue:
|
||||||||||||||||
Royalties
|
11,892 | 11,821 | 40,281 | 38,305 | ||||||||||||
Distribution
centers
|
5,457 | 5,874 | 18,067 | 18,817 | ||||||||||||
Rent
|
2,711 | 3,303 | 9,119 | 9,793 | ||||||||||||
Franchise
fees
|
214 | 897 | 845 | 3,313 | ||||||||||||
Total
franchised and licensed restaurants and other revenue
|
20,274 | 21,895 | 68,312 | 70,228 | ||||||||||||
Franchised
and licensed restaurants and other expenses:
|
||||||||||||||||
Administrative
expense (including provision for bad debts)
|
1,808 | 1,559 | 5,727 | 5,591 | ||||||||||||
Distribution
centers
|
5,495 | 5,989 | 17,947 | 19,221 | ||||||||||||
Rent
and other occupancy
|
1,958 | 1,957 | 6,860 | 6,277 | ||||||||||||
Total
franchised and licensed restaurants and other expenses
|
9,261 | 9,505 | 30,534 | 31,089 | ||||||||||||
Advertising
expense
|
6,572 | 6,656 | 22,025 | 23,331 | ||||||||||||
General
and administrative expense
|
16,887 | 17,591 | 56,430 | 62,101 | ||||||||||||
Facility
action charges, net
|
207 | 914 | 960 | 3,507 | ||||||||||||
Operating
income
|
$ | 5,624 | $ | 4,801 | $ | 23,225 | $ | 16,394 | ||||||||
Company-operated
average unit volume (trailing-13 periods)
|
$ | 1,004 | $ | 982 | ||||||||||||
Franchise-operated
average unit volume (trailing-13 periods)
|
$ | 981 | $ | 971 | ||||||||||||
Company-operated
same-store sales (decrease) increase
|
(1.8 | )% | 1.3 | % | (0.4 | )% | 1.1 | % | ||||||||
Franchise-operated
same-store sales (decrease) increase
|
(1.4 | )% | 2.5 | % | 0.7 | % | 0.8 | % | ||||||||
Company-operated
same-store transaction increase (decrease)
|
1.3 | % | (3.5 | )% | 1.2 | % | (3.2 | )% | ||||||||
Average
check (actual $)
|
$ | 4.94 | $ | 5.09 | $ | 5.04 | $ | 5.14 | ||||||||
Restaurant
operating costs as a percentage of company-operated restaurants
revenue:
|
||||||||||||||||
Food
and packaging
|
28.7 | % | 30.8 | % | 29.1 | % | 30.2 | % | ||||||||
Payroll
and other employee benefits
|
30.9 | % | 29.8 | % | 30.2 | % | 30.6 | % | ||||||||
Occupancy
and other
|
23.8 | % | 24.1 | % | 23.4 | % | 22.5 | % | ||||||||
Total
restaurant operating costs
|
83.4 | % | 84.7 | % | 82.7 | % | 83.4 | % | ||||||||
Advertising
expense as a percentage of company-operated restaurants
revenue
|
6.0 | % | 5.8 | % | 5.9 | % | 5.9 | % |
23
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
The
following table shows the change in our restaurant portfolio for the trailing-13
periods ended November 2, 2009:
|
Company-operated
|
Franchised and
licensed
|
Total
|
|||||||||
Open
at November 3, 2008
|
490 | 1,422 | 1,912 | |||||||||
New
|
4 | 29 | 33 | |||||||||
Closed
|
(9 | ) | (23 | ) | (32 | ) | ||||||
Divested
|
(14 | ) | (5 | ) | (19 | ) | ||||||
Acquired
|
5 | 14 | 19 | |||||||||
Open
at November 2, 2009
|
476 | 1,437 | 1,913 |
Company-Operated
Restaurants
Revenue
from company-operated Hardee’s restaurants decreased $5,214, or 4.5%, to
$109,957 during the twelve weeks ended November 2, 2009, as compared to the
comparable prior year period. The decrease is mostly due to the combined impact
of the divestiture of 14 company-operated restaurants to franchisees since the
end of the third quarter of fiscal 2009 and a 1.8% decrease in same-store sales.
In addition, since the end of the third quarter of fiscal 2009, we acquired five
restaurants from a franchisee and opened four and closed nine company-operated
restaurants.
During
the forty weeks ended November 2, 2009, revenue from company-operated
restaurants decreased $22,807, or 5.7%, to $375,160 as compared to the forty
weeks ended November 3, 2008. This decrease is primarily due to the impact of
the changes in our restaurant portfolio discussed above as well as the 0.4%
decrease in same-store sales.
The
changes in the restaurant operating costs as a percentage of company-operated
restaurants revenue are explained as follows:
|
Twelve
Weeks
|
Forty
Weeks
|
||||||
Restaurant
operating costs as a percentage of company-operated restaurants revenue
for the period ended November 3, 2008
|
84.7 | % | 83.4 | % | ||||
Decrease
in food and packaging costs
|
(2.1 | ) | (1.1 | ) | ||||
Increase
(decrease) in labor costs, excluding workers’ compensation
|
1.0 | (0.5 | ) | |||||
Increase
in depreciation and amortization expense
|
0.9 | 1.2 | ||||||
Decrease
in utilities expense
|
(0.7 | ) | (0.2 | ) | ||||
Decrease
in asset disposal expense
|
(0.5 | ) | (0.1 | ) | ||||
Decrease
in general liability insurance expense
|
(0.3 | ) | — | |||||
Increase
(decrease) in property tax expense
|
0.3 | (0.1 | ) | |||||
Other,
net
|
0.1 | 0.1 | ||||||
Restaurant
operating costs as a percentage of company-operated restaurants revenue
for the period ended November 2, 2009
|
83.4 | % | 82.7 | % |
Food and
packaging costs decreased as a percent of company-operated restaurants revenue,
as compared to the prior year periods, primarily due to lower commodity costs
for beef, pork, cheese, and oil products during the twelve weeks ended November
2, 2009, and primarily due to lower commodity costs for beef, cheese, oil and
flour products during the forty weeks ended November 2, 2009. Additionally, one
of our restaurants has a gas station and its fuel sales, which have a higher
associated cost of sales than our food products, have decreased due to lower
gasoline prices for the forty weeks ended November 2, 2009 as compared to the
prior year period.
Labor
costs, excluding workers’ compensation expense, increased as a percent of
company-operated restaurants revenue during the twelve weeks ended November 2,
2009, as compared to the prior year period, due primarily to the impact of
minimum wage rate increases. Labor costs, excluding workers’ compensation
expense, decreased as a percent of company-operated restaurants revenue during
the forty weeks ended November 2, 2009, as compared to the prior year period,
due primarily to the more efficient use of labor resulting from actions
initiated in the second quarter of fiscal 2009, partially offset by the impact
of minimum wage rate increases.
24
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
Depreciation
and amortization expense increased as a percent of company-operated restaurants
revenue during the twelve and forty weeks ended November 2, 2009, over the
comparable prior year periods, mainly due to asset additions from remodels, new
restaurant openings and equipment upgrades.
Utilities
expense decreased as a percent of company-operated restaurants revenue during
the twelve weeks ended November 2, 2009, from the comparable prior year period,
mainly due to natural gas rate decreases.
Asset
disposal expense decreased as a percent of company-operated restaurants revenue
during the twelve weeks ended November 2, 2009, from the comparable prior year
period, mainly due to $413 of asset disposals related to two restaurants that
were rebuilt in the prior year period, that did not recur in the current year
period.
General
liability insurance expense decreased as a percent of company-operated
restaurants revenue during the twelve weeks ended November 2, 2009, from the
comparable prior year period, due primarily to an unfavorable claims reserve
adjustment as a result of actuarial analyses of outstanding claims reserves in
the prior year period, which did not occur to the same extent in the current
year period.
Property
tax expense increased as a percent of company-operated restaurants revenue
during the twelve weeks ended November 2, 2009, from the comparable prior year
period, due primarily to increases in property tax rates and increased assessed
values for real property.
Franchised
and Licensed Restaurants
Total
franchised and licensed restaurants revenue decreased $1,621, or 7.4%, to
$20,274 during the twelve weeks ended November 2, 2009, as compared to the prior
year period. Franchise fees revenue decreased $683, or 76.1%, as compared to the
prior year period due to $605 in franchise fees revenue recorded from the
refranchising of 23 company-operated restaurants in the prior year period, which
did not recur in the current year period since we completed our Hardee’s
refranchising program during fiscal 2009. Rent revenues decreased
$592, or 17.9% due primarily to a $788 decrease in collection of previously
unrecognized rent from financially troubled franchisees as compared to the prior
year period. Distribution center revenues decreased $417, or 7.1%,
mainly due to a decrease in equipment sales as a result of reduced remodel
activity by our franchisees in the current year period.
Total
franchised and licensed restaurants revenue decreased $1,916, or 2.7%, to
$68,312 during the forty weeks ended November 2, 2009, as compared to the prior
year period. Franchise fee revenue decreased by $2,468, or 74.5%. In
the comparable prior year period, franchise fee revenues were significantly
higher due to $2,290 in franchise fees revenue associated with the refranchising
of 88 company-operated restaurants in the prior year period, which did not recur
in the current year period. Distribution center revenues decreased by $750, or
4.0%, primarily as a result of a decrease in equipment sales related to reduced
remodel activity by our franchisees as compared to the prior year period. Rent
revenues decreased $674 due primarily to a $1,544 decrease in collection of
previously unrecognized rent from financially troubled franchisees as compared
to the prior year period, partially offset by an increase in rent revenues due
to an increase in the number of domestic franchised restaurants, resulting
primarily from our refranchising program. These decreases were partially offset
by an increase in royalty revenues of $1,976, or 5.2%, over the comparable prior
year period due to an increase in the number of domestic franchised restaurants,
resulting from our refranchising program, a net increase of 14 international
restaurants since the end of the third quarter of fiscal 2009, and increased
collections of $369 of previously unrecognized royalties from financially
troubled franchisees, as compared with the prior year period.
Franchised
and licensed operating and other expenses decreased $244, or 2.6%, to $9,261,
during the twelve weeks ended November 2, 2009, as compared to the prior year
period. This decrease is mainly due to a decrease of $494, or 8.2%, in
distribution center costs related to the decrease in remodel equipment sales,
partially offset by an increase in administrative expense of $249, or
16.0%.
Franchised
and licensed operating and other expenses decreased $555, or 1.8%, to $30,534,
during the forty weeks ended November 2, 2009, as compared to the prior year
period. This decrease is mainly due to a decrease of $1,274, or 6.6%, in
distribution center costs related to the decrease in remodel equipment sales, as
well as the collection
of $230 in previously reserved receivables from a franchisee. This decrease was
partially offset by a $583, or 9.3% increase in rent expense related to an
increase in the number of franchised restaurants that sublease property from us
as a result of our refranchising program.
25
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
Consolidated
Expenses
General
and Administrative Expense
General
and administrative expenses decreased $179, or 0.6%, to $30,977, and increased
0.3% to 9.6% of total revenue, for the twelve weeks ended November 2, 2009, as
compared to the twelve weeks ended November 3, 2008. This decrease was primarily
attributable to a decrease in share-based compensation expense of $715, which is
attributable to a number of factors, including our performance against specified
goals for fiscal 2010 and the decline in our stock price. Additionally, due to
the implementation of various cost-reduction initiatives, there was a reduction
of general corporate expenses of $231. These decreases were partially offset by
an increase in bonus expense of $838, which is based on our performance relative
to executive management and operations bonus criteria.
General
and administrative expenses decreased $4,976, or 4.6%, to $103,061, and
decreased 0.1% to 9.3% of total revenue, for the forty weeks ended November 2,
2009, as compared to the forty weeks ended November 3, 2008. This decrease was
mainly due to the implementation of various cost-reduction initiatives,
resulting in a reduction of general corporate expenses of $4,617. Additionally,
there was a $3,313 decrease in share-based compensation expense which is
attributable to a number of factors, including our performance against specified
goals for fiscal 2010 and the decline in our stock price. Finally, we had a
$2,781 increase in bonus expense, which is based on our performance relative to
executive management and operations bonus criteria.
Interest
Expense
During
the twelve weeks ended November 2, 2009, interest expense decreased $2,933, or
31.3%, to $6,430, as compared to the twelve weeks ended November 3, 2008. There
was a decrease of $1,740 in the interest expense on our Facility due to
decreased average outstanding borrowings and lower interest rates. Additionally,
there was a decrease of $1,280 in the charge recorded to adjust the carrying
value of our interest rate swap agreements to fair value.
During
the forty weeks ended November 2, 2009, interest expense decreased $1,496, or
9.2%, to $14,834, as compared to the forty weeks ended November 3, 2008. There
was a decrease of $6,079 in the interest expense on our Facility due to
decreased average outstanding borrowings and lower interest
rates. This decrease was partially offset by an increase of $4,290 in
the charge recorded to adjust the carrying value of our interest rate swap
agreements to fair value. See Note 5 of Notes to Condensed
Consolidated Financial Statements for additional detail of the components of
interest expense.
Income
Tax Expense
Our
effective income tax rate for the twelve weeks ended November 2, 2009 and
November 3, 2008 was 41.6% and 41.2%, respectively. Our effective income tax
rate for the forty weeks ended November 2, 2009 and November 3, 2008 was 40.6%
and 38.9%, respectively. The effective rate for the forty weeks ended November
3, 2008 was reduced due to the impact of favorable tax regulations that were
recognized during the first quarter of fiscal 2009. See Note 11 of Notes to
Condensed Consolidated Financial Statements for additional detail of the
components of income tax expense.
26
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
Presentation
of Non-GAAP Measurements
Adjusted
EBITDA
Adjusted
EBITDA is not a recognized term under GAAP and does not purport to be an
alternative to income from operations, an indicator of cash flow from operations
or a measure of liquidity. As shown in the table below and defined in our
Facility, Adjusted EBITDA is calculated as earnings before cumulative effect of
accounting changes, interest expense, income taxes, depreciation and
amortization, facility action charges, share-based compensation
expense, impairment of goodwill and impairment of assets held for sale. Because
not all companies calculate Adjusted EBITDA identically, this presentation of
Adjusted EBITDA may not be comparable to similarly titled measures of other
companies. Adjusted EBITDA is not intended to be a measure of free cash flow for
management’s discretionary use, as it does not consider certain cash
requirements such as interest expense, income taxes, debt service payments and
cash costs arising from facility actions. Our maximum annual capital
expenditures are limited by our Facility, based on a sliding scale driven by our
Adjusted EBITDA.
|
Twelve Weeks Ended
|
Forty Weeks Ended
|
||||||||||||||||||
|
November 2, 2009
|
November 3, 2008
|
November 2, 2009
|
November 3, 2008
|
Trailing-13
Periods
Ended November 2, 2009
|
|||||||||||||||
Net
income
|
$ | 6,157 | $ | 5,388 | $ | 32,802 | $ | 34,348 | $ | 35,410 | ||||||||||
Interest
expense
|
6,430 | 9,363 | 14,834 | 16,330 | 27,113 | |||||||||||||||
Income
tax expense
|
4,379 | 3,773 | 22,460 | 21,882 | 22,111 | |||||||||||||||
Depreciation
and amortization
|
16,505 | 14,835 | 54,317 | 48,141 | 69,673 | |||||||||||||||
Facility
action charges, net
|
520 | 1,242 | 3,022 | 2,666 | 4,495 | |||||||||||||||
Share-based
compensation expense
|
2,000 | 2,658 | 6,242 | 9,524 | 9,252 | |||||||||||||||
Adjusted
EBITDA
|
$ | 35,991 | $ | 37,259 | $ | 133,677 | $ | 132,891 | $ | 168,054 |
Liquidity
and Capital Resources
We expect
that our cash on hand, future cash flows from operations and borrowings under
our Facility will provide sufficient liquidity to allow us to service our
existing debt and to meet our operating and capital requirements for at least
the next 12 months. We believe our most significant cash use during the next 12
months will be for capital expenditures. Based on our current capital spending
projections, we expect capital expenditures to be between $100,000 and $105,000
for fiscal 2010 and between $85,000 and $95,000 for fiscal 2011. Under the terms
of our Facility, we may be required to make an annual principal prepayment,
based on excess cash flows (as defined in our Facility). Other than these
prepayments, we have no significant debt maturities coming due until March 27,
2012. See Note 5 of Notes to Condensed Consolidated Financial Statements for
more information on our existing debt. We closely monitor the potential impacts
of volatility in the worldwide capital and financial markets on our liquidity;
and to date, there have been no significant impacts on either our liquidity or
the availability of committed funds under our Facility.
Our
Facility provides for a $470,000 senior secured credit facility consisting of a
$200,000 revolving credit facility and a $270,000 term loan. The revolving
credit facility matures on March 27, 2012, and includes an $85,000 letter of
credit sub-facility. During the twelve and forty weeks ended November 2, 2009,
we made aggregate principal payments of $671 and $3,633 on the term loan,
respectively, which included a payment during the first quarter of fiscal 2010
of $1,616 based on excess cash flows for fiscal 2009, as required by the terms
of our Facility. As of November 2, 2009, we had (i) borrowings outstanding under
the term loan portion of our Facility of $248,103, (ii) borrowings outstanding
under the revolving portion of our Facility of $28,500, (iii) outstanding
letters of credit under the revolving portion of our Facility of $35,363, and
(iv) availability under the revolving portion of our Facility of
$136,137.
The terms
of our Facility include financial performance covenants, which include a maximum
leverage ratio, and certain restrictive covenants. The maximum leverage covenant
requires us to maintain a leverage ratio not to exceed 2.75, 2.50 and 2.25 in
fiscal 2010, 2011 and 2012, respectively. As of November 2, 2009, our leverage
ratio was 2.08. Our most significant restrictive covenants limit our ability to
incur debt, incur liens on our assets, make any significant change in our
corporate structure or the nature of our business, prepay certain debt, engage
in a change of control transaction without the member banks’ consents and make
investments or acquisitions.
Our
Facility limits the amount of common stock we can repurchase and/or cash
dividends we can distribute. As of November 2, 2009, we are permitted
to make additional common stock repurchases and/or cash dividend payments up to
$66,792 under the terms of our Facility. The aggregate amount allowed for common
stock repurchases and/or cash dividend payments is increased each year by a
portion of excess cash flows (as defined in our Facility). In addition to being
limited by our Facility, our ability to repurchase common stock is limited by
our Board of Directors’ authorization and the amount of cumulative repurchases
of our common stock that we have already
made thereunder. As of November 2, 2009, pursuant to these limitations, we are
permitted to make additional repurchases of our common stock up to
$36,909.
27
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
Our
Facility permits us to make annual capital expenditures in the amount of
$85,000, plus 80% of the amount of actual Adjusted EBITDA (as defined in our
Facility) in excess of $150,000. In addition, we may reinvest proceeds from the
sale of assets and carry forward certain unused capital expenditure amounts to
the following year. As of November 2, 2009, we expect to be permitted to make
total capital expenditures of $146,084 in fiscal 2010.
Our
Facility is collateralized by a lien on all of our personal property assets and
liens on certain restaurant properties. We were in compliance with the covenants
and all other requirements of our Facility as of November 2, 2009.
We have
fixed rate swap agreements with various counterparties to effectively fix future
interest payments on $200,000 of our term loan debt at 6.12%. These agreements
will expire on March 12, 2012. These derivative instruments were not designated
as cash flow hedges in accordance with the authoritative guidance. Accordingly,
the change in the fair value of the interest rate swap agreements is recognized
in interest expense in our accompanying unaudited Condensed Consolidated
Statements of Income. During the twelve and forty weeks ended November 2, 2009,
we paid $1,595 and $6,658, respectively, for net settlements under our fixed
rate swap agreements. As a matter of policy, we do not enter into derivative
instruments unless there is an underlying exposure. These interest rate swap
agreements are highly sensitive to interest rate fluctuations which could result
in significant variability in their future value.
The terms
of our Facility are not impacted by any changes in our credit rating. We believe
the key Company-specific factors affecting our ability to maintain our existing
debt financing relationships and to access such capital in the future are our
present and expected levels of profitability, cash flows from operations,
capital expenditures, asset collateral bases and the level of our Adjusted
EBITDA relative to our debt obligations. In addition, as noted above, our
existing debt agreements include significant restrictions on future financings
including, among others, limits on the amount of indebtedness we may incur or
which may be secured by any of our assets.
During
the twelve and forty weeks ended November 2, 2009, we declared cash dividends of
$0.06 and $0.18 per share of common stock, for a total of $3,311 and $9,861,
respectively. Dividends payable of $3,311 and $3,279 have been included in other
current liabilities in our accompanying unaudited Condensed Consolidated Balance
Sheets as of November 2, 2009 and January 31, 2009, respectively. The dividends
declared during the twelve weeks ended November 2, 2009 were subsequently paid
on November 23, 2009.
During
the forty weeks ended November 2, 2009, cash provided by operating activities
was $118,536, an increase of $10,162, or 9.4%, from the prior year comparable
period. This increase is primarily attributable to positive changes in operating
liabilities, including accounts payable and other current and long-term
liabilities and estimated liability for closed restaurants and self-insurance.
Working capital account balances can vary significantly from quarter to quarter,
depending upon the timing of large customer receipts and payments to vendors,
but they are not anticipated to be a significant source or use of cash over the
long term. Additionally, this increase is due to increases in depreciation and
amortization of $6,176. These increases were partially offset by a decrease in
share-based compensation expense of $3,299.
Cash used
in investing activities during the forty weeks ended November 2, 2009 totaled
$63,607, which principally consisted of purchases of property and equipment,
partially offset by proceeds from the sale of property and equipment, and
collections on non-trade notes receivable.
28
CKE
RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Dollars
in thousands, except per share amounts)
Capital
expenditures were as follows:
Forty Weeks Ended
|
||||||||
|
November 2, 2009
|
November 3, 2008
|
||||||
Non-discretionary:
|
||||||||
Remodels:
|
||||||||
Carl’s
Jr.
|
$ | 5,293 | $ | 8,760 | ||||
Hardee’s
|
17,317 | 15,949 | ||||||
Capital
Maintenance:
|
||||||||
Carl’s
Jr.
|
11,479 | 8,896 | ||||||
Hardee’s
|
12,150 | 13,269 | ||||||
Corporate/other
|
2,163 | 3,942 | ||||||
Total
non-discretionary
|
48,402 | 50,816 | ||||||
Discretionary:
|
||||||||
New
restaurants/rebuilds:
|
||||||||
Carl’s
Jr.
|
9,273 | 15,246 | ||||||
Hardee’s
|
3,575 | 7,025 | ||||||
Dual-branding:
|
||||||||
Carl’s
Jr.
|
641 | 969 | ||||||
Hardee’s
|
269 | 2,201 | ||||||
Real
estate/franchise acquisitions
|
3,234 | 5,477 | ||||||
Corporate/other
|
4,069 | 924 | ||||||
Total
discretionary
|
21,061 | 31,842 | ||||||
Total
|
$ | 69,463 | $ | 82,658 |
Capital
expenditures for the forty weeks ended November 2, 2009, decreased $13,195, or
16.0%, from the comparable prior year period mainly due to a $9,423 decrease new
restaurant and rebuild construction, as well as, a $2,260 decrease in
dual-branding activity, a $2,243 decrease in real estate and franchise
acquisitions and a $2,099 decrease in remodel activity. These decreases were
partially offset by an increase corporate and other discretionary capital
expenditures of $3,145.
Cash used
in financing activities during the forty weeks ended November 2, 2009 was
$52,730, which principally consisted of net repayments of $33,500 under the
revolving portion of our Facility, dividends paid of $9,829, repayments of
$5,637 related to capital lease obligations, payments of $3,633 under the term
loan portion of our Facility and $1,690 of common stock
repurchases.
(Dollars
in thousands)
Interest
Rate Risk
Our
principal exposure to financial market risks relates to the impact that interest
rate changes could have on our Facility. Our Facility, which is comprised of a
revolving credit facility and a term loan, bears interest at an annual rate
equal to the prime rate or LIBOR plus an applicable margin. As of November 2,
2009, we had $276,603 of borrowings and $35,363 of letters of credit outstanding
under our Facility. We have entered into interest rate swap agreements with a
combined notional amount of $200,000. These agreements will expire on March 12,
2012. The effect of the agreements is to limit the interest rate exposure on a
portion of our term loan debt under our Facility to a fixed rate of 6.12%. The
agreements were not designated as cash flow hedges under the terms of the
authoritative guidance. Accordingly, the change in the fair value of the
interest rate swap agreements is recognized in interest expense in our
accompanying Condensed Consolidated Statements of Income. These interest rate
swap agreements are highly sensitive to interest rate fluctuations which could
result in significant variability in their future fair value.
A
hypothetical increase of 100 basis points in short-term interest rates would
result in a reduction in our annual pre-tax earnings of $766. The estimated
reduction is based upon the outstanding balance of the borrowings under our
Facility that are not covered by our interest rate swaps and the
weighted-average interest rate for the fiscal year and assumes no change in the
volume, index or composition of debt as in effect on November 2,
2009.
Foreign
Currency Risk
In the
normal course of business, we are exposed to foreign currency risk as
substantially all of our licensees transact business in currencies other than
our consolidated reporting currency, the U.S. dollar. As a result, we are
exposed to changes in the exchange rate between the U.S. dollar and the
following currencies: Bahraini Dinar, Egyptian Pound, Jordan Dinar, Kuwait
Dinar, Lebanese Pound, Malaysian Ringgit, Mexican Peso, Oman Rial, Pakistani
Rupee, Qatar Riyal, Russian Ruble, Saudi Arabian Riyal, Singapore Dollar,
Chinese Yuan and United Arab Emirates Dirham.
Commodity
Price Risk
We
purchase certain products which are affected by commodity prices and are,
therefore, subject to price volatility caused by weather, market conditions and
other factors which are not considered predictable or within our control.
Although many of the products purchased are subject to changes in commodity
prices, certain purchasing contracts or pricing arrangements contain risk
management techniques designed to minimize price volatility. The purchasing
contracts and pricing arrangements we use may result in unconditional purchase
obligations, which are not reflected in our accompanying Condensed Consolidated
Balance Sheets. Typically, we use these types of purchasing techniques to
control costs as an alternative to directly managing financial instruments to
hedge commodity prices. In many cases, we believe we will be able to address
material commodity cost increases by adjusting our menu pricing or changing our
product delivery strategy. However, increases in commodity prices, without
adjustments to our menu prices, could increase restaurant operating costs as a
percent of company-operated restaurants revenue for our restaurant
concepts.
(a)
Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, our management recognized that any system of
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives,
as ours are designed to do, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
In
connection with the preparation of this Quarterly Report on Form 10-Q, as of
November 2, 2009, an evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this Quarterly Report on Form
10-Q to ensure that the information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and
to ensure that the information required to be disclosed by us in reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosures.
(b)
Changes in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting during the
fiscal quarter ended November 2, 2009, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Part II. Other
Information
Item 1A
of Part I of our Annual Report on Form 10-K for the fiscal year ended
January 31, 2009 (“2009 Annual Report”) includes a detailed discussion of the
risk factors that could materially affect our business, financial condition or
results of operations There have been no material changes in our risk
factors from those disclosed in our 2009 Annual Report, except as set forth
below. The information below updates, and should be read in
conjunction with, the risk factors in our 2009 Annual Report.
Our business may
be impacted if our Carl’s Jr. franchisees do not renew or extend their
distribution agreement
We
currently supply food, paper and other supplies both to company-operated Carl’s
Jr. restaurants and to a majority of Carl’s Jr. franchised and licensed
restaurants through our two distribution center facilities in
California. We gain significant economies of scale within our
distribution center operations through the sale of food, paper and other
supplies to our Carl’s Jr. franchisees. Our current distribution
agreement with Carl’s Jr. franchisees expires in March 2010, and we are in
negotiations to extend the agreement. If our franchisees decide not
to renew the agreement with us, or if the agreement is renewed with less
favorable terms, our financial results could be adversely impacted.
Issuer
Purchase of Equity Securities
The
following table provides information as of November 2, 2009, with respect to
shares of common stock repurchased by us during the fiscal quarter then ended
(dollars in thousands, except per share amounts):
|
(a)
|
(b)
|
(c)
|
(d)
|
||||||||||||
Period
|
Total
Number
of Shares Purchased
|
Average
Price
Paid
per Share
|
Total
Number
of Shares Purchased
as Part of
Publicly Announced
Plans or Programs
|
Maximum
Dollar
Value
of Shares
that May
Yet Be Purchased
Under
the Plans
or Programs
|
||||||||||||
August
11, 2009 — September 7, 2009
|
— | $ | — | — | $ | 37,259 | ||||||||||
September
8, 2009 — October 5, 2009
|
— | — | — | 37,259 | ||||||||||||
October
6, 2009 — November 2, 2009 (1)
|
32,878 | 10.64 | 32,878 | 36,909 | ||||||||||||
Total
|
32,878 | $ | 10.64 | 32,878 | $ | 36,909 |
____________
(1)
|
We
received and cancelled a total of 32,878 shares of our outstanding common
stock in payment of taxes owed on ordinary income recognized by twenty-one
of our employees in connection with the vesting of restricted stock awards
issued under our stock incentive
plans.
|
Exhibit No.
|
Description
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934.
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934.
|
32.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. Section
1350.
|
32.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. Section
1350.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CKE
RESTAURANTS, INC.
|
||
Date:
December 8, 2009
|
||
/s/
Reese Stewart
|
||
Senior
Vice President
|
||
Chief
Accounting Officer
|
||
(Principal
Accounting Officer)
|
Exhibit
Index
Exhibit No.
|
Description
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934.
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934.
|
32.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. Section
1350.
|
32.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. Section
1350.
|