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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
o | 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: 001-32875
BURGER KING HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
75-3095469 (I.R.S. Employer Identification No.) |
|
5505 Blue Lagoon Drive, Miami, Florida (Address of Principal Executive Offices) |
33126 (Zip Code) |
(305) 378-3000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 o No þ*
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
o No o
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 o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a 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 o No þ
As of August 8, 2011, there were 100,000 shares of the Registrants Common Stock outstanding, all
of which were owned by Burger King Capital Holdings, LLC, the Registrants parent holding company.
The registrants Common Stock is not publicly traded.
* | The registrant 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, but is not subject to such filing requirements. |
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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PART I Financial Information
Item1. Financial Statements
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
Condensed Consolidated Balance Sheets
(Unaudited)
As of | ||||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In millions, except share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 282.2 | $ | 207.0 | ||||
Trade and notes receivable, net |
144.5 | 148.0 | ||||||
Prepaids and other current assets, net |
158.3 | 159.2 | ||||||
Deferred income taxes, net |
27.6 | 23.2 | ||||||
Total current assets |
612.6 | 537.4 | ||||||
Property and equipment, net of accumulated
depreciation of $90.4 million and $26.4 million,
respectively |
1,117.9 | 1,161.4 | ||||||
Intangible assets, net |
2,938.9 | 2,877.6 | ||||||
Goodwill |
634.4 | 634.4 | ||||||
Net investment in property leased to franchisees |
255.1 | 258.3 | ||||||
Other assets, net |
207.1 | 226.0 | ||||||
Total assets |
$ | 5,766.0 | $ | 5,695.1 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts and drafts payable |
$ | 59.0 | $ | 90.2 | ||||
Accrued advertising |
85.3 | 82.5 | ||||||
Other accrued liabilities |
231.9 | 247.8 | ||||||
Current portion of long term debt and capital leases |
30.6 | 32.9 | ||||||
Total current liabilities |
406.8 | 453.4 | ||||||
Long-term debt, net of current portion |
2,692.3 | 2,652.0 | ||||||
Capital leases, net of current portion |
97.2 | 99.3 | ||||||
Other liabilities, net |
355.3 | 379.7 | ||||||
Deferred income taxes, net |
660.8 | 652.2 | ||||||
Total liabilities |
4,212.4 | 4,236.6 | ||||||
Commitments and Contingencies (Note 15) |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value; 200,000 shares
authorized at June 30, 2011 and December 31, 2010;
100,000 shares issued and outstanding at June 30,
2011 and December 31, 2010 |
| | ||||||
Additional paid-in capital |
1,563.5 | 1,563.5 | ||||||
(Accumulated deficit) / retained earnings |
(62.2 | ) | (102.2 | ) | ||||
Accumulated other comprehensive income (loss) |
52.3 | (2.8 | ) | |||||
Total stockholders equity |
1,553.6 | 1,458.5 | ||||||
Total liabilities and stockholders equity |
$ | 5,766.0 | $ | 5,695.1 | ||||
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Condensed Consolidated Statements of Operations
(Unaudited)
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Revenues: |
||||||||||||||||
Company restaurant revenues |
$ | 419.0 | $ | 454.1 | $ | 811.6 | $ | 893.3 | ||||||||
Franchise revenues |
148.8 | 140.3 | 281.0 | 270.2 | ||||||||||||
Property revenues |
28.4 | 28.6 | 56.7 | 56.4 | ||||||||||||
Total revenues |
596.2 | 623.0 | 1,149.3 | 1,219.9 | ||||||||||||
Company restaurant expenses: |
||||||||||||||||
Food, paper and product costs |
135.4 | 147.2 | 262.4 | 285.2 | ||||||||||||
Payroll and employee benefits |
122.2 | 139.3 | 242.2 | 277.5 | ||||||||||||
Occupancy and other operating costs |
110.8 | 119.2 | 219.5 | 232.5 | ||||||||||||
Total company restaurant expenses |
368.4 | 405.7 | 724.1 | 795.2 | ||||||||||||
Selling, general and administrative expenses |
106.0 | 121.1 | 212.2 | 238.9 | ||||||||||||
Property expenses |
17.7 | 14.7 | 35.9 | 29.9 | ||||||||||||
Other operating (income) expense, net |
0.3 | (1.3 | ) | 5.3 | (5.8 | ) | ||||||||||
Total operating costs and expenses |
492.4 | 540.2 | 977.5 | 1,058.2 | ||||||||||||
Income from operations |
103.8 | 82.8 | 171.8 | 161.7 | ||||||||||||
Interest expense |
47.7 | 12.2 | 99.4 | 24.4 | ||||||||||||
Interest income |
(0.4 | ) | (0.2 | ) | (1.6 | ) | (0.5 | ) | ||||||||
Total interest expense, net |
47.3 | 12.0 | 97.8 | 23.9 | ||||||||||||
Loss on early extinguishment of debt |
| | 19.6 | | ||||||||||||
Income before income taxes |
56.5 | 70.8 | 54.4 | 137.8 | ||||||||||||
Income tax expense |
13.7 | 21.8 | 14.4 | 47.8 | ||||||||||||
Net income |
$ | 42.8 | $ | 49.0 | $ | 40.0 | $ | 90.0 | ||||||||
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Successor | Predecessor | |||||||
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 40.0 | $ | 90.0 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
68.7 | 59.3 | ||||||
Loss on early extinguishment of debt |
19.6 | | ||||||
(Gain) on hedging activities |
| (0.9 | ) | |||||
Amortization of deferred financing cost and debt issuance discount |
6.9 | 1.0 | ||||||
Loss on remeasurement of foreign denominated transactions |
1.5 | 47.1 | ||||||
Loss (gains) on refranchisings, dispositions of assets and release of
unfavorable lease obligation |
0.7 | (6.5 | ) | |||||
Impairment on non-restaurant properties |
| 1.7 | ||||||
Bad debt expense, net of recoveries |
1.1 | 0.4 | ||||||
Share-based compensation |
0.6 | 8.3 | ||||||
Deferred income taxes |
16.1 | 16.6 | ||||||
Changes in current assets and liabilities, excluding acquisitions and dispositions: |
||||||||
Trade and notes receivables |
8.7 | (13.6 | ) | |||||
Prepaids and other current assets |
7.3 | (18.5 | ) | |||||
Accounts and drafts payable |
(33.0 | ) | 2.1 | |||||
Accrued advertising |
4.1 | 2.8 | ||||||
Other accrued liabilities |
(31.5 | ) | 2.8 | |||||
Other long-term assets and liabilities |
(10.3 | ) | (4.3 | ) | ||||
Net cash provided by operating activities |
100.5 | 188.3 | ||||||
Cash flows from investing activities: |
||||||||
Payments for property and equipment |
(23.5 | ) | (86.5 | ) | ||||
Proceeds from refranchisings, disposition of assets and restaurant closures |
11.7 | 16.2 | ||||||
Investments related to unconsolidated entities |
(2.7 | ) | ||||||
Payments for acquired franchisee operations, net of cash acquired |
| (13.2 | ) | |||||
Return of investment on direct financing leases |
4.0 | 4.3 | ||||||
Other investing activities |
(4.4 | ) | (2.1 | ) | ||||
Net cash used for investing activities |
(14.9 | ) | (81.3 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from term debt |
1,860.0 | | ||||||
Repayments of term debt and capital leases |
(1,852.4 | ) | (34.0 | ) | ||||
Borrowings under revolving credit facility |
| 9.0 | ||||||
Repayments of revolving credit facility |
| (9.0 | ) | |||||
Payment of financing costs |
(23.1 | ) | | |||||
Dividends paid on common stock |
| (17.1 | ) | |||||
Proceeds from stock option exercises |
| 3.8 | ||||||
Repurchases of common stock |
| (0.3 | ) | |||||
Excess tax benefits from share-based compensation |
| 2.6 | ||||||
Net cash used for financing activities |
(15.5 | ) | (45.0 | ) | ||||
Effect of exchange rates on cash and cash equivalents |
5.1 | (14.3 | ) | |||||
Increase in cash and cash equivalents |
75.2 | 47.7 | ||||||
Cash and cash equivalents at beginning of period |
207.0 | 139.9 | ||||||
Cash and cash equivalents at end of period |
$ | 282.2 | $ | 187.6 | ||||
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Successor | Predecessor | |||||||
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Supplemental cash flow disclosures: |
||||||||
Interest paid |
$ | 93.5 | $ | 23.8 | ||||
Income taxes paid |
$ | 13.3 | $ | 33.2 | ||||
Non-cash investing and financing activities: |
||||||||
Acquisition of property with capital lease obligations |
$ | | $ | 1.8 | ||||
Net investment in direct financing leases |
$ | 0.5 | $ | 7.3 |
See accompanying notes to condensed consolidated financial statements.
6
Table of Contents
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Organization
Burger King Holdings, Inc. (BKH or the Company) is a Delaware corporation formed on July
23, 2002. The Company is the parent of Burger King Corporation (BKC), a Florida corporation that
franchises and operates fast food hamburger restaurants, principally under the Burger King® brand
(the Brand).
The Company generates revenues from three sources: (i) retail sales at Company restaurants;
(ii) franchise revenues, consisting of royalties based on a percentage of sales reported by
franchise restaurants and franchise fees paid by franchisees; and (iii) property income from
restaurants that the Company leases or subleases to franchisees.
On September 2, 2010, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with Burger King Worldwide Holdings, Inc., formerly known as Blue Acquisition Holding
Corporation, a Delaware corporation (Parent) and Blue Acquisition Sub, Inc., a Delaware
corporation (Merger Sub), a wholly-owned subsidiary of Parent established as an acquisition
vehicle for the purpose of acquiring the Company. In accordance with the terms of the Merger
Agreement, on October 19, 2010 (the Merger Date), Merger Sub completed its acquisition of 100% of
the Companys equity (the Acquisition) and merged with and into the Company, with the Company
continuing as the surviving corporation (the Merger). Parent is owned 99.9% by 3G Special
Situations Fund II, L.P. (3G), which is an affiliate of 3G Capital Partners, Ltd., a private
equity investment firm based in New York (3G Capital or the Sponsor). The common stock of BKH
ceased to be traded on the New York Stock Exchange after close of market on October 19, 2010 and
BKH continues operations as a privately-held company. The Acquisition, Merger and related
financing transactions are collectively referred to as the Transactions.
On April 8, 2011, Parent transferred all of its equity interests in BKH to Burger King Capital
Holdings, LLC, a Delaware limited liability company (BKCH), in exchange for membership interests
in BKCH. As a result, BKCH became a wholly-owned subsidiary of Parent and the Company became a
wholly-owned subsidiary of BKCH.
Note 2. Basis of Presentation and Consolidation
The Company has prepared the accompanying unaudited Condensed Consolidated Financial
Statements (Financial Statements) in accordance with the rules and regulations of the Securities
and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include
all of the information and footnotes required by United States generally accepted accounting
principles (GAAP) for complete financial statements. Therefore, the Financial Statements should
be read in conjunction with the audited Consolidated Financial Statements contained in the
Companys Transition Report on Form 10-K for the six-month period ended December 31, 2010 filed
with the SEC on March 23, 2011. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation have been included in the Financial
Statements. The results for interim periods do not necessarily indicate the results that may be
expected for any other interim period or for the full year.
The Financial Statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany balances and transactions have been eliminated in
consolidation.
As discussed in Note 1, the Company was acquired by an affiliate of 3G Capital in a
transaction accounted for as a business combination using the acquisition method of accounting. In
addition, Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC)
805-50-S99-1 Business Combinations Related Issues requires the application of push down
accounting in situations where the ownership of an entity has changed. As a result, the post-merger
financial statements of the Company reflect the new basis of accounting.
During the quarter ended June 30, 2011, the Company adjusted its preliminary estimate of the
fair value of net assets acquired. The allocation of consideration to the net tangible and
intangible assets acquired and liabilities assumed remains preliminary and reflects various revised
fair value estimates and analyses as of June 30, 2011, including work performed by third-party
valuation specialists. The preliminary computations of consideration and the allocation of
consideration to the net tangible and intangible assets acquired
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and liabilities assumed as of June 30, 2011 are presented in the tables below (in millions)
and remain subject to revision as valuations are finalized and the Company completes its review of
the valuations.
As of 10/19/2010 | ||||
Cash paid for shares outstanding (1) |
$ | 3,277.3 | ||
Settlement of outstanding stock-based compensation |
48.1 | |||
Total consideration |
$ | 3,325.4 | ||
Preliminary Allocation of Consideration:
As of 10/19/2010 | ||||
Current assets |
$ | 508.1 | ||
Property and equipment |
1,168.7 | |||
Intangible assets |
2,929.4 | |||
Net investment in property leased to franchisees |
258.4 | |||
Other assets, net |
87.4 | |||
Current liabilities |
(458.1 | ) | ||
Term debt |
(667.4 | ) | ||
Capital leases |
(99.9 | ) | ||
Other liabilities |
(390.6 | ) | ||
Deferred income taxes, net |
(645.0 | ) | ||
Net assets acquired |
$ | 2,691.0 | ||
Excess purchase price attributed to goodwill |
$ | 634.4 | ||
(1) | Represents cash paid, based on a $24.00 per share price, for 136,555,642 outstanding shares. |
The adjustment to the Companys preliminary estimate of net assets acquired resulted in a
corresponding $104.1 million increase in estimated goodwill due to the following changes to
preliminary estimates of fair values and allocation of purchase price (in millions):
Increase (Decrease) in | ||||
Goodwill | ||||
Change in: |
||||
Property and equipment |
$ | 31.3 | ||
Intangible assets |
53.1 | |||
Net investment in property leased to franchisees |
(118.1 | ) | ||
Other assets, net |
(0.2 | ) | ||
Current liabilities |
(2.1 | ) | ||
Capital lease obligation |
35.5 | |||
Deferred
income taxes, net |
(71.7 | ) | ||
Other, net |
176.3 | |||
Total increase in goodwill |
$ | 104.1 | ||
All purchase price allocation adjustments have been reflected on a retrospective basis as of
the Merger Date. Additionally, the Companys results of operations were retrospectively adjusted
to reflect the effects of these revisions to the Companys preliminary purchase price allocation.
The primary areas of the preliminary purchase price allocations that are not yet finalized
relate to the fair values of certain tangible assets acquired and liabilities assumed, the
valuation of intangible assets acquired, income and non-income based taxes and goodwill.
8
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The Company expects to continue to obtain information to assist in determining the fair value
of the net assets acquired at the Merger Date during the measurement period. Measurement period
adjustments that the Company determines to be material will be applied retrospectively to the
Merger Date.
Unless the context otherwise requires, all references to the Successor refer to Burger King
Holdings, Inc. and all its subsidiaries, including BKC, for the period subsequent to the
Acquisition. All references to our Predecessor refer to Burger King Holdings, Inc. and all its
subsidiaries, including BKC, for all periods prior to the Acquisition, which operated under a
different ownership and capital structure. In addition, the Acquisition was accounted for under the
acquisition method of accounting, which resulted in purchase price allocations that affect the
comparability of results of operations for periods before and after the Acquisition.
Certain prior year amounts in the accompanying Financial Statements and Notes to the Financial
Statements have been reclassified in order to be comparable with the current year classifications.
These reclassifications had no effect on previously reported net income.
Change in Fiscal Year End
On November 5, 2010, the BKH Board of Directors approved a change in fiscal year-end from June
30 to December 31. The change became effective at the end of the quarter ended December 31, 2010.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the Companys Financial Statements
and Notes to the Financial Statements. Management adjusts such estimates and assumptions when facts
and circumstances dictate. Such estimates and assumptions may be affected by volatile credit,
equity, foreign currency and energy markets, and declines in consumer spending. As future
events and their effects cannot be determined with precision, actual results could differ
significantly from these estimates.
Note 3. Share-based Compensation
Successor
On February 2, 2011, the Board of Directors of Parent approved and adopted the Burger King
Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan (the Omnibus Plan). The Omnibus Plan
generally provides for the grant of awards to employees, directors, consultants and other persons
who provide services to Parent and its subsidiaries, with respect to an aggregate of 5,000 shares
(5 million millishares or .001 of one full share) of common stock. The Omnibus Plan permits the
grant of several types of awards with respect to the common stock, including stock options,
restricted stock units, restricted stock and performance shares.
During the six months ended June 30, 2011, Parent granted options to purchase up to 4,050,059 millishares to key employees and members of the Board of Directors of Parent.
The exercise price per millishare is $15.82, and the options vest 100% on October 19, 2015, provided the employee is continuously employed by BKC or one of its subsidiaries or the director remains on the board of Parent, as applicable. The grant date fair value of the options granted was $1.96
per millishare and was estimated using the Black-Scholes option pricing model based on the following weighted-average input assumptions: exercise price of $15.82 per share; risk-free interest rate of 1.93%; expected term of 5.0 years; expected volatility of 35.0%; and expected dividend yield of zero. The compensation cost related to these granted options will be recognized ratably over the requisite service period.
The Company recorded $0.4 million and $0.6 million of share-based compensation expense in
selling, general and administrative expenses for the three and six months ended June 30, 2011,
respectively. No stock options were exercised during the three and six months ended June 30, 2011.
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Predecessor
The Predecessor recorded $4.0 million and $8.3 million of share-based compensation expense for
the three and six months ended June 30, 2010, respectively, in selling, general and administrative
expenses. Excess tax benefits from stock options exercised of $2.6 million in the six months ended
June 30, 2010 were reported as financing cash flows in the accompanying condensed consolidated
statements of cash flows.
Note 4. Restaurant Acquisitions, Closures and Dispositions
Acquisitions
Restaurant acquisitions are summarized as follows:
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions, except restaurant count) | ||||||||||||||||
Number of restaurants acquired |
| 1 | | 36 | ||||||||||||
Prepaids and other current assets |
$ | | $ | 0.1 | $ | | $ | 1.8 | ||||||||
Property and equipment, net |
| | | 4.9 | ||||||||||||
Goodwill and other intangible assets |
| 0.3 | | 6.8 | ||||||||||||
Other assets, net |
| | | 2.1 | ||||||||||||
Assumed liabilities |
| | | (2.4 | ) | |||||||||||
Total purchase price |
$ | | $ | 0.4 | $ | | $ | 13.2 | ||||||||
Closures and Dispositions
Gains and losses on closures and dispositions represent sales of Company properties and other
costs related to restaurant closures and sales of Company restaurants to franchisees, referred to
as refranchisings, and are recorded in other operating (income) expenses, net in the accompanying
condensed consolidated statements of operations (See Note 14). Gains and losses recognized in the
current period may reflect closures and refranchisings that occurred in previous periods.
Closures and dispositions are summarized as follows:
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions, except restaurant count) | ||||||||||||||||
Number of restaurant closures |
5 | 11 | 12 | 16 | ||||||||||||
Number of refranchisings |
8 | 79 | 11 | 79 | ||||||||||||
Net (gains) losses on
disposal of assets,
restaurant
closures and refranchisings |
$ | 1.3 | $ | 0.1 | $ | 1.8 | $ | (3.1 | ) |
Note 5. Prepaids and Other Current Assets, net
Included in prepaids and other current assets, net, were prepaid expenses of $50.3 million and
$38.7 million, inventories totaling $13.8 million and $15.6 million, foreign currency forward
contracts of $0.4 million and $7.9 million, and refundable income taxes of $93.8 million and $85.9
million as of June 30, 2011 and December 31, 2010, respectively.
10
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Note 6. Intangible Assets, net and Goodwill
As a result of the Merger on the Merger Date, and the related application of acquisition
accounting, the Company completed a preliminary valuation of the Brand and other identifiable
intangible assets as of that date. The Brand, the Companys only intangible asset with an
indefinite life, had a carrying value of $2.3 billion and $2.2 billion as of June 30, 2011 and
December 31, 2010, respectively. As of June 30, 2011 and December 31, 2010, goodwill had a carrying
value of $634.4 million. The goodwill is attributable to preliminary acquisition accounting and
will be allocated to reporting units upon completion of the fair value studies in 2011. The change
in the carrying value of the Brand, the franchise agreements and favorable leases between December
31, 2010 and June 30, 2011 is attributable to foreign currency translation.
The tables below present intangible assets subject to amortization:
As of | ||||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Franchise agreements |
$ | 501.4 | $ | 486.8 | ||||
Accumulated amortization |
(15.1 | ) | (4.0 | ) | ||||
Total, net |
$ | 486.3 | $ | 482.8 | ||||
As of | ||||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Favorable leases |
$ | 162.2 | $ | 159.9 | ||||
Accumulated amortization |
(12.5 | ) | (3.8 | ) | ||||
Total, net |
$ | 149.7 | $ | 156.1 | ||||
The Company recorded amortization expense on intangible assets of $9.8 million and $19.5
million during the three and six months ended June 30, 2011, respectively. The Predecessor recorded
amortization expense on intangible assets of $2.3 million and $4.4 million during the three and six
months ended June 30, 2010, respectively.
11
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Note 7. Comprehensive Income
The components of total comprehensive income are as follows:
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Net income |
$ | 42.8 | $ | 49.0 | $ | 40.0 | $ | 90.0 | ||||||||
Translation adjustment |
46.1 | (11.3 | ) | 67.9 | (9.4 | ) | ||||||||||
Net change in fair value of derivatives (1) |
(15.7 | ) | 2.3 | (13.4 | ) | 3.2 | ||||||||||
Amounts reclassified to earnings during the period
from terminated caps/swaps (2) |
| (1.0 | ) | 0.6 | | |||||||||||
Pension and post-retirement benefit plans (3) |
| (19.4 | ) | | (18.9 | ) | ||||||||||
Total other comprehensive income (loss) |
30.4 | (29.4 | ) | 55.1 | (25.1 | ) | ||||||||||
Total comprehensive income |
$ | 73.2 | $ | 19.6 | $ | 95.1 | $ | 64.9 | ||||||||
(1) | Amounts are presented net of tax of $10.6 million and $1.3 million for the three months ended June 30, 2011 and 2010, respectively, and $9.0 million and $1.8 million for the six months ended June 30, 2011 and 2010, respectively. | |
(2) | Amounts are presented net of tax of $0.6 million for the three months ended June 30, 2010 and $0.4 million for the six months ended June 30, 2011. | |
(3) | The tax effect for the three and six month period ended June 30, 2010 was not significant. |
Note 8. Other Accrued Liabilities and Other Liabilities
Included in other accrued liabilities (current), as of June 30, 2011 and December 31, 2010,
were accrued payroll and employee-related benefits costs totaling $47.4 million and $30.6 million,
respectively; accrued severance of $23.8 million and $42.8 million, respectively; interest payable
of $17.0 million and $16.2 million, respectively; liability under the Executive Retirement Plan
(the ERP liability) of $12.5 million and $4.9 million, respectively; foreign currency forward
contracts of $0.8 million and $7.6 million, respectively; gift card liabilities of $13.3 million
and $17.4 million, respectively; and sales tax payable of $19.6 million and $12.6 million,
respectively.
Included in other liabilities (non-current), as of June 30, 2011 and December 31, 2010, were
accrued pension liabilities of $55.5 million and $59.3 million, respectively; liabilities for
unfavorable leases of $208.8 million and $221.5 million, respectively; casualty insurance reserves
of $22.1 million and $22.3 million, respectively; retiree health benefits of $25.9 million and
$25.1 million, respectively; deferred income of $5.0 million and $0.5 million, respectively; ERP
liability of $14.3 million and $22.1 million, respectively; and income tax payable of $11.3 million
and $15.4 million, respectively.
12
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Note 9. Long-Term Debt
Long-term debt is comprised of the following:
Principal | Interest rates (a) | |||||||||||||||||||
As of | ||||||||||||||||||||
June 30, | December 31, | |||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||
Maturity dates | 2011 | 2010 | June 30, 2011 | June 30, 2011 | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Secured Term Loan USD
tranche (b) |
2016 | $ | 1,592.0 | $ | 1,510.0 | 5.2 | % | 5.7 | % | |||||||||||
Secured Term Loan Euro
tranche (b) |
2016 | 288.6 | 334.2 | 5.3 | % | 5.9 | % | |||||||||||||
9 7/8% Senior Notes |
2018 | 800.0 | 800.0 | 10.2 | % | 10.2 | % | |||||||||||||
Deferred Premiums on
interest rate caps USD
(See Note 11) |
2016 | 39.1 | 42.4 | 2.5 | % | 2.5 | % | |||||||||||||
Deferred Premiums on
interest rate caps EUR
(See Note 11) |
2016 | 8.9 | 11.1 | 2.9 | % | 2.9 | % | |||||||||||||
Revolving Credit Facility |
2015 | | | N/A | N/A | |||||||||||||||
Other |
N/A | 3.8 | 1.4 | |||||||||||||||||
Total debt |
2,732.4 | 2,699.1 | ||||||||||||||||||
Less: current
maturities of debt |
(24.7 | ) | (27.0 | ) | ||||||||||||||||
Total long-term debt |
$ | 2,707.7 | $ | 2,672.1 | ||||||||||||||||
(a) | Represents the effective interest rate for the instrument computed on a quarterly basis, including the amortization of deferred debt issuance costs and discount, as applicable, and in the case of the Companys Secured Term Loans, the effect of interest rate caps. | |
(b) | Principal face amount herein is presented gross of a 1% discount of $14.2 million on the USD tranche and revolving credit facility and $1.2 million on the Euro tranche at June 30, 2011 and $16.8 million on the USD tranche and $3.3 million on the Euro tranche at December 31, 2010. |
Amended Credit Agreement
On February 15, 2011, BKC entered into a credit agreement dated as of October 19, 2010, as
amended and restated as of February 15, 2011 (the Amended Credit Agreement), with JPMorgan Chase
Bank, N.A., as administrative agent, Barclays Capital, as syndication agent, and the lenders party
thereto from time to time. Under the Amended Credit Agreement, the aggregate principal amount of
secured term loans denominated in U.S. dollars was increased to $1,600.0 million and the amount of
secured term loans denominated in Euros was reduced to 200.0 million (the Term Loan Facility).
The Amended Credit Agreement also provides for a senior secured revolving credit facility for up to
$150.0 million of revolving extensions of credit outstanding at any time (including revolving
loans, swingline loans and letters of credit), the amount of which was unchanged by the February
15, 2011 amendment (the Revolving Credit Facility, together with the Term Loan Facility, the
Credit Facilities). The maturity date of the Term Loan Facility is October 19, 2016 and the
maturity date of the Revolving Credit Facility is October 19, 2015.
Under the Amended Credit Agreement, at BKCs election, the interest rate per annum applicable
to the loans is based on a fluctuating rate of interest determined by reference to either (i) a
base rate determined by reference to the higher of (a) the prime rate of JPMorgan Chase Bank, N.A.,
(b) the federal funds effective rate plus 0.50% and (c) the Eurocurrency rate applicable for an
interest period of one month plus 1.00%, plus an applicable margin equal to 2.00% for loans under
the U.S. dollar denominated tranche of the Term Loan Facility and 2.25% for loans under the
Revolving Credit Facility, or (ii) a Eurocurrency rate determined by reference to EURIBOR for the
Euro denominated tranche and LIBOR for the U.S. dollar denominated tranche and Revolving Credit
Facility, adjusted for statutory reserve requirements, plus an applicable margin equal to 3.25% for
loans under the Euro denominated tranche of the Term Loan Facility, 3.00% for loans under the U.S.
dollar denominated tranche of the Term Loan Facility and 3.25% for loans under the Revolving Credit
Facility. Term Loan B borrowings under the Amended Credit Agreement are subject to a LIBOR floor of
1.50%.
13
Table of Contents
In connection with the Amended Credit Agreement, the Company recorded a $19.6 million loss on
early extinguishment of debt during the six months ended June 30, 2011.
As of June 30, 2011, the Company had $28.5 million in irrevocable standby letters of credit
outstanding, which were issued under the Revolving Credit Facility primarily to certain insurance
carriers to guarantee payments of deductibles for various insurance programs, such as health and
commercial liability insurance. Such letters of credit are secured by the collateral under the
Credit Facilities. As of June 30, 2011, no amounts had been drawn on any of these irrevocable
standby letters of credit.
The financial covenants, negative covenants, affirmative covenants, maturity dates, prepayment
events and events of default, as described in the Companys Transition Report on Form 10-K for the
six-month period ended December 31, 2010, were unchanged by the February 15, 2011 amendment. As of
June 30, 2011, the Company was in compliance with all covenants of the Amended Credit Agreement.
9 7/8% Senior Notes
We currently have outstanding $800,000,000 aggregate principal amount of 9.875% senior
notes due 2018 (the Senior Notes). The Senior Notes bear interest at a rate of 9.875% per annum,
which is payable semi-annually on October 15 and April 15 of each year, commencing on April 15,
2011. The Senior Notes mature on October 15, 2018.
The Senior Notes are general unsecured senior obligations of BKC that rank pari passu in right
of payment with all existing and future senior indebtedness of BKC. The Senior Notes are
effectively subordinated to all secured indebtedness of BKC (including the Credit Facilities) to
the extent of the value of the assets securing such indebtedness and are structurally subordinated
to all indebtedness and other liabilities, including preferred stock, of non-guarantor
subsidiaries.
The Senior Notes are guaranteed by BKH and all existing direct and indirect subsidiaries that
borrow under or guarantee any indebtedness or indebtedness of another guarantor. Under certain
circumstances, subsidiary guarantors may be released from their guarantees without the consent of
the holders of the Senior Notes.
The Senior Notes Indenture contains certain covenants that the Company must meet during the
term of the Senior Notes, including, but not limited to, limitations on restricted payments (as
defined in the Senior Notes Indenture), incurrence of indebtedness, issuance of disqualified stock
and preferred stock, asset sales, mergers and consolidations, transactions with affiliates,
guarantees of
indebtedness by subsidiaries and activities of BKH. As of June 30, 2011, the Company was in
compliance with all covenants of the Senior Notes Indenture.
Other
The Company has lines of credit with foreign banks, which can also be used to provide
guarantees, in the amount of $3.6 million and $3.3 million as of June 30, 2011 and December 31,
2010, respectively. There were $2.5 million and $1.2 million of guarantees issued against these
lines of credit as of June 30, 2011 and December 31, 2010, respectively.
14
Table of Contents
Interest Expense
Interest expense consists of the following:
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Secured Term Loan USD tranche |
$ | 18.2 | $ | | $ | 39.1 | $ | | ||||||||
Secured Term Loan Euro tranche |
3.4 | | 7.9 | | ||||||||||||
Interest Rate Caps USD and Euro |
0.3 | | 0.6 | | ||||||||||||
9 7/8% Senior Notes |
19.3 | | 39.1 | | ||||||||||||
Amortization on original debt
issuance discount, deferred
financing costs and other |
4.1 | 6.1 | 7.9 | 12.3 | ||||||||||||
Predecessor term loans (a) |
| 3.5 | | 7.0 | ||||||||||||
Capital lease obligations |
2.4 | 2.6 | 4.8 | 5.1 | ||||||||||||
Total |
$ | 47.7 | $ | 12.2 | $ | 99.4 | $ | 24.4 | ||||||||
(a) | The effective interest rates for the three and six month periods ended June 30, 2010 for the Predecessor term loans were each 4.7%. |
15
Table of Contents
Note 10. Fair Value Measurements
Fair Value Measurements
The following table presents financial assets and liabilities measured at fair value on a
recurring basis, which include derivatives designated as cash flow hedging instruments, derivatives
not designated as hedging instruments and other investments, which consist of money market accounts
and mutual funds held in a rabbi trust established by the Company to fund a portion of the
Companys current and future obligations under its Executive Retirement Plan (ERP), as well as
their location on the Companys condensed consolidated balance sheets as of June 30, 2011 and
December 31, 2010:
As of June 30, 2011 | Fair Value Measurements at June 30, 2011 | |||||||||||||||||||||||
Carrying Value and Balance Sheet Location | Assets (Liabilities) | |||||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||||||
Active Markets for | Significant | |||||||||||||||||||||||
Identical | Significant Other | Unobservable | ||||||||||||||||||||||
Prepaid and Other | Other Accrued | Instruments | Observable Inputs | Inputs | ||||||||||||||||||||
Description | Current Assets | Other Assets | Liabilities | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Derivatives designated as cash
flow hedging instruments: |
||||||||||||||||||||||||
Interest rate caps |
$ | 1.7 | $ | 65.7 | $ | | $ | | $ | 67.4 | $ | | ||||||||||||
Total |
$ | 1.7 | $ | 65.7 | $ | | $ | | $ | 67.4 | $ | | ||||||||||||
Derivatives not designated as
hedging instruments: |
||||||||||||||||||||||||
Interest rate swaps |
$ | | $ | | $ | (0.9 | ) | $ | | $ | (0.9 | ) | $ | | ||||||||||
Foreign currency forward
contracts (asset) |
0.4 | | | | 0.4 | | ||||||||||||||||||
Foreign currency forward
contracts (liability) |
| | (0.8 | ) | | (0.8 | ) | | ||||||||||||||||
Total |
$ | 0.4 | $ | | $ | (1.7 | ) | $ | | $ | (1.3 | ) | $ | | ||||||||||
Other investments: |
||||||||||||||||||||||||
Investments held in a rabbi trust |
$ | | $ | 21.6 | $ | | $ | 21.6 | $ | | $ | | ||||||||||||
Total |
$ | | $ | 21.6 | $ | | $ | 21.6 | $ | | $ | | ||||||||||||
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As of December 31, 2010 | Fair Value Measurements at December 31, 2010 | |||||||||||||||||||||||
Carrying Value and Balance Sheet Location | Assets (Liabilities) | |||||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||||||
Active Markets for | Significant | |||||||||||||||||||||||
Identical | Significant Other | Unobservable | ||||||||||||||||||||||
Prepaid and Other | Other Accrued | Instruments | Observable Inputs | Inputs | ||||||||||||||||||||
Description | Current Assets | Other Assets | Liabilities | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Derivatives designated as cash
flow hedging instruments: |
||||||||||||||||||||||||
Interest rate caps |
$ | 11.1 | $ | 80.0 | $ | | $ | | $ | 91.1 | $ | | ||||||||||||
Foreign currency forward
contracts (asset) |
0.1 | | | | 0.1 | | ||||||||||||||||||
Total |
$ | 11.2 | $ | 80.0 | $ | | $ | | $ | 91.2 | $ | | ||||||||||||
Derivatives not designated as
hedging instruments: |
||||||||||||||||||||||||
Interest rate swaps |
$ | | $ | | $ | (2.6 | ) | $ | | $ | (2.6 | ) | $ | | ||||||||||
Foreign currency forward
contracts (asset) |
7.8 | | | | 7.8 | | ||||||||||||||||||
Foreign currency forward
contracts (liability) |
| | (7.6 | ) | | (7.6 | ) | | ||||||||||||||||
Total |
$ | 7.8 | $ | | $ | (10.2 | ) | $ | | $ | (2.4 | ) | $ | | ||||||||||
The Companys derivatives are valued using a discounted cash flow analysis that incorporates
observable market parameters, such as interest rate yield curves and currency rates, classified as
Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments
that are necessary to reflect the probability of default by the counterparty or the Company.
At June 30, 2011, the fair value of the Companys variable rate term debt and the Senior Notes
were estimated at $2,717.9 million, compared to a carrying amount of $2,665.2 million, net of
original issue discount. At December 31, 2010, the fair value of the Companys variable rate term
debt and the Senior Notes were estimated at $2,731.0 million, compared to a carrying amount of
$2,624.1 million, net of original issue discount. Fair value of variable rate term debt was
estimated using inputs based on bid and offer prices and are Level 2 inputs within the fair value
hierarchy. Fair value of the Senior Notes was estimated using quoted market prices and are Level 1
inputs within the fair value hierarchy.
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring
basis. These assets and liabilities are not measured at fair value on an ongoing basis but are
subject to periodic impairment tests. For the Company, these items primarily include long-lived
assets, the Brand and other intangible assets.
17
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Note 11. Derivative Instruments
Disclosures about Derivative Instruments and Hedging Activities
The Company enters into derivative instruments for risk management purposes, including
derivatives designated as hedging instruments and those utilized as economic hedges. The Company
uses derivatives to manage exposure to fluctuations in interest rates and currency exchange rates.
Interest Rate Caps
Following the Transactions, the Company entered into two deferred premium interest rate
caps, one of which was denominated in U.S. dollars (notional amount of $1.5 billion) and the other
denominated in Euros (notional amount of 250 million) (the Cap Agreements). The six year Cap
Agreements are a series of 25 individual caplets that reset and settle on the same dates as the
Term Loan Facility. The deferred premium associated with the Cap Agreements was $47.7 million for
the U.S. dollar denominated exposure and 9.4 million for the Euro denominated exposure. In
connection with the Amended Credit Agreement, the Company modified its interest rate cap
denominated in Euros to reduce its notional amount by 50 million throughout the life of the
caplets. Additionally, the Company entered into a new interest rate cap agreement denominated in
U.S. dollars (notional amount of $90 million) with a strike price of 1.50% (the New Cap
Agreement). The terms of the New Cap Agreement are substantially similar to those described above
and the Cap Agreements were not otherwise revised by these modifications.
Under the terms of the Cap Agreements, if LIBOR/EURIBOR resets above a strike price of 1.75%
(1.50% for the New Cap Agreement), the Company will receive the net difference between the rate and
the strike price. In addition, on the quarterly settlement dates, the Company will remit the
deferred premium payment (plus interest) to the counterparty. If LIBOR/EURIBOR resets below the
strike price no payment is made by the counterparty. However, the Company would still be
responsible for the deferred premium and interest.
The interest rate cap contracts are designated as cash flow hedges and to the extent they are
effective in offsetting the variability of the variable rate interest payments, changes in the
derivatives fair values are not included in current earnings but are included in accumulated other
comprehensive income (AOCI) in the accompanying consolidated balance sheets. At each cap maturity
date, the portion of fair value attributable to the matured cap will be reclassified from AOCI into
earnings as a component of interest expense.
Interest Rate Swaps
The Predecessor entered into receive-variable, pay-fixed interest rate swap contracts to hedge
a portion of the Predecessors forecasted variable-rate interest payments on its underlying Term
Loan A and Term Loan B-1 debt (the Predecessors Term Debt). Interest payments on the
Predecessors Term Debt were made quarterly and the variable rate on the Predecessors Term Debt
was reset at the end of each fiscal quarter. The interest rate swap contracts were designated as
cash flow hedges and to the extent they were effective in offsetting the variability of the
variable-rate interest payments, changes in the derivatives fair value were not included in
current earnings but in accumulated other comprehensive income (AOCI). These changes in fair value were subsequently reclassified into
earnings as a component of interest expense each quarter as interest payments were made on the
Predecessors Term Debt.
In connection with the Transactions, interest rate swaps with a notional value of $500 million
were terminated. The remaining interest rate swaps that were not terminated by the counterparties
have a notional value of $75 million and remain classified as a liability on the Companys
consolidated balance sheet as of June 30, 2011. Future fluctuations in the fair value of remaining
interest rate swaps will be included in the determination of net income (loss) until the final
contracts expire in September 2011.
18
Table of Contents
Foreign Currency Forward Contracts
The Company enters into foreign currency forward contracts, which typically have maturities
between one and fifteen months, to economically hedge the remeasurement of certain foreign
currency-denominated intercompany loans receivable and other foreign-currency denominated assets
recorded in the Companys condensed consolidated balance sheets. Remeasurement represents changes
in the expected amount of cash flows to be received or paid upon settlement of the intercompany
loan receivables and other foreign-currency denominated assets and liabilities resulting from a
change in currency exchange rates. The Company may enter into foreign currency forward contracts
from time to time in order to manage the foreign exchange variability in forecasted royalty cash
flows due to fluctuations in exchange rates. Foreign currency forward contracts with a net notional
amount of $1.7 million and $2.1 million were outstanding at June 30, 2011 and December 31, 2010,
respectively.
Credit Risk
By entering into derivative instrument contracts, the Company exposes itself, from time to
time, to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. When the fair value of a derivative contract is
in an asset position, the counterparty has a liability to the Company, which creates credit risk
for the Company. The Company attempts to minimize this risk by selecting counterparties with
investment grade credit ratings and regularly monitoring its market position with each
counterparty.
Credit-Risk Related Contingent Features
The Companys derivative instruments do not contain any credit-risk related contingent
features.
The following table presents the required quantitative disclosures for the Companys
derivative instruments (in millions):
Successor | Predecessor | |||||||||||||||||||||||||||
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||||||
June 30, 2011 | June 30, 2010 | |||||||||||||||||||||||||||
Foreign Currency | Foreign Currency | |||||||||||||||||||||||||||
Interest Rate Caps | Interest Rate Swaps | Forward Contracts | Total | Interest Rate Swaps | Forward Contracts | Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Derivatives designated as cash flow hedging instruments: |
||||||||||||||||||||||||||||
Gain (loss) recognized in other comprehensive income (effective
portion) |
$ | (26.4 | ) | $ | | $ | | $ | (26.4 | ) | $ | (3.8 | ) | $ | (0.6 | ) | $ | (4.4 | ) | |||||||||
Gain (loss) reclassified from AOCI into interest expense, net (1) |
$ | 1.0 | $ | | $ | (0.1 | ) | $ | 0.9 | $ | (5.3 | ) | $ | | $ | (5.3 | ) | |||||||||||
Gain (loss) reclassified from AOCI into royalty income |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
Gain (loss) recognized in interest expense, net (ineffective
portion) (2) |
$ | | $ | | $ | | $ | | $ | (0.2 | ) | $ | | $ | (0.2 | ) | ||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||||||||
Gain (loss) recognized in other operating expense, net |
$ | | $ | | $ | (0.5 | ) | $ | (0.5 | ) | $ | | $ | 29.9 | $ | 29.9 | ||||||||||||
Gain (loss) recognized in interest expense, net |
$ | | $ | 1.1 | $ | | $ | 1.1 | $ | | $ | | $ | |
19
Table of Contents
For the Six Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||
June 30, 2011 | June 30, 2010 | |||||||||||||||||||||||||||
Foreign Currency | Foreign Currency | |||||||||||||||||||||||||||
Interest Rate Caps |
Interest Rate Swaps |
Forward Contracts |
Total | Interest Rate Swaps |
Forward Contracts |
Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Derivatives designated as cash flow hedging instruments: |
||||||||||||||||||||||||||||
Gain (loss) recognized in other comprehensive income (effective
portion) |
$ | (22.2 | ) | $ | | $ | (0.1 | ) | $ | (22.3 | ) | $ | (7.9 | ) | $ | (0.4 | ) | $ | (8.3 | ) | ||||||||
Gain (loss) reclassified from AOCI into interest expense, net (1) |
$ | 1.0 | $ | | $ | | $ | 1.0 | $ | (10.6 | ) | $ | | $ | (10.6 | ) | ||||||||||||
Gain (loss) reclassified from AOCI into royalty income |
$ | | $ | | $ | | $ | | $ | | $ | (0.3 | ) | $ | (0.3 | ) | ||||||||||||
Gain (loss) recognized in interest expense, net (ineffective
portion) (2) |
$ | | $ | | $ | | $ | | $ | (0.2 | ) | $ | | $ | (0.2 | ) | ||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||||||||
Gain (loss) recognized in other operating expense, net |
$ | | $ | | $ | (0.3 | ) | $ | (0.3 | ) | $ | | $ | 51.6 | $ | 51.6 | ||||||||||||
Gain (loss) recognized in interest expense, net |
$ | | $ | (0.1 | ) | $ | | $ | (0.1 | ) | $ | | $ | | $ | |
(1) | Includes zero in gains for the three and six months ended June 30, 2011 and $0.5 million and $0.9 million in gains for the three and six months ended June 30, 2010, respectively, related to the terminated hedges. | |
(2) | No ineffectiveness has been recorded in earnings related to the interest rate swap agreements during the three and six months ended June 30, 2011. The amount of ineffectiveness recorded in earnings related to interest rate swap agreements during the three and six months ended June 30, 2010 was not significant. |
The net amount of pre-tax gains and losses in accumulated comprehensive income (loss) as
of June 30, 2011 that the Company expects to be reclassified into earnings within the next 12
months is $1.7 million of losses.
Note 12. Income Taxes
The U.S. Federal tax statutory rate reconciles to the effective tax rate as follows:
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
U.S. federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||
State income taxes, net of federal income tax benefit |
1.1 | 4.2 | 1.4 | 4.2 | ||||||||||||
Costs/(Benefits) and taxes related to foreign
operations |
11.2 | 2.4 | 10.2 | 2.2 | ||||||||||||
Foreign tax differential |
(15.2 | ) | (7.7 | ) | (14.3 | ) | (4.0 | ) | ||||||||
Foreign exchange differential on tax benefits |
(0.4 | ) | 0.2 | (0.6 | ) | 0.9 | ||||||||||
Change in valuation allowance |
(3.4 | ) | (2.4 | ) | (0.5 | ) | (3.4 | ) | ||||||||
Change in accrual for tax uncertainties |
(0.1 | ) | (1.2 | ) | (1.6 | ) | (1.0 | ) | ||||||||
Foreign tax deductions |
(2.7 | ) | | (2.7 | ) | | ||||||||||
Other |
(1.3 | ) | 0.3 | (0.4 | ) | 0.8 | ||||||||||
Effective income tax rate |
24.2 | % | 30.8 | % | 26.5 | % | 34.7 | % | ||||||||
Income tax expense was $13.7 million and $14.4 million for the three and six months ended June
30, 2011, respectively, resulting in an effective tax rate of 24.2% and 26.5%, respectively,
primarily as a result of the current mix of income from multiple tax jurisdictions, and the
resolution of state tax audits. Income tax expense was $21.8 million and $47.8 million for the
three and six months ended June 30, 2010, respectively, resulting in an effective tax rate of 30.8%
and 34.7%, respectively, primarily as a result of the mix of income from multiple tax jurisdictions
and currency fluctuations.
20
Table of Contents
The Company had $10.4 million and $12.2 million of unrecognized tax benefits at June 30, 2011
and December 31, 2010, respectively, which if recognized, would affect the effective income tax
rate.
In the next twelve months, it is reasonably possible that the Companys unrecognized tax benefits
will not significantly change.
The Company recognizes potential accrued interest and penalties related to unrecognized tax
benefits in income tax expense. The total amount of accrued interest and penalties at June 30, 2011
and December 31, 2010 was $2.6 million and $3.2 million, respectively. Potential interest and
penalties associated with uncertain tax positions recognized during the three months ended June 30,
2011 and 2010 were $0.2 million and $0.8 million. Potential interest and penalties associated with
uncertain tax positions recognized during the six months ended June 30, 2011 and 2010 were $0.4
million and $0.6 million, respectively. To the extent interest and penalties are not assessed with
respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of
the overall income tax provision.
The Company files income tax returns, including returns for its subsidiaries, with federal,
state, local and foreign jurisdictions. Generally, the Company is subject to routine examination by
taxing authorities in these jurisdictions, including significant international tax jurisdictions,
such as the United Kingdom, Germany, Spain, Switzerland, Singapore and Mexico. None of the foreign
jurisdictions should be individually material. The Company also has various state and foreign
income tax returns in the process of examination. From time to time, these audits result in
proposed assessments where the ultimate resolution may result in the Company owing additional
taxes. The Company believes that its tax positions comply with applicable tax law and that it has
adequately provided for these matters.
Note 13. Retirement Plan and Other Postretirement Benefits
The Companys liability under its ERP was $26.8 million and $27.0 million at June 30, 2011 and
December 31, 2010, respectively.
A summary of the components of net periodic benefit cost for the Companys defined benefit
pension plans and other post-retirement benefits is presented below:
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Retirement Benefits | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Service cost-benefits earned during the period |
$ | 0.7 | $ | (0.1 | ) | $ | 1.1 | $ | 0.8 | |||||||
Interest costs on projected benefit obligations |
3.4 | 2.4 | 6.1 | 5.4 | ||||||||||||
Expected return on plan assets |
(2.7 | ) | (2.1 | ) | (5.3 | ) | (4.7 | ) | ||||||||
Recognized net actuarial loss |
(0.1 | ) | (0.1 | ) | (0.1 | ) | (0.2 | ) | ||||||||
Net periodic benefit cost |
$ | 1.3 | $ | 0.1 | $ | 1.8 | $ | 1.3 | ||||||||
Other benefits costs were $0.4 million and $0.3 million for the three months ended June 30,
2011 and June 30, 2010, respectively, and $0.9 million and $0.7 million for the six-months ended
June 30, 2011 and 2010, respectively.
21
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Note 14. Other Operating (Income) Expense, Net
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Net (gains) losses on disposal of
assets, restaurant closures and
refranchisings |
$ | 1.3 | $ | 0.1 | $ | 1.8 | $ | (3.1 | ) | |||||||
Litigation settlements and reserves, net |
0.2 | (0.2 | ) | 0.6 | (0.8 | ) | ||||||||||
Foreign exchange net (gains) losses |
(1.7 | ) | (2.6 | ) | 1.4 | (4.5 | ) | |||||||||
Other, net |
0.5 | 1.4 | 1.5 | 2.6 | ||||||||||||
Other operating (income) expense, net |
$ | 0.3 | $ | (1.3 | ) | $ | 5.3 | $ | (5.8 | ) | ||||||
Note 15. Commitments and Contingencies
In some of the matters described below, loss contingencies are not both probable and estimable
in the view of management and, accordingly, reserves have not been established for those matters.
However, information is provided below or included in Note 21, Commitments and Contingencies to
the Consolidated Financial Statements of the Companys Transition Report on Form10-K for the
six-month period ended December 31, 2010 regarding the nature of the contingency and, where
specified, the amount of the claim associated with the loss contingency.
Litigation
On July 30, 2008, BKC was sued by four Florida franchisees over its decision to mandate
extended operating hours in the United States. The plaintiffs seek damages, declaratory relief and
injunctive relief. The court dismissed the plaintiffs original complaint in November 2008. In
December 2008, the plaintiffs filed an amended complaint. In August 2010, the court entered an
order reaffirming the legal bases for dismissal of the original complaint, again holding that BKC
had the authority under its franchise agreements to mandate extended operating hours. The court
held a hearing on December 7, 2010 and stated that, in light of the ruling that the hours clause
was unambiguous, it would grant BKCs motion to dismiss, with prejudice, on seven of the eight
claims in the amended complaint. The court denied the motion to dismiss on one claim in the amended
complaint, that the hours clause was unconscionable under Florida law. BKC has filed a motion for
summary judgment on the remaining claim and is waiting for the courts decision on the motion.
On September 10, 2008, a class action lawsuit was filed against the Company in the United
States District Court for the Northern District of California. The complaint alleged that all 96
Burger King restaurants in California leased by the Company and operated by franchisees violate
accessibility requirements under federal and state law. In September 2009, the court issued a
decision on the plaintiffs motion for class certification. In its decision, the court limited the
class action to the 10 restaurants visited by the named plaintiffs, with a separate class of
plaintiffs for each of the 10 restaurants and 10 separate trials. In March 2010, the Company agreed
to settle the lawsuit with respect to the 10 restaurants and, in July 2010, the court gave final
approval to the settlement. In February 2011, a class action lawsuit was filed with respect to the
other 86 restaurants. The plaintiffs seek injunctive relief, statutory damages, attorneys fees and
costs. The Company intends to vigorously defend against all claims in the lawsuit, but the Company
is unable to predict the ultimate outcome of this litigation.
From time to time, the Company is involved in other legal proceedings arising in the ordinary
course of business relating to matters including, but not limited to, disputes with franchisees,
suppliers, employees and customers, as well as disputes over our intellectual property.
22
Table of Contents
Note 16. Segment Reporting
The Company operates in the fast food hamburger restaurant category of the quick service
restaurant segment of the restaurant industry. Revenues include retail sales at Company
restaurants, franchise revenues (consisting of royalties based on a percentage of sales reported by
franchise restaurants and franchise fees paid by franchisees), and property revenues. The business
is managed in three distinct geographic segments: (1) United States (U.S.) and Canada; (2)
Europe, the Middle East and Africa and Asia Pacific (EMEA/APAC); and (3) Latin America.
The following tables present revenues and income from operations by geographic segment:
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Revenues: |
||||||||||||||||
U.S. and Canada |
$ | 405.3 | $ | 426.9 | $ | 781.9 | $ | 834.0 | ||||||||
EMEA/APAC |
158.8 | 167.2 | 306.1 | 331.0 | ||||||||||||
Latin America |
32.1 | 28.9 | 61.3 | 54.9 | ||||||||||||
Total revenues |
$ | 596.2 | $ | 623.0 | $ | 1,149.3 | $ | 1,219.9 | ||||||||
Other than the U.S., no other individual country represented 10% or more of the Companys
total revenues during the three and six months ended June 30, 2011. The U.S. also represented 10%
or more of the Companys total revenues during the three and six months ended June 30, 2010 and
Germany represented 10% or more of the Companys total revenues during the six months ended June
30, 2010. Revenues in the U.S. totaled $362.5 million and $701.8 million for the three and six
months ended June 30, 2011, respectively, and $387.8 million and $834.0 million for the three and
six months ended June 30, 2010, respectively. Revenues in Germany totaled $55.9 million and $108.4
million for the three and six months ended June 30, 2011, respectively, and $60.4 million and
$126.5 million for the three and six months ended June 30, 2010, respectively.
The unallocated amounts reflected in the table below include corporate support costs in areas
such as facilities, finance, human resources, information technology, legal, marketing and supply
chain management, which benefit all of the Companys geographic segments and system wide
restaurants and are not allocated specifically to any of the geographic segments.
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Income from
Operations: |
||||||||||||||||
U.S. and Canada |
$ | 89.9 | $ | 79.6 | $ | 162.7 | $ | 165.4 | ||||||||
EMEA/APAC |
35.0 | 25.2 | 56.6 | 41.8 | ||||||||||||
Latin America |
12.5 | 10.9 | 25.9 | 19.4 | ||||||||||||
Unallocated |
(33.6 | ) | (32.9 | ) | (73.4 | ) | (64.9 | ) | ||||||||
Total income
from operations |
103.8 | 82.8 | 171.8 | 161.7 | ||||||||||||
Interest
expense, net |
47.3 | 12.0 | 97.8 | 23.9 | ||||||||||||
Loss on early
extinguishment
of debt |
| | 19.6 | | ||||||||||||
Income before
income taxes |
56.5 | 70.8 | 54.4 | 137.8 | ||||||||||||
Income tax
expense |
13.7 | 21.8 | 14.4 | 47.8 | ||||||||||||
Net income |
$ | 42.8 | $ | 49.0 | $ | 40.0 | $ | 90.0 | ||||||||
23
Table of Contents
Note 17. Supplemental Financial Information
On October 19, 2010, BKC issued the Senior Notes. The Senior Notes are irrevocably and
unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by the Company and
the domestic subsidiaries of BKC (the Guarantors).
The following is the condensed consolidating financial information for the Issuer, the
Guarantors and the non-U.S. subsidiaries of BKC (the Non-Guarantors), together with eliminations,
as of and for the periods indicated. The consolidating financial information may not necessarily be
indicative of the financial position, results of operations or cash flows had BKC, Guarantors and
Non-Guarantors operated as independent entities.
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
As of June 30, 2011
(In millions)
(Unaudited)
Condensed Consolidating Balance Sheets
As of June 30, 2011
(In millions)
(Unaudited)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 159.2 | $ | | $ | 123.0 | | $ | 282.2 | |||||||||||
Trade and notes receivable, net |
87.5 | | 57.0 | | 144.5 | |||||||||||||||
Prepaids and other current assets, net |
129.9 | | 28.4 | | 158.3 | |||||||||||||||
Deferred income taxes, net |
26.6 | | 1.0 | | 27.6 | |||||||||||||||
Total current assets |
403.2 | | 209.4 | | 612.6 | |||||||||||||||
Property and equipment, net of accumulated depreciation |
906.8 | | 211.1 | | 1,117.9 | |||||||||||||||
Intangible assets, net |
1,572.0 | | 1,366.9 | | 2,938.9 | |||||||||||||||
Goodwill |
634.4 | | | | 634.4 | |||||||||||||||
Net investment in property leased to franchisees |
234.3 | | 20.8 | | 255.1 | |||||||||||||||
Intercompany receivable |
388.1 | | | (388.1 | ) | | ||||||||||||||
Investment in subsidiaries |
1,150.4 | 1,553.9 | | (2,704.3 | ) | | ||||||||||||||
Other assets, net |
163.2 | 0.3 | 43.1 | 0.5 | 207.1 | |||||||||||||||
Total assets |
$ | 5,452.4 | $ | 1,554.2 | $ | 1,851.3 | $ | (3,091.9 | ) | $ | 5,766.0 | |||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts and drafts payable |
$ | 33.9 | $ | | $ | 25.1 | | $ | 59.0 | |||||||||||
Accrued advertising |
57.0 | | 28.3 | | 85.3 | |||||||||||||||
Other accrued liabilities |
158.9 | 0.1 | 72.9 | | 231.9 | |||||||||||||||
Current portion of long term debt and capital leases |
28.7 | | 1.9 | | 30.6 | |||||||||||||||
Total current liabilities |
278.5 | 0.1 | 128.2 | | 406.8 | |||||||||||||||
Term debt, net of current portion |
2,692.3 | | | | 2,692.3 | |||||||||||||||
Capital leases, net of current portion |
70.0 | | 27.2 | | 97.2 | |||||||||||||||
Other liabilities, net |
279.9 | | 75.4 | | 355.3 | |||||||||||||||
Payables to affiliates |
| 7.4 | 383.4 | (390.8 | ) | | ||||||||||||||
Deferred income taxes, net |
575.3 | | 85.5 | | 660.8 | |||||||||||||||
Total liabilities |
3,896.0 | 7.5 | 699.7 | (390.8 | ) | 4,212.4 | ||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Additional paid-in capital |
1,562.5 | 1,563.5 | 1,093.9 | (2,656.4 | ) | 1,563.5 | ||||||||||||||
(Accumulated deficit) / retained earnings |
(58.4 | ) | (65.9 | ) | 22.5 | 39.6 | (62.2 | ) | ||||||||||||
Accumulated other comprehensive income |
52.3 | 49.1 | 35.2 | (84.3 | ) | 52.3 | ||||||||||||||
Total stockholders equity |
1,556.4 | 1,546.7 | 1,151.6 | (2,701.1 | ) | 1,553.6 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 5,452.4 | $ | 1,554.2 | $ | 1,851.3 | $ | (3,091.9 | ) | $ | 5,766.0 | |||||||||
24
Table of Contents
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
As of December 31, 2010
(In millions)
Condensed Consolidating Balance Sheets
As of December 31, 2010
(In millions)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 132.9 | $ | 0.7 | $ | 73.4 | | $ | 207.0 | |||||||||||
Trade and notes receivable, net |
94.5 | | 53.5 | | 148.0 | |||||||||||||||
Prepaids and other current assets, net |
131.4 | | 27.8 | | 159.2 | |||||||||||||||
Deferred income taxes, net |
22.3 | | 0.9 | | 23.2 | |||||||||||||||
Total current assets |
381.1 | 0.7 | 155.6 | | 537.4 | |||||||||||||||
Property and equipment, net of accumulated depreciation |
939.5 | | 221.9 | | 1,161.4 | |||||||||||||||
Intangible assets, net |
1,584.1 | | 1,293.5 | | 2,877.6 | |||||||||||||||
Goodwill |
634.4 | | | | 634.4 | |||||||||||||||
Net investment in property leased to franchisees |
238.2 | | 20.1 | | 258.3 | |||||||||||||||
Intercompany receivable |
369.9 | | | (369.9 | ) | | ||||||||||||||
Investment in subsidiaries |
1,033.3 | 1,458.3 | 1,013.5 | (3,505.1 | ) | | ||||||||||||||
Other assets, net |
194.2 | | 32.0 | (0.2 | ) | 226.0 | ||||||||||||||
Total assets |
$ | 5,374.7 | $ | 1,459.0 | $ | 2,736.6 | $ | (3,875.2 | ) | $ | 5,695.1 | |||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts and drafts payable |
$ | 58.5 | $ | | $ | 31.7 | | $ | 90.2 | |||||||||||
Accrued advertising |
62.6 | | 19.9 | | 82.5 | |||||||||||||||
Other accrued liabilities |
164.6 | 0.3 | 82.9 | | 247.8 | |||||||||||||||
Current portion of long term debt and capital leases |
31.0 | | 1.9 | | 32.9 | |||||||||||||||
Total current liabilities |
316.7 | 0.3 | 136.4 | | 453.4 | |||||||||||||||
Term debt, net of current portion |
2,652.0 | | | | 2,652.0 | |||||||||||||||
Capital leases, net of current portion |
72.0 | | 27.3 | | 99.3 | |||||||||||||||
Other liabilities, net |
304.6 | (0.2 | ) | 75.3 | | 379.7 | ||||||||||||||
Payables to affiliates |
| 0.7 | 369.2 | (369.9 | ) | | ||||||||||||||
Deferred income taxes, net |
570.6 | | 81.6 | | 652.2 | |||||||||||||||
Total liabilities |
3,915.9 | 0.8 | 689.8 | (369.9 | ) | 4,236.6 | ||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Additional paid-in capital |
1,562.5 | 1,563.5 | 2,099.0 | (3,661.5 | ) | 1,563.5 | ||||||||||||||
(Accumulated deficit) retained earnings |
(100.9 | ) | (102.4 | ) | (22.0 | ) | 123.1 | (102.2 | ) | |||||||||||
Accumulated other comprehensive loss |
(2.8 | ) | (2.9 | ) | (30.2 | ) | 33.1 | (2.8 | ) | |||||||||||
Total stockholders equity |
1,458.8 | 1,458.2 | 2,046.8 | (3,505.3 | ) | 1,458.5 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 5,374.7 | $ | 1,459.0 | $ | 2,736.6 | $ | (3,875.2 | ) | $ | 5,695.1 | |||||||||
25
Table of Contents
Successor
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
Three Months Ended June 30, 2011
(In millions)
(Unaudited)
Condensed Consolidating Statements of Operations
Three Months Ended June 30, 2011
(In millions)
(Unaudited)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Company restaurant revenues |
$ | 263.7 | $ | | $ | 155.3 | $ | | $ | 419.0 | ||||||||||
Franchise revenues |
91.6 | | 57.2 | | 148.8 | |||||||||||||||
Intercompany revenues |
1.8 | | | (1.8 | ) | | ||||||||||||||
Property revenues |
22.4 | | 6.0 | | 28.4 | |||||||||||||||
Total revenues |
379.5 | | 218.5 | (1.8 | ) | 596.2 | ||||||||||||||
Company restaurant expenses: |
||||||||||||||||||||
Food, paper and product costs |
86.4 | | 49.0 | | 135.4 | |||||||||||||||
Payroll and employee benefits |
78.5 | | 43.7 | | 122.2 | |||||||||||||||
Occupancy and other operating costs |
66.3 | | 44.5 | | 110.8 | |||||||||||||||
Total company restaurant expenses |
231.2 | | 137.2 | | 368.4 | |||||||||||||||
Selling, general and administrative expenses |
69.8 | | 36.2 | | 106.0 | |||||||||||||||
Intercompany expenses |
| | 1.8 | (1.8 | ) | | ||||||||||||||
Property expenses |
11.7 | | 6.0 | | 17.7 | |||||||||||||||
Other operating (income) expense, net |
0.1 | 0.2 | 0.4 | (0.4 | ) | 0.3 | ||||||||||||||
Total operating costs and expenses |
312.8 | 0.2 | 181.6 | (2.2 | ) | 492.4 | ||||||||||||||
Income (loss) from operations |
66.7 | (0.2 | ) | 36.9 | 0.4 | 103.8 | ||||||||||||||
Interest expense |
46.9 | | 0.8 | | 47.7 | |||||||||||||||
Intercompany interest (income) expense |
(2.5 | ) | | 2.5 | | | ||||||||||||||
Interest income |
(0.4 | ) | | | | (0.4 | ) | |||||||||||||
Total interest expense, net |
44.0 | | 3.3 | | 47.3 | |||||||||||||||
Income (loss) before income taxes |
22.7 | (0.2 | ) | 33.6 | 0.4 | 56.5 | ||||||||||||||
Income tax expense |
4.7 | | 9.0 | | 13.7 | |||||||||||||||
Income (loss) from continuing operations |
18.0 | (0.2 | ) | 24.6 | 0.4 | 42.8 | ||||||||||||||
Equity in earnings of subsidiaries |
32.5 | 39.5 | | (72.0 | ) | | ||||||||||||||
Net income |
$ | 50.5 | $ | 39.3 | $ | 24.6 | $ | (71.6 | ) | $ | 42.8 | |||||||||
26
Table of Contents
Successor
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
Six Months Ended June 30, 2011
(In millions)
(Unaudited)
Condensed Consolidating Statements of Operations
Six Months Ended June 30, 2011
(In millions)
(Unaudited)
Non- | |||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||
Revenues: |
|||||||||||||||||||||
Company restaurant revenues |
$ | 512.8 | $ | | $ | 298.8 | $ | | $ | 811.6 | |||||||||||
Franchise revenues |
174.5 | | 106.5 | | 281.0 | ||||||||||||||||
Intercompany revenues |
3.4 | | | (3.4 | ) | | |||||||||||||||
Property revenues |
44.1 | | 12.6 | | 56.7 | ||||||||||||||||
Total revenues |
734.8 | | 417.9 | (3.4 | ) | 1,149.3 | |||||||||||||||
Company restaurant expenses: |
|||||||||||||||||||||
Food, paper and product costs |
168.0 | | 94.4 | | 262.4 | ||||||||||||||||
Payroll and employee benefits |
156.1 | | 86.1 | | 242.2 | ||||||||||||||||
Occupancy and other operating costs |
131.3 | | 88.2 | | 219.5 | ||||||||||||||||
Total company restaurant expenses |
455.4 | | 268.7 | | 724.1 | ||||||||||||||||
Selling, general and administrative expenses |
139.0 | | 73.2 | | 212.2 | ||||||||||||||||
Intercompany expenses |
| | 3.4 | (3.4 | ) | | |||||||||||||||
Property expenses |
23.3 | | 12.6 | | 35.9 | ||||||||||||||||
Other operating (income) expense, net |
1.1 | 0.2 | 4.0 | | 5.3 | ||||||||||||||||
Total operating costs and expenses |
618.8 | 0.2 | 361.9 | (3.4 | ) | 977.5 | |||||||||||||||
Income (loss) from operations |
116.0 | (0.2 | ) | 56.0 | | 171.8 | |||||||||||||||
Interest expense |
98.0 | | 1.4 | | 99.4 | ||||||||||||||||
Intercompany interest (income) expense |
(4.5 | ) | | 4.5 | | | |||||||||||||||
Interest income |
(1.1 | ) | | (0.5 | ) | | (1.6 | ) | |||||||||||||
Total interest expense, net |
92.4 | | 5.4 | | 97.8 | ||||||||||||||||
Loss on early extinguishment |
19.6 | | | | 19.6 | ||||||||||||||||
Income (loss) before income taxes |
4.0 | (0.2 | ) | 50.6 | | 54.4 | |||||||||||||||
Income tax expense (benefit) |
(1.8 | ) | | 16.2 | | 14.4 | |||||||||||||||
Income (loss) from continuing operations |
5.8 | (0.2 | ) | 34.4 | | 40.0 | |||||||||||||||
Equity in earnings of subsidiaries |
34.4 | 40.2 | | (74.6 | ) | | |||||||||||||||
Net income |
$ | 40.2 | $ | 40.0 | $ | 34.4 | $ | (74.6 | ) | $ | 40.0 | ||||||||||
27
Table of Contents
Predecessor
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
Three Months Ended June 30, 2010
(In millions)
(Unaudited)
Condensed Consolidating Statements of Operations
Three Months Ended June 30, 2010
(In millions)
(Unaudited)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Company restaurant revenues |
$ | 286.9 | $ | | $ | 167.2 | $ | | $ | 454.1 | ||||||||||
Franchise revenues |
93.3 | | 47.0 | | 140.3 | |||||||||||||||
Intercompany revenues |
1.6 | | 1.8 | (3.4 | ) | | ||||||||||||||
Property revenues |
21.8 | | 6.8 | | 28.6 | |||||||||||||||
Total revenues |
403.6 | | 222.8 | (3.4 | ) | 623.0 | ||||||||||||||
Company restaurant expenses: |
||||||||||||||||||||
Food, paper and product costs |
95.1 | | 52.1 | | 147.2 | |||||||||||||||
Payroll and employee benefits |
88.2 | | 51.1 | | 139.3 | |||||||||||||||
Occupancy and other operating costs |
68.5 | | 50.7 | | 119.2 | |||||||||||||||
Total company restaurant expenses |
251.8 | | 153.9 | | 405.7 | |||||||||||||||
Selling, general and administrative
expenses |
74.7 | | 46.4 | | 121.1 | |||||||||||||||
Intercompany expenses |
1.8 | | 1.6 | (3.4 | ) | | ||||||||||||||
Property expenses |
8.9 | | 5.8 | | 14.7 | |||||||||||||||
Other operating (income) expense, net |
3.8 | | (5.1 | ) | | (1.3 | ) | |||||||||||||
Total operating costs and expenses |
341.0 | | 202.6 | (3.4 | ) | 540.2 | ||||||||||||||
Income from operations |
62.6 | | 20.2 | | 82.8 | |||||||||||||||
Interest expense |
11.5 | | 0.7 | | 12.2 | |||||||||||||||
Intercompany interest (income) expense |
(2.2 | ) | | 2.2 | | | ||||||||||||||
Interest income |
0.1 | | (0.3 | ) | | (0.2 | ) | |||||||||||||
Total interest expense, net |
9.4 | | 2.6 | | 12.0 | |||||||||||||||
Income before income taxes |
53.2 | | 17.6 | | 70.8 | |||||||||||||||
Income tax expense |
18.0 | | 3.8 | | 21.8 | |||||||||||||||
Income from continuing operations |
35.2 | | 13.8 | | 49.0 | |||||||||||||||
Equity in earnings of subsidiaries |
13.8 | 49.0 | | (62.8 | ) | | ||||||||||||||
Net income |
$ | 49.0 | $ | 49.0 | $ | 13.8 | $ | (62.8 | ) | $ | 49.0 | |||||||||
28
Table of Contents
Predecessor
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
Six Months Ended June 30, 2010
(In millions)
(Unaudited)
Condensed Consolidating Statements of Operations
Six Months Ended June 30, 2010
(In millions)
(Unaudited)
Non- | ||||||||||||||||||||
Issuer | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Company restaurant revenues |
$ | 565.0 | $ | | $ | 328.3 | $ | | $ | 893.3 | ||||||||||
Franchise revenues |
178.5 | | 91.7 | | 270.2 | |||||||||||||||
Intercompany revenues |
3.0 | | 3.4 | (6.4 | ) | | ||||||||||||||
Property revenues |
42.6 | | 13.8 | | 56.4 | |||||||||||||||
Total revenues |
789.1 | | 437.2 | (6.4 | ) | 1,219.9 | ||||||||||||||
Company restaurant expenses: |
||||||||||||||||||||
Food, paper and product costs |
183.8 | | 101.4 | | 285.2 | |||||||||||||||
Payroll and employee benefits |
174.6 | | 102.9 | | 277.5 | |||||||||||||||
Occupancy and other operating costs |
133.4 | | 99.1 | | 232.5 | |||||||||||||||
Total company restaurant expenses |
491.8 | | 303.4 | | 795.2 | |||||||||||||||
Selling, general and administrative
expenses |
146.6 | | 92.3 | | 238.9 | |||||||||||||||
Intercompany expenses |
3.4 | | 3.0 | (6.4 | ) | | ||||||||||||||
Property expenses |
17.9 | | 12.0 | | 29.9 | |||||||||||||||
Other operating (income) expense, net |
0.8 | | (6.6 | ) | | (5.8 | ) | |||||||||||||
Total operating costs and expenses |
660.5 | | 404.1 | (6.4 | ) | 1,058.2 | ||||||||||||||
Income from operations |
128.6 | | 33.1 | 0.1 | 161.7 | |||||||||||||||
Interest expense |
23.0 | | 1.4 | | 24.4 | |||||||||||||||
Intercompany interest (income) expense |
(4.6 | ) | | 4.6 | | | ||||||||||||||
Interest income |
0.4 | | (0.9 | ) | | (0.5 | ) | |||||||||||||
Total interest expense, net |
18.8 | | 5.1 | | 23.9 | |||||||||||||||
Income before income taxes |
109.8 | | 28.0 | 0.1 | 137.8 | |||||||||||||||
Income tax expense |
39.2 | | 8.6 | | 47.8 | |||||||||||||||
Income from continuing operations |
70.6 | | 19.4 | | 90.0 | |||||||||||||||
Equity in earnings of subsidiaries |
19.4 | 90.0 | | (109.4 | ) | | ||||||||||||||
Net income |
$ | 90.0 | $ | 90.0 | $ | 19.4 | $ | (109.4 | ) | $ | 90.0 | |||||||||
29
Table of Contents
Successor
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2011
(In millions)
(Unaudited)
Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2011
(In millions)
(Unaudited)
Issuer | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 40.2 | $ | 40.0 | $ | 34.4 | $ | (74.6 | ) | $ | 40.0 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiary |
(34.4 | ) | (40.2 | ) | | 74.6 | | |||||||||||||
Depreciation and amortization |
48.8 | | 19.9 | | 68.7 | |||||||||||||||
Loss on early extinguishment of debt |
19.6 | | | | 19.6 | |||||||||||||||
Amortization of deferred financing cost and debt issuance discount |
6.9 | | | | 6.9 | |||||||||||||||
Gain on hedging activities |
| | | | | |||||||||||||||
Loss on remeasurement of foreign denominated transactions |
0.9 | | 0.6 | | 1.5 | |||||||||||||||
Loss on refranchisings, dispositions of assets and release of unfavorable lease obligation |
| | 0.7 | | 0.7 | |||||||||||||||
Impairment on non-restaurant properties |
| | | | | |||||||||||||||
Bad debt expense, net of recoveries |
1.2 | | (0.1 | ) | | 1.1 | ||||||||||||||
Share based compensation |
0.6 | | | | 0.6 | |||||||||||||||
Deferred income taxes |
16.1 | | | | 16.1 | |||||||||||||||
Changes in current assets and liabilities, excluding acquisitions and dispositions: |
||||||||||||||||||||
Trade and notes receivables |
6.5 | | 2.2 | | 8.7 | |||||||||||||||
Prepaids and other current assets |
10.5 | | (3.2 | ) | | 7.3 | ||||||||||||||
Accounts and drafts payable |
(24.6 | ) | | (8.4 | ) | | (33.0 | ) | ||||||||||||
Accrued advertising |
(2.5 | ) | | 6.6 | | 4.1 | ||||||||||||||
Other accrued liabilities |
(18.4 | ) | | (13.1 | ) | | (31.5 | ) | ||||||||||||
Other long-term assets and liabilities |
(20.4 | ) | 0.2 | 11.0 | (1.1 | ) | (10.3 | ) | ||||||||||||
Net cash provided by operating activities |
51.0 | | 50.6 | (1.1 | ) | 100.5 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Payments for property and equipment |
(16.1 | ) | | (7.4 | ) | | (23.5 | ) | ||||||||||||
Proceeds from refranchisings, disposition of assets and restaurant closures |
1.5 | | 10.2 | | 11.7 | |||||||||||||||
Investments related to unconsolidated entities |
(0.4 | ) | | (2.3 | ) | | (2.7 | ) | ||||||||||||
Return of investment on direct financing leases |
4.0 | | | | 4.0 | |||||||||||||||
Other investing activities |
(4.1 | ) | | (0.3 | ) | | (4.4 | ) | ||||||||||||
Net cash (used for) provided by investing activities |
(15.1 | ) | | 0.2 | | (14.9 | ) | |||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Proceeds from term debt |
1,860.0 | | | 1,860.0 | ||||||||||||||||
Repayments of term debt and capital leases |
(1,851.5 | ) | | (0.9 | ) | | (1,852.4 | ) | ||||||||||||
Payment of deferred financing cost |
(23.1 | ) | | | | (23.1 | ) | |||||||||||||
Capital distribution from Parent |
0.7 | (0.7 | ) | | | | ||||||||||||||
Intercompany Financing |
4.2 | | (5.3 | ) | 1.1 | | ||||||||||||||
Net cash used for financing activities |
(9.7 | ) | (0.7 | ) | (6.2 | ) | 1.1 | (15.5 | ) | |||||||||||
Effect of exchange rates on cash and cash equivalents |
0.2 | | 5.0 | | 5.1 | |||||||||||||||
Increase (decrease) in cash and cash equivalents |
26.3 | (0.7 | ) | 49.6 | | 75.2 | ||||||||||||||
Cash and cash equivalents at beginning of period |
132.9 | 0.7 | 73.4 | | 207.0 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 159.2 | $ | | $ | 123.0 | $ | | $ | 282.2 | ||||||||||
30
Table of Contents
Predecessor
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2010
(In millions)
(Unaudited)
Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2010
(In millions)
(Unaudited)
Issuer | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 90.0 | $ | 90.0 | $ | 21.5 | $ | (111.5 | ) | $ | 90.0 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||||||||||
Equity in earnings of subsidiary |
(21.5 | ) | (90.0 | ) | | 111.5 | | |||||||||||||
Depreciation and amortization |
42.7 | | 16.6 | | 59.3 | |||||||||||||||
Impairment on non-restaurant properties |
1.7 | | | | 1.7 | |||||||||||||||
Gain on hedging activities |
(0.9 | ) | | | | (0.9 | ) | |||||||||||||
Amortization of deferred financing cost and debt issuance discount |
1.0 | | | | 1.0 | |||||||||||||||
(Gain) loss on remeasurement of foreign denominated transactions |
50.6 | | (3.5 | ) | | 47.1 | ||||||||||||||
Gain on refranchisings, dispositions of assets and release of unfavorable lease obligation |
(0.3 | ) | | (6.2 | ) | | (6.5 | ) | ||||||||||||
Bad debt expense, net of recoveries |
(0.1 | ) | | 0.5 | | 0.4 | ||||||||||||||
Stock-based compensation |
6.9 | | 1.4 | | 8.3 | |||||||||||||||
Deferred income taxes |
15.7 | | 0.9 | | 16.6 | |||||||||||||||
Changes in current assets and liabilities, excluding acquisitions and dispositions: |
||||||||||||||||||||
Trade and notes receivables |
(8.8 | ) | | (4.8 | ) | | (13.6 | ) | ||||||||||||
Prepaids and other current assets |
(18.5 | ) | | | | (18.5 | ) | |||||||||||||
Accounts and drafts payable |
(4.3 | ) | | 6.4 | | 2.1 | ||||||||||||||
Accrued advertising |
0.4 | | 2.4 | | 2.8 | |||||||||||||||
Other accrued liabilities |
2.4 | | 0.4 | | 2.8 | |||||||||||||||
Other long-term assets and liabilities |
(2.9 | ) | | (1.7 | ) | 0.3 | (4.3 | ) | ||||||||||||
Net cash provided by operating activities |
154.1 | | 33.9 | 0.3 | 188.3 | |||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Payments for property and equipment |
(57.1 | ) | | (29.4 | ) | | (86.5 | ) | ||||||||||||
Proceeds from refranchisings, disposition of assets and restaurant closures |
7.5 | | 8.7 | | 16.2 | |||||||||||||||
Payments for acquired franchisee operations, net of cash acquired |
(0.1 | ) | | (13.1 | ) | | (13.2 | ) | ||||||||||||
Return of investment on direct financing leases |
3.9 | | 0.4 | | 4.3 | |||||||||||||||
Other investing activities |
0.9 | | (3.0 | ) | | (2.1 | ) | |||||||||||||
Net cash used for investing activities |
(44.9 | ) | | (36.4 | ) | | (81.3 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Repayments of term debt and capital leases |
(33.1 | ) | | (0.9 | ) | | (34.0 | ) | ||||||||||||
Borrowings under revolving credit facility |
9.0 | | | | 9.0 | |||||||||||||||
Repayments of revolving credit facility |
(9.0 | ) | | | | (9.0 | ) | |||||||||||||
Dividends paid on common stock |
| (17.1 | ) | | | (17.1 | ) | |||||||||||||
Proceeds from stock option exercises |
| 3.8 | | | 3.8 | |||||||||||||||
Excess tax benefits from share-based compensation |
2.5 | | 0.1 | | 2.6 | |||||||||||||||
Repurchases of common stock |
| (0.3 | ) | | | (0.3 | ) | |||||||||||||
Intercompany Financing |
(12.9 | ) | 13.5 | (0.3 | ) | (0.3 | ) | | ||||||||||||
Net cash used for financing activities |
(43.5 | ) | (0.1 | ) | (1.1 | ) | (0.3 | ) | (45.0 | ) | ||||||||||
Effect of exchange rates on cash and cash equivalents |
0.2 | | (14.5 | ) | | (14.3 | ) | |||||||||||||
Increase (decrease) in cash and cash equivalents |
65.9 | (0.1 | ) | (18.1 | ) | | 47.7 | |||||||||||||
Cash and cash equivalents at beginning of period |
4.3 | | 135.6 | | 139.9 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 70.2 | $ | (0.1 | ) | $ | 117.5 | $ | | $ | 187.6 | |||||||||
31
Table of Contents
On April 19, 2011, BKCH, the direct parent of the Company, and Burger King Capital Finance,
Inc., a Delaware corporation and another direct subsidiary of BKCH (BK Finance and, together with
BKCH, the Issuers) entered into an indenture with Wilmington Trust FSB, as trustee, pursuant to
which the Issuers sold $685 million in aggregate principal amount at maturity of 11.0% senior
discount notes due 2019 (the Discount Notes). The Discount Notes generated $401.5 million in
gross proceeds. Until April 15, 2016, no cash interest will accrue, but the Discount Notes will
accrete at a rate of 11.0% per annum compounded semi-annually such that the accreted value on April
15, 2016 will be equal to the principal amount at maturity. Thereafter, cash interest on the
Discount Notes will accrue at a rate equal to 11.0% per annum and will be payable semi-annually in
cash in arrears on April 15 and
October 15 of each year, commencing on October 15, 2016. The Discount Notes will mature on April
15, 2019. Neither the Company nor BKC is a guarantor of the Discount Notes. The Issuers have no
operations or assets other than the interest in BKH held by BKCH. Accordingly, the cash required
to service the Discount Notes is expected to be funded through distributions from BKH.
We are presenting the following condensed consolidating financial information for the Company
and the Issuers, together with eliminations, as of and for the periods indicated in accordance with
the indenture. The consolidating financial information may not necessarily be indicative of the
financial position or results of operations had the Issuers operated as independent entities.
BURGER KING CAPITAL HOLDINGS, LLC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
As of June 30, 2011
(In millions)
(Unaudited)
Condensed Consolidating Balance Sheets
As of June 30, 2011
(In millions)
(Unaudited)
BKH | Issuers | Eliminations | Consolidated | |||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 282.2 | $ | 392.4 | | $ | 674.6 | |||||||||
Trade and notes receivable, net |
144.5 | | | 144.5 | ||||||||||||
Prepaids and other current assets |
158.3 | 3.8 | | 162.1 | ||||||||||||
Deferred income taxes, net |
27.6 | | | 27.6 | ||||||||||||
Total current assets |
612.6 | 396.2 | | 1,008.8 | ||||||||||||
Property and equipment, net of accumulated depreciation |
1,117.9 | | | 1,117.9 | ||||||||||||
Intangible assets, net |
2,938.9 | | | 2,938.9 | ||||||||||||
Goodwill |
634.4 | | | 634.4 | ||||||||||||
Net investment in property leased to franchisees |
255.1 | | | 255.1 | ||||||||||||
Intercompany receivable |
| | | | ||||||||||||
Investment in subsidiaries |
| | | | ||||||||||||
Other assets, net |
207.1 | 8.1 | (0.5 | ) | 214.7 | |||||||||||
Total assets |
$ | 5,766.0 | $ | 404.3 | $ | (0.5 | ) | $ | 6,169.8 | |||||||
Liabilities and Stockholders Equity |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts and drafts payable |
$ | 59.0 | $ | | | $ | 59.0 | |||||||||
Accrued advertising |
85.3 | | | 85.3 | ||||||||||||
Other accrued liabilities |
231.9 | | | 231.9 | ||||||||||||
Current portion of long term debt and capital leases |
30.6 | | | 30.6 | ||||||||||||
Total current liabilities |
406.8 | | | 406.8 | ||||||||||||
Term debt, net of current portion |
2,692.3 | 410.2 | | 3,102.5 | ||||||||||||
Capital leases, net of current portion |
97.2 | | | 97.2 | ||||||||||||
Other liabilities, net |
355.3 | | | 355.3 | ||||||||||||
Payables to affiliates |
| 0.5 | (0.5 | ) | | |||||||||||
Deferred income taxes, net |
660.8 | | | 660.8 | ||||||||||||
Total liabilities |
4,212.4 | 410.7 | (0.5 | ) | 4,622.6 | |||||||||||
Stockholders equity: |
||||||||||||||||
Additional paid-in capital |
1,563.5 | | | 1,563.5 | ||||||||||||
Accumulated deficit |
(62.2 | ) | (6.4 | ) | | (68.6 | ) | |||||||||
Accumulated other comprehensive loss |
52.3 | | | 52.3 | ||||||||||||
Total stockholders equity |
1,553.6 | (6.4 | ) | | 1,547.2 | |||||||||||
Total liabilities and stockholders equity |
$ | 5,766.0 | $ | 404.3 | $ | (0.5 | ) | $ | 6,169.8 | |||||||
32
Table of Contents
Successor
BURGER KING CAPITAL HOLDINGS, LLC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
Three Months Ended June 30, 2011
(In millions)
(Unaudited)
Condensed Consolidating Statements of Operations
Three Months Ended June 30, 2011
(In millions)
(Unaudited)
BKH | Issuers | Eliminations | Consolidated | |||||||||||||
Revenues: |
||||||||||||||||
Company restaurant revenues |
$ | 419.0 | $ | | $ | | $ | 419.0 | ||||||||
Franchise revenues |
148.8 | | | 148.8 | ||||||||||||
Intercompany revenues |
| | | | ||||||||||||
Property revenues |
28.4 | | | 28.4 | ||||||||||||
Total revenues |
596.2 | | | 596.2 | ||||||||||||
Company restaurant expenses: |
||||||||||||||||
Food, paper and product costs |
135.4 | | | 135.4 | ||||||||||||
Payroll and employee benefits |
122.2 | | | 122.2 | ||||||||||||
Occupancy and other operating costs |
110.8 | | | 110.8 | ||||||||||||
Total company restaurant expenses |
368.4 | | | 368.4 | ||||||||||||
Selling, general and administrative expenses |
106.0 | | | 106.0 | ||||||||||||
Property expenses |
17.7 | | | 17.7 | ||||||||||||
Other operating (income) expense, net |
0.3 | | | 0.3 | ||||||||||||
Total operating costs and expenses |
492.4 | | | 492.4 | ||||||||||||
Income from operations |
103.8 | | | 103.8 | ||||||||||||
Interest expense |
47.7 | 9.0 | | 56.7 | ||||||||||||
Intercompany interest (income) expense |
| | | | ||||||||||||
Interest income |
(0.4 | ) | | | (0.4 | ) | ||||||||||
Total interest expense, net |
47.3 | 9.0 | | 56.3 | ||||||||||||
Income (loss) before income taxes |
56.5 | (9.0 | ) | | 47.5 | |||||||||||
Income tax expense (benefit) |
13.7 | (2.6 | ) | | 11.1 | |||||||||||
Income (loss) from continuing operations |
42.8 | (6.4 | ) | | 36.4 | |||||||||||
Equity in earnings of subsidiaries |
| 42.8 | (42.8 | ) | | |||||||||||
Net income |
$ | 42.8 | $ | 36.4 | $ | (42.8 | ) | $ | 36.4 | |||||||
33
Table of Contents
Successor
BURGER KING CAPITAL HOLDINGS, LLC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
Six Months Ended June 30, 2011
(In millions)
(Unaudited)
Condensed Consolidating Statements of Operations
Six Months Ended June 30, 2011
(In millions)
(Unaudited)
BKH | Issuers | Eliminations | Consolidated | |||||||||||||
Revenues: |
||||||||||||||||
Company restaurant revenues |
$ | 811.6 | $ | | $ | | $ | 811.6 | ||||||||
Franchise revenues |
281.0 | | | 281.0 | ||||||||||||
Intercompany revenues |
| | | | ||||||||||||
Property revenues |
56.7 | | | 56.7 | ||||||||||||
Total revenues |
1,149.3 | | | 1,149.3 | ||||||||||||
Company restaurant expenses: |
||||||||||||||||
Food, paper and product costs |
262.4 | | | 262.4 | ||||||||||||
Payroll and employee benefits |
242.2 | | | 242.2 | ||||||||||||
Occupancy and other operating costs |
219.5 | | | 219.5 | ||||||||||||
Total company restaurant expenses |
724.1 | | | 724.1 | ||||||||||||
Selling, general and administrative expenses |
212.2 | | | 212.2 | ||||||||||||
Intercompany expenses |
| | | | ||||||||||||
Property expenses |
35.9 | | | 35.9 | ||||||||||||
Other operating (income) expense, net |
5.3 | | | 5.3 | ||||||||||||
Total operating costs and expenses |
977.5 | | | 977.5 | ||||||||||||
Income from operations |
171.8 | | | 171.8 | ||||||||||||
Interest expense |
99.4 | 9.0 | | 108.4 | ||||||||||||
Intercompany interest (income) expense |
| | | | ||||||||||||
Interest income |
(1.6 | ) | | | (1.6 | ) | ||||||||||
Total interest expense, net |
97.8 | 9.0 | | 106.8 | ||||||||||||
Loss on early extinguishment |
19.6 | | | 19.6 | ||||||||||||
Income (loss) before income taxes |
54.4 | (9.0 | ) | | 45.4 | |||||||||||
Income tax expense (benefit) |
14.4 | (2.6 | ) | | 11.8 | |||||||||||
Income (loss) from continuing operations |
40.0 | (6.4 | ) | | 33.6 | |||||||||||
Equity in earnings of subsidiaries |
| 40.0 | (40.0 | ) | | |||||||||||
Net income |
$ | 40.0 | $ | 33.6 | $ | (40.0 | ) | $ | 33.6 | |||||||
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with our unaudited condensed consolidated
financial statements and the related notes thereto included in Part I, Item 1 Financial
Statements. Unless the context otherwise requires, all references to we, us, our and
Successor refer to Burger King Holdings, Inc. and its subsidiaries, including BKC, for the period
subsequent to the acquisition of BKH by an affiliate of 3G Capital on the Merger Date. All
references to our Predecessor refer to Burger King Holdings, Inc. and all its subsidiaries,
including BKC, for all periods prior to the Acquisition, which operated under a different ownership
and capital structure. In addition, the Acquisition was accounted for under the acquisition method
of accounting, which resulted in preliminary purchase price allocations that affect the
comparability of results of operations for periods before and after the Acquisition.
Operating results for any one quarter are not necessarily indicative of results to be expected
for any other quarter or for the fiscal year and our key business measures, as discussed below, may
decrease for any future period. Unless otherwise stated, comparable sales growth, average
restaurant sales and sales growth are presented on a system-wide basis, which means they include
sales at both Company restaurants and franchise restaurants. Franchise sales represent sales at all
franchise restaurants and revenues to our franchisees. We do not record franchise sales as
revenues; however, our franchise revenues include royalties based on a percentage of franchise
sales. System-wide results are driven primarily by our franchise restaurants, as approximately 90%
of our system-wide restaurants are franchised.
Overview
We operate in the fast food hamburger restaurant, or FFHR, category of the quick service
restaurant, or QSR, segment of the restaurant industry. We are the second largest FFHR chain in the
world as measured by the number of restaurants and system-wide sales. Our system of restaurants
includes restaurants owned by us, as well as by our franchisees. Our business operates in three
reportable segments: (1) the United States and Canada; (2) Europe, the Middle East, Africa and Asia
Pacific, or EMEA/APAC; and (3) Latin America.
Approximately 90% of our current restaurants are franchised, but we expect the percentage of
franchise restaurants to increase as we implement our portfolio management strategy of
refranchising up to half of our Company restaurants within the next three to five years and our
plans to accelerate restaurant development by franchisees in several international markets. The
current 90/10 ratio of franchise restaurants to Company restaurants applies on a worldwide basis,
but may not reflect the ratio of franchise restaurants to Company restaurants in any specific
market or region. We believe a restaurant ownership mix that is heavily weighted to franchise
restaurants is beneficial to us because the capital required to grow and maintain our system is
funded primarily by franchisees while giving us a base of Company restaurants to demonstrate
credibility with franchisees in launching new initiatives. However, our franchise dominated
business model also presents a number of drawbacks and risks, such as our limited control over
franchisees and limited ability to facilitate changes in restaurant ownership. In addition, our
operating results are closely tied to the success of our franchisees, and we are dependent on
franchisees to open new restaurants as part of our growth strategy.
Our international operations are impacted by fluctuations in currency exchange rates. In
Company markets located outside of the United States, we generate revenues and incur expenses
denominated in local currencies. These revenues and expenses are translated using the average rates
during the period in which they are recognized, and are impacted by changes in currency exchange
rates. In many of our franchise markets, our franchisees pay royalties to us in currencies other
than the local currency in which they operate; however, as the royalties are calculated based on
local currency sales, our revenues are still impacted by fluctuations in currency exchange rates.
We review and analyze business results excluding the effect of currency translation and calculate
certain incentive compensation for management and corporate level employees based on these results
believing this better represents our underlying business trends.
In the U.S. and Canada, where approximately 60% of our restaurants are currently located, we
have identified four priorities that we believe will permit us to drive future sales and traffic:
marketing communications, menu, operations and image. We are currently modifying our marketing
communications approach to reach out to a broader consumer base. In addition, we are developing
enhanced menu items, which we intend to begin introducing later this year, in an effort to appeal
to this broader consumer base. Operationally, we are in the process of restructuring our field
teams to significantly increase our field presence, which we believe will help improve restaurant
operations. Finally, we have lowered the cost of remodeling restaurants and have provided our
franchisees in the United
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States with financial incentives and access to a third-party financing program to assist them
in their remodeling efforts. We believe that these initiatives will be an important step to
driving sales growth in the U.S and Canada segment.
Seasonality
Our business is moderately seasonal. Restaurant sales are typically higher in the spring and
summer months when weather is warmer than in the fall and winter months. Restaurant sales during
the winter are typically highest in December, during the holiday shopping season. Our restaurant
sales and Company restaurant margins are typically lowest during the winter months, which include
February, the shortest month of the year. Furthermore, adverse weather conditions which typically
occur in the winter months can have material adverse effects on restaurant sales. Because our
business is moderately seasonal, results for any one quarter are not necessarily indicative of the
results that may be achieved for any other quarter or for the full fiscal year. The timing of
holidays may also impact restaurant sales.
Key Business Measures
We use three key business measures as indicators of our operational performance: comparable
sales growth, average restaurant sales and sales growth. We believe that these measures are
important indicators of the overall direction, trends of sales and the effectiveness of our
advertising, marketing and operating initiatives and the impact of these on the entire Burger King®
system.
Comparable sales growth and sales growth are presented by reportable segment and are analyzed
on a constant currency basis, which means they are calculated by translating current year results
at prior year average exchange rates to remove the effects of currency fluctuations from these
trend analyses. We believe these constant currency measures provide a more meaningful analysis of
our business by identifying the underlying business trends, without distortion from the effect of
currency movements.
Comparable Sales Growth
Comparable sales growth refers to the change in restaurant sales in one period from the same
period in the prior year for restaurants that have been open for 13 months or longer as of the end
of the most recent period. Company comparable sales growth refers to comparable sales growth for
Company restaurants and franchise comparable sales growth refers to comparable sales growth for
franchise restaurants. We believe that comparable sales growth is a key indicator of our
performance, as influenced by our strategic initiatives and those of our competitors.
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Successor | Predecessor | Successor | Predecessor | |||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In constant currencies) | ||||||||||||||||
Company Comparable Sales Growth: |
||||||||||||||||
U.S. and Canada |
(3.7 | )% | (1.3 | )% | (4.8 | )% | (2.6 | )% | ||||||||
EMEA / APAC |
5.3 | % | (2.2 | )% | 5.0 | % | (3.1 | )% | ||||||||
Latin America |
4.6 | % | (0.3 | )% | 0.3 | % | (2.7 | )% | ||||||||
Total Company Comparable Sales Growth |
(1.6 | )% | (1.5 | )% | (2.6 | )% | (2.7 | )% | ||||||||
Franchise Comparable Sales Growth: |
||||||||||||||||
U.S. and Canada |
(5.5 | )% | (1.6 | )% | (5.8 | )% | (3.9 | )% | ||||||||
EMEA / APAC |
1.9 | % | 0.5 | % | 1.7 | % | 1.1 | % | ||||||||
Latin America |
6.9 | % | 4.2 | % | 5.7 | % | 1.4 | % | ||||||||
Total Franchise Comparable Sales Growth |
(2.2 | )% | (0.5 | )% | (2.5 | )% | (2.1 | )% | ||||||||
Comparable Sales Growth: |
||||||||||||||||
U.S. and Canada |
(5.3 | )% | (1.5 | )% | (5.6 | )% | (3.7 | )% | ||||||||
EMEA/APAC |
2.2 | % | 0.2 | % | 1.9 | % | 0.6 | % | ||||||||
Latin America |
6.8 | % | 3.9 | % | 5.4 | % | 1.2 | % | ||||||||
Total System-wide Comparable Sales Growth |
(2.2 | )% | (0.7 | )% | (2.5 | )% | (2.1 | )% |
We experienced negative system-wide comparable sales growth of 2.2% (in constant currencies)
for the three months ended June 30, 2011, compared to negative system-wide comparable sales growth
of 0.7% (in constant currencies) for the same period last year, primarily driven by negative
comparable sales growth in the U.S. and Canada, partially offset by positive comparable sales
growth in EMEA/APAC and Latin America for the period. Negative comparable sales growth in the U.S.
and Canada of 5.3% (in constant currencies) was largely due to lower traffic compared to the prior
period, when traffic was supported by value promotions, such as our BK® Breakfast Muffin Sandwich
and Buck Double promotions. Positive comparable sales growth in EMEA/APAC was primarily driven by
positive results in Germany, Turkey, Italy and China, partially offset by negative comparable sales
growth in Australia. Positive comparable sales growth in Latin America was primarily due to
positive results in Brazil and Argentina, partially offset by negative comparable sales growth in
Puerto Rico.
We experienced negative system-wide comparable sales growth of 2.5% (in constant currencies)
for the six months ended June 30, 2011, compared to negative system-wide comparable sales growth of
2.1% (in constant currencies) for the same period last year, primarily driven by negative
comparable sales growth in the U.S. and Canada, partially offset by positive comparable sales
growth in EMEA/APAC and Latin America for the period. Negative comparable sales growth in the U.S.
and Canada of 5.6% (in constant currencies) was largely due to lower traffic compared to the prior
period, when traffic was supported by value promotions, such as our 1/4 lb Dollar Double
Cheeseburger, Buck Double and BK® Breakfast Muffin Sandwich promotions. Positive comparable sales
growth in EMEA/APAC was driven by positive results in Germany, Turkey, Italy and China, partially
offset by negative comparable sales growth in Australia. Positive comparable sales growth in Latin
America was primarily due to positive results in Brazil and Argentina, partially offset by negative
comparable sales growth in Puerto Rico.
Average Restaurant Sales
System-wide average restaurant sales at all Company and franchise restaurants, or ARS, is an
important measure of the financial performance of our restaurants and changes in the overall
direction and trends of sales. ARS is influenced by comparable sales performance and the timing of
restaurant openings and closures and includes the impact of movements in currency exchange rates.
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Successor | Predecessor | Successor | Predecessor | |||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
System-wide Average
Restaurant Sales |
$ | 315 | $ | 309 | $ | 608 | $ | 603 |
Trailing twelve months ARS was $1.2 million, including the unfavorable impact of currency
exchange rates of $1,000 for the period ended June 30, 2011, compared to $1.2 million for the
period ended June 30, 2010.
System-wide ARS increased during the three months ended June 30, 2011, primarily as a result
of $10,000 of favorable impact from the movement of currency exchange rates and system-wide
comparable sales growth in EMEA/APAC and Latin America, partially offset by negative comparable
sales growth in the U.S. and Canada.
System-wide ARS increased during the six months ended June 30, 2011, primarily as a result of
$10,000 of favorable impact from the movement of currency exchange rates and system-wide comparable
sales growth in EMEA/APAC and Latin America, partially offset by negative comparable sales growth
in the U.S. and Canada.
Sales Growth
Sales growth refers to the change in sales at all Company and franchise restaurants in one
period from the same period in the prior year. We believe that sales growth is an important
indicator of the overall direction and trends of sales and income from operations on
a system-wide basis. Sales growth is influenced by the timing of restaurant openings and
closures and comparable sales growth, as well as the effectiveness of our advertising and marketing
initiatives and featured products.
Successor | Predecessor | Successor | Predecessor | |||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In constant currencies) | ||||||||||||||||
Sales Growth: |
||||||||||||||||
U.S. and Canada |
(5.5 | )% | (0.7 | )% | (5.3 | )% | (3.1 | )% | ||||||||
EMEA/APAC |
8.9 | % | 14.5 | % | 8.4 | % | 17.3 | % | ||||||||
Latin America |
16.6 | % | 15.6 | % | 16.2 | % | 15.0 | % | ||||||||
Total System-wide Sales Growth |
0.4 | % | 4.8 | % | 0.5 | % | 3.9 | % |
System-wide sales growth for the three months ended June 30, 2011 was 0.4% (in constant
currencies) compared to 4.8% (in constant currencies) for the same period last year, primarily as a
result of a net increase of 162 restaurants during the trailing twelve month period ended June 30,
2011, partially offset by negative system-wide comparable sales growth. Negative sales growth in
the U.S. and Canada of 5.5% (in constant currencies) was primarily due to negative comparable sales
growth in the U.S. and Canada. Sales growth of 8.9% (in constant currencies) in EMEA/APAC was
primarily a result of a net increase of 156 restaurants during the trailing twelve month period
ended June 30, 2011 and comparable sales growth of 2.2% (in constant currencies) in EMEA/APAC.
Sales growth of 16.6% (in constant currencies) in Latin America was primarily a result of a net
increase of 27 restaurants during the trailing twelve month period ended June 30, 2011 and
comparable sales growth of 6.8% (in constant currencies) for the region.
System-wide sales growth for the six months ended June 30, 2011 was 0.5% (in constant
currencies) compared to 3.9% (in constant currencies) for the same period last year, primarily as a
result of a net increase of 162 restaurants during the trailing twelve month
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period ended June 30,
2011, partially offset by negative system-wide comparable sales growth. Negative sales growth in
the U.S. and Canada of 5.3% (in constant currencies) was primarily due to negative comparable sales
growth in the U.S. and Canada. Sales growth of 8.4% (in constant currencies) in EMEA/APAC was
primarily a result of a net increase of 156 restaurants during the trailing twelve month period
ended June 30, 2011 and comparable sales growth of 1.9% (in constant currencies) in EMEA/APAC.
Sales growth of 16.2% (in constant currencies) in Latin America was primarily a result of a net
increase of 27 restaurants during the trailing twelve month period ended June 30, 2011 and
comparable sales growth of 5.4% (in constant currencies) for the region.
Other Operating Data:
Successor | Predecessor | |||||||
As of June 30, | ||||||||
2011 | 2010 | |||||||
Restaurant Count Data: |
||||||||
Number of Company restaurants: |
||||||||
U.S. and Canada |
978 | 987 | ||||||
EMEA/APAC |
255 | 303 | ||||||
Latin America |
97 | 97 | ||||||
Total Company restaurants |
1,330 | 1,387 | ||||||
Number of franchise restaurants: |
||||||||
U.S. and Canada |
6,550 | 6,562 | ||||||
EMEA/APAC |
3,388 | 3,184 | ||||||
Latin America |
1,068 | 1,041 | ||||||
Total franchise restaurants |
11,006 | 10,787 | ||||||
Total system-wide restaurants |
12,336 | 12,174 | ||||||
Factors Affecting Comparability of Results of Operations
The Transactions
The Acquisition as described in Note 1 to the accompanying unaudited condensed consolidated
financial statements was accounted for using the acquisition method of accounting, or acquisition
accounting, in accordance with Financial Accounting Standard Board (FASB) Accounting Standard
Codification (ASC) Topic 805, Business Combinations. Acquisition accounting provides a period of
up to one year to obtain the information necessary to finalize the fair value of all assets
acquired and liabilities assumed on the Merger Date. As of June 30, 2011 and December 31, 2010 we
have recorded preliminary acquisition accounting allocations. Acquisition accounting resulted in
certain items that affect the comparability of the results of operations between us and our
Predecessor, including changes in asset carrying values (and related depreciation and amortization)
and changes in favorable and unfavorable leases (and related amortization).
Additionally, our interest expense is significantly higher following the Transactions than
experienced by our Predecessor in prior periods, primarily due to the higher principal amount of
debt outstanding following the Transactions.
Restructuring Plan
In December 2010, we began the implementation of a global restructuring plan that
resulted in work force reductions throughout our organization. In the United States, approximately
375 corporate and field positions were eliminated, the majority of which were based at our
headquarters in Miami, Florida. In addition, approximately 250 corporate and field positions in
Canada, Latin America, EMEA and APAC were eliminated. Refer to the Companys Transition Report on
Form 10-K for the six-month period ended December 31, 2010 for additional information on the
charges incurred by the Company for the aforementioned period.
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In June 2011, we implemented a Voluntary Resignation Severance (VRS Program) offered for a
limited time to eligible employees based at our Miami headquarters. As a result of the VRS Program, at our Miami headquarters and the restructuring of our US field organization,
we incurred $4.5 million of severance benefits and other severance related costs for the three month period ended June 30, 2011, and we expect to record an
additional $8 million to $12 million in severance benefits and other severance-related costs over
the remaining service period for employees who were part of the additional work force reductions or
who elected to participate in the VRS Program but continue to be employed by the Company until
their scheduled termination date.
The table below summarizes the factors affecting comparability of results of operations due to
acquisition accounting, the restructuring plan and transaction costs incurred in connection with
the Transactions.
Successor | Successor | |||||||
For the three months ended | For the six months ended | |||||||
June 30, 2011 | June 30, 2011 | |||||||
(in millions) | ||||||||
The Transactions: |
||||||||
Revenues: |
||||||||
Property revenues |
$ | 1.3 | $ | 2.6 | ||||
Total effect on revenues |
$ | 1.3 | $ | 2.6 | ||||
Occupancy and other operating costs: |
||||||||
Depreciation and amortization (1) |
2.2 | 4.6 | ||||||
Lease straightline adjustment |
0.2 | 0.5 | ||||||
Total effect on occcupancy and other operating costs |
$ | 2.4 | $ | 5.1 | ||||
Selling, general and administrative expenses: |
||||||||
Depreciation and amortization (2) |
4.6 | 9.1 | ||||||
Transaction costs |
0.3 | 1.1 | ||||||
Total effect on selling, general and administrative expenses |
$ | 4.9 | $ | 10.2 | ||||
Property expenses: |
||||||||
Depreciation and amortization (3) |
2.0 | 4.0 | ||||||
Lease straightline adjustment |
0.3 | 0.6 | ||||||
Total effect on property expenses |
$ | 2.3 | $ | 4.6 | ||||
Total effect of the Transactions on Income (loss) from Operations |
$ | (8.3 | ) | $ | (17.3 | ) | ||
Restructuring: |
||||||||
Selling, general and administrative expenses: |
||||||||
Global restructuring and related professional fees |
$ | 11.7 | $ | 23.9 | ||||
Total effect of Restructuring on Income (loss) from Operations |
$ | (11.7 | ) | $ | (23.9 | ) | ||
Total effect on Income (loss) from Operations |
$ | (20.0 | ) | $ | (41.2 | ) | ||
(1) | Represents depreciation of buildings and equipment used in Company restaurants and amortization of favorable and unfavorable leases associated with Company restaurants. | |
(2) | Represents depreciation of software, furniture and fixtures used in our corporate headquarters and amortization of franchise agreements. | |
(3) | Represents depreciation of properties leased to franchisees and amortization of favorable and unfavorable leases associated with properties leased to franchisees. |
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Results of Operations for the Three Months Ended June 30, 2011 and 2010
The following table presents our results of operations for the three months ended June 30,
2011 and 2010:
Successor | Predecessor | |||||||||||
Three Months Ended June 30, | Increase/ | |||||||||||
2011 | 2010 | (Decrease) | ||||||||||
(In millions) | ||||||||||||
Revenues: |
||||||||||||
Company restaurant revenues |
$ | 419.0 | $ | 454.1 | (8 | )% | ||||||
Franchise revenues |
148.8 | 140.3 | 6 | % | ||||||||
Property revenues |
28.4 | 28.6 | (1 | )% | ||||||||
Total revenues |
596.2 | 623.0 | (4 | )% | ||||||||
Company restaurant expenses |
368.4 | 405.7 | (9 | )% | ||||||||
Selling, general and administrative expenses |
106.0 | 121.1 | (12 | )% | ||||||||
Property expenses |
17.7 | 14.7 | 20 | % | ||||||||
Other operating (income) expense, net |
0.3 | (1.3 | ) | NM | ||||||||
Total operating costs and expenses |
492.4 | 540.2 | (9 | )% | ||||||||
Income from operations |
103.8 | 82.8 | 25 | % | ||||||||
Interest expense |
47.7 | 12.2 | 291 | % | ||||||||
Interest income |
(0.4 | ) | (0.2 | ) | 100 | % | ||||||
Interest expense, net |
47.3 | 12.0 | 294 | % | ||||||||
Income before income taxes |
56.5 | 70.8 | (20 | )% | ||||||||
Income tax expense |
13.7 | 21.8 | (37 | )% | ||||||||
Net income |
$ | 42.8 | $ | 49.0 | (13 | )% | ||||||
NM- Not meaningful. |
Revenues
Company restaurant revenues
Total Company restaurant revenues decreased by $35.1 million, or 8%, to $419.0 million for the
three months ended June 30, 2011, compared to the same period in the prior year, primarily due to a
net decrease of 57 Company restaurants during the trailing twelve-month period ended June 30, 2011,
including the net refranchising of 51 Company restaurants as part of our ongoing portfolio
management initiative, and negative worldwide Company comparable sales growth of 1.6% (in constant
currencies). These factors were partially offset by $13.9 million of favorable impact from the
movement of currency exchange rates.
In the U.S. and Canada, Company restaurant revenues decreased by $20.2 million, or 6%, to
$302.2 million for the three months ended June 30, 2011, compared to the same period in the prior
year. This decrease was the result of negative Company comparable sales growth in the U.S. and
Canada of 3.7% (in constant currencies) and a net decrease of nine Company restaurants during the
trailing twelve-month period ended June 30, 2011, including the net refranchising of five Company
restaurants. These factors were partially offset by $2.3 million of favorable impact from the
movement of currency exchange rates in Canada.
In EMEA/APAC, Company restaurant revenues decreased by $17.0 million, or 15%, to $99.3 million
for the three months ended June 30, 2011, compared to the same period in the prior year, primarily
due to a net decrease of 48 Company restaurants during the trailing twelve-month period ended June
30, 2011, including the net refranchising of 46 Company restaurants. These factors were partially
offset by Company comparable sales growth of 5.3% (in constant currencies) and $10.5 million of
favorable impact from the movement of currency exchange rates.
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In Latin America, where all Company restaurants are located in Mexico, Company restaurant
revenues increased by $2.1 million, or 14%, to $17.5 million for the three months ended June 30,
2011, compared to the same period in the prior year. The increase was primarily the result of
comparable sales growth of 4.6% (in constant currencies) and $1.2 million of favorable impact from
the movement of currency exchange rates.
Franchise revenues
Total franchise revenues increased by $8.5 million, or 6%, to $148.8 million for the three
months ended June 30, 2011, compared to the same period in the prior year, primarily due to a net
increase of 219 franchise restaurants during the trailing twelve-month period ended June 30, 2011,
including the net refranchising of 51 Company restaurants, and $5.2 million of favorable impact
from the movement of currency exchange rates. These factors were partially offset by negative
worldwide franchise comparable sales growth of 2.2% (in constant currencies).
In the U.S. and Canada, franchise revenues decreased by $2.1 million, or 3%, to $78.8 million
for the three months ended June 30, 2011, compared to the same period in the prior year. This
decrease was primarily the result of negative franchise comparable sales growth in the U.S. and
Canada of 5.5% (in constant currencies). The impact from the movement of currency exchange rates
was not significant in this segment for the period.
Franchise revenues in EMEA/APAC increased by $9.6 million, or 21%, to $55.4 million for the
three months ended June 30, 2011, compared to the same period in the prior year. This increase was
primarily due to a net increase of 204 franchise restaurants during the trailing twelve-month
period ended June 30, 2011, including the net refranchising of 46 Company restaurants, positive
franchise comparable sales growth of 1.9% (in constant currencies), and $5.2 million of favorable
impact from the movement of currency exchange rates.
Latin America franchise revenues increased by $1.0 million, or 7%, to $14.6 million for the
three months ended June 30, 2011, compared to the same period in the prior year. The increase was
primarily due to a net increase of 27 franchise restaurants during the trailing twelve-month period
ended June 30, 2011 and positive franchise comparable sales growth of 6.9% (in constant
currencies). The impact from the movement of currency exchange rates was not significant in this
segment for the period.
Property Revenues
Total property revenues decreased by $0.2 million, or 1%, to $28.4 million for the three
months ended June 30, 2011, compared to the same period in the prior year. The decrease was
primarily driven by decreased revenues from percentage rents as a result of negative franchise
comparable sales growth in the U.S., partially offset by the favorable impact of changes to our
portfolio of
properties leased to franchisees, preliminary acquisition accounting effects of $1.3 million
and $0.5 million of favorable impact from the movement of currency exchange rates.
In the U.S. and Canada, property revenues increased by $0.7 million, or 3%, to $24.1 million
for the three months ended June 30, 2011, compared to the same period in the prior year, primarily
as a result of $1.1 million of preliminary acquisition accounting effects.
Property revenues in EMEA/APAC decreased by $0.9 million, or 17%, to $4.3 million for the
three months ended June 30, 2011, compared to the same period in the prior year, primarily due to a
reduction in the number of properties in our portfolio of properties leased to franchisees,
partially offset by $0.4 million of favorable impact from the movement of currency exchange rates.
Operating Costs and Expenses
Food, paper and product costs
Total food, paper and product costs decreased by $11.8 million, or 8%, to $135.4 million
during the three months ended June 30, 2011, compared to the same period in the prior year,
primarily as a result of an 8% decrease in Company restaurant revenues. This
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decrease was partially
offset by $4.3 million of unfavorable impact from the movement of currency exchange rates and lower
food margins in EMEA/APAC.
As a percentage of Company restaurant revenues, total food, paper and product costs decreased
by 0.1%, to 32.3% during the three months ended June 30, 2011, compared to the same period in the
prior year. The decrease was driven by a shift in product mix away from lower margin value menu
items in the U.S. and strategic pricing initiatives, partially offset by higher commodity prices in
the U.S. and EMEA.
In the U.S. and Canada, food, paper and product costs decreased by $8.3 million, or 8%, to
$99.1 million during the three months ended June 30, 2011, compared to the same period in the prior
year, primarily as a result of a 6% decrease in Company restaurant revenues and improved food
margins. These factors were partially offset by $0.8 million of unfavorable impact from the
movement of currency exchange rates. Food, paper and product costs in the U.S. and Canada as a
percentage of Company restaurant revenues decreased by 0.5% to 32.8%, primarily due to a shift in
product mix away from lower margin value menu items and strategic pricing initiatives, partially
offset by higher commodity costs in the U.S.
In EMEA/APAC, food, paper and product costs decreased by $4.2 million, or 12%, to $29.7
million for the three months ended June 30, 2011, compared to the same period in the prior year,
primarily as a result of a 15% decrease in Company restaurant revenues. This decrease was partially
offset by lower food margins in EMEA and $3.1 million of unfavorable impact from the movement of
currency exchange rates, primarily in EMEA. Food, paper and product costs as a percentage of
Company restaurant revenues increased by 0.8% to 29.9%, primarily due to higher commodity costs
across the EMEA market.
In Latin America, food, paper and product costs increased by $0.7 million, or 12%, to $6.6
million for the three months ended June 30, 2011, compared to the same period in the prior year,
primarily as a result of a 14% increase in Company restaurant revenues and $0.4 million of
unfavorable impact from the movement of currency exchange rates. Food, paper and product costs as a
percentage of Company restaurant revenues decreased by 0.6% to 37.7% primarily due to a shift in
product mix and strategic pricing initiatives.
Payroll and employee benefits costs
Total payroll and employee benefits costs decreased by $17.1 million, or 12%, to $122.2
million during the three months ended June 30, 2011, compared to the same period in the prior year.
This decrease was primarily due to the net decrease of 57 Company restaurants during the trailing
twelve-month period ended June 30, 2011, including the net refranchising of 51 Company restaurants
and improved labor margins. These factors were partially offset by $4.3 million of unfavorable
impact from the movement of currency exchange rates. As a percentage of Company restaurant
revenues, total payroll and employee benefits costs decreased by 1.5% to 29.2%, primarily due to
improved labor margins in the U.S. and Canada and EMEA/APAC segments.
In the U.S. and Canada, payroll and employee benefits costs decreased by $9.3 million, or 9%,
to $90.7 million during the three months ended June 30, 2011, compared to the same period in the
prior year, primarily due the net reduction of nine Company restaurants during the trailing
twelve-month period ended June 30, 2011, including the net refranchising of five Company
restaurants and improved labor margins. These factors were partially offset by $0.8 million of
unfavorable impact from the movement of currency exchange rates. As a percentage of Company
restaurant revenues, payroll and employee benefits costs decreased by 1.0% to 30.0%, primarily due
to revisions to restaurant compensation plans to more closely align incentive compensation with
restaurant performance.
In EMEA/APAC, payroll and employee benefits costs decreased by $8.0 million, or 21%, to $29.5
million during the three months ended June 30, 2011, compared to the same period in the prior year,
primarily due to the net decrease of 48 Company restaurants during the trailing twelve-month period
ended June 30, 2011, including the net refranchising of 46 Company restaurants, partially offset by
$3.2 million of unfavorable impact from the movement of currency exchange rates. As a percentage of
Company restaurant revenues, payroll and employee benefits costs decreased by 2.5% to 29.7%,
primarily due to improved leverage of fixed payroll and employee benefit costs resulting from
positive comparable sales growth.
In Latin America, payroll and employee benefits costs increased by $0.3 million, or 17%, to
$2.1 million during the three months ended June 30, 2011, compared to the same period in the prior
year, primarily as a result of higher variable labor costs due to Company comparable sales growth
of 4.6%. The impact from the movement of currency exchange rates was not significant in this
segment for the period. As a percentage of Company restaurant revenues, payroll and employee
benefits costs increased by 0.3% to 12.0%.
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Occupancy and other operating costs
Total occupancy and other operating costs decreased by $8.4 million, or 7%, to $110.8 million
during the three months ended June 30, 2011, compared to the same period in the prior year,
primarily due to the net decrease of 57 Company restaurants during the trailing twelve-month period
ended June 30, 2011, including the net refranchising of 51 Company restaurants, and non-recurring
depreciation charges recorded in the U.S. during the three months ended June 30, 2010. These
factors were partially offset by $2.4 million of preliminary acquisition accounting effects and
$4.0 million of unfavorable impact from the movement of currency exchange rates.
As a percentage of Company restaurant revenues, total occupancy and other operating costs
increased by 0.3% to 26.4% during the three months ended June 30, 2011, compared to the same period
in the prior year, primarily as a result of the impact of sales deleverage on our fixed occupancy
and other operating costs due to negative Company comparable sales growth in the U.S. and Canada.
In the U.S. and Canada, occupancy and other operating costs decreased by $2.3 million, or 3%,
to $75.1 million during the three months ended June 30, 2011, compared to the same period in the
prior year. This decrease was primarily driven by the net reduction of nine Company restaurants
during the trailing twelve month period ended June 30, 2011, including the net refranchising of
five Company restaurants and non-recurring depreciation recorded in the U.S. during the three
months ended June 30, 2010. These factors were partially offset by $2.6 million of preliminary
acquisition accounting effects and $0.5 million of unfavorable impact from the movement of currency
exchange rates. As a percentage of Company restaurant revenues, occupancy and other operating costs
increased by 0.8% to 24.8%, primarily due the impact of sales deleverage on our fixed occupancy and
other operating costs.
In EMEA/APAC, occupancy and other operating costs decreased by $6.4 million, or 17%, to $30.7
million during the three months ended June 30, 2011, compared to the same period in the prior year.
The decrease was primarily due to a net decrease of 48 Company restaurants during the trailing
twelve-month period ended June 30, 2011, including the net refranchising of 46 Company restaurants.
As a percentage of Company restaurant revenues, occupancy and other operating costs decreased by
1.0% to 30.9%, primarily due to the improved leverage of fixed occupancy and other operating costs
resulting from positive comparable sales growth, mainly in Germany which is our largest Company
market in EMEA.
In Latin America, occupancy and other operating costs increased by $0.3 million, or 6.4%, to
$5.0 million during the three months ended June 30, 2011, compared to the same period in the prior
year, primarily due to $0.4 million of unfavorable impact from the movement of currency exchange
rates, partially offset by $0.2 million of preliminary acquisition accounting effects. As a
percentage
of Company restaurant revenues, occupancy and other operating costs decreased by 0.8% to
29.7%, primarily as a result of improved leverage of fixed occupancy and other operating costs
resulting from positive comparable sales growth.
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Selling, general and administrative expenses
Our selling, general and administrative expenses were comprised of the following for the three
months ended June 30, 2011 and 2010:
Successor | Predecessor | |||||||||||
Three Months Ended June 30, | ||||||||||||
2011 | 2010 | % Change | ||||||||||
(In millions) | ||||||||||||
Selling expenses |
$ | 20.5 | $ | 22.7 | (9 | )% | ||||||
General and administrative expenses before non-cash and other items: |
62.4 | 88.0 | (29 | )% | ||||||||
Share-based compensation |
0.4 | 3.9 | (90 | )% | ||||||||
Depreciation and amortization |
10.7 | 6.5 | 65 | % | ||||||||
Transaction costs |
0.3 | | NM | |||||||||
Global restructuring and related professional fees |
11.7 | | NM | |||||||||
Total general and administrative expenses |
85.5 | 98.4 | (13 | )% | ||||||||
Selling, general and administrative expenses |
$ | 106.0 | $ | 121.1 | (12 | )% | ||||||
NM Not meaningful |
Selling expenses decreased by $2.2 million, or 9%, to $20.5 million for the three months
ended June 30, 2011, compared to the same period in the prior year, primarily due to a $1.5 million
reduction in contributions to the marketing funds in our Company restaurant markets as a result of
lower sales at our Company restaurants and a $0.5 million decrease in local marketing expenditures.
These factors were partially offset by $0.7 million of unfavorable impact from the movement of
currency exchange rates for the three months ended June 30, 2011.
General and administrative expenses include costs that are not directly linked to our Company
restaurant, franchise or property operations. These expenses include salary and employee related
costs for our non-restaurant employees, professional fees and general overhead for our corporate
offices, which include rent, maintenance and utilities, travel and meeting expenses, IT and
technology costs and other general operating expenses. We refer to these expenses as general and
administrative expenses before non-cash and other items. General and administrative expenses also
include share-based compensation, depreciation and amortization, consisting primarily of
amortization of franchise agreement intangible assets, and costs associated with unusual or
non-recurring events that are classified as general and administrative expenses, including
Transaction costs and global restructuring expenses and related professional fees. General and
administrative expenses before non-cash and other items is a non-GAAP measure that management uses
to evaluate the efficiency of the core operations and to assist our management in comparing our
performance on a consistent basis for purposes of business decision-making by removing the impact
of certain items that were impacted by the Acquisition, the application of acquisition accounting
and our restructuring initiatives.
Our general and administrative expenses before non-cash and other items, which is a non-GAAP measure, decreased by $25.6
million, or 29%, to $62.4 million for the three months ended June 30, 2011, compared to the same
period in the prior year. This decrease was driven by a 39% decrease in salary and fringe benefits
and a 35% decrease in professional fees, which are directly attributable to the benefits derived
from our global restructuring and implementation of a Zero Based Budgeting (ZBB) program. These
expense reductions are consistent with our expectations that overall salary and fringe expense and
other corporate non-personnel general and administrative expenses included in general and
administrative expenses will decrease on an annual run rate basis by approximately $85 million to
$110 million with our global restructuring and ZBB program. If we are unable to maintain our
operations with a reduced workforce, we may incur additional general and administrative expenses
and therefore may not be able to sustain these cost reductions.
Our total general
and administrative expenses decreased by $12.9 million, or 13%, driven by the
$25.6 million decrease in general and administrative expenses before non-cash and other items and a
$3.5 million decrease in share-based compensation, partially offset by $0.3 million of Transaction
costs, $11.7 million of global restructuring expenses and related professional fees and a $4.2
million increase in depreciation and amortization resulting primarily from preliminary acquisition
accounting. Our total general and administrative
expenses include $3.2 million of unfavorable impact from the movement of currency exchange
rates for the three months ended June 30, 2011.
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Property Expenses
Total property expenses increased by $3.0 million, or 20%, to $17.7 million for the three
months ended June 30, 2011, compared to the same period in the prior year, primarily due to a $2.3
million increase in depreciation and amortization as result of preliminary acquisition accounting,
an increase in bad debt expense of $0.9 million and $0.5 million of unfavorable impact from the
movement of currency exchange rates. These factors were partially offset by decreased rent expense
from a reduction in the number of properties subleased to franchisees in EMEA.
Other operating (income) expense, net
Successor | Predecessor | |||||||
Three Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Net (gains) losses on disposal of assets,
restaurant closures and refranchisings |
$ | 1.3 | $ | 0.1 | ||||
Litigation settlements and reserves, net |
0.2 | (0.2 | ) | |||||
Foreign exchange, net (gains) losses |
(1.7 | ) | (2.6 | ) | ||||
Other, net |
0.5 | 1.4 | ||||||
Other operating (income) expense, net |
$ | 0.3 | $ | (1.3 | ) | |||
Income from Operations
Successor | Predecessor | |||||||
Three Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Income from Operations: |
||||||||
U.S. and Canada |
$ | 89.9 | $ | 79.6 | ||||
EMEA/APAC |
35.0 | 25.2 | ||||||
Latin America |
12.5 | 10.9 | ||||||
Unallocated |
(33.6 | ) | (32.9 | ) | ||||
Total income from operations |
$ | 103.8 | $ | 82.8 | ||||
Income from operations increased by $21.0 million, or 25%, to $103.8 million during the three
months ended June 30, 2011, compared to the same period in the prior year, primarily as a result of
a $15.1 million decrease in selling, general and administrative expenses, an $8.5 million increase
in franchise revenues and a $2.2 million increase in Company restaurant margin. These factors were
partially offset by a $3.2 million decrease in net property income and a $1.6 million decrease in
other operating income, net. (See Note 16 to the accompanying unaudited condensed consolidated
financial statements for segment information disclosures).
For the three months ended June 30, 2011, the favorable impact of movements in currency
exchange rates on revenues was partially offset by the unfavorable impact on Company restaurant
expenses and selling, general and administrative expenses from the movement of currency exchange
rates, resulting in a net favorable impact on income from operations of $3.0 million.
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Interest Expense, net
Interest expense, net increased by $35.3 million during the three months ended June 30, 2011,
compared to the same period in the prior year, reflecting an increase in borrowings due to the
Transactions, as well as higher interest rates.
The weighted average interest rate for the Companys long-term debt, including the Senior
Notes, was 6.6% for the three months ended June 30, 2011, which included the effect of our interest
rate caps on our Amended Credit Agreement. We expect interest expense will be significantly higher
in future periods than experienced by our Predecessor in comparable periods as a result of our
increased amount of outstanding indebtedness.
The weighted average interest rate for the three months ended June 30, 2010 was 4.7%, which
included the impact of interest rate swaps on 74.8% of our Predecessors term debt.
Income Tax Expense
Income tax expense was $13.7 million for the three months ended June 30, 2011, resulting in an
effective tax rate of 24.2%, primarily as a result of the current mix of income from multiple tax
jurisdictions and the resolution of state tax audits. Income tax expense was $21.8 million for the
three months ended June 30, 2010, resulting in an effective tax
rate of 30.8%, primarily as a
result of the mix of income from multiple tax jurisdictions and currency fluctuations.
Net Income
Our net income decreased by $6.2 million, or 13%, to $42.8 million during the three months
ended June 30, 2011, compared to the same period in the prior year, primarily as a result of a
$35.3 million increase in net interest expense, partially offset by a $21.0 million increase in
income from operations and a $8.1 million decrease in income tax expense.
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Results of Operations for the Six Months Ended June 30, 2011 and 2010
The following table presents our results of operations for the six months ended June 30, 2011
and 2010:
Successor | Predecessor | |||||||||||
Six Months Ended June 30, | Increase/ | |||||||||||
2011 | 2010 | (Decrease) | ||||||||||
(In millions) | ||||||||||||
Revenues: |
||||||||||||
Company restaurant revenues |
$ | 811.6 | $ | 893.3 | (9 | )% | ||||||
Franchise revenues |
281.0 | 270.2 | 4 | % | ||||||||
Property revenues |
56.7 | 56.4 | 1 | % | ||||||||
Total revenues |
1,149.3 | 1,219.9 | (6 | )% | ||||||||
Company restaurant expenses |
724.1 | 795.2 | (9 | )% | ||||||||
Selling, general and administrative expenses |
212.2 | 238.9 | (11 | )% | ||||||||
Property expenses |
35.9 | 29.9 | 20 | % | ||||||||
Other operating (income) expense, net |
5.3 | (5.8 | ) | NM | ||||||||
Total operating costs and expenses |
977.5 | 1,058.2 | (8 | )% | ||||||||
Income from operations |
171.8 | 161.7 | 6 | % | ||||||||
Interest expense |
99.4 | 24.4 | 307 | % | ||||||||
Interest income |
(1.6 | ) | (0.5 | ) | 220 | % | ||||||
Interest expense, net |
97.8 | 23.9 | 309 | % | ||||||||
Loss on early extinguishment of debt |
19.6 | | NM | |||||||||
Income before income taxes |
54.4 | 137.8 | (61 | )% | ||||||||
Income tax expense |
14.4 | 47.8 | (70 | )% | ||||||||
Net income |
$ | 40.0 | $ | 90.0 | (56 | )% | ||||||
NM- Not meaningful. |
Revenues
Company restaurant revenues
Total Company restaurant revenues decreased by $81.7 million, or 9%, to $811.6 million for the
six months ended June 30, 2011, compared to the same period in the prior year, primarily due to a
net decrease of 57 Company restaurants during the trailing twelve-month period ended June 30, 2011,
including the net refranchising of 51 Company restaurants as part of our ongoing portfolio
management initiative, and negative worldwide Company comparable sales growth of 2.6% (in constant
currencies). These factors were partially offset by $17.6 million of favorable impact from the
movement of currency exchange rates.
In the U.S. and Canada, Company restaurant revenues decreased by $47.8 million, or 8%, to
$584.8 million for the six months ended June 30, 2011, compared to the same period in the prior
year. This decrease was the result of negative Company comparable sales growth in the U.S. and
Canada of 4.8% (in constant currencies) and a net decrease of nine Company restaurants during the
trailing twelve-month period ended June 30, 2011, including the net refranchising of five Company
restaurants. These factors were partially offset by $4.0 million of favorable impact from the
movement of currency exchange rates in Canada.
In EMEA/APAC, Company restaurant revenues decreased by $36.8 million, or 16%, to $193.8
million for the six months ended June 30, 2011, compared to the same period in the prior year,
primarily due to a net decrease of 48 Company restaurants during the trailing twelve-month period
ended June 30, 2011, including the net refranchising of 46 Company restaurants. These factors were
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partially offset by Company comparable sales growth of 5.0% (in constant currencies) and $11.5
million of favorable impact from the movement of currency exchange rates.
In Latin America, where all Company restaurants are located in Mexico, Company restaurant
revenues increased by $2.9 million, or 9.0%, to $33.0 million for the six months ended June 30,
2011, compared to the same period in the prior year. The increase was primarily the result of
Company comparable sales growth of 0.3% (in constant currencies) and $2.0 million of favorable
impact from the movement of currency exchange rates.
Franchise revenues
Total franchise revenues increased by $10.8 million, or 4%, to $281.0 million for the six
months ended June 30, 2011, compared to the same period in the prior year, primarily due to a net
increase of 219 franchise restaurants during the trailing twelve-month period ended June 30, 2011,
including the net refranchising of 51 Company restaurants, and $4.6 million of favorable impact
from the movement of currency exchange rates. These factors were partially offset by negative
worldwide franchise comparable sales growth of 2.5% (in constant currencies).
In the U.S. and Canada, franchise revenues decreased by $6.5 million, or 4%, to $149.2 million
for the six months ended June 30, 2011, compared to the same period in the prior year. This
decrease was primarily the result of negative franchise comparable sales growth in the U.S. and
Canada of 5.8% (in constant currencies). The impact from the movement of currency exchange rates
was not significant in this segment for the period.
Franchise revenues in EMEA/APAC increased by $13.8 million, or 15%, to $103.4 million for the
six months ended June 30, 2011, compared to the same period in the prior year. This increase was
primarily due to a net increase of 204 franchise restaurants during the trailing twelve-month
period ended June 30, 2011, including the net refranchising of 46 Company restaurants, positive
franchise comparable sales growth of 1.7% (in constant currencies), and $4.6 million of favorable
impact from the movement of currency exchange rates.
Latin America franchise revenues increased by $3.5 million, or 14%, to $28.4 million for the
six months ended June 30, 2011, compared to the same period in the prior year. The increase was
primarily due to the recognition of $1.6 million in cumulative royalties previously deferred, the
net increase of 27 franchise restaurants during the trailing twelve-month period ended June 30,
2011 and positive franchise comparable sales growth of 5.7% (in constant currencies). The impact
from the movement of currency exchange rates was not significant in this segment for the period.
Property Revenues
Total property revenues increased by $0.3 million, or 1% to $56.7 million for the six months
ended June 30, 2011, compared to the same period in the prior year. The increase was primarily
driven by preliminary acquisition accounting effects of $2.6 million and $1.0 million of favorable
impact from the movement of currency exchange rates. These factors were partially offset by
decreased revenues from percentage rents as a result of negative franchise comparable sales growth
in the U.S.
In the U.S. and Canada, property revenues increased by $1.8 million, or 4%, to $47.5 million
for the six months ended June 30, 2011, compared to the same period in the prior year. The increase
was due to $2.6 million of preliminary acquisition accounting effects, partially offset by
decreased revenues from percentage rent as a result of negative franchise comparable sales growth
in the U.S.
Property revenues in EMEA/APAC decreased by $1.5 million, or 14%, to $9.2 million for the six
months ended June 30, 2011, compared to the same period in the prior year, due to a reduction in
the number of properties in our portfolio of properties leased to franchisees. The impact from the
movement of currency exchange rates was not significant in this segment for the period.
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Operating Costs and Expenses
Food, paper and product costs
Total food, paper and product costs decreased by $22.8 million, or 8%, to $262.4 million
during the six months ended June 30, 2011, compared to the same period in the prior year, primarily
as a result of a 9% decrease in Company restaurant revenues. This decrease was partially offset by
$5.5 million of unfavorable impact from the movement of currency exchange rates and lower food
margins in EMEA/APAC.
As a percentage of Company restaurant revenues, total food, paper and product costs increased
by 0.4%, to 32.3% during the six months ended June 30, 2011, compared to the same period in the
prior year. The increase was driven by higher commodity prices in the U.S. and EMEA, partially
offset by a shift in product mix away from lower margin value menu items in the U.S. and strategic
pricing initiatives.
In the U.S. and Canada, food, paper and product costs decreased by $14.9 million, or 7%, to
$191.8 million during the six months ended June 30, 2011, compared to the same period in the prior
year, primarily as a result of an 8% decrease in Company restaurant revenues. These factors were partially offset by $1.3 million of unfavorable impact from the
movement of currency exchange rates. Food, paper and product costs in the U.S. and Canada as a
percentage of Company restaurant revenues increased by 0.1% to 32.8%, primarily due to higher
commodity prices in the U.S., partially offset by a shift in product mix away from lower margin
value menu items and strategic pricing initiatives.
In EMEA/APAC, food, paper and product costs decreased by $8.5 million, or 13%, to $58.3
million for the six months ended June 30, 2011, compared to the same period in the prior year,
primarily as a result of a 16% decrease in Company restaurant revenues. This decrease was partially
offset by lower food margins in EMEA/APAC due to higher commodity costs and $3.5 million of
unfavorable impact from the movement of currency exchange rates. Food, paper, and product costs as
a percentage of Company restaurant revenues increased by 1.1% to 30.1%, primarily due to higher
commodity costs in EMEA.
In Latin America, food, paper and product costs increased by $0.6 million, or 5%, to $12.3
million for the six months ended June 30, 2011, compared to the same period in the prior year,
primarily as a result of a 9% increase in Company restaurant revenues and $1.0 million of
unfavorable impact from the movement of currency exchange rates. Food, paper, and product costs as
a percentage of Company restaurant revenues decreased by 1.3% to 37.4% primarily due to a shift in
product mix and strategic pricing initiatives.
Payroll and employee benefits costs
Total payroll and employee benefits costs decreased by $35.3 million, or 12.8%, to $242.2
million during the six months ended June 30, 2011, compared to the same period in the prior year.
This decrease was primarily due to the net decrease of 57 Company restaurants during the trailing
twelve-month period ended June 30, 2011, including the net refranchising of 51 Company restaurants
and improved labor margins. These factors were partially offset by $4.8 million of unfavorable
impact from the movement of currency exchange rates. As a percentage of Company restaurant
revenues, total payroll and employee benefits costs decreased by 1.3% to 29.8%, primarily due to
improved labor margins in the U.S. and Canada and EMEA/APAC.
In the U.S. and Canada, payroll and employee benefits costs decreased by $17.6 million, or 9%,
to $179.7 million during the six months ended June 30, 2011, compared to the same period in the
prior year, primarily due to the net reduction of nine Company restaurants during the trailing
twelve-month period ended June 30, 2011, including the net refranchising of five Company
restaurants and improved labor margins. These factors were partially offset by $1.3 million of
unfavorable impact from the movement of currency exchange rates. As a percentage of Company
restaurant revenues, payroll and employee benefits costs decreased by 0.5% to 30.7%, primarily due
to revisions to restaurant compensation plans to more closely align incentive compensation with
restaurant performance, partially offset by the impact of sales deleverage on our fixed payroll and
employee benefit costs due to negative Company comparable sales growth.
In EMEA/APAC, payroll and employee benefits costs decreased by $18.0 million, or 24%, to $58.6
million during the six months ended June 30, 2011, compared to the same period in the prior year,
primarily due to the net decrease of 48 Company restaurants
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during the trailing twelve-month period ended June 30, 2011, including the net refranchising
of 46 Company restaurants, partially offset by $3.3 million of unfavorable impact from the movement
of currency exchange rates. As a percentage of Company restaurant revenues, payroll and employee
benefit costs decreased by 3.0% to 30.2%, primarily due to improved leverage of payroll and
employee beenfit costs, resulting from comparable sales growth and the acquisition of 35
restaurants in Singapore in March 2010, where labor costs are generally lower.
In Latin America, payroll and employee benefits costs increased by $0.3 million, or 8%, to
$3.9 million during the six months ended June 30, 2011, compared to the same period in the prior
year, primarily as a result of higher variable labor costs due to positive company comparable sales
of 0.3%. The impact from the movement of currency exchange rates was not significant in this
segment for the period. As a percentage of Company restaurant revenues, payroll and employee
benefits costs remained relatively unchanged at 11.9%.
Occupancy and other operating costs
Total occupancy and other operating costs decreased by $12.8 million, or 6%, to $219.5 million
during the six months ended June 30, 2011, compared to the same period in the prior year, primarily
due to the net decrease of 57 Company restaurants during the trailing twelve-month period ended
June 30, 2011, including the net refranchising of 51 Company restaurants, and non-recurring
depreciation charges recorded in the U.S., during the six months ended June 30, 2010. These factors
were partially offset by $5.1 million of preliminary acquisition accounting effects and $5.4
million of unfavorable impact from the movement of currency exchange rates.
As a percentage of Company restaurant revenues, total occupancy and other operating costs
increased by 1.1% to 27.0% during the six months ended June 30, 2011, compared to the same period
in the prior year, primarily as a result of the impact of sales deleverage on our fixed occupancy
and other operating costs due to negative Company comparable sales growth in the U.S., Canada and
Mexico and preliminary acquisition accounting.
In the U.S. and Canada, occupancy and other operating costs decreased by $1.7 million, or
1.2%, to $148.7 million during the six months ended June 30, 2011, compared to the same period in
the prior year. This decrease was primarily driven by the net reduction of nine Company restaurants
during the trailing twelve month period ended June 30, 2011, including the net refranchising of
five Company restaurants and non-recurring depreciation charges recorded during the six months
ended June 30, 2011. These factors were partially offset by $5.4 million of preliminary acquisition
accounting effects and $1.0 million of unfavorable impact from the movement of currency exchange
rates. As a percentage of Company restaurant revenues, occupancy and other operating costs
increased by 1.6% to 25.4%, primarily due to the impact of sales deleverage on our fixed occupancy
and other operating costs and preliminary acquisition accounting.
In EMEA/APAC, occupancy and other operating costs decreased by $11.5 million, or 16%, to $61.1
million during the six months ended June 30, 2011, compared to the same period in the prior year.
The decrease was primarily due to a net decrease of 48 Company restaurants during the trailing
twelve-month period, including the net refranchising of 46 Company restaurants. These factors were
partially offset by $3.8 million of unfavorable impact from the movement of currency exchange
rates. As a percentage of Company restaurant revenues, occupancy and other operating costs remained
relatively unchanged at 31.5%.
In Latin America, occupancy and other operating costs increased by $0.4 million, or 4%, to
$9.7 million during the six months ended June 30, 2011, compared to the same period in the prior
year, primarily due to $1.0 million of unfavorable impact from the movement of currency exchange
rates. As a percentage of Company restaurant revenues, occupancy and other operating costs
decreased by 1.3% to 29.5%, primarily as a result of improved leverage of fixed occupancy and other
operating costs resulting from positive comparable sales growth.
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Selling, general and administrative expenses
Our selling, general and administrative expenses were comprised of the following for the six
months ended June 30, 2011 and 2010:
Successor | Predecessor | |||||||||||
Six Months Ended June 30, | ||||||||||||
2011 | 2010 | % Change | ||||||||||
(In millions) | ||||||||||||
Selling expenses |
$ | 39.5 | $ | 44.3 | (11 | )% | ||||||
General and administrative expenses before non-cash and other items: |
125.4 | 173.5 | (28 | )% | ||||||||
Share-based compensation |
0.6 | 8.1 | (93 | )% | ||||||||
Depreciation and amortization |
21.7 | 13.0 | 67 | % | ||||||||
Transaction costs |
1.1 | | NM | |||||||||
Global restructuring and related professional fees |
23.9 | | NM | |||||||||
Total general and administrative expenses |
172.7 | 194.6 | (11 | )% | ||||||||
Selling, general and administrative expenses |
$ | 212.2 | $ | 238.9 | (11 | )% | ||||||
NM Not meaningful |
Selling expenses decreased by $4.8 million, or 11%, to $39.5 million for the six months
ended June 30, 2011, compared to the same period in the prior year, primarily due to a $3.5 million
reduction in contributions to the marketing funds in our Company restaurant markets as a result of
lower sales at our Company restaurants and a $1.4 million decrease in local marketing expenditures.
These factors were partially offset by $0.9 million of unfavorable impact from the movement of
currency exchange rates for the six months ended June 30, 2011.
Our general and administrative expenses before non-cash and other items, which is a non-GAAP
measure, decreased by $48.1 million, or 28%, to $125.4 million for the six months ended June 30,
2011, compared to the same period in the prior year. This decrease
was driven by a 35% decrease in
salary and fringe benefits and a 31% decrease in professional fees, which are directly attributable
to the benefits derived from our global restructuring and implementation of the ZBB program. These
expense reductions are consistent with our expectations that overall salary and fringe expense and
other corporate non-personnel general and administrative expenses included in general and
administrative expenses will decrease on an annual run rate basis by approximately $85 million to
$110 million with our global restructuring and ZBB program. If we are unable to maintain our
operations with a reduced workforce, we may incur additional general and administrative expenses
and therefore may not be able to sustain these cost reductions.
Our total general and administrative expenses decreased by $21.9 million, or 11%, driven by
the $48.1 million decrease in general and administrative expenses before non-cash and other items
and a $7.5 million decrease in share-based compensation, partially offset by $1.1 million of
Transaction costs, $23.9 million of global restructuring expenses and related professional fees,
and an $8.7 million increase in depreciation and amortization
resulting primarily from preliminary
acquisition accounting. Our total general and administrative expenses include $2.6 million of
unfavorable impact from the movement of currency exchange rates for the six months ended June 30,
2011.
Property Expenses
Total property expenses increased by $6.0 million, or 20%, to $35.9 million for the six months
ended June 30, 2011, compared to the same period in the prior year, primarily due to a $4.6 million
increase in depreciation and amortization as result of preliminary acquisition accounting, an
increase in bad debt expense of $1.8 million and $0.6 million of unfavorable impact from the
movement of currency exchange rates. These factors were partially offset by decreased rent expense
from a reduction in the number of properties subleased to franchisees in EMEA.
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Other operating (income) expense, net
Successor | Predecessor | |||||||
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Net (gains) losses on disposal of assets,
restaurant closures and refranchisings |
$ | 1.8 | $ | (3.1 | ) | |||
Litigation settlements and reserves, net |
0.6 | (0.8 | ) | |||||
Foreign exchange net (gains) losses |
1.4 | (4.5 | ) | |||||
Other, net |
1.5 | 2.6 | ||||||
Other operating (income) expense, net |
$ | 5.3 | $ | (5.8 | ) | |||
Income from Operations
Successor | Predecessor | |||||||
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Income from Operations: |
||||||||
U.S. and Canada |
$ | 162.7 | $ | 165.4 | ||||
EMEA/APAC |
56.6 | 41.8 | ||||||
Latin America |
25.9 | 19.4 | ||||||
Unallocated |
(73.4 | ) | (64.9 | ) | ||||
Total income from operations |
$ | 171.8 | $ | 161.7 | ||||
Income from operations increased by $10.1 million, or 6%, to $171.8 million during the six
months ended June 30, 2011, compared to the same period in the prior year, primarily as a result of
a $26.7 million decrease in selling, general and administrative expenses and a $10.8 million
increase in franchise revenues. These factors were partially offset by an $11.1 million decrease
in other operating income, net, a $10.6 million decrease in Company restaurant margin and a $5.7
million decrease in net property income. (See Note 16 to the accompanying unaudited condensed
consolidated financial statements for segment information disclosures).
For the six months ended June 30, 2011, the favorable impact of movements in currency exchange
rates on revenues was partially offset by the unfavorable impact on Company restaurant expenses and
selling, general and administrative expenses from the movement of currency exchange rates,
resulting in a net favorable impact on income from operations of $3.1 million.
Interest Expense, net
Interest expense, net increased by $73.9 million during the six months ended June 30, 2011,
compared to the same period in the prior year, reflecting an increase in borrowings due to the
Transactions, as well as higher interest rates.
The weighted average interest rate for the Companys long-term debt, including the Senior
Notes, was 7.0% for the six months ended June 30, 2011, which included the effect of interest rate
caps on our Amended Credit Agreement. We expect aggregate interest expense to be significantly
higher in future periods than experienced by our Predecessor in comparable periods as a result of
our increased amount of outstanding indebtedness.
The weighted average interest rate for the six months ended June 30, 2010 was 4.7%, which
included the impact of interest rate swaps on 74.0% of our Predecessors term debt.
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Loss on Early Extinguishment of Debt
We recorded a loss on early extinguishment of debt of $19.6 million for the six months
ended June 30, 2011, reflecting the write off deferred financing costs and fees incurred in
conjunction with the amendment of our credit facility as discussed in Note 9 to the accompanying
unaudited condensed consolidated financial statements.
Income Tax Expense
Income tax expense was $14.4 million for the six months ended June 30, 2011, resulting in an
effective tax rate of 26.5%, primarily as a result of the current mix of income from multiple tax
jurisdictions and the resolution of state tax audits. Income tax expense was $47.8 million for the
six months ended June 30, 2010, resulting in an effective tax rate of 34.7%, primarily as a result
of the mix of income from multiple tax jurisdictions and currency fluctuations.
Net Income
Our net income decreased by $50.0 million, or 56%, to $40.0 million during the six months
ended June 30, 2011, compared to the same period in the prior year, primarily as a result of a
$73.9 million increase in interest expense, net and a $19.6 million loss on early extinguishment of
debt, partially offset by a $33.4 million decrease in income tax expense and a $10.1 million
increase in income from operations.
Liquidity and Capital Resources
At June 30, 2011, we had cash and cash equivalents of $282.2 million and working capital of
$205.8 million. In addition, at June 30, 2011, we had borrowing capacity of $121.5 million under
our Revolving Credit Facility. Cash provided by operations was $100.5 million for the six months
ended June 30, 2011 compared to $188.3 million for the six months ended June 30, 2010.
Our primary sources of liquidity are cash generated by operations and borrowings
available under our Revolving Credit Facility. We have used, and may in the
future use, our liquidity to make required interest and principal payments, to voluntarily repay and/or repurchase, our or one of our affiliates outstanding
debt, to fund our capital expenditures and/or to pay dividends to our parent
holding company. Based on our current level of operations and available cash, we
believe our cash flow from operations, combined with availability under our
Revolving Credit Facility, will provide sufficient liquidity to fund our current
obligations, debt service requirements and capital spending requirements over the
next twelve months and the foreseeable future. Our consolidated cash and cash
equivalents include balances held in foreign tax jurisdictions that represent
undistributed earnings of our foreign subsidiaries, which are considered
indefinitely reinvested for U.S. income tax purposes. We do not plan to utilize
cash flows from our foreign subsidiaries to meet our future debt service
requirements in the U.S. and to the degree cash is transferred to the U.S. from
our foreign subsidiaries, we expect we will be able to do so in a tax efficient
manner. However, adverse income tax consequences could result if we are
compelled to make unplanned transfers of cash to meet future liquidity
requirements in the U.S.
As a result of the Transactions, we are highly leveraged. Our liquidity requirements are
significant, primarily due to debt service requirements.
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Debt Instruments and Debt Service Requirements
Amended Credit Agreement
BKC entered into a credit agreement dated as of October 19, 2011, as amended and restated as
of February 15, 2011 (the Amended Credit Agreement) with JPMorgan Chase Bank, N.A., as
administrative agent, Barclays Capital, as syndication agent, and the lenders party thereto from
time to time. Under the Amended Credit Agreement, the aggregate principal amount of term loans
denominated in U.S. dollars was increased to $1,600.0 million and the amount of term loans
denominated in Euros was reduced to 200.0 million (the Term Loan Facility). The Amended Credit
Agreement also provides for a senior secured revolving credit facility for up to $150.0 million of
revolving extensions of credit outstanding at any time (including revolving loans, swingline loans
and letters of credit), the amount of which was unchanged by the February 15, 2011 amendment (the
Revolving Credit Facility).
As of June 30, 2011, we had no amounts outstanding under the Revolving Credit Facility
although we utilized approximately $28.5 million of the
available commitment as of June 30, 2011 to support letters
of credit. Therefore the availability under the Revolving Credit Facility was
$121.5 million. We may, from time to time, borrow from and repay the Revolving Credit Facility.
Consequently, the amount outstanding under the Revolving Credit Facility at the end of a period may
not be reflective of the total amounts outstanding during the period.
Based on the amounts outstanding under the Term Loan Facility, as of June 30, 2011, debt
service for the next twelve months will be approximately
$86.4 million in interest and $19.0 million in principal payments.
Under the Amended Credit Agreement, at BKCs election, the interest rate per annum applicable
to the loans is based on a fluctuating rate of interest determined by reference to either (i) a
base rate determined by reference to the higher of (a) the prime rate of JPMorgan Chase Bank, N.A.,
(b) the federal funds effective rate plus 0.50% and (c) the Eurocurrency rate applicable for an
interest period of one month plus 1.00%, plus an applicable margin equal to 2.00% for loans under
the U.S. dollar denominated tranche of the Term Loan Facility and 2.25% for loans under the
Revolving Credit Facility, or (ii) a Eurocurrency rate determined by reference to EURIBOR for the
Euro denominated tranche and LIBOR for the U.S. dollar denominated tranche and Revolving Credit
Facility, adjusted for statutory reserve requirements, plus an applicable margin equal to 3.25% for
loans under the Euro denominated tranche of the Term Loan Facility, 3.00% for loans under the U.S.
dollar denominated tranche of the Term Loan Facility and 3.25% for loans under the Revolving Credit
Facility. Term Loan B borrowings under the Amended Credit Agreement are subject to a LIBOR floor of
1.50%. The maturity date of Term Loan Facility is October 19, 2016 and the maturity date of the
Revolving Credit Facility is October 19, 2015.
The financial covenants, negative covenants, affirmative covenants, maturity dates, prepayment
events and events of default, as described in the Companys Transition Report on Form 10-K for the
six-month period ended December 31, 2010, were unchanged by
the February 15, 2011 amendment. As of June 30, 2011, the Company was in compliance with all
covenants of the Amended Credit Agreement.
Senior Notes
We currently have outstanding $800,000,000 aggregate principal amount of 9.875% senior notes
due 2018 (the Senior Notes). The Senior Notes bear interest at a rate of 9.875% per annum, which
is payable semi-annually on October 15 and April 15 of each year, commencing on April 15, 2011. The
Senior Notes mature on October 15, 2018.
Based on the amount outstanding at June 30, 2011, debt service for the next 12 months on the
Senior Notes is $79 million in interest payments. No principal payments are due until maturity. At
June 30, 2011, the Senior Notes were recorded at a carrying value of $800.0 million.
The Senior Notes Indenture contains certain covenants that BKC must meet during the term of
the Senior Notes, including, but not limited to, limitations on restricted payments (as defined in
the Senior Notes Indenture), incurrence of indebtedness, issuance of disqualified stock and
preferred stock, asset sales, mergers and consolidations, transactions with affiliates, and
guarantees of indebtedness by subsidiaries. As of June 30, 2011, the Company was in compliance with
all covenants of our Senior Notes.
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Interest Rate Cap Agreements
Following the Transactions, we entered into two deferred premium interest rate caps, one of
which was denominated in U.S. dollars (notional amount of $1.5 billion) and the other denominated
in Euros (notional amount of 250 million) (the Cap Agreements). The six year Cap Agreements are
a series of 25 individual caplets that reset and settle on the same dates as the Term Loan
Facility. The deferred premium associated with the Cap Agreements was $47.7 million for the U.S.
dollar denominated exposure and 9.4 million for the Euro denominated exposure. After we entered
into the Amended Credit Agreement, we modified our interest rate cap denominated in Euros to reduce
its notional amount by 50 million throughout the life of the caplets. Additionally, we entered
into a new interest rate cap agreement denominated in U.S. dollars (notional amount of $90 million
with a strike price of 1.50%) (the New Cap Agreement). The terms of the New Cap Agreement are
substantially similar to those described above and the Cap Agreements were not otherwise revised by
these modifications.
Under the terms of the Cap Agreements, if LIBOR/EURIBOR resets above a strike price of 1.75%
(1.50% for the New Cap Agreement), we will receive the net difference between the rate and the
strike price. In addition, on the quarterly settlement dates, we will remit the deferred premium
payment (plus interest) to the counterparty. If LIBOR/EURIBOR resets below the strike price no
payment is made by the counterparty. However, we would still be responsible for the deferred
premium and interest.
The interest rate cap contracts are designated as cash flow hedges and to the extent they are
effective in offsetting the variability of the variable interest payments, changes in the
derivatives fair value are not included in current earnings but are included in accumulated other
comprehensive income (AOCI) in the accompanying consolidated balance sheets. At each cap maturity
date, the portion of fair value attributable to the matured cap will be reclassified from AOCI into
earnings as a component of interest expense.
Comparative Cash Flows
Operating Activities
Cash provided by operating activities was $100.5 million during the six months ended June 30,
2011, compared to $188.3 million during the six months ended June 30, 2010. The decrease in cash
provided by operating activities during the six months ended June 30, 2011 resulted primarily from
a decrease in earnings, driven by an increase in interest expense, as well as Transaction costs and
costs associated with our global restructuring including related professional fees.
Investing Activities
Cash used for investing activities was $14.9 million during the six months ended June 30, 2011
compared to $81.3 million during the six months ended June 30, 2010. This decrease was driven
primarily by a decrease in capital expenditures and acquisitions of franchise restaurants during
the six months ended June 30, 2011 compared to the same period in the prior year.
Capital expenditures for new restaurants include the costs to build new Company restaurants as
well as properties for new restaurants that we lease to franchisees. Capital expenditures for
existing restaurants consist of the purchase of real estate related to existing restaurants,
maintenance capital required for each Company restaurant to maintain its appearance in accordance
with our standards and investments in new equipment and remodeling. Capital expenditures made for
existing restaurants also include investments we make in properties we lease or sublease to
franchisees, including contributions we make towards leasehold improvements completed by
franchisees on properties we own. Other capital expenditures include investments in information
technology systems and corporate furniture and fixtures. The following table presents capital
expenditures, by type of expenditure:
Successor | Predecessor | ||||||||
Six Months Ended | |||||||||
June 30, | |||||||||
2011 | 2010 | ||||||||
(In millions) | |||||||||
New restaurants |
$ | 2.4 | $ | 23.4 | |||||
Existing restaurants |
20.5 | 54.1 | |||||||
Other, including corporate |
0.6 | 9.0 | |||||||
Total |
$ | 23.5 | $ | 86.5 | |||||
We expect cash capital expenditures of approximately $75 million to $85 million in 2011 to
fund new restaurant development, maintenance capital requirements, our restaurant reimaging
program, operational initiatives in our restaurants and other corporate expenditures. Our actual
capital expenditures may be affected by economic and other factors. We expect to continue to
review our level of capital expenditures throughout the remainder of 2011. We expect to fund
capital expenditures from cash on hand, cash flow from operations and borrowings under the
Revolving Credit Facility.
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Financing Activities
Cash used by financing activities was $15.5 million during the six months ended June 30, 2011,
compared to $45.0 million during the six months ended June 30, 2010, primarily as a result of a
decrease in term debt repayments and elimination of dividends on common stock. The primary use of
cash for financing activities during the six months ended June 30, 2011 was the payment of fees and
expenses related to the Amended Credit Agreement.
Commitments and Off-Balance Sheet Arrangements
In April 2011, BKC entered into an agreement with, among others, 20/20 Franchisee Funding, LLC
(20/20 Funding), under which 20/20 Funding will offer financing to BKCs franchisees to remodel
their restaurants. While BKC does not guarantee the repayment of these loans, BKC has provided a
limited guarantee to 20/20 Funding on loan losses up to a maximum of $18.5 million. As of the date
of this report, no loans have been funded under this program and no liability was recorded at June
30, 2011 for this limited guarantee.
For information on Commitments and Contingencies, see Note 15 to the accompanying unaudited
condensed consolidated financial statements and Note 21, Commitments and Contingencies to the
Consolidated Financial Statements of the Companys Transition Report on Form 10-K for the six-month
period ended December 31, 2010.
New Financial Accounting Standards Board (FASB) Accounting Standards Updates Issued But Not Yet
Adopted
In July 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses. This ASU amends ASC Topic 310 by requiring additional disclosures
about the credit quality of financing receivables and the related allowance for credit losses. The
disclosures required by this ASU are effective for annual reporting periods ending on or after
December 15, 2011, which for us will be December 31, 2011. The amendments in this ASU will affect
our disclosures and are not expected to have a significant impact on the Company.
On December 20, 2010, the FASB issued ASU No. 2010-28, Intangibles-Goodwill and Other (Topic
350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts. This ASU is a consensus of the FASB Emerging Issues Task Force (EITF)
and requires an entity to perform Step 2 of the goodwill impairment test if it is more likely than
not that a goodwill impairment exists for reporting units with zero or negative carrying amounts.
An entity should consider whether there are any adverse qualitative factors indicating that
impairment may exist. If the entity determines that it is more likely than not that the goodwill is
impaired, Step 2 should be performed. Any resulting goodwill impairment should be recorded as a
cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any
impairments occurring after initial adoptions should be included in earnings. The amendments in
this ASU are effective for fiscal years, and interim periods, beginning after December 15,
2011, which for us will be January 1, 2012. Early adoption is not permitted. We have not yet
determined the impact, if any, that the adoption of this ASU will have on the Company.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The
amendments in this ASU clarify the Boards intent about the application of existing fair value
measurement requirements. The amendments change the wording used to describe many of the
requirements in U.S. GAAP for disclosing information about fair value measurements. The amendments
in this ASU are effective for fiscal years, and interim periods, beginning after December 15, 2011,
which for us will be January 1, 2012. We have not yet determined the impact, if any, that the
adoption of this ASU will have on the Company.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation
of Comprehensive Income. The amendments in this ASU eliminate the option to present component of
other comprehensive income as part of the statement of changes in stockholders equity. All
nonowner changes in stockholders equity will be presented either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. The amendments in this ASU
are effective for fiscal years, and interim periods, beginning after December 15, 2012, which for
us will be January 1, 2013. The Amendments in this ASU will affect the presentation of
comprehensive income and are not expected to have a significant effect on the Company.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes during the six months ended June 30, 2011 to the disclosures
made in Part II, Item 7A of our Transition Report on Form 10-K for the six-month period ended
December 31, 2010.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the participation of management,
including the Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the Companys disclosure controls and procedures (as defined in §240.13a-15(e) or
§240.15d-15(e)) as of June 30, 2011. Based on that evaluation, the CEO and CFO concluded that the
Companys disclosure controls and procedures were effective as of such date.
Internal Control Over Financial Reporting
The Companys management, including the CEO and CFO, confirm that there were no changes in the
Companys internal control over financial reporting during the fiscal quarter ended June 30, 2011
that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
Cautionary Note Regarding Forward-Looking Statements
Certain statements made in this report that reflect managements expectations regarding future
events and economic performance are forward-looking in nature and, accordingly, are subject to
risks and uncertainties. These forward-looking statements include statements regarding our
expectations about the benefits of our highly franchised business model; our expectations regarding
our ability to refranchise up to half of the current Company restaurant portfolio within the next
three to five years;
our expectations and belief regarding our
ability to successfully execute on our four priorities of marketing
communications, menu, operations and image to drive future sales and
traffic; our expectations and belief regarding our ability to develop
enhanced menu items which will appeal to a broader consumer base;
our expectations and belief regarding our ability to improve
restaurant operations through the restructuring of our field teams to
significantly increase our field presence;
our expectations and belief regarding our ability to decrease overall salary
and fringe benefits and other corporate non-personnel general and administrative expenses on an
annual run rate basis by approximately $85 million to $110 million; our expectations and belief
regarding our ability to fund our current obligations, projected working capital requirements, debt
service requirements and capital spending requirements over the next twelve months and the
foreseeable future; our expectations regarding our exposure to changes in interest rates following
the Transactions and the impact of changes in interest rates on the amount of our interest
payments, future earnings and cash flows; our expectations regarding our ability to hedge interest
rate risk of our variable rate debt through the purchase of interest rate caps; and other
expectations regarding our future financial and operational results. These forward-looking
statements are only predictions based on our current expectations and projections about future
events. Important factors could cause our actual results, level of activity, performance or
achievements to differ materially from those expressed or implied by these forward-looking
statements.
These factors include those risk factors set forth in filings with the Securities and Exchange
Commission, including our annual and quarterly reports, and the following:
| Global economic or other business conditions that may affect the desire or ability of our customers to purchase our products such as inflationary pressures, high unemployment levels, increases in gas prices, declines in median income growth, consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety, and the impact of negative sales and traffic on our business, including the risk that we will be required to incur non-cash impairment or other charges that reduce our earnings; | ||
| Risks related to our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations under our Amended Credit Facilities and Senior Notes; | ||
| Risks related to the financial strength of our franchisees, which could result in, among other things, restaurant closures, delayed or reduced payments to us of royalties, advertising contributions and rents, and an inability to obtain financing to fund development, restaurant remodels or equipment initiatives on acceptable terms or at all; |
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| Risks arising from the significant and rapid fluctuations in interest rates and in the currency exchange markets and the decisions and positions that we take to hedge such volatility; | ||
| Risks related to adverse weather conditions and other uncontrollable events, and the impact of such events on our operating results; | ||
| Our ability to compete domestically and internationally in an intensely competitive industry; | ||
| Our ability to successfully implement our domestic and international growth strategy and risks related to our international operations; | ||
| Risk related to the concentration of our restaurants in limited geographic areas, such as Germany, where we have experienced and may continue to experience declining sales and operating profits; | ||
| Our ability to realize anticipated cost savings and efficiencies, including those arising from our recent staff reductions and cost reduction plans and our ability to successfully implement our business strategy with reduced personnel; | ||
| Our ability to manage changing labor conditions and costs in the U.S. and internationally, including future mandated health care costs, if we or our franchisees choose not to pass, or cannot pass, these increased costs on to our guests; | ||
| Our ability and the ability of our franchisees to manage cost increases; | ||
| Our relationship with, and the success of, our franchisees and risks related to our restaurant ownership mix; | ||
| The effectiveness of our marketing and advertising programs and franchisee support of these programs; | ||
| Risks related to food safety, including foodborne illness and food tampering, and the safety of toys and other promotional items available in our restaurants; | ||
| Risks arising from the interruption or delay in the availability of our food or other supplies, including those that would arise from the loss of any of our major distributors, particularly in those international markets where we have a single distributor; | ||
| Our ability to successfully execute our portfolio management strategy to increase sales and profitability and to reposition our remodeling program to drive meaningful sales lifts and maximize return on capital; | ||
| Our ability to implement our growth strategy and strategic initiatives given restrictions imposed by our Amended Credit Agreement and Senior Notes Indenture; | ||
| Risks related to the ability of counterparties to our Credit Facilities, interest rate caps and foreign currency forward contracts to fulfill their commitments and/or obligations; | ||
| Risks related to interruptions or security breaches of our computer systems and risks related to the lack of integration of our worldwide technology systems; | ||
| Risks related to changes in the mix of earnings in countries with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities and continued losses in certain international Company restaurant markets and changes resulting from the Transactions that could negatively impact our effective tax rate and our ability to utilize foreign tax credits to offset our U.S. income taxes; | ||
| Risks related to the reasonableness of our tax estimates, including sales, excise, GST, VAT and other taxes; |
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| Adverse legal judgments, settlements or pressure tactics; and | ||
| Adverse legislation or regulation. |
These risks are not exhaustive and may not include factors which could adversely impact our
business and financial performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible for our management to
predict all risk factors, nor can we assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
Although we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness
of any of these forward-looking statements. You should not rely upon forward-looking statements as
predictions of future events. We do not undertake any responsibility to update any of these
forward-looking statements to conform our prior statements to actual results or revised
expectations.
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Part II Other Information
Item 1. Legal Proceedings
Ramalco Corp. et al. v. Burger King Corporation, No. 09-43704CA05 (Circuit Court of
the Eleventh Judicial Circuit, Dade County, Florida). On July 30, 2008, BKC was sued by four
Florida franchisees over our decision to mandate extended operating hours in the United States. The
plaintiffs seek damages, declaratory relief and injunctive relief. The court dismissed the
plaintiffs original complaint in November 2008. In December 2008, the plaintiffs filed an amended
complaint. In August 2010, the court entered an order reaffirming the legal bases for dismissal of
the original complaint, again holding that BKC had the authority under its franchise agreements to
mandate extended operating hours. The court held a hearing on December 7, 2010 and stated that, in
light of the ruling that the hours clause was unambiguous, it would grant BKCs motion to dismiss,
with prejudice, on seven of the eight claims in the amended complaint. The court denied the motion
to dismiss on one claim in the amended complaint, that the hours clause was unconscionable under
Florida law. BKC has filed a motion for summary judgment on the remaining claim and is waiting for
the courts decision on the motion.
Castenada v. Burger King Corp. and Burger King Corporation., No. CV08-4262 (U.S.
District Court for the Northern District of California). On September 10, 2008, a class action
lawsuit was filed against the Company in the United States District Court for the Northern District
of California. The complaint alleged that all 96 Burger King restaurants in California leased by
the Company and operated by franchisees violate accessibility requirements under federal and state
law. In September 2009, the court issued a decision on the plaintiffs motion for class
certification. In its decision, the court limited the class action to the 10 restaurants visited by
the named plaintiffs, with a separate class of plaintiffs for each of the 10 restaurants and 10
separate trials. In March 2010, the Company agreed to settle the lawsuit with respect to the 10
restaurants and, in July 2010, the court gave final approval to the settlement. In February 2011, a
class action lawsuit styled Vallabhapurapu v. Burger King Corporation, No. C11-00667 (U.S.
District Court for the Northern District of California) was filed with respect to the other 86
restaurants. The plaintiffs seek injunctive relief, statutory damages, attorneys fees and costs.
The Company intends to vigorously defend against all claims in the lawsuit, but the Company is
unable to predict the ultimate outcome of this litigation.
Darcy Newman v. Burger King Holdings, Inc. et. al., Case No. 10-48422CA30 (Miami-Dade
County Circuit Court), Belle Cohen v. David A. Brandon, et. al., Case No. 10-48395CA32
(Miami-Dade County Circuit Court), Melissa Nemeth v. Burger King Holdings, Inc. et. al.,
Case No. 10-48424CA05 (Miami-Dade County Circuit Court); Vijayalakshmi Venkataraman v. John W.
Chidsey, et. al., Case No. 10-48402CA13 (Miami-Dade County Circuit Court); Roberto S.
Queiroz v. Burger King Holdings, Inc., et al., Case No. 5808-VCP (Delaware Court of Chancery)
Robert Debardelaben v. Burger King Holdings, Inc., et al., Case No. 5850-UA (Delaware Court
of Chancery). On June 15, 2011, the Florida court gave final approval of the proposed settlement
on the terms described in the Companys Form 10-Q for the three months ended March 31, 2011 filed
with the SEC on May 12, 2011. The Companys insurance carrier paid $900,000 of the $1 million in
attorneys fees and expenses awarded to Plaintiffs counsel, and the Company paid the balance.
From time to time, we are involved in other legal proceedings arising in the ordinary course
of business relating to matters including, but not limited to, disputes with franchisees,
suppliers, employees and customers, as well as disputes over our intellectual property.
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Item 1A. Risk Factors
Item 1A of Part I of our Transition Report on Form 10-K for the six-month period ended
December 31, 2010 (the 2010 Transition Period) includes a detailed discussion of the risk factors
that could materially affect our business, financial condition or future prospects. We encourage
you to read these risk factors in their entirety.
Set forth below is a discussion of the material changes to our risk factors previously
disclosed in the 2010 Transition Report. The information below updates, and should be read in
conjunction with, the risk factors in our 2010 Transition Report. We encourage you to read these
risk factors in their entirety.
We outsource certain aspects of our business to third party vendors which subjects us to risks,
including disruptions in our business and increased costs.
We plan to outsource certain administrative functions, including account payment and
receivable processing, to a third-party service provider. We also outsource certain information
technology support services and benefit plan administration, and may outsource other functions in
the future to achieve cost savings and efficiencies. If the service providers to which we outsource
these functions to do not perform effectively, we may not be able to achieve the expected cost
savings and may have to incur additional costs in connection with such failure to perform.
Depending on the function involved, such failures may also lead to business disruption, transaction
errors, processing inefficiencies, the loss of sales and customers, the loss of or damage to
intellectual property through security breach, the loss of sensitive data through security breach
or otherwise. Any such damage or interruption could have a material adverse effect on our business,
cause us to face significant fines, customer notice obligations or costly litigation, harm our
reputation with our customers or prevent us from paying our suppliers or employees or receiving
payments on a timely basis.
Item 5. Other Information
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of
Certain Officers; Compensatory Arrangements of Certain Officers.
In the Companys Quarterly Report on Form 10-Q for the three months ended March 31, 2011 filed
with the SEC on May 12, 2011 (the Q1 Form 10-Q), the Company reported certain changes to the
compensation of Jonathan Fitzpatrick, the Companys Executive Vice President, Chief Brand and
Operations Officer. Effective April 18, 2011, BKC and Mr. Fitzpatrick entered into Amendment No. 1
(the Amendment) to the Employment Agreement by and between BKC and Mr. Fitzpatrick dated as of
October 25, 2010 (the Employment Agreement). As previously disclosed in the Q1 Form 10-Q, the
Amendment (1) increased Mr. Fitzpatricks base salary to $400,000, effective April 22, 2011, (2) increased his
target bonus percentage to 140% of his base salary, effective for the full 2011 calendar year and
(3) provided for a special grant of options, as of May 1, 2011, to purchase 63,211 millishares of
the common stock of Burger King Worldwide Holdings, Inc. under the Omnibus Incentive Plan.
In addition, effective January 1, 2012, the Amendment will reduce the amount payable if BKC
terminates Mr. Fitzpatricks employment without cause or if he terminates his employment with good
reason (as defined in the Employment Agreement) from two times the sum of current base salary and
target annual bonus for the year of termination to an amount equal to Mr. Fitzpatricks base salary
as of the date of termination (the Severance Amount). The lesser of the Safe Harbor Amount (as
defined below) and one-half of the Severance Amount will be paid in installments during the period
commencing on the 60th day following termination and ending four months thereafter, with the first
installment payment equal to the payments due for the first 60 days following termination and the
remainder in substantially equal installments over the remaining four-month period. The balance of
the Severance Amount will be paid in equal installments during the period commencing on the first
business day following the six-month anniversary of the termination date and ending on the first
anniversary of the termination date. The Safe Harbor Amount means an amount equal to two times the
lesser of (1) the sum of Mr. Fitzpatricks annualized compensation within the meaning of Section
409A of the Internal Revenue Code and (2) the maximum amount that may be taken into account under a
qualified plan pursuant to Section 401(a)(17) of the Internal Revenue Code. In addition to the
Severance Amount, Mr. Fitzpatrick will also receive his pro-rata bonus through the termination date
to the extent the Company pays the bonus for that year. This amount is payable within five
business days following the date that the Company pays the bonus to its employees. Pursuant to the
Amendment, the non-competition and non-solicitation restrictions applicable to Mr. Fitzpatrick will
be reduced from two years to one year, effective January 1, 2012.
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A copy of Amendment No. 1 to the Employment Agreement is attached hereto as Exhibit 10.78 to this
report.
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Item 6. Exhibits
The exhibits listed in the accompanying index are filed as part of this report.
Exhibit | ||||
Number | Description | |||
10.78 | Amendment No. 1 dated as of April 18, 2011 to the Employment
Agreement by and between Burger King Corporation and Jonathan
Fitzpatrick, dated as of October 25, 2010 |
|||
31.1 | Certification of Chief Executive Officer of Burger King Holdings,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer of Burger King Holdings,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
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.
BURGER KING HOLDINGS, INC. (Registrant) |
||||
Date: August 11, 2011 | By: | /s/ Daniel Schwartz | ||
Name: | Daniel Schwartz | |||
Title: | Chief Financial Officer (principal financial officer) (duly authorized officer) |
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INDEX TO EXHIBITS
Exhibit | ||||
Number | Description | |||
10.78 | Amendment No. 1 dated as of April 18, 2011 to the Employment
Agreement by and between Burger King Corporation and Jonathan
Fitzpatrick, dated as of October 25, 2010 |
|||
31.1 | Certification of Chief Executive Officer of Burger King Holdings,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer of Burger King Holdings,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
66