UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-32369

AFC Enterprises, Inc.

(Exact name of registrant as specified in its charter)

Minnesota (State or other jurisdiction of incorporation or organization)		58-2016606 (IRS Employer Identification No.)
5555 Glenridge Connector, NE, Suite 300 Atlanta, Georgia (Address of principal executive offices)		30342 (Zip code)

(404) 459-4450
(Registrant’s 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 þ No o

     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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ 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 þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

     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 7, 2011 there were 24,385,617 shares of the registrant’s common stock, par value $.01 per share, outstanding.

 

 

AFC ENTERPRISES, INC.
INDEX

		Page
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of July 10, 2011 and December 26, 2010			2
Condensed Consolidated Statements of Operations for the Twelve and Twenty-Eight Week Periods Ended July 10, 2011 and July 11, 2010			3
Condensed Consolidated Statement of Changes in Shareholders’ Equity (Deficit) for the Twenty-Eight Week Period Ended July 10, 2011			4
Condensed Consolidated Statements of Cash Flows for the Twenty-Eight Week Periods Ended July 10, 2011 and July 11, 2010			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			27
PART 2 OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 6. Exhibits			29
SIGNATURE
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART 1. FINANCIAL INFORMATION

Item 1.    Financial Statements

AFC Enterprises, Inc.

Condensed Consolidated Balance Sheets (unaudited)
(In millions, except share data)

		07/10/11				12/26/10
ASSETS
Current assets:
Cash and cash equivalents		$	6.3			$	15.9
Accounts and current notes receivable, net			6.2				5.6
Other current assets			3.0				4.3
Advertising cooperative assets, restricted			16.4				16.1
Total current assets			31.9				41.9
Long-term assets:
Property and equipment, net			20.6				21.2
Goodwill			11.1				11.1
Trademarks and other intangible assets, net			46.7				47.0
Other long-term assets, net			2.5				2.7
Total long-term assets			80.9				82.0
Total assets		$	112.8			$	123.9
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3.5			$	4.8
Other current liabilities			5.6				7.6
Current debt maturities			5.2				4.0
Advertising cooperative liabilities			16.4				16.1
Total current liabilities			30.7				32.5
Long-term liabilities:
Long-term debt			60.2				62.0
Deferred credits and other long-term liabilities			21.0				20.2
Total long-term liabilities			81.2				82.2
Commitments and contingencies
Shareholders’ equity:
Preferred stock ($.01 par value; 2,500,000 shares authorized; 0 shares issued and outstanding)			—				—
Common stock ($.01 par value; 150,000,000 shares authorized; 24,385,617 and 25,685,705 shares issued and outstanding at July 10, 2011 and December 26, 2010, respectively)			0.3				0.3
Capital in excess of par value			96.0				116.4
Accumulated deficit			(94.7	)			(107.4	)
Accumulated other comprehensive loss			(0.7	)			(0.1	)
Total shareholders’ equity			0.9				9.2
Total liabilities and shareholders’ equity		$	112.8			$	123.9

See accompanying notes to unaudited condensed consolidated financial statements.

AFC Enterprises, Inc.

Condensed Consolidated Statements of Operations (unaudited)
(In millions, except per share data)

		12 Weeks Ended								28 Weeks Ended
		07/10/11				07/11/10				07/10/11				07/11/10
Revenues:
Sales by company-operated restaurants		$	12.3			$	12.1			$	29.9			$	28.2
Franchise revenues			22.0				21.2				49.9				47.6
Rent and other revenues			1.0				1.0				2.3				2.3
Total revenues			35.3				34.3				82.1				78.1
Expenses:
Restaurant employee, occupancy and other expenses			6.2				6.2				14.6				14.0
Restaurant food, beverages and packaging			4.1				3.8				9.9				8.9
Rent and other occupancy expenses			0.6				0.6				1.4				1.4
General and administrative expenses			13.6				12.6				32.1				29.4
Depreciation and amortization			1.0				0.9				2.3				2.1
Other expenses (income), net			0.2				—				(0.3	)			(0.1	)
Total expenses			25.7				24.1				60.0				55.7
Operating profit			9.6				10.2				22.1				22.4
Interest expense, net			0.9				1.7				2.0				4.5
Income before income taxes			8.7				8.5				20.1				17.9
Income tax expense			3.2				1.7				7.4				5.3
Net income		$	5.5			$	6.8			$	12.7			$	12.6
Earnings per common share, basic:		$	0.22			$	0.27			$	0.51			$	0.50
Earnings per common share, diluted:		$	0.22			$	0.26			$	0.50			$	0.49
Weighted-average shares outstanding:
Basic			24.4				25.3				25.0				25.3
Diluted			24.8				25.5				25.4				25.4

See accompanying notes to unaudited condensed consolidated financial statements.

AFC Enterprises, Inc.

Condensed Consolidated Statement of Changes in Shareholders’ Equity (unaudited)
(In millions, except share data)

										Capital in								Accumulated
		Common Stock								Excess of								Other
		Number of								Par				Accumulated				Comprehensive
		Shares				Amount				Value				Deficit				Loss				Total
Balance at December 26, 2010			25,685,705			$	0.3			$	116.4			$	(107.4	)		$	(0.1	)		$	9.2
Net income			—				—				—				12.7				—				12.7
Other comprehensive loss
Net change in fair value of cash flow hedge, (net of tax impact of $0.4 million)			—				—				—				—				(0.6	)			(0.6	)
Total comprehensive income																							12.1
Repurchases and retirement of shares			(1,465,436	)			—				(22.3	)			—				—				(22.3	)
Issuance of common stock under stock option plan			49,784				—				0.6				—				—				0.6
Issuance of restricted stock awards, net of forfeitures			115,564				—				(0.1	)			—				—				(0.1	)
Stock-based compensation expense			—				—				1.4				—								1.4
Balance at July 10, 2011			24,385,617			$	0.3			$	96.0			$	(94.7	)		$	(0.7	)		$	0.9

See accompanying notes to unaudited condensed consolidated financial statements.

AFC Enterprises, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)
(In millions)

		28 Weeks Ended
		07/10/11				07/11/10
Cash flows provided by (used in) operating activities:
Net income		$	12.7			$	12.6
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			2.3				2.1
Asset write-downs			0.2				0.2
Net gain on sale of assets			(0.7	)			(0.3	)
Deferred income taxes			0.5				0.2
Non-cash interest expense, net			0.3				1.1
Provision for credit losses			—				(0.2	)
Stock-based compensation expense			1.4				1.2
Change in operating assets and liabilities:
Accounts receivable			(0.8	)			0.8
Other operating assets			1.3				(0.4	)
Accounts payable and other operating liabilities			(3.5	)			(2.4	)
Net cash provided by operating activities			13.7				14.9
Cash flows provided by (used in) investing activities:
Capital expenditures			(1.7	)			(1.4	)
Proceeds from dispositions of property and equipment			0.7				—
Proceeds from notes receivable and other investing activities			0.2				2.2
Net cash provided by (used in) investing activities			(0.8	)			0.8
Cash flows provided by (used in) financing activities:
Principal payments — 2005 credit facility (term loan)			—				(14.9	)
Principal payments — 2010 credit facility (term loan)			(2.5	)			—
Borrowings under 2010 revolving line of credit			2.0				—
Share repurchases			(22.3	)			—
Proceeds from exercise of employee stock options			0.6				—
Other financing activities, net			(0.3	)			(0.3	)
Net cash used in financing activities			(22.5	)			(15.2	)
Net increase (decrease) in cash and cash equivalents			(9.6	)			0.5
Cash and cash equivalents at beginning of year			15.9				4.1
Cash and cash equivalents at end of quarter		$	6.3			$	4.6

See accompanying notes to unaudited condensed consolidated financial statements

AFC Enterprises, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 — Description of Business

     AFC Enterprises, Inc. (“AFC” or the “Company”) develops, operates and franchises quick-service restaurants under the trade names Popeyes ^® Chicken & Biscuits and Popeyes ^® Louisiana Kitchen (collectively “Popeyes”) in 45 states, the District of Columbia, Puerto Rico, Guam, the Cayman Islands and 27 foreign countries.

Note 2 — Significant Accounting Policies

     The Company’s significant accounting policies are presented in Note 2 to the Company’s consolidated financial statements for the fiscal year ended December 26, 2010, which are contained in the Company’s 2010 Annual Report on Form 10-K for the fiscal year ended December 26, 2010 (“2010 Form 10-K”). The significant accounting policies that are most critical and aid in fully understanding and evaluating the reported financial results include the following:

     Basis of Presentation. The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, certain information required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements is not included. The Consolidated Balance Sheet data as of December 26, 2010 that is presented herein was derived from the Company’s audited consolidated financial statements for the fiscal year then ended. The condensed consolidated financial statements as of July 10, 2011 have not been audited by the Company’s independent registered public accountants, but in the opinion of management, they contain all normal recurring adjustments necessary for a fair statement of the Company’s financial condition and results of operations for the interim periods presented. Interim period operating results are not necessarily indicative of the results expected for the full fiscal year. The Company suggests that the accompanying financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the 2010 Form 10-K. Except as disclosed herein, there has been no material change in the information disclosed in the notes to our consolidated financial statements included in the 2010 Form 10-K.

     Use of Estimates. The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates affect the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     Recent Accounting Pronouncements That the Company Has Not Yet Adopted. Accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are expected to have an immaterial impact on the financial statements upon adoption.

Note 3 — Other Current Liabilities

(In millions)		7/10/11				12/26/10
Accrued wages, bonuses and severances		$	3.2			$	5.0
Other			2.4				2.6
		$	5.6			$	7.6

AFC Enterprises, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 4 — Fair Value Measurements

     The following table reflects assets and liabilities that are measured and carried at fair value on a recurring basis as of July 10, 2011 and December 26, 2010:

		Quoted
		Prices in
		Active
		Markets for				Significant
		Identical				Other				Significant
		Asset or				Observable				Unobservable
		Liability				Inputs				Inputs				Carrying
(In millions)		(Level 1)				(Level 2)				(Level 3)				Value
July 10, 2011
Financial Assets
Cash equivalents		$	4.2			$	—			$	—			$	4.2
Restricted cash (advertising cooperative assets)			4.3				—				—				4.3
Total assets at fair value		$	8.5			$	—			$	—			$	8.5
Financial Liabilities
Interest rate swap agreement		$	—			$	1.1			$	—			$	1.1
Total liabilities at fair value		$	—			$	1.1			$	—			$	1.1
December 26, 2010
Financial Assets
Cash equivalents		$	15.8			$	—			$	—			$	15.8
Restricted cash (advertising cooperative assets)			4.3				—				—				4.3
Total assets at fair value		$	20.1			$	—			$	—			$	20.1
Financial Liabilities
Interest rate swap agreement		$	—			$	0.1			$	—			$	0.1
Total liabilities at fair value		$	—			$	0.1			$	—			$	0.1

     At July 10, 2011 and December 26, 2010, the fair value of the Company’s current assets and current liabilities approximates carrying value because of the short-term nature of these instruments. The Company believes the fair value of its credit facilities approximates its carrying value, as management believes the floating rate interest and other terms are commensurate with the credit and interest rate risks involved.

AFC Enterprises, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 5 — Long-Term Debt and Other Borrowings

(In millions)		07/10/11				12/26/10
2010 Credit Facility:
Revolving credit facility		$	24.0			$	22.0
Term Loan			37.5				40.0
Capital lease obligations			1.4				1.4
Other notes			2.5				2.6
			65.4				66.0
Less current portion			(5.2	)			(4.0	)
		$	60.2			$	62.0

     2010 Credit Facility. On December 23, 2010, the Company entered into a bank credit facility (the “2010 Credit Facility”) with a group of lenders consisting of a five year $60.0 million revolving credit facility and a five year $40.0 million term loan.

     Under the terms of the revolving credit facility, the Company may obtain other short-term borrowings of up to $10.0 million and letters of credit up to $25.0 million. Collectively, these other borrowings and letters of credit may not exceed the amount of unused borrowings under the 2010 Credit Facility. As of July 10, 2011, the Company had $1.0 million of outstanding letters of credit. Availability for short-term borrowings and letters of credit under the revolving credit facility was $35.0 million.

     As of July 10, 2011, the Company was in compliance with the financial and other covenants of the 2010 Credit Facility. As of July 10, 2011, the Company’s weighted average interest rate for all outstanding indebtedness under the 2010 Credit Facility was 3.8%. As of July 11, 2010, the Company’s weighted average interest rate for all outstanding indebtedness under its then-existing credit facility was 7.2%.

     Interest Rate Swap Agreements. On February 22, 2011, the Company entered into new interest rate swap agreements limiting the interest rate exposure on $30.0 million of the term loan debt to a fixed rate of 4.8%. The term of the swap agreements expires March 31, 2015.

     The Company’s interest rate swap agreements are derivative instruments that are designated as cash flow hedges. The fair value gain or loss on the interest rate swaps is included as a component of the “Accumulated other comprehensive loss” (“AOCL”). The following tables summarize the fair value of the Company’s interest rate swap agreements and the effect on the financial statements:

Fair Values of Derivative Instruments

Derivative Liabilities

Balance Sheet

(In millions)

Location

7/10/11

12/26/10

Other current

Interest rate swap agreements

liabilities

$

—

$

0.1

Deferred credits and other long-

Interest rate swap agreements

term liabilities

1.1

—

AFC Enterprises, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations
Twenty-eight Weeks ended July 10, 2011 and July 11, 2010

														Amount of Gain
										Location of				(Loss) Reclassified
		Amount of Gain (Loss)								Gain (Loss)				from AOCL to
		Recognized in AOCL								Reclassified				Income (effective
		(effective portion)								from AOCL to				portion)
(In millions)		2011				2010				Income				2011				2010
Interest rate swap agreements, net of tax		$	(0.6	)		$	—			Interest expense, net				$	—			$	(0.6	)
		$	(0.6	)		$	—							$	—			$	(0.6	)

Note 6 — Deferred Credits and Other Long-Term Liabilities

(In millions)		7/10/11				12/26/10
Deferred franchise revenues		$	2.5			$	2.9
Deferred gains on unit conversions			1.8				2.0
Deferred rentals			2.7				3.0
Above-market rent obligations			2.7				2.8
Deferred income taxes			5.9				5.8
Other			5.4				3.7
		$	21.0			$	20.2

Note 7 — Comprehensive Income

     Comprehensive income is net income plus the change in fair value of the Company’s cash flow hedge discussed in Note 5 plus derivative (gains) or losses realized in earnings during the period. The following table presents the components of comprehensive income for the twelve and twenty-eight weeks ended July 10, 2011 and July 11, 2010:

		12 Weeks Ended								28 Weeks Ended
(In millions)		07/10/11				07/11/10				07/10/11				07/11/10
Net income		$	5.5			$	6.8			$	12.7			$	12.6
Change in fair value of interest rate swap agreements, net of income taxes			(0.3	)			—				(0.6	)			—
Derivative loss realized in earnings during the period, net of income taxes			—				0.1				—				0.4
Total comprehensive income		$	5.2			$	6.9			$	12.1			$	13.0

AFC Enterprises, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 8 — Other Expenses (Income), Net

		12 Weeks Ended								28 Weeks Ended
(In millions)		07/10/11				07/11/10				07/10/11				07/11/10
Impairments and disposals of fixed assets		$	0.1			$	0.1			$	0.2			$	0.2
Net gain on sale of assets			(0.1	)			(0.1	)			(0.7	)			(0.3	)
Other			0.2				—				0.2				—
		$	0.2			$	—			$	(0.3	)		$	(0.1	)

     Net gain on sale of assets consists primarily of recognition of deferred gains associated with refranchising of company-operated restaurants and gain on the sale of real estate to franchisees and other third parties. During the twenty-eight weeks ended July 10, 2011, the Company sold two properties to a franchisee for approximately $0.7 million and recognized a gain of $0.5 million.

Other expense for the twelve and twenty-eight week periods ended July 10, 2011 was $0.2 million and consists primarily of expenses related to the Company’s pending relocation to a new corporate support center.

Note 9 — Commitments and Contingencies

     Litigation. The Company is a defendant in various legal proceedings arising in the ordinary course of business, including claims resulting from “slip and fall” accidents, employment-related claims, claims from guests or employees alleging illness, injury or other food quality, health or operational concerns and claims related to franchise matters. The Company establishes reserves to provide for the settlement of such matters when payment is probable and reasonably estimable. The Company’s management believes their ultimate resolution will not have a material adverse effect on the Company’s financial condition or its results of operations.

     Insurance Programs. The Company carries property, general liability, business interruption, crime, directors and officers liability, employment practices liability, environmental and workers’ compensation insurance policies which it believes are customary for businesses of its size and type. Pursuant to the terms of their franchise agreements, the Company’s franchisees are also required to maintain certain types and levels of insurance coverage, including commercial general liability insurance, workers’ compensation insurance, all risk property and automobile insurance.

     The Company has established reserves with respect to the programs described above based on the estimated total losses the Company will experience. At July 10 2011, the Company’s insurance reserves of approximately $0.9 million were collateralized by letters of credit and/or cash deposits of $1.1 million.

      Corporate Support Center Lease. Subsequent to July 10, 2011, the Company entered into a non-cancellable operating lease for its new corporate support center. The lease term is approximately eleven years and future minimum lease payments under the lease are approximately zero in 2011 and 2012, $0.7 million in 2013, $1.3 million in 2014 and 2015 and $10.0 million thereafter for the remaining term of the lease. The lease includes tenant improvements, design and move allowances of approximately $2.9 million.

Note 10 — Interest Expense, Net

		12 Weeks Ended								28 Weeks Ended
(In millions)		07/10/11				07/11/10				07/10/11				07/11/10
Interest on debt, less capitalized amounts		$	0.7			$	1.5			$	1.5			$	3.8
Amortization and write-offs of debt issuance costs			0.1				0.1				0.2				0.5
Other debt related charges			0.1				0.1				0.3				0.3
Interest income			—				—				—				(0.1	)
		$	0.9			$	1.7			$	2.0			$	4.5

AFC Enterprises, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

     During the twenty-eight weeks ended July 10, 2011 and July 11, 2010, total payments made for interest were approximately $1.5 million and $3.5 million, respectively.

Note 11 — Income Taxes

     The Company’s effective tax rates for the twelve week periods ended July 10, 2011 and July 11, 2010 were 36.8% and 20.0%, respectively. The Company’s effective tax rates for the twenty-eight week periods ended July 10, 2011 and July 11, 2010 were 36.8% and 29.6%, respectively. In the second quarter of 2010, the Company recorded a tax benefit of $1.4 million related to the completion a federal tax audit. Excluding the impact of the Internal Revenue Service audits, the effective tax rates for the twelve and twenty-eight week periods ended July 11, 2010 were 36.5% and 37.4%. The effective rate differs from statutory rates due to adjustments to estimated tax reserves and permanent differences.

     The amount of unrecognized tax benefits was approximately $2.1 million as of July 10, 2011 and December 26, 2010, of which approximately $0.6 million, if recognized, would affect the effective income tax rate. The Company has unrecognized tax benefits of approximately $0.1 million which the Company would recognize within the next twelve months if the statute of limitations were to expire.

The Company files income tax returns in the United States and various state jurisdictions. The U.S. federal tax years 2007 through 2009 are open to audit, with 2009 currently under examination.

Note 12 — Components of Earnings Per Common Share Computation

     The Company’s basic earnings per share calculation is computed based on the weighted-average number of common shares outstanding. Diluted earnings per share calculation is computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive common shares include employee stock options, non-vested restricted stock awards and non-vested restricted share units. Performance based awards are included in the average diluted shares outstanding each period if the performance criteria have been met at the end of the respective periods.

     Potentially dilutive shares are excluded from the diluted earnings per share computation in periods in which they have an anti-dilutive effect. During the twenty-eight week period ended July 10, 2011, approximately 0.1 million weighted stock options were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the period presented. During the twelve and twenty-eight week periods ended July 11, 2010, approximately 0.6 million weighted stock options were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented.

		12 Weeks Ended								28 Weeks Ended
(In millions)		07/10/11				07/11/10				07/10/11				07/11/10
Numerator for earnings per share computation:
Net Income		$	5.5			$	6.8			$	12.7			$	12.6
Denominator for basic earnings per share — weighted average shares			24.4				25.3				25.0				25.3
Effect of dilutive share-based employee and director compensation			0.4				0.2				0.4				0.1
Denominator for diluted earnings per share			24.8				25.5				25.4				25.4

Note 13 — Segment Information

     Based on its internal reporting and management structure, the Company has determined that it has two reportable segments: franchise operations and company-operated restaurants. The company-operated restaurant segment derives its revenues from the operation of company owned restaurants. The franchise segment consists of domestic and international franchising activities and derives its revenues principally from (1) ongoing royalty payments that are determined based on a percentage of franchisee sales; (2) franchise fees associated with new restaurant openings; (3) development fees associated with the opening of new franchised restaurants in a given market; and (4) rental income associated with properties leased or subleased to franchisees. Operating profit for each reportable segment includes operating results directly allocable to each segment plus a 5% inter-company royalty charge from franchise operations to company-operated restaurants.

AFC Enterprises, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

		12 Weeks Ended								28 Weeks Ended
(In millions)		07/10/11				07/11/10				07/10/11				07/11/10
Revenues
Franchise restaurants(a)		$	23.0			$	22.2			$	52.2			$	49.9
Company-operated restaurants			12.3				12.1				29.9				28.2
		$	35.3			$	34.3			$	82.1			$	78.1
Operating profit before unallocated expenses
Franchise restaurants(b)		$	9.8			$	10.1			$	21.4			$	21.6
Company-operated restaurants			1.0				1.0				2.7				2.8
			10.8				11.1				24.1				24.4
Less unallocated expenses(c)
Depreciation and amortization			1.0				0.9				2.3				2.1
Other expenses (income), net			0.2				—				(0.3	)			(0.1	)
Operating Profit		$	9.6			$	10.2			$	22.1			$	22.4
Capital expenditures
Franchise operations		$	0.3			$	0.3			$	0.4			$	0.5
Company-operated restaurants			0.4				0.3				1.3				0.9
		$	0.7			$	0.6			$	1.7			$	1.4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis for AFC Enterprises, Inc. (“AFC” or the “Company”) should be read in conjunction with our condensed consolidated financial statements included in Part 1, Item 1 of this quarterly report and in conjunction with the Company’s Annual Report on Form10-K for the fiscal year ended December 26, 2010 (the “2010 Form 10-K”).

Nature of Business

We develop, operate and franchise quick-service restaurants (“QSRs”) under the trade names Popeyes^® Chicken & Biscuits and Popeyes^® Louisiana Kitchen (collectively “Popeyes”). The Company operates two business segments: franchise operations and company-operated restaurants.

As of July 10, 2011, we operated and franchised 2,000 Popeyes restaurants in 45 states, the District of Columbia, Puerto Rico, Guam, the Cayman Islands and 27 foreign countries.

(POPEYES LOGO)

		July 10,				Dec. 26,
Total Operating Restaurants as of:		2011				2010
Domestic:
Company-Operated			38				38
Franchised			1,557				1,542
International:
Franchised			405				397
Total			2,000				1,977

Our Business Strategy

Our business strategy, announced at the beginning of 2008, capitalizes on our strengths as a highly franchised restaurant system. The model provides diverse and reliable earnings with steady cash flow, and low capital spending requirements.

Our strategic plan is built on the foundation of aligning and collaborating with our stakeholders, and is focused on the following four pillars. We believe our execution of these strategies makes Popeyes more competitive and better positioned to capture market share and accelerate long-term growth as the consumer environment improves.

	•		Build the Popeyes Brand — offer a distinctive brand and menu with superior food at affordable prices.
	•		Run Great Restaurants — improve restaurant operations and Popeyes’ guest experience by delighting the guest with “service as distinctive as our food”.
	•		Strengthen Unit Economics — lower restaurant operating costs and improve profitability while maintaining excellent food quality for our guests.
	•		Ramp Up New Unit Growth — build more restaurants across the U.S. and abroad with superior profits and investment returns.

Management Overview of 2011 Operating Results (Second Quarter)

Our second quarter of 2011 results and highlights include the following:

	•		Reported net income was $5.5 million, or $0.22 per diluted share, compared to $6.8 million, or $0.26 per diluted share, last year which included a $0.05 per diluted share impact from the settlement of a federal income tax audit. Adjusted earnings per diluted share were $0.23 compared to $0.21 in 2010. The increase in adjusted earnings per diluted share was primarily due to lower interest expense. Adjusted earnings per diluted share is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
	•		Global system-wide sales increased 4.8% compared to a 2.8% increase last year.
	•		Global same-store sales increased 0.7% compared to a 0.6% increase last year. Domestic same-store sales increased 0.5% compared to a 0.4% increase in 2010. International same-store sales increased 2.3% compared to a 2.7% increase last year. According to independent data, in the second quarter of 2011, Popeyes domestic same-store sales continued to outpace the chicken QSR category, beating the segment for the 13th consecutive quarter.
	•		The Popeyes system opened 30 restaurants during the second quarter, resulting in 62 new restaurants opened in the first half of 2011. The Company permanently closed 39 restaurants through the end of the second quarter, resulting in 23 net openings in 2011 compared to 5 in the same period of the prior year.
	•		Through the end of the second quarter, Operating EBITDA was $24.1 million, at 29.4% of total revenue, compared to $24.4 million, at 31.2% of total revenue last year. The decrease in Operating EBITDA as a percent of total revenue was primarily due to new investments in general and administrative expenses, partially offset by higher revenues. Operating EBITDA is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
	•		Through the second quarter of 2011, the Company used $22.3 million of cash to repurchase 1,465,436 shares of common stock under the Company’s current Share Repurchase Program.

A summary of our financial results and key operational metrics is presented below.

		12 Weeks Ended								28 Weeks Ended
(Dollars in millions)		07/10/11				07/11/10				07/10/11				07/11/10
Sales by company-operated restaurants		$	12.3			$	12.1			$	29.9			$	28.2
Franchise revenues (a)			22.0				21.2				49.9				47.6
Other revenues			1.0				1.0				2.3				2.3
Total revenues		$	35.3			$	34.3			$	82.1			$	78.1
Operating profit		$	9.6			$	10.2			$	22.1			$	22.4
Net income		$	5.5			$	6.8			$	12.7			$	12.6
Global system-wide sales increase			4.8	%			2.8	%			6.0	%			2.4	%
Same-store sales increase (decrease) (b)
Company-operated restaurant segment			(0.2	)%			0.3	%			3.6	%			0.2	%
Domestic franchised restaurants			0.5	%			0.4	%			2.3	%			(0.1	)%
Total domestic (company-operated and franchised restaurants)			0.5	%			0.4	%			2.4	%			(0.1	)%
International franchised restaurants			2.3	%			2.7	%			3.3	%			1.9	%
Total global system			0.7	%			0.6	%			2.5	%			0.1	%
Company-operated restaurants (all domestic)
Restaurants at beginning of period			38				37				38				37
New restaurant openings			—				—				—				—
Unit conversions, net			—				—				—				—
Permanent closings			—				—				—				—
Temporary (closings)/re-openings, net			—				—				—				—
Restaurants at the end of second quarter			38				37				38				37

A summary of our financial results and key operational metrics is presented below (continued from previous page).

		12 Weeks Ended								28 Weeks Ended
(Dollars in millions)		07/10/11				07/11/10				07/10/11				07/11/10
Franchised restaurants (domestic and international)
Restaurants at beginning of period			1,959				1,907				1,939				1,906
New restaurant openings			30				17				62				34
Unit conversions, net			—				—				—				—
Permanent closings			(25	)			(17	)			(39	)			(29	)
Temporary (closings)/re-openings, net			(2	)			1				—				(3	)
Restaurants at the end of second quarter			1,962				1,908				1,962				1,908
Total system restaurants			2,000				1,945				2,000				1,945

(a)		Franchise revenues are principally comprised of royalty payments from franchisees that are based upon franchisee sales. While franchisee sales are not recorded as revenue by the Company, we believe they are important in understanding the Company’s financial performance and overall financial health, given the Company’s strategic focus on growing its overall business through franchising. For the second quarter of 2011 and 2010, franchisee sales, as reported by our franchisees, were approximately $447.2 million and $426.4 million, respectively.
(b)		Same-store sales statistics exclude temporarily and permanently closed restaurants and stores that have been open for less than 65 weeks.

2011 Same-Store Sales — Second Quarter

Global same-store sales increased 0.7% compared to a 0.6% increase in 2010. Domestic same-store sales increased 0.5% compared to a 0.4% increase last year. According to independent data, in the second quarter 2011, Popeyes outpaced the chicken QSR category for the 13th consecutive quarter.

International same-store sales increased 2.3% and represented the 6th consecutive quarter of positive same-store sales. This increase was primarily driven by strong same-store sales in Turkey and Canada, partially offset by Korea.

Looking Forward to the Remainder of 2011

The Company now expects that Popeyes global same-store sales growth will be in the range of positive 1.0 to 2.0% versus prior guidance of positive 1.0 to 3.0% as Popeyes restaurants roll over strong same-store sales from the third and fourth quarters of 2010.

Global new openings are still expected to be in the range of 120-140 restaurants. As previously indicated, international new unit openings are expected to remain on pace with the system’s 2010 growth of approximately 60 restaurants.

Consistent with previous guidance, the Company expects system-wide unit closings will be in the range of 60-80 restaurants, resulting in 40-80 net openings as compared to 39 net openings in 2010.

The Company continues to expect general and administrative expenses will be in the range of $60-$62 million, at a rate of 3.1-3.2% of system-wide sales, among the lowest in the restaurant industry. As previously disclosed, this expense includes $1.0 million for the planned corporate office relocation. Absent this unusual item, general and administrative expenses as a percent of system-wide sales would be 3.0-3.1%.

Consistent with previous guidance, the Company expects 2011 reported earnings per diluted share will be in the range of $0.87-$0.91. The Company continues to expect adjusted earnings per diluted share will be in the range of $0.91-$0.95, compared to $0.86 in 2010. Adjusted earnings per diluted share is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.” Full year 2011 adjusted diluted earnings per share excludes approximately $1.5 million for the corporate office relocation ($1.0 million for general and administrative expenses and $0.5 million for depreciation and other expenses), or $0.04 per diluted share.

Comparisons of the Second Quarter for 2011 and 2010

Sales by Company-Operated Restaurants

Sales by company-operated restaurants were $12.3 million in the second quarter of 2011, a $0.2 million increase from the second quarter of 2010. The increase was primarily due to a $0.3 million increase as a result of a new restaurant opened in the fourth quarter of 2010 offset by a decline in company-operated same-store sales of 0.2% during the second quarter.

Franchise Revenues

Franchise revenues have three basic components: (1) royalties that are based on a percentage (typically 5%) of franchisee sales; (2) franchise fees associated with new unit openings and renewals; and (3) development fees associated with the agreement pursuant to which a franchisee may develop new restaurants in a given market. Royalties are the largest component of franchise revenues, generally constituting more than 90% of franchise revenues.

Franchise revenues were $22.0 million in the second quarter of 2011, a $0.8 million increase from the second quarter of 2010. The increase was primarily due to an increase in royalty revenue from positive same-store sales and new franchised restaurants.

Company-operated Restaurant Operating Profit Margins

Company-operated restaurant operating profit (“ROP”) was $2.0 million, or 16.3% of sales, compared to $2.1 million, or 17.4% of sales, last year. The $0.1 million decrease in ROP was primarily due to higher food costs as a result of increased commodity costs, partially offset by modest pricing increases on select menu items. Company-operated ROP is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”

General and Administrative Expenses

General and administrative expenses were $13.6 million, or 3.0% of system-wide sales, compared to $12.6 million, or 2.9% of system-wide sales, last year.

This increase was primarily attributable to a $1.1 million increase in global new restaurant development and marketing initiatives, a $0.4 million increase is franchisee support services and a $0.5 increase in other general administrative expenses, net. Increases in general and administrative expenses were partially offset by a $1.0 million decrease in legal fees associated with litigation initiated by the company which resulted in settlement and the renegotiation of a long-term supply agreement with a key supplier of proprietary ingredients and products during the second quarter of 2010.

Other Expenses (Income), Net

Other expense (income), net was $0.2 million, primarily due to expenses related to the Company’s pending relocation to a new corporate support center.

Interest Expense, Net

Interest expense, net was $0.9 million, an $0.8 million decrease from 2010. This decrease was primarily due to lower average interest rates under the Company’s new 2010 Credit Facility, and lower amortization for bank fees recognized in the second quarter of 2010.

Income Tax Expense

Income tax expense was $3.2 million, yielding an effective tax rate of 36.8%, compared to an effective tax rate of 20.0% in the prior year. In the second quarter of 2010, the Company recorded a tax benefit of $1.4 million related to the completion of a federal income tax audit. Excluding this tax benefit, the effective tax rate would have been 36.5% for the second quarter of 2010. The effective rates differ from statutory rates due to adjustments to estimated tax reserves.

Comparisons of the Twenty Eight Weeks Ended July 10, 2011 and July 11, 2010

Sales by Company-Operated Restaurants

Sales by company-operated restaurants were $29.9 million in the twenty-eight weeks ended July 10, 2011, a $1.7 million increase from 2010. The increase was primarily due to the positive 3.6% increase in same store sales year —to-date 2011 and a $0.7 million increase as a result of the new restaurant opened in the fourth quarter of 2010.

Franchise Revenues

Franchise revenues have three basic components: (1) royalties that are based on a percentage (typically 5%) of franchisee sales; (2) franchise fees associated with new unit openings and renewals; and (3) development fees associated with the agreement pursuant to which a franchisee may develop new restaurants in a given market. Royalties are the largest component of franchise revenues, generally constituting more than 90% of franchise revenues.

Franchise revenues were $49.9 million in the twenty-eight weeks ended July 10, 2011, a $2.3 million increase from 2010. The increase was primarily due to an increase in royalty revenue from positive same-store sales and new franchised restaurants.

Company-operated Restaurant Operating Profit Margins

Company-operated restaurant operating profit (“ROP”) was $5.4 million in the twenty-eight weeks ended July 10, 2011, or 18.1% of sales, compared to $5.3 million, or 18.8% of sales, last year. The $0.1 million increase in ROP was primarily due to the increase in same store sales of 3.6% partially offset by higher food costs as a result of increased commodity costs. Company-operated ROP is a supplemental non-GAAP measure of performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”

General and Administrative Expenses

General and administrative expenses were $32.1 million in the twenty-eight weeks ended July 10, 2011, or 3.1% of system-wide sales, compared to $29.4 million, or 3.0% of system-wide sales, last year.

This increase was primarily attributable to a $2.2 million increase in global new restaurant development, marketing and supply chain initiatives, a $0.4 million increase is franchisee support services, a $0.5 million increase in incentive compensation, and a $0.6 increase in other general administrative expenses, net. Increases in general and administrative expenses were partially offset by a $1.0 million decrease in legal fees associated with litigation initiated by the company which resulted in settlement and the renegotiation of a long-term supply agreement with a key supplier of proprietary ingredients and products during the second quarter of 2010.

Other Expenses (Income), Net

Other income was $0.3 million during the twenty-eight weeks ended July 10, 2011, primarily due to a net gain on the sale of two real estate properties offset by expenses associated with the corporate headquarters relocation.

Interest Expense, Net

Interest expense, net was $2.0 million in the twenty-eight week period ended July 10, 2011, a $2.5 million decrease from 2010. This decrease was primarily due to lower average interest rates under the Company’s new 2010 Credit Facility, and lower amortization for bank fees and swap settlement charges recognized in second quarter 2010.

Income Tax Expense

Income tax expense was $7.4 million in the twenty-eight week period ended July 10, 2011, yielding an effective tax rate of 36.8%, compared to an effective tax rate of 29.6% in the prior year. In the second quarter of 2010, the Company recorded a $1.4 million tax benefit related to the completion of a federal income tax audit for years 2004 and 2005. Excluding this benefit, the Company’s effective tax rate would have been 37.4% for 2010 year to date. The lower tax rate in 2011 reflects a lower effective state income tax rate, lower interest expense accruals on income tax reserves and higher income tax credits. The effective rates differ from statutory rates due to adjustments to estimated tax reserves and other permanent differences.

Liquidity and Capital Resources

We finance our business activities primarily with:

	•		cash flows generated from our operating activities, and
	•		borrowings under our 2010 Credit Facility.

Our franchise model provides diverse and reliable cash flows. Net cash provided by operating activities of the Company was $13.7 million and $14.9 million for the twenty-eight week period ended July 10, 2011 and July 11, 2010, respectively. See our condensed consolidated statements of cash flows in Part 1, Item 1 to this quarterly report. Based primarily upon our generation of cash flow from operations, our existing cash reserves (approximately $6.3 million available as of July 10, 2011), and available borrowings under our 2010 Credit Facility (approximately $35.0 million available as of July 10, 2011), we believe that we will have adequate cash flow to meet our anticipated future requirements for working capital, including various contractual obligations and expected capital expenditures.

Our cash flows and available borrowings allow us to pursue our growth strategies. Our priorities in the use of available cash are:

	•		reinvestment in our core business activities that promote the Company’s strategic initiatives,
	•		repurchase shares of our common stock and
	•		reduction of long-term debt.

Our investment in core business activities includes our obligation to maintain our company-operated restaurants and provide marketing plans and operations support to our franchise system.

Under the terms of the Company’s 2010 Credit Facility, quarterly principal payments of $1.25 million will be due during 2011 and 2012, $1.50 million during 2013 and 2014, and $4.50 million during 2015.

Pursuant to the 2010 Credit Facility, the Company is subject to a Total Leverage Ratio requirement of ≤ 2.75 to 1.0 through December 23, 2015. As of July 10, 2011, the Company’s Total Leverage Ratio was 1.39 to 1.0. The Total Leverage Ratio is defined as the ratio of the Company’s Consolidated Total Indebtedness to Consolidated EBITDA for the four immediately preceding fiscal quarters. Consolidated Total Indebtedness means, as at any date of determination, the aggregate principal amount of Indebtedness of the Company and its Subsidiaries.

The Company repurchased 1,027,148 shares of our common stock during the second quarter of 2011. As of July 10, 2011, the remaining value of shares that may be repurchased under the Company’s current share repurchase program was approximately $16.7 million. The Company may repurchase and retire its common shares at any time its Total Leverage Ratio is less than 2.00 to 1.0.

Critical Accounting Policies and Significant Estimates

There have been no material changes to the Company’s critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the 2010 Form 10-K.

Contractual Obligations

The Company’s material contractual obligations are summarized and included in our 2010 Form 10-K. During the quarter ended July 10, 2011, there have been no material changes outside the ordinary course of business in the contractual obligations specified in the 2010 Form 10-K.

Long-Term Debt

For a discussion of our long-term debt, see Note 5 to our condensed financial statements at Part 1, Item 1 to this quarterly report. That note is hereby incorporated by reference into this Item 2. See Note 10 in the 2010 Form 10-K for more information about the Company’s long-term debt.

Capital Expenditures

Our capital expenditures consist of new unit construction and development, equipment replacements, the purchase of new equipment, reimaging our company-operated restaurants and investments in information technology hardware and software. Substantially all of our capital expenditures have been financed using cash provided from operating activities and borrowings under our 2010 Credit Facility.

During the twenty-eight week period ended July 10, 2011, we invested approximately $1.7 million in various capital projects, including approximately $0.9 million in company restaurant reimages, $0.4 million of IT projects and $0.4 million in other capital assets to maintain, replace and extend the lives of company-operated restaurant facilities and equipment.

During the twenty-eight week period ended July 11, 2010, we invested approximately $1.4 million in various capital projects, including approximately $0.5 million in restaurant reimage projects, $0.4 million of software and computer equipment and approximately $0.5 million in other capital assets to maintain, replace and extend the lives of company-operated restaurant facilities, equipment and other corporate office assets.

Impact of Inflation

The impact of inflation on the cost of food, labor, fuel and energy costs, and other commodities has impacted our operating expenses. To the extent permitted by the competitive environment in which we operate, increased costs are partially recovered through menu price increases coupled with purchasing prices and productivity improvements.

Recently Adopted Accounting Pronouncements

For a discussion of recently adopted accounting pronouncements, see Note 2 to our condensed consolidated financial statements at Part 1, Item 1 to this quarterly report.

Accounting Pronouncements That We Have Not Yet Adopted

For a discussion of recently issued accounting pronouncements that we have not yet adopted, see Note 2 to our condensed consolidated financial statements at Part 1, Item 1 to this quarterly report.

Management’s Use of Non-GAAP Financial Measures

Adjusted earnings per diluted share, Operating EBITDA and Company-operated restaurant operating profit margins are supplemental non-GAAP financial measures. The Company uses adjusted earnings per diluted share, Operating EBITDA and Company-operated restaurant operating profit margins in addition to net income, operating profit and cash flows from operating activities, to assess its performance and believes it is important for investors to be able to evaluate the Company using the same measures used by management. The Company believes these measures are important indicators of its operational strength and performance of its business because they provide a link between profitability and operating cash flow. Adjusted earnings per diluted share, Operating EBITDA and Company-operated restaurant operating profit margins as calculated by the Company are not necessarily comparable to similarly titled measures reported by other companies. In addition, adjusted earnings per diluted share, Operating EBITDA and Company- operated restaurant operating profit margins: (a) do not represent net income, cash flows from operations or earnings per share as defined by GAAP; (b) are not necessarily indicative of cash available to fund cash flow needs; and (c) should not be considered as an alternative to net income, earnings per share, operating profit, cash flows from operating activities or other financial information determined under GAAP.

Adjusted Earnings per Diluted Share: Calculation and Definition

The Company defines adjusted earnings for the periods presented as the Company’s reported net income after adjusting for certain non-operating items consisting of (i) other income, net (which for second quarter 2011 includes $0.1 million for impairments and disposals of fixed assets, $0.1 million for net gain on sales of assets and $0.2 million of other expenses related to the pending relocation to a new corporate support center; for second quarter year-to-date 2011 includes $0.2 million for impairments and disposals of fixed assets, $0.7 million for net gain on sales of assets and $0.2 million of other expenses related to the pending relocation to the new corporate support center; for second quarter 2010 includes $0.1 million for impairments and disposals of fixed assets and $0.1 million for net gain on sale of assets; for second quarter year-to-date 2010 includes $0.2 million for impairments and disposals of fixed assets and $0.3 million for net gain on sale of assets and for fiscal 2010 includes $0.7 million for impairments and disposals of fixed assets partially offset by $0.5 million for net gain on sales of assets), (ii) accelerated depreciation related to Company’s pending relocation to a new corporate support center, (iii) the interest expense associated with the credit facility refinancing in fiscal 2010, (iv) the tax effect of these adjustments, and (v) the tax audit benefit. Adjusted earnings per diluted share provides the per share effect of adjusted net income on a diluted basis. The following table reconciles on a historical basis for second quarter 2011, second quarter year-to-date of 2011, second quarter 2010, second quarter year-to-date of 2010 and fiscal year 2010, the Company’s adjusted earnings per diluted share on a consolidated basis to the line on its consolidated statement of operations entitled net income, which the Company believes is the most directly comparable GAAP measure on its consolidated statement of operations to adjusted earnings per diluted share:

	(in millions, except per share data)			Q2 2011					Q2 2010					Year-to-date					Year-to-date					FY 2010
														7/10/2011					7/11/2010
	Net income			$	5.5				$	6.8				$	12.7				$	12.6				$	22.9
	Other expense (income), net			$	0.2					—				$	(0.3	)			$	(0.1	)			$	0.2
	Accelerated Depreciation related to Company’s relocation to new corporate support center			$	0.1					—				$	0.3					—					—
	Interest expense associated with credit facility				—					—					—					—				$	0.6
	Tax effect			$	(0.1	)				—				$	(0.1	)			$	0.1				$	(0.3	)
	Tax audit benefit				—				$	(1.4	)				—				$	(1.4	)			$	(1.4	)
	Adjusted net income			$	5.7				$	5.4				$	12.6				$	11.2				$	22.0
	Adjusted earnings per diluted share			$	0.23				$	0.21				$	0.50				$	0.44				$	0.86
	Weighted-average diluted shares outstanding				24.8					25.5					25.4					25.4					25.5