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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2014

 

¨ 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: 001-35511

 

 

BURGER KING WORLDWIDE, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   45-5011014

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

5505 Blue Lagoon Drive, Miami, Florida   33126
(Address of Principal Executive Offices)   (Zip Code)

(305) 378-3000

(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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one);

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of June 30, 2014, there were 352,280,790 shares of the Registrant’s Common Stock outstanding.

 

 

 


Table of Contents

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

          Page  
   PART I – Financial Information   

Item 1.

  

Financial Statements

     3   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     37   

Item 4.

  

Controls and Procedures

     38   
   PART II – Other Information   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     39   

Item 6.

  

Exhibits

     39   
  

Signatures

     40   
  

Index to Exhibits

     41   

 

2


Table of Contents

PART I — Financial Information

Item1. Financial Statements

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In millions, except share data)

(Unaudited)

 

     As of  
     June 30,
2014
    December 31,
2013
 
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 904.7     $ 786.9   

Trade and notes receivable, net

     170.4       179.7   

Prepaids and other current assets, net

     82.4       69.8   

Deferred income taxes, net

     20.0       38.0   
  

 

 

   

 

 

 

Total current assets

     1,177.5       1,074.4   

Property and equipment, net of accumulated depreciation of $209.7 million and $187.9 million, respectively

     786.1       801.5   

Intangible assets, net

     2,773.7       2,796.0   

Goodwill

     629.0       630.0   

Net investment in property leased to franchisees

     151.4       163.1   

Other assets, net

     236.4       363.5   
  

 

 

   

 

 

 

Total assets

   $ 5,754.1     $ 5,828.5   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts and drafts payable

   $ 24.1     $ 31.1   

Accrued advertising

     72.8       56.5   

Other accrued liabilities

     156.4       177.0   

Current portion of long term debt and capital leases

     94.1       81.4   
  

 

 

   

 

 

 

Total current liabilities

     347.4       346.0   

Term debt, net of current portion

     2,860.0       2,880.2   

Capital leases, net of current portion

     70.0       75.4   

Other liabilities, net

     300.8       317.9   

Deferred income taxes, net

     638.4       692.8   
  

 

 

   

 

 

 

Total liabilities

     4,216.6       4,312.3   
  

 

 

   

 

 

 

Guarantees, Commitments and Contingencies (Note 18)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value; 200,000,000 shares authorized; no shares issued or outstanding

     —          —     

Common stock, $0.01 par value; 2,000,000,000 shares authorized; 352,280,790 shares issued at June 30, 2014; 352,161,950 shares issued at December 31, 2013;

     3.5       3.5   

Additional paid-in capital

     1,249.0       1,239.9   

Retained earnings

     311.7       225.5   

Accumulated other comprehensive income (loss)

     (19.4 )     54.6   

Treasury stock, at cost; 345,286 shares at June 30, 2014 and 345,286 shares at December 31, 2013

     (7.3 )     (7.3
  

 

 

   

 

 

 

Total stockholders’ equity

     1,537.5       1,516.2   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,754.1     $ 5,828.5   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In millions, except per share data)

(Unaudited)

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

Revenues:

     

Franchise and property revenues

   $ 242.9       $ 225.6       $ 465.3       $ 432.2   

Company restaurant revenues

     18.3         52.7         36.8         173.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     261.2         278.3         502.1         606.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Franchise and property expenses

     35.7         36.7         73.1         73.0   

Company restaurant expenses

     15.7         46.6         31.2         154.7   

Selling, general and administrative expenses

     47.0         61.5         95.2         128.2   

Other operating expenses (income), net

     11.3         0.3         19.8         14.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

     109.7         145.1         219.3         370.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     151.5         133.2         282.8         235.6   

Interest expense, net

     50.6         50.0         100.6         99.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     100.9         83.2         182.2         136.5   

Income tax expense

     25.8         20.3         46.7         37.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 75.1       $ 62.9       $ 135.5       $ 98.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.21       $ 0.18       $ 0.38       $ 0.28   

Diluted

   $ 0.21       $ 0.18       $ 0.38       $ 0.28   

Weighted average shares outstanding

           

Basic

     352.3         350.9         352.3         350.7   

Diluted

     359.4         357.7         359.3         357.4   

Dividends per common share

   $ 0.07       $ 0.06       $ 0.14       $ 0.11   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In millions)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Net income

   $ 75.1      $ 62.9      $ 135.5      $ 98.7   

Foreign currency translation adjustment

     (9.1     17.4        (9.7     (13.0

Reclassification of foreign currency translation adjustment into net income

     —          (3.0     —          (3.0

Net change in fair value of net investment hedges (net of tax of $0.9, $2.1, $0.7 and $2.9)

     1.2        (3.3     1.0        4.5   

Net change in fair value of interest rate caps/swaps (net of tax of $20.7, $39.7, $42.4 and $49.3)

     (32.7     61.6        (66.9     76.4   

Amounts reclassified to earnings of cash flow hedges (net of tax of $0.8, $0.5, $1.6 and $1.0)

     1.4        0.9        2.6        1.6   

Pension and post-retirement benefit plans (net of tax of $0, $0, $0 and $0.3)

     —          —          —          0.3   

Amortization of prior service costs (net of tax of $0.4, $0.3, $0.6 and $0.6)

     (0.4     (0.5     (0.9     (0.7

Amortization of actuarial losses (net of tax of $0, $0.1, $0 and $0.3)

     (0.1     0.1        (0.1     0.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (39.7     73.2        (74.0     66.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 35.4      $ 136.1      $ 61.5      $ 165.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In millions)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 135.5      $ 98.7   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     32.2        32.6   

Amortization of deferred financing costs and debt issuance discount

     30.1        27.5   

Equity in net loss from unconsolidated affiliates

     9.9        6.8   

(Gain) loss on remeasurement of foreign denominated transactions

     (2.3     3.0   

Amortization of defined benefit pension and postretirement items

     (1.6     (0.7

Realized loss on terminated caps/swaps

     4.2        2.8   

Net losses (gains) on refranchisings and dispositions of assets

     3.6        (2.1

Bad debt (recoveries) expense, net

     (0.2     2.2   

Share-based compensation expense

     6.0        4.8   

Deferred income taxes

     5.0        22.2   

Changes in current assets and liabilities, excluding acquisitions and dispositions:

    

Trade and notes receivable

     11.4        0.7   

Prepaids and other current assets

     7.7        0.7   

Accounts and drafts payable

     (8.4     (19.8

Accrued advertising

     (13.1     0.2   

Other accrued liabilities

     4.8        (35.7

Other long-term assets and liabilities

     (11.7     (13.7
  

 

 

   

 

 

 

Net cash provided by operating activities

     213.1        130.2   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Payments for property and equipment

     (7.2     (8.6

(Payments) proceeds from refranchisings, disposition of assets and restaurant closures

     (6.8     48.6   

Payments for acquired franchisee operations, net of cash acquired

     —          (11.9

Return of investment on direct financing leases

     7.7        8.1   

Other investing activities

     (0.3     —     
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

     (6.6     36.2   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repayments of term debt and capital leases

     (38.3     (25.3

Dividends paid on common stock

     (49.3     (38.6

Proceeds from stock option exercises

     —          2.5   

Excess tax benefits from share-based compensation

     —          3.5   
  

 

 

   

 

 

 

Net cash used for financing activities

     (87.6     (57.9
  

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     (1.1     (1.1

Increase in cash and cash equivalents

     117.8        107.4   

Cash and cash equivalents at beginning of period

     786.9        546.7   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 904.7      $ 654.1   
  

 

 

   

 

 

 

Supplemental cashflow disclosures:

    

Interest paid

   $ 68.0      $ 69.5   

Income taxes paid

   $ 19.0      $ 14.7   

Non-cash investing and financing activities:

    

Investment in unconsolidated affiliates

   $ —        $ 17.8   

Acquisition of property with capital lease obligations

   $ —        $ 0.9   

See accompanying notes to consolidated financial statements.

 

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Table of Contents

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Tabular amounts in millions unless noted otherwise)

Note 1. Basis of Presentation and Consolidation

We have 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 accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited Consolidated Financial Statements contained in our Annual Report on Form 10-K filed with the SEC on February 21, 2014.

The Financial Statements include our accounts and the accounts of our wholly-owned subsidiaries. We consolidate entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All material intercompany balances and transactions have been eliminated in consolidation. Investments in affiliates owned 50% or less are accounted for by the equity method.

We also consider for consolidation an entity in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our most significant variable interests are in entities that operate restaurants under our franchise arrangements and certain equity method investees that operate as master franchisees. We do not have any ownership interests in our franchisees’ businesses, except for our investments in various entities that are accounted for under the equity method. Additionally, we generally do not provide financial support to our franchisees in a typical franchise relationship. As our franchise and master franchise arrangements provide our franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE. Based on the results of our analysis of potential VIEs, we have not consolidated any franchisee entities. Our maximum exposure to loss resulting from involvement with potential VIEs is attributable to trade and notes receivable balances, outstanding loan guarantees and future lease payments, where applicable.

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 preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our 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, 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.

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.

Note 2. New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that amends accounting guidance on reporting discontinued operations and disclosures of disposals of components of an entity. Under this guidance, only disposals of a component of an entity that represent a major strategic shift on an entity’s operations and financial results shall be reported in discontinued operations. The guidance also requires the presentation as discontinued operation for an entity that, on acquisition, meets the criteria to be classified as held for sale. In addition, the update expands disclosures for discontinued operations, requires new disclosures regarding disposals of an individually significant component of an entity that does not qualify for discontinued operations presentation and expands disclosures about an entity’s significant continuing involvement with a discontinued

 

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operation. The accounting standards update is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014, with early adoption permitted. We early adopted the provisions of this accounting standards update and it did not have a significant impact on our condensed consolidated financial statements.

In May 2014, the FASB issued an accounting standards update that amends accounting guidance on revenue recognition. Under this guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should disclose sufficient information to enable users of financial statements to understand the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted. The accounting standards update permits the use of either the retrospective or cumulative effect transition method. We are evaluating the impact of this accounting standards update on our condensed consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the accounting standards update on our ongoing financial reporting.

Note 3. Prepaids and Other Current Assets, net

Prepaids and other current assets, net consist of the following:

 

     As of  
     June 30,
2014
     December 31,
2013
 

Prepaid expenses

   $ 55.9       $ 34.2   

Refundable and prepaid income taxes

     9.7         25.3   

Inventories

     0.7         1.2   

Deferred financing costs - current

     9.1         9.1   

Other current assets

     7.0         —     
  

 

 

    

 

 

 

Prepaids and other current assets

   $ 82.4       $ 69.8   
  

 

 

    

 

 

 

Note 4. Intangible Assets, net and Goodwill

Intangible assets, net and goodwill consist of the following:

 

     As of  
     June 30, 2014      December 31, 2013  
     Gross      Accumulated
Amortization
    Net      Gross      Accumulated
Amortization
    Net  

Identifiable assets subject to amortization:

               

Franchise agreements

   $ 490.2       $ (76.3   $ 413.9       $ 491.3       $ (66.0   $ 425.3   

Favorable leases

     158.2         (55.5     102.7         158.4         (48.5     109.9   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

     648.4         (131.8     516.6         649.7         (114.5     535.2   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Indefinite lived intangible assets - Brand

   $ 2,257.1       $ —        $ 2,257.1       $ 2,260.8       $ —        $ 2,260.8   
       

 

 

         

 

 

 

Intangible assets, net

        $ 2,773.7            $ 2,796.0   
       

 

 

         

 

 

 

Goodwill

   $ 629.0            $ 630.0        

We recorded amortization expense on intangible assets of $8.8 million for the three months ended June 30, 2014 and $8.8 million for the same period in the prior year. We recorded amortization expense on intangible assets of $17.6 million for the six months ended June 30, 2014 and $18.4 million for the same period in the prior year. The change in the Brand and goodwill balance for the six months ended June 30, 2014 was due to foreign currency translation effect.

 

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Note 5. Other assets, net

Other assets, net consist of the following:

 

     As of  
     June 30,
2014
     December 31,
2013
 

Derivative assets

   $ 64.9       $ 174.1   

Equity method investments

     91.4         102.0   

Deferred financing costs - noncurrent

     31.0         35.5   

Other

     49.1         51.9   
  

 

 

    

 

 

 

Other assets, net

   $ 236.4       $ 363.5   
  

 

 

    

 

 

 

Note 6. Equity Method Investments

The carrying amount of all our equity method investments was $91.4 million as of June 30, 2014 and $102.0 million as of December 31, 2013 and is included as a component of other assets, net in our condensed consolidated balance sheets. The entities in which we have an equity interest own or franchise Burger King restaurants or lease Burger King restaurants to franchisees. Franchise and property revenue we recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

Revenues from affiliates:

           

Franchise royalties

   $ 21.2       $ 17.7       $ 39.8       $ 31.0   

Property revenues

     6.5         6.6         12.7         12.8   

Franchise fees and other revenue

     2.2         1.7         3.3         2.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 29.9       $ 26.0       $ 55.8       $ 46.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2014 and December 31, 2013, we had $15.7 million and $18.1 million, respectively, of accounts receivable from our equity method investments which were recorded in trade and notes receivable, net in our condensed consolidated balance sheets.

 

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Note 7. Other Accrued Liabilities and Other Liabilities, net

Other accrued liabilities and other liabilities, net consist of the following:

 

     As of  
     June 30,
2014
     December 31,
2013
 

Current:

     

Accrued compensation and benefits

   $ 20.4       $ 30.9   

Gift card liabilities

     15.4         22.0   

Deferred income - current

     14.7         15.7   

Restructuring and other provisions

     13.9         15.3   

Interest payable

     16.9         16.9   

Closed property reserve

     14.0         11.5   

Lease liability - current portion

     6.2         9.8   

Other

     54.9         54.9   
  

 

 

    

 

 

 

Other accrued liabilities

   $ 156.4       $ 177.0   
  

 

 

    

 

 

 

Non-current:

     

Unfavorable leases

   $ 108.1       $ 116.6   

Lease liability - noncurrent

     38.5         38.6   

Accrued pension

     34.6         37.4   

Income tax payable

     32.3         31.6   

Derivative liabilities

     24.0         25.9   

Deferred income - noncurrent

     16.0         13.2   

Casualty insurance - noncurrent

     10.8         13.1   

Other

     36.5         41.5   
  

 

 

    

 

 

 

Other liabilities, net

   $ 300.8       $ 317.9   
  

 

 

    

 

 

 

Note 8. Long-Term Debt

Long-term debt consists of the following:

 

           Interest rates (a)  
          As of     Three Months Ended     Six Months Ended  
     Maturity
dates
   June 30,
2014
    December 31,
2013
    June 30,     June 30,  
          2014     2013     2014     2013  

Tranche A Term Loans

   2017    $ 965.6      $ 991.4        3.3     3.2     3.3     3.2

Tranche B Term Loans (b)

   2019      686.6        689.4        4.6     4.6     4.6     4.6

9 78% Senior Notes

   2018      794.5        794.5        10.1     10.1     10.1     10.1

11.0% Discount Notes (c)

   2019      478.0        453.1        11.5     11.5     11.5     11.5

Deferred Premiums on interest rate caps

   2016      18.4        22.0        2.5     2.5     2.5     2.5

Other

   N/A      0.7        0.7           
     

 

 

   

 

 

         

Total debt

        2,943.8        2,951.1           

Less: current maturities of debt

        (83.8     (70.9        
     

 

 

   

 

 

         

Total long-term debt

      $ 2,860.0      $ 2,880.2           
     

 

 

   

 

 

         

 

(a) Represents the effective interest rate for the instrument computed on a quarterly basis, including the amortization of deferred debt issuance costs and original issue discount, as applicable, and in the case of our term loans, the effect of interest rate caps.
(b) Principal face amount herein is presented net of a discount of $6.1 million at June 30, 2014 and $6.7 million at December 31, 2013.
(c) Principal face amount herein is presented net of a discount of $101.1 million at June 30, 2014 and $126.0 million at December 31, 2013.

 

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2012 Revolving Credit Facility

As of June 30, 2014, we had no amounts outstanding under the 2012 Revolving Credit Facility. Funds available under the 2012 Revolving Credit Facility for future borrowings may be used to repay other debt, finance debt or share repurchases, acquisitions, capital expenditures and other general corporate purposes. We have a $75.0 million letter of credit sublimit as part of the 2012 Revolving Credit Facility, which reduces our borrowing capacity under this facility by the cumulative amount of outstanding letters of credit. As of June 30, 2014, we had no letters of credit issued against the 2012 Revolving Credit Facility and our borrowing capacity was $130.0 million.

Interest Expense, net

Interest expense, net consists of the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Tranche A Term Loans

   $ 6.2      $ 6.6      $ 12.4      $ 13.2   

Tranche B Term Loans

     6.6        6.6        13.1        13.2   

Interest Rate Caps

     2.4        1.6        4.5        3.0   

9 78% Senior Notes

     19.6        19.6        39.2        39.2   

11.0% Discount Notes

     12.6        11.4        24.9        22.4   

Amortization of deferred financing costs and debt issuance discount

     2.6        2.6        5.2        5.1   

Capital lease obligations

     1.3        1.7        2.7        3.3   

Other

     0.4        0.5        0.6        0.8   

Interest income

     (1.1     (0.6     (2.0     (1.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 50.6      $ 50.0      $ 100.6      $ 99.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 9. Income Taxes

The U.S. Federal tax statutory rate reconciles to the effective tax rate as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

U.S. Federal income tax rate

     35.0     35.0     35.0 %     35.0

State income taxes, net of federal income tax benefit

     1.5       1.5       1.5       1.6   

Costs and taxes related to foreign operations

     3.3       5.3       3.2       5.2   

Foreign tax rate differential

     (17.9 )     (14.9 )     (17.9 )     (14.8

Change in valuation allowance

     2.9       (2.2 )     2.9       (1.0

Change in accrual for tax uncertainties

     0.4       0.9       0.4       2.1   

Other

     0.4       (1.2 )     0.5       (0.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     25.6     24.4     25.6     27.7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note 10. Accumulated Other Comprehensive Income (Loss)

The following table displays the change in the components of accumulated other comprehensive income (loss):

 

     Gains(Losses)
on Cash Flow

Hedges
    Defined Benefit
Pension
    Foreign
Currency
Translation
Adjustments
    Accumulated
Other
Comprehensive
Income (Loss)
 

Balances at December 31, 2013

   $ 68.8      $ 16.0      $ (30.2   $ 54.6   

Foreign currency translation adjustment

     —          —          (9.7     (9.7

Net change in fair value of net investment hedges, net of tax

     1.0        —          —          1.0   

Net change in fair value of interest rate caps/swaps, net of tax

     (66.9     —          —          (66.9

Amounts reclassified to earnings of cash flow hedges, net of tax

     2.6        —          —          2.6   

Amortization of prior service costs, net of tax

     —          (0.9     —          (0.9

Amortization of actuarial losses, net of tax

     —          (0.1     —          (0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2014

   $ 5.5      $ 15.0      $ (39.9   $ (19.4
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table displays the reclassifications out of accumulated other comprehensive income (loss):

 

          Amounts Reclassified from AOCI     Amounts Reclassified from AOCI  

Details about AOCI Components

  

Affected Line Item in the Statements

of Operations

   Three Months Ended
June 30,
    Six Months Ended
June 30,
 
      2014     2013     2014     2013  

Gains (Losses) on cash flow hedges:

           

Interest rate derivative contracts

   Interest expense, net    $ (2.2   $ (1.4   $ (4.2   $ (2.6
  

Income tax (expense) benefit

     0.8        0.5        1.6        1.0   
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net of tax

     (1.4     (0.9     (2.6     (1.6
     

 

 

   

 

 

   

 

 

   

 

 

 

Defined benefit pension plan items:

           

Amortization of prior service costs

   SG&A (1)    $ 0.8      $ 0.8      $ 1.5      $ 1.3   

Amortization of actuarial gains (losses)

   SG&A (1)      0.1        (0.2     0.1        (0.6
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Total before tax

     0.9        0.6        1.6        0.7   
  

Income tax (expense) benefit

     (0.4     (0.2     (0.6     (0.3
     

 

 

   

 

 

   

 

 

   

 

 

 
  

Net of tax

   $ 0.5      $ 0.4      $ 1.0      $ 0.4   
     

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustment into net income:

           

Sale of foreign entity

   Other operating expenses (income), net      —          (3.0     —          (3.0
     

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications

   Net of tax    $ (0.9   $ (3.5   $ (1.6   $ (4.2
     

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Refers to selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.

 

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Note 11. Fair Value Measurements

The following table presents our assets and liabilities measured at fair value on a recurring basis and the levels of inputs used to measure fair value, which include derivatives designated as cash flow hedging instruments, derivatives designated as net investment hedges, investments held in a rabbi trust which consist of money market accounts and mutual funds established to fund a portion of our current and future obligations under our Executive Retirement Plan (“ERP”), and ERP liabilities as well as their location on our condensed consolidated balance sheets as of June 30, 2014 and December 31, 2013:

 

          Fair Value Measurements
at June 30, 2014
     Fair Value Measurements
at December 31, 2013
 
    

Balance Sheet Location

   (Level 1)      (Level 2)      Total      (Level 1)      (Level 2)      Total  

Assets:

                    

Derivatives designated as cash flow hedges:

                    

Interest rate caps

   Other assets, net    $ —         $ 1.9       $ 1.9       $ —         $ 4.2       $ 4.2   

Forward-starting interest rate swaps

   Other assets, net      —           63.0         63.0         —           169.9         169.9   

Other:

                    

Investments held in a rabbi trust

   Other assets, net      6.7         —           6.7         8.9         —           8.9   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

      $ 6.7       $ 64.9       $ 71.6       $ 8.9       $ 174.1       $ 183.0   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                    

Derivatives designated as net investment hedges:

                    

Cross-currency rate swaps

   Other liabilities, net    $ —         $ 24.0       $ 24.0       $ —         $ 25.9       $ 25.9   

Other:

                    

ERP liabilities

   Other accrued liabilities      —           1.4         1.4         —           2.8         2.8   

ERP liabilities

   Other liabilities, net      —           5.3         5.3         —           6.0         6.0   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

      $ —         $ 30.7       $ 30.7       $ —         $ 34.7       $ 34.7   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our 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 us or the counterparty.

Investments held in a rabbi trust consist of money market funds and mutual funds and the fair value measurements are derived using quoted prices in active markets for the specific funds which are based on Level 1 inputs of the fair value hierarchy. The fair value measurements of the ERP liabilities are derived principally from observable market data which are based on Level 2 inputs of the fair value hierarchy.

At June 30, 2014, the fair value of our variable rate term debt and bonds was estimated at $3.1 billion, compared to a carrying amount of $2.9 billion, net of original issue discount. At December 31, 2013, the fair value of our variable rate term debt and bonds was estimated at $3.1 billion, compared to a carrying amount of $2.9 billion, 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 and Discount 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. These items primarily include long-lived assets, goodwill, the Brand and other intangible assets.

Note 12. Derivative Instruments

We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges, derivatives designated as net investment hedges and those utilized as economic hedges. We use derivatives to manage exposure to fluctuations in interest rates and currency exchange rates. See Note 11 for fair value measurements of our derivative instruments.

Interest Rate Caps

We have entered into interest rate cap agreements to manage interest rate risk. Such agreements cap the borrowing rate on variable debt to provide a hedge against the risk of rising rates. At June 30, 2014 and December 31, 2013, we had interest rate cap agreements (notional amount of $1.1 billion and $1.2 billion, respectively) (the “Cap Agreements”) to mitigate the impact of fluctuations in the three-month LIBOR and effectively cap the LIBOR applicable to our variable rate debt at a weighted-average rate of 1.75%. The six year Cap Agreements are a series of individual caplets that reset and settle quarterly through October 19, 2016 consistent with the payment dates of our LIBOR-based term debt.

 

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Under the terms of the Cap Agreements, if LIBOR resets above a strike price, we will receive the net difference between LIBOR and the strike price. We have elected our applicable rate per annum as the Eurocurrency rate determined by reference to LIBOR. In addition, on the quarterly settlement dates, we will remit the deferred premium payment (plus interest) to the counterparty, whether LIBOR resets above or below the strike price.

The Cap Agreements 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 condensed consolidated balance sheets. At each cap maturity date, the portion of the fair value attributable to the matured cap will be reclassified from AOCI into earnings as a component of interest expense.

From time to time as we prepay portions of the 2012 Term Loan Facility, we may modify our Cap Agreements to reduce the notional amount. The terms of the Cap Agreements will not otherwise be revised by these modifications. On the modification date, the portion of the fair value attributable to the modified cap will be reclassified from AOCI into earnings as a component of interest expense.

Cross-currency Rate Swaps

To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we may, from time to time, hedge a portion of our net investment in one or more of our foreign subsidiaries. At June 30, 2014, we had outstanding cross-currency rate swaps with an aggregate notional value of $430.0 million to hedge a portion of the net investment in our Switzerland subsidiary, Burger King Europe GmbH. A total notional value of $230.0 million of these swaps are contracts to exchange quarterly fixed-rate interest payments we make in Euros for quarterly fixed-rate interest payments we receive in U.S. dollars and mature on October 19, 2016. A total notional value of $200.0 million of these swaps are contracts to exchange quarterly floating-rate interest payments we make in Euros based on EURIBOR for quarterly floating-rate interest payments we receive in U.S. dollars based on LIBOR and mature on September 28, 2017. These cross-currency rate swaps also require the exchange of Euros and U.S. dollar principal payments upon maturity. Changes in the fair value of these instruments are recognized in AOCI to offset the change in the carrying amount of the net investment being hedged. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.

Forward-Starting Interest Rate Swaps

At June 30, 2014, we had outstanding three forward-starting interest rate swaps with a total notional value of $2.3 billion to hedge the variability of forecasted interest payments attributable to changes in LIBOR. The forward-starting interest rate swaps effectively fix LIBOR on $1.0 billion of floating-rate debt beginning 2015 and an additional $1.3 billion of floating-rate debt starting 2016. The hedges have a seven year maturity. We account for these hedges as cash flow hedges, and as such, the effective portion of unrealized changes in market value has been recorded in AOCI and is reclassified to income during the period in which the hedge transaction affects earnings. Gains and losses from hedge ineffectiveness are recognized in current earnings.

Foreign Currency Forward Contracts

From time to time, we enter into foreign currency forward contracts to economically hedge the remeasurement of certain foreign currency-denominated intercompany loans receivable and other foreign-currency denominated assets recorded in our consolidated balance sheets. The forward currency forward contracts are not designated as hedging instruments. Gains and losses on foreign currency forward contracts are recognized in other (income) expense, net and are offset by the gains or losses resulting from the settlement of the underlying foreign currency denominated assets and liabilities. At June 30, 2014, we had no outstanding foreign currency forward contracts.

Credit Risk

By entering into derivative instrument contracts, we are exposed 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 us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty.

Credit-Risk Related Contingent Features

Our derivative instruments do not contain any credit-risk related contingent features.

 

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Table of Contents

The following tables present the required quantitative disclosures for our derivative instruments:

 

     Gain (Loss) Recognized in
Other Comprehensive Income (Loss)
(effective portion)
 
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2014     2013     2014     2013  

Derivatives designated as cash flow hedges:

        

Interest rate caps

   $ (1.8   $ 3.5      $ (2.3   $ 3.3   

Forward-starting interest rate swaps

   $ (51.6   $ 97.8      $ (107.0   $ 122.4   

Derivatives designated as net investment hedges:

        

Cross-currency rate swaps

   $ 2.1      $ (5.3   $ 1.7      $ 7.5   
     Gain (Loss) Reclassified from
AOCI into Interest Expense, net
 
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Derivatives designated as cash flow hedges:

        

Interest rate caps

   $ (2.2   $ (1.4   $ (4.2   $ (2.6
     Gain (Loss) Recognized in
Other Operating Expenses (Income), Net
 
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Derivatives not designated as hedging instruments:

        

Foreign currency forward contracts

   $ —        $ (0.4   $ —        $ (0.9

The net amount of pre-tax gains and losses included in AOCI as of June 30, 2014 that we expect to be reclassified into earnings within the next 12 months is $11.2 million of losses.

 

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Table of Contents

Note 13. Share-Based Compensation

Share-based incentive awards are provided to employees, directors and other persons who provide services to the Company and its subsidiaries under the terms of various share-based compensation plans.

During the six months ended June 30, 2014, approximately 3,622,000 stock options were granted. These awards generally cliff vest five years from the original grant date and expire ten years following the grant date.

We recorded $3.2 million of share-based compensation expense in selling, general and administrative expenses for the three months ended June 30, 2014 compared to $2.7 million for the three months ended June 30, 2013. We recorded $6.0 million of share-based compensation expense in selling, general and administrative expenses for the six months ended June 30, 2014 compared to $4.8 million for the six months ended June 30, 2013.

Note 14. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period adjusted for the dilutive effect of stock options. We exclude stock options from the calculation of diluted earnings per share if the effect of including such stock options is anti-dilutive.

Basic and diluted earnings per share are as follows (in millions, except per share information):

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2014     2013     2014     2013  

Numerator:

       

Net income

  $ 75.1      $ 62.9      $ 135.5      $ 98.7   

Denominator:

       

Weighted average shares - basic

    352.3        350.9        352.3        350.7   

Effect of dilutive securities

    7.1        6.8        7.0        6.7   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares - diluted

    359.4        357.7        359.3        357.4   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

  $ 0.21      $ 0.18      $ 0.38      $ 0.28   

Diluted earnings per share

  $ 0.21      $ 0.18      $ 0.38      $ 0.28   

Anti-dilutive stock options outstanding

    3.6        2.9        3.6        2.9   

 

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Table of Contents

Note 15. Franchise and Property Revenues

Franchise and property revenues consist of the following:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

Franchise royalties

   $ 174.3       $ 165.3       $ 334.6       $ 314.2   

Property revenues

     54.3         53.3         107.8         104.9   

Franchise fees and other revenue

     14.3         7.0         22.9         13.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Franchise and property revenues

   $ 242.9       $ 225.6       $ 465.3       $ 432.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents information relating to the analysis of our restaurant count for the geographic areas and periods indicated.

 

     U.S. & Canada     EMEA     LAC     APAC     Total  

Number of Company restaurants:

          

Restaurant count at December 31, 2013

     52        —          —          —          52   

Openings

     —          —          —          —          —     

Closures

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant count at June 30, 2014

     52        —          —          —          52   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Number of franchise restaurants:

          

Restaurant count at December 31, 2013

     7,384        3,450        1,550        1,231        13,615   

Openings

     28        147        50        80        305   

Closures

     (93     (41     (17     (13     (164
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant count at June 30, 2014

     7,319        3,556        1,583        1,298        13,756   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Number of system-wide restaurants:

          

Restaurant count at December 31, 2013

     7,436        3,450        1,550        1,231        13,667   

Openings

     28        147        50        80        305   

Closures

     (93     (41     (17     (13     (164
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant count at June 30, 2014

     7,371        3,556        1,583        1,298        13,808   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 16. Company restaurant expenses

Company restaurant expenses consist of the following:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

Food, paper and product costs

   $ 5.5       $ 16.8       $ 11.1       $ 55.3   

Payroll and employee benefits

     5.6         16.7         11.1         54.2   

Occupancy and other operating costs

     4.6         13.1         9.0         45.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Company restaurant expenses

   $ 15.7       $ 46.6       $ 31.2       $ 154.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 17. Other Operating Expenses (Income), Net

Other operating expenses (income), net consists of the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Net losses (gains) on disposal of assets, restaurant closures and refranchisings

   $ 5.1      $ (4.3   $ 7.9      $ 0.3   

Litigation settlements and reserves, net

     2.1        0.4        2.2        0.5   

Foreign exchange net (gains) losses

     (2.9     2.3        (2.5     5.6   

Equity in net loss from unconsolidated affiliates

     5.9        1.6        9.9        6.8   

Other, net

     1.1        0.3        2.3        1.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other operating expenses (income), net

   $ 11.3      $ 0.3      $ 19.8      $ 14.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Closures and Dispositions

Gains and losses on closures and dispositions represent sales of Company properties and other costs related to restaurant closures and refranchisings, and are recorded in other operating (income) expenses, net in the accompanying condensed consolidated statements of operations. Gains and losses recognized in the current period may reflect closures and refranchisings that occurred in previous periods. Equity in net loss from unconsolidated affiliates reflects our share of investee net income or loss.

During the three months ended June 30, 2014, net (gains) losses on disposal of assets, restaurant closures and refranchisings consisted of $1.9 million in net losses associated with refranchisings and $3.2 million of net losses associated with asset disposals and restaurant closures. During the three months ended June 30, 2013, net (gains) losses on disposal of assets, restaurant closures and refranchisings consisted of $6.5 million of net gains associated with refranchisings, $1.0 million of net losses from sale of subsidiaries and $1.2 million of net losses associated with asset disposals and restaurant closures.

During the six months ended June 30, 2014, net (gains) losses on disposal of assets, restaurant closures and refranchisings consisted of $2.3 million in net losses associated with refranchisings and $5.6 million of net losses associated with asset disposals and restaurant closures. During the six months ended June 30, 2013, net (gains) losses on disposal of assets, restaurant closures and refranchisings consisted of $2.7 million of net gains associated with refranchisings, $1.0 million of net losses from sale of subsidiaries and $2.0 million of net losses associated with asset disposals and restaurant closures.

Note 18. Guarantees, Commitments and Contingencies

Litigation

On March 1, 2013, a putative class action lawsuit was filed against BKC in the U.S. District Court of Maryland. The complaint alleges that BKC and/or its agents sent unsolicited advertisements by fax to thousands of consumers in Maryland and elsewhere in the United States to promote its home delivery program in violation of the Telephone Consumers Protection Act. The plaintiff is seeking monetary damages and injunctive relief. In April 2014, the court denied BKC’s motion to dismiss, and it is anticipated that the parties will proceed with discovery. BKC will vigorously contest liability and class certification.

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. The Company has an estimated liability of approximately $11.7 million as of June 30, 2014, representing the Company’s best estimate within the range of losses which could be incurred in connection with pending litigation matters.

Guarantees

From time to time, we enter into agreements under which we guarantee loans made by third parties to qualified franchisees. As of June 30, 2014, there were $125.5 million of loans outstanding to franchisees that we had guaranteed under six such programs, with additional franchisee borrowing capacity of approximately $202.5 million remaining. Our maximum guarantee liability under these programs is limited to an aggregate of $32.5 million, assuming full utilization of all borrowing capacity. We record a liability in the period the loans are funded. As of June 30, 2014, the liability reflecting the fair value of these guarantee obligations was $5.1 million. No significant payments have been made by us in connection with these guarantees through June 30, 2014.

 

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Note 19. Segment Reporting

We operate in the fast food hamburger restaurant category of the quick service restaurant segment of the restaurant industry. Revenues include franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees, property income we derive from properties we lease or sublease to our franchisees and retail sales at Company restaurants. Our business is managed in four distinct geographic segments: (1) United States (“U.S.”) and Canada; (2) Europe, the Middle East and Africa (“EMEA”); (3) Latin America and the Caribbean (“LAC”); and (4) Asia Pacific (“APAC”).

Revenues by geographic segment consist of the following:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

Revenues:

           

U.S. and Canada

   $ 158.9       $ 164.1       $ 308.2       $ 337.5   

EMEA

     67.4         82.9         128.4         194.4   

LAC

     19.3         17.5         36.3         47.1   

APAC

     15.6         13.8         29.2         27.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 261.2       $ 278.3       $ 502.1       $ 606.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Only the U.S. represented more than 10% of our total revenues during the three and six months ended June 30, 2014 and only the U.S. and Germany represented more than 10% of our total revenues during the three and six months ended June 30, 2013. Revenues in the U.S. totaled $151.8 million for the three months ended June 30, 2014, compared to $150.2 million for the three months ended June 30, 2013. Revenues in the U.S. totaled $294.5 million for the six months ended June 30, 2014, compared to $291.1 million for the six months ended June 30, 2013. Revenues in Germany totaled $28.2 million for the three months ended June 30, 2013 and $83.1 million for the six months ended June 30, 2013.

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 our geographic segments and system wide restaurants and are not allocated specifically to any of the geographic segments.

Our measure of segment income is adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest, taxes, depreciation and amortization, adjusted to exclude specifically identified items that management believes do not directly reflect our core operations and assists management in comparing segment performance by removing the impact of certain items that management believes do not reflect our core operations. A reconciliation of segment income to net income consists of the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Segment Income:

        

U.S. and Canada

   $ 113.3      $ 107.5      $ 215.9      $ 205.0   

EMEA

     53.0        45.0        101.1        87.3   

LAC

     17.4        15.5        32.3        30.6   

APAC

     13.5        11.4        25.2        21.8   

Unallocated Management G&A

     (14.4     (16.9     (32.0     (37.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     182.8        162.5        342.5        307.5   

Share-based compensation and non-cash incentive compensation expense

     4.2        3.2        7.7        5.9   

Global portfolio realignment project costs

     —          9.8        —          18.9   

Other operating expenses (income), net

     11.3        0.3        19.8        14.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     167.3        149.2        315.0        268.2   

Depreciation and amortization

     15.8        16.0        32.2        32.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     151.5        133.2        282.8        235.6   

Interest expense, net

     50.6        50.0        100.6        99.1   

Income tax expense

     25.8        20.3        46.7        37.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 75.1      $ 62.9      $ 135.5      $ 98.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note 20. Supplemental Financial Information

On October 19, 2010, Burger King Corporation (“BKC”) issued the Senior Notes. The Senior Notes are irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Burger King Holdings, Inc. and the U.S. subsidiaries of BKC (the “Guarantors”). On April 19, 2011, Burger King Capital Holdings, LLC (“BKCH”) and Burger King Capital Finance, Inc. (“BKCF” and together with BKCH, the “Issuers”) issued the Discount Notes. In August 2012, the Company entered into a Supplemental Indenture with respect to the Senior Notes and a Supplemental Indenture with respect to the Discount Notes (the “Supplemental Indentures”) to guarantee BKC’s obligations under the Senior Notes and the Issuers’ obligations under the Discount Notes. The Supplemental Indentures allow the financial reporting obligation under the Indentures to be satisfied through the reporting of the Company’s consolidated financial information. The 2012 Credit Agreement allows the financial reporting obligation of BKC to be satisfied through the reporting of the Company’s consolidated financial information, provided that the financial information of BKC and its subsidiaries is presented on a standalone basis. The non-U.S. subsidiaries are identified below as Non-Guarantors.

The following represents the condensed consolidating financial information for BKC (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 condensed consolidating financial information of BKW is combined with the financial information of BKCF and presented in a single column under the heading “BKW.” Selling, general and administrative expenses in the condensed consolidating statements of operations only pertain to professional fees and other transaction costs incurred by BKW associated with the Business Combination Agreement. 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 WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

As of June 30, 2014

(Unaudited)

 

    BKW     BKCH     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  
ASSETS              

Current assets:

             

Cash and cash equivalents

  $ 1.8      $ —        $ 598.5      $ —        $ 304.4      $ —        $ 904.7   

Trade and notes receivable, net

    5.4        —          112.4        —          52.6        —          170.4   

Prepaids and other current assets, net

    —          2.5        60.3        —          19.6        —          82.4   

Deferred income taxes, net

    2.3        —          15.4        —          2.3        —          20.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    9.5        2.5        786.6        —          378.9        —          1,177.5   

Property and equipment, net

    —          —          720.8        —          65.3        —          786.1   

Intangible assets, net

    —          —          1,519.0        —          1,254.7        —          2,773.7   

Goodwill

    —          —          359.6        —          269.4        —          629.0   

Net investment in property leased to franchisees

    —          —          140.8        —          10.6        —          151.4   

Intercompany receivable

    10.8        17.2        60.1        —          —          (88.1     —     

Investment in subsidiaries

    1,514.0        1,966.6        1,746.7        1,966.6        —          (7,193.9     —     

Other assets, net

    —          5.4        167.9        —          63.1        —          236.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,534.3      $ 1,991.7      $ 5,501.5      $ 1,966.6      $ 2,042.0      $ (7,282.0   $ 5,754.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY              

Current liabilities:

             

Accounts and drafts payable

  $ —        $ —        $ 17.1      $ —        $ 7.0      $ —        $ 24.1   

Accrued advertising

    —          —          57.1        —          15.7        —          72.8   

Other accrued liabilities

    —          —          111.9        —          44.5        —          156.4   

Current portion of long term debt and capital leases

    —          —          90.9        —          3.2        —          94.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    —          —          277.0        —          70.4        —          347.4   

Term debt, net of current portion

    —          478.0        2,382.0        —          —          —          2,860.0   

Capital leases, net of current portion

    —          —          54.1        —          15.9        —          70.0   

Other liabilities, net

    0.7        —          271.0        —          29.1        —          300.8   

Payables to affiliates

    —          —          —          —          88.1        (88.1     —     

Deferred income taxes, net

    (3.9     (0.3     550.8        —          91.8        —          638.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    (3.2     477.7        3,534.9        —          295.3        (88.1     4,216.6   

Stockholders’ equity:

             

Common stock

    3.5        —          —          —          —          —          3.5   

Additional paid-in capital

    1,249.0        1,182.9        1,532.9        1,533.9        1,330.4        (5,580.1     1,249.0   

Retained earnings

    311.7        350.5        453.1        452.1        452.3        (1,708.0     311.7   

Accumulated other comprehensive income (loss)

    (19.4     (19.4     (19.4     (19.4     (36.0     94.2        (19.4

Treasury stock, at cost

    (7.3     —          —          —          —          —          (7.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

    1,537.5        1,514.0        1,966.6        1,966.6        1,746.7        (7,193.9     1,537.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 1,534.3      $ 1,991.7      $ 5,501.5      $ 1,966.6      $ 2,042.0      $ (7,282.0   $ 5,754.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheets

As of December 31, 2013

(Unaudited)

 

    BKW     BKCH     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  
ASSETS              

Current assets:

             

Cash and cash equivalents

  $ 5.7      $ —        $ 553.2      $ —        $ 228.0      $ —        $ 786.9   

Trade and notes receivable, net

    —          —          127.6        —          52.1        —          179.7   

Prepaids and other current assets, net

    —          17.7        45.1        —          7.0        —          69.8   

Deferred income taxes, net

    2.4        —          33.7        —          1.9        —          38.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    8.1        17.7        759.6        —          289.0        —          1,074.4   

Property and equipment, net

    —          —          733.6        —          67.9        —          801.5   

Intangible assets, net

    —          —          1,530.7        —          1,265.3        —          2,796.0   

Goodwill

    —          —          359.6        —          270.4        —          630.0   

Net investment in property leased to franchisees

    —          —          151.8        —          11.3        —          163.1   

Intercompany receivable

    11.5        —          97.0        —          —          (108.5     —     

Investment in subsidiaries

    1,492.7        1,926.6        1,675.7        1,926.6        —          (7,021.6     —     

Other assets, net

    —          5.8        289.4        —          68.3        —          363.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,512.3      $ 1,950.1      $ 5,597.4      $ 1,926.6      $ 1,972.2      $ (7,130.1   $ 5,828.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY              

Current liabilities:

             

Accounts and drafts payable

  $ —        $ —        $ 21.1      $ —        $ 10.0      $ —        $ 31.1   

Accrued advertising

    —          —          33.8        —          22.7        —          56.5   

Other accrued liabilities

    (0.4     (31.6     164.2        —          44.8        —          177.0   

Current portion of long term debt and capital leases

    —          —          78.2        —          3.2        —          81.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    (0.4     (31.6     297.3        —          80.7        —          346.0   

Term debt, net of current portion

    —          453.1        2,427.1        —          —          —          2,880.2   

Capital leases, net of current portion

    —          —          57.7        —          17.7        —          75.4   

Other liabilities, net

    0.5        0.1        283.8        —          33.5        —          317.9   

Payables to affiliates

    —          36.2        —          —          72.3        (108.5     —     

Deferred income taxes, net

    (4.0     (0.4     604.9        —          92.3        —          692.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    (3.9     457.4        3,670.8        —          296.5        (108.5     4,312.3   

Stockholders’ equity:

             

Common stock

    3.5        —          —          —          —          —          3.5   

Additional paid-in capital

    1,239.9        1,173.8        1,523.8        1,524.8        1,328.9        (5,551.3     1,239.9   

Retained earnings

    225.5        264.3        348.2        347.2        373.1        (1,332.8     225.5   

Accumulated other comprehensive income (loss)

    54.6        54.6        54.6        54.6        (26.3     (137.5     54.6   

Treasury stock, at cost

    (7.3     —          —          —          —          —          (7.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

    1,516.2        1,492.7        1,926.6        1,926.6        1,675.7        (7,021.6     1,516.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 1,512.3      $ 1,950.1      $ 5,597.4      $ 1,926.6      $ 1,972.2      $ (7,130.1   $ 5,828.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations

Three Months Ended June 30, 2014

(Unaudited)

 

     BKW      BKCH     Issuer     Guarantors      Non-
Guarantors
     Eliminations     Consolidated  

Revenues:

                 

Franchise and property revenues

   $ —         $ —        $ 155.9      $ —         $ 87.0       $ —        $ 242.9   

Company restaurant revenues

     —           —          18.3        —           —           —          18.3   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     —           —          174.2        —           87.0         —          261.2   

Franchise and property expenses

     —           —          25.3        —           10.4         —          35.7   

Company restaurant expenses

     —           —          15.7        —           —           —          15.7   

Selling, general and administrative expenses

     —           —          33.1        —           13.9         —          47.0   

Intercompany expenses

     —           —          (2.5     —           2.5         —          —     

Other operating expenses (income), net

     —           —          5.3        —           6.0         —          11.3   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total operating costs and expenses

     —           —          76.9        —           32.8         —          109.7   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     —           —          97.3        —           54.2         —          151.5   

Interest expense, net

     —           12.8        37.5        —           0.3         —          50.6   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     —           (12.8     59.8        —           53.9         —          100.9   

Income tax expense (benefit)

     —           (3.3     15.0        —           14.1         —          25.8   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from continuing operations

     —           (9.5     44.8        —           39.8         —          75.1   

Equity in earnings of subsidiaries

     75.1         84.6        39.8        84.6         —           (284.1     —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 75.1       $ 75.1      $ 84.6      $ 84.6       $ 39.8       $ (284.1   $ 75.1   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 35.4       $ 35.4      $ 44.9      $ 44.9       $ 30.7       $ (155.9   $ 35.4   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations

Six Months Ended June 30, 2014

(Unaudited)

 

     BKW      BKCH     Issuer     Guarantors      Non-
Guarantors
     Eliminations     Consolidated  

Revenues:

                 

Franchise and property revenues

   $ —         $ —        $ 299.7      $ —         $ 165.6       $ —        $ 465.3   

Company restaurant revenues

     —           —          36.8        —           —           —          36.8   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     —           —          336.5        —           165.6         —          502.1   

Franchise and property expenses

     —           —          51.9        —           21.2         —          73.1   

Company restaurant expenses

     —           —          31.2        —           —           —          31.2   

Selling, general and administrative expenses

     —           —          69.6        —           25.6         —          95.2   

Intercompany expenses

     —           —          (3.1     —           3.1         —          —     

Other operating expenses, net

     —           —          11.7        —           8.1         —          19.8   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total operating costs and expenses

     —           —          161.3        —           58.0         —          219.3   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     —           —          175.2        —           107.6         —          282.8   

Interest expense, net

     —           25.3        74.7        —           0.6         —          100.6   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     —           (25.3     100.5        —           107.0         —          182.2   

Income tax expense (benefit)

     —           (6.6     25.5        —           27.8         —          46.7   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from continuing operations

     —           (18.7     75.0        —           79.2         —          135.5   

Equity in earnings of subsidiaries

     135.5         154.2        79.2        154.2         —           (523.1     —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 135.5       $ 135.5      $ 154.2      $ 154.2       $ 79.2       $ (523.1   $ 135.5   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 61.5       $ 61.5      $ 80.2      $ 80.2       $ 69.5       $ (291.4   $ 61.5   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

22


Table of Contents

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations

Three Months Ended June 30, 2013

(Unaudited)

 

     BKW      BKCH     Issuer      Guarantors      Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

                 

Franchise and property revenues

   $ —         $ —        $ 150.6       $ —         $ 75.0      $ —        $ 225.6   

Company restaurant revenues

     —           —          19.4         —           33.3        —          52.7   

Intercompany revenues

     —           —          0.1         —           (0.1     —          —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     —           —          170.1         —           108.2        —          278.3   

Franchise and property expenses

     —           —          25.8         —           10.9        —          36.7   

Company restaurant expenses

     —           —          17.5         —           29.1        —          46.6   

Selling, general and administrative expenses

     —           —          42.8         —           18.7        —          61.5   

Intercompany expenses

     —           —          0.4         —           (0.4     —          —     

Other operating expenses (income), net

     —           —          2.8         —           (2.5     —          0.3   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     —           —          89.3         —           55.8        —          145.1   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     —           —          80.8         —           52.4        —          133.2   

Interest expense, net

     —           11.5        37.7         —           0.8        —          50.0   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     —           (11.5     43.1         —           51.6        —          83.2   

Income tax expense (benefit)

     —           (3.1     10.4         —           13.0        —          20.3   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     —           (8.4     32.7         —           38.6        —          62.9   

Equity in earnings of subsidiaries

     62.9         71.3        38.6         71.3         —          (244.1     —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 62.9       $ 62.9      $ 71.3       $ 71.3       $ 38.6      $ (244.1   $ 62.9   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 136.1       $ 136.1      $ 144.5       $ 144.5       $ 56.0      $ (481.1   $ 136.1   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Operations

Six Months Ended June 30, 2013

(Unaudited)

 

     BKW      BKCH     Issuer     Guarantors      Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

                

Franchise and property revenues

   $ —         $ —        $ 288.5      $ —         $ 143.7      $ —        $ 432.2   

Company restaurant revenues

     —           —          38.5        —           135.3        —          173.8   

Intercompany revenues

     —           —          1.6        —           (1.6     —          —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     —           —          328.6        —           277.4        —          606.0   

Franchise and property expenses

     —           —          52.2        —           20.8        —          73.0   

Company restaurant expenses

     —           —          34.3        —           120.4        —          154.7   

Selling, general and administrative expenses

     —           —          87.2        —           41.0        —          128.2   

Intercompany expenses

     —           —          (0.3     —           0.3        —          —     

Other operating expenses (income), net

     —           —          14.2        —           0.3        —          14.5   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     —           —          187.6        —           182.8        —          370.4   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     —           —          141.0        —           94.6        —          235.6   

Interest expense, net

     —           22.7        74.2        —           2.2        —          99.1   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     —           (22.7     66.8        —           92.4        —          136.5   

Income tax expense (benefit)

     —           (6.1     19.0        —           24.9        —          37.8   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     —           (16.6     47.8        —           67.5        —          98.7   

Equity in earnings of subsidiaries

     98.7         115.3        67.5        115.3         —          (396.8     —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 98.7       $ 98.7      $ 115.3      $ 115.3       $ 67.5      $ (396.8   $ 98.7   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 165.1       $ 165.1      $ 181.7      $ 181.7       $ 54.5      $ (583.0   $ 165.1   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Cash Flows

Six Months Ended June 30, 2014

(Unaudited)

 

    BKW     BKCH     Issuer     Guarantor     Non-Guarantor     Eliminations     Consolidated  

Cash flows from operating activities:

     

Net income

  $ 135.5      $ 135.5      $ 154.2      $ 154.2      $ 79.2      $ (523.1   $ 135.5   

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

             

Equity in earnings of subsidiary

    (135.5     (154.2     (79.2     (154.2     —          523.1        —     

Depreciation and amortization

    —          —          24.3        —          7.9        —          32.2   

Amortization of deferred financing cost and debt issuance discount

    —          25.3        4.8        —          —          —          30.1   

Equity in net loss from unconsolidated affiliates

    —          —          5.0        —          4.9        —          9.9   

Loss (gain) on remeasurement of foreign denominated transactions

    —          —          (1.8     —          (0.5     —          (2.3

Amortization of defined benefit pension and postretirement items

    —          —          (1.5     —          (0.1     —          (1.6

Realized loss on terminated caps/swaps

    —          —          4.2        —          —          —          4.2   

Net loss (gain) on refranchisings and dispositions of assets

    —          —          5.0        —          (1.4     —          3.6   

Bad debt (recoveries) expense, net

    —          —          (0.3     —          0.1        —          (0.2

Share-based compensation expense

    —          —          4.7        —          1.3        —          6.0   

Deferred income taxes

    —          —          4.6        —          0.4        —          5.0   

Changes in current assets and liabilities, excluding dispositions:

             

Trade and notes receivables

    (5.4     —          17.6        —          (0.8     —          11.4   

Prepaids and other current assets

    —          —          9.7        —          (2.0     —          7.7   

Accounts and drafts payable

    —          —          (5.5     —          (2.9     —          (8.4

Accrued advertising

    —          —          (1.9     —          (11.2     —          (13.1

Other accrued liabilities

    —          —          7.0        —          (2.2     —          4.8   

Other long-term assets and liabilities

    —          —          (13.4     —          1.7        —          (11.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) operating activities

    (5.4     6.6        137.5        —          74.4        —          213.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

             

Payments for property and equipment

    —          —          (7.2     —          —          —          (7.2

(Payments) proceeds from refranchisings, disposition of assets and restaurant closures

    —          —          2.0        —          (8.8     —          (6.8

Return of investment on direct financing leases

    —          —          7.2        —          0.5        —          7.7   

Other investing activities

    —          —          (0.3     —          —          —          (0.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) investing activities

    —          —          1.7        —          (8.3     —          (6.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

             

Repayments of term debt and capital leases

    —          —          (36.8     —          (1.5     —          (38.3

Dividends paid on common stock

    (49.3     —          —          —          —          —          (49.3

Intercompany financing

    50.8        (6.6     (57.1     —          12.9        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) financing activities

    1.5        (6.6     (93.9     —          11.4        —          (87.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

    —          —          —          —          (1.1     —          (1.1

Increase (decrease) in cash and cash equivalents

    (3.9     —          45.3        —          76.4        —          117.8   

Cash and cash equivalents at beginning of period

    5.7        —          553.2        —          228.0        —          786.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 1.8      $ —        $ 598.5      $ —        $ 304.4      $ —        $ 904.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

BURGER KING WORLDWIDE, INC. AND SUBSIDIARIES

Condensed Consolidating Statements of Cash Flows

Six Months Ended June 30, 2013

(Unaudited)

 

    BKW     BKCH     Issuer     Guarantor     Non-Guarantor     Eliminations     Consolidated  

Cash flows from operating activities:

             

Net income

  $ 98.7      $ 98.7      $ 115.3      $ 115.3      $ 67.5      $ (396.8   $ 98.7   

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

             

Equity in earnings of subsidiary

    (98.7     (115.3     (67.5     (115.3     —          396.8        —     

Depreciation and amortization

    —          —          21.7        —          10.9        —          32.6   

Amortization of deferred financing cost and debt issuance discount

    —          22.7        4.8        —          —          —          27.5   

Equity in net loss from unconsolidated affiliates

    —          —          3.6        —          3.2        —          6.8   

Loss (gain) on remeasurement of foreign denominated transactions

    —          —          2.6        —          0.4        —          3.0   

Amortization of defined benefit pension and postretirement items

    —          —          (0.7     —          —          —          (0.7

Realized loss on terminated caps/swaps

    —          —          2.8        —          —          —          2.8   

Net loss (gain) on refranchisings and dispositions of assets

    —          —          5.7        —          (7.8     —          (2.1

Bad debt (recoveries) expense, net

    —          —          2.5        —          (0.3     —          2.2   

Share-based compensation expense

    —          —          4.1        —          0.7        —          4.8   

Deferred income taxes

    0.4        16.4        (1.1     —          6.5        —          22.2   

Changes in current assets and liabilities, excluding dispositions:

             

Trade and notes receivables

    —          —          (0.3     —          1.0        —          0.7   

Prepaids and other current assets

    —          —          (0.9     —          1.6        —          0.7   

Accounts and drafts payable

    —          —          (16.5     —          (3.3     —          (19.8

Accrued advertising

    —          —          1.9        —          (1.7     —          0.2   

Other accrued liabilities

    —          —          (25.7     —          (10.0     —          (35.7

Other long-term assets and liabilities

    0.2        —          (14.0     —          0.1        —          (13.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) operating activities

    0.6        22.5        38.3        —          68.8        —          130.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

             

Payments for property and equipment

    —          —          (6.3     —          (2.3     —          (8.6

Proceeds from refranchisings, disposition of assets and restaurant closures

    —          —          45.0        —          3.6        —          48.6   

Payments for acquired franchisee operations, net of cash acquired

    —          —          (11.9     —          —          —          (11.9

Return of investment on direct financing leases

    —          —          7.5        —          0.6        —          8.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) investing activities

    —          —          34.3        —          1.9        —          36.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

             

Repayments of term debt and capital leases

    —          —          (23.6     —          (1.7     —          (25.3

Dividends paid on common stock

    (38.6     —          —          —          —          —          (38.6

Proceeds from stock option exercises

    2.5        —          —          —          —          —          2.5   

Excess tax benefits from share-based compensation

    —          —          3.5        —          —          —          3.5   

Intercompany financing

    38.0        (22.5     126.8        —          (142.3     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) financing activities

    1.9        (22.5     106.7        —          (144.0     —          (57.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

    —          —          —          —          (1.1     —          (1.1

Increase (decrease) in cash and cash equivalents

    2.5        —          179.3        —          (74.4     —          107.4   

Cash and cash equivalents at beginning of period

    0.1        —          355.3        —          191.3        —          546.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 2.6      $ —        $ 534.6      $ —        $ 116.9      $ —        $ 654.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 21. Subsequent Event

Dividend

On July 31, 2014, our Board of Directors approved a cash dividend to shareholders of $0.08 per share that will be paid on August 26, 2014 to shareholders of record at the close of business on August 12, 2014. Future dividends will be determined at the discretion of the Board of Directors.

 

25


Table of Contents

Item 2. Management’s 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” and “our” refer to Burger King Worldwide, Inc. and its subsidiaries, including Burger King Holdings, Inc. (“Holdings”) and Burger King Corporation (“BKC”).

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 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 are 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 by our franchise restaurants, as approximately 100% of our system-wide restaurants are franchised.

Overview

Burger King Worldwide, Inc. (“BKW”, the “Company” or “we”) is a Delaware corporation formed on April 2, 2012 and the indirect parent of Burger King Corporation (“BKC”), a Florida corporation that franchises and operates fast food hamburger restaurants, principally under the Burger King® brand. We are the world’s second largest fast food hamburger restaurant, or FFHR, chain as measured by the total number of restaurants. As of June 30, 2014, we owned or franchised a total of 13,808 restaurants in 98 countries and U.S. territories worldwide. Of these restaurants, 13,756 were owned by our franchisees and 52 were Company restaurants. Our restaurants are limited service restaurants that feature flame-grilled hamburgers, chicken and other specialty sandwiches, French fries, soft drinks and other affordably-priced food items. We believe our restaurants appeal to a broad spectrum of consumers, with multiple day parts and product platforms appealing to different customer groups. During our nearly 60 years of operating history, we have developed a scalable and cost-efficient quick service hamburger restaurant model that offers guests fast, delicious food at affordable prices.

We generate revenues from three sources: (1) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and fees paid by franchisees, (2) property income from properties that we lease or sublease to franchisees, and (3) retail sales at Company restaurants.

Operating Metrics and Key Financial Measures

We evaluate our restaurants and assess our business based on the following operating metrics and key financial measures:

 

    System-wide sales growth refers to the change in sales at all franchise restaurants and Company restaurants in one period from the same period in the prior year.

 

    Franchise sales represent sales at all franchise restaurants and are 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.

 

    Comparable sales growth refers to the change in restaurant sales in one period from the same prior year period for restaurants that have been opened for thirteen months or longer.

 

    Net restaurant growth (“NRG”) represents the opening of new restaurants during a stated period, net of closures.

 

    Net refranchisings refer to sales of Company restaurants to franchisees, net of acquisitions of franchise restaurants by us.

 

    Adjusted EBITDA, which represents earnings (net income or loss) before interest, taxes, depreciation and amortization, adjusted to exclude specifically identified items that management believes do not directly reflect our core operations. See Non-GAAP Reconciliations.

System-wide sales growth and comparable sales growth are measured on a constant currency basis, which means the results exclude the effect of foreign currency translation and are calculated by translating prior year results at current year exchange rates. We analyze certain key financial measures on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements (“FX impact”).

 

26


Table of Contents

Global Portfolio Realignment Project

During 2011, we initiated a project to realign our global restaurant portfolio by refranchising our Company restaurants and establishing strategic partnerships to accelerate development through joint ventures and master franchise and development agreements (the “global portfolio realignment project”). As a result of the global portfolio realignment project, we incurred $9.8 million of general and administrative expenses consisting of professional fees and severance during the three months ended June 30, 2013 and $18.9 million during the six months ended June 30, 2013. In 2013, we completed our global portfolio realignment project, including our refranchising initiative. We continue to own and operate 52 restaurants in Miami, Florida, which we expect to use as a base for the testing of new products and systems. We also expect to continue to enter into joint ventures and master franchise and development agreements as part of our business strategy to accelerate development.

As a result of the global portfolio realignment project, our Company restaurant revenues and Company restaurant expenses have significantly decreased while our franchise and property revenues and franchise and property expenses have increased. Additionally, our selling expenses have decreased as a result of a decrease in advertising fund contributions for Company restaurants following the refranchisings.

Results of Operations for the Three and Six Months Ended June 30, 2014 and 2013

Tabular amounts in millions unless noted otherwise.

The following tables present our results of operations and key business metrics for the three and six months ended June 30, 2014 and 2013:

 

     Three Months Ended
June 30,
     Variance     Six Months Ended
June 30,
     Variance  
        $     %        $     %  
     2014      2013      Favorable / (Unfavorable)     2014      2013      Favorable / (Unfavorable)  

Revenues:

                    

Franchise and property revenues

   $ 242.9       $ 225.6       $ 17.3        7.7   $ 465.3       $ 432.2       $ 33.1        7.7

Company restaurant revenues

     18.3         52.7         (34.4     (65.3 )%      36.8         173.8         (137.0     (78.8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     261.2         278.3         (17.1     (6.1 )%      502.1         606.0         (103.9     (17.1 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Franchise and property expenses

     35.7         36.7         1.0        2.7     73.1         73.0         (0.1     (0.1 )% 

Company restaurant expenses

     15.7         46.6         30.9        66.3     31.2         154.7         123.5        79.8

Selling, general and administrative expenses

     47.0         61.5         14.5        23.6     95.2         128.2         33.0        25.7

Other operating expenses (income), net

     11.3         0.3         (11.0     NM        19.8         14.5         (5.3     (36.6 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total operating costs and expenses

     109.7         145.1         35.4        24.4     219.3         370.4         151.1        40.8
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income from operations

     151.5         133.2         18.3        13.7     282.8         235.6         47.2        20.0

Interest expense, net

     50.6         50.0         (0.6     (1.2 )%      100.6         99.1         (1.5     (1.5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     100.9         83.2         17.7        21.3     182.2         136.5         45.7        33.5

Income tax expense

     25.8         20.3         (5.5     (27.1 )%      46.7         37.8         (8.9     (23.5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 75.1       $ 62.9       $ 12.2        19.4   $ 135.5       $ 98.7       $ 36.8        37.3
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

NM - not meaningful

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

FX Impact Favorable/(Unfavorable)

        

Consolidated total revenues

   $ (0.5   $ (1.3   $ (3.8   $ (2.8

Consolidated franchise and property expenses

     (0.4     0.1        (0.5     0.2   

Consolidated SG&A

     (0.4     (0.2     (0.7     (0.3

Consolidated income from operations

     (1.5     (0.7     (5.0     (2.8

Consolidated net income

     (1.6     (0.7     (5.6     (2.8

Consolidated adjusted EBITDA

     (0.5     (0.9     (3.7     (2.8
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Key Business Metrics

   2014     2013     2014     2013  

System-wide sales growth

     5.4     4.0     6.1     3.1

Franchise sales

   $ 4,274.6      $ 4,060.9      $ 8,205.1      $ 7,731.4   

System comparable sales growth

     0.9     0.6     1.4     (0.4 )% 

System Net Restaurant Growth (NRG)

     131        125        141        129   

Net refranchisings

     —          305        —          338   

Restaurant counts at period end

        

Company

     52        74        52        74   

Franchise

     13,756        13,052        13,756        13,052   

System

     13,808        13,126        13,808        13,126   

 

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Table of Contents

System Comparable Sales Growth

During the three and six months ended June 30, 2014, worldwide system comparable sales growth of 0.9% and 1.4%, respectively, reflects comparable sales growth in all of our segments.

Franchise and Property

During the three months ended June 30, 2014, the increase in franchise and property revenues, excluding FX impact, was due primarily to an increase of $9.8 million in franchise royalties driven by worldwide net restaurants growth of 682 restaurants during the trailing twelve-month period and comparable sales growth in all of our segments, and an increase of $7.2 million in franchise fees and other revenue driven primarily by an increase in renewal franchise fees. Franchise and property revenues had a $0.5 million unfavorable FX impact during the current period.

During the six months ended June 30, 2014, the increase in franchise and property revenues, excluding FX impact, was due primarily to an increase of $24.4 million in franchise royalties driven by worldwide net restaurants growth of 682 restaurants during the trailing twelve-month period, the net refranchising of 360 Company restaurants during 2013 and comparable sales growth in all of our segments, and an increase of $9.7 million in franchise fees and other revenue driven primarily by an increase in renewal franchise fees. Franchise and property revenues had a $3.8 million unfavorable FX impact during the current period.

During the three and six months ended June 30, 2014, franchise and property expenses were relatively unchanged from the same periods during the prior year.

Company restaurants

During the three and six months ended June 30, 2014, Company restaurant revenues and expenses decreased primarily due to the net refranchising of 360 Company restaurants during 2013.

Selling, general and administrative expenses

Our selling, general and administrative expenses were comprised of the following:

 

    Three Months Ended
June 30,
    Variance     Six Months Ended
June 30,
    Variance  
      $     %       $     %  
    2014     2013     Favorable / (Unfavorable)     2014     2013     Favorable / (Unfavorable)  

Selling expenses

  $ 0.1      $ 1.0      $ 0.9        90.0   $ 0.3      $ 4.7      $ 4.4        93.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Management general and administrative expenses

    39.3        44.4        5.1        11.5     80.6        93.3        12.7        13.6

Share-based compensation and non-cash incentive compensation expense

    4.2        3.2        (1.0     (31.3 )%      7.7        5.9        (1.8     (30.5 )% 

Depreciation and amortization

    3.4        3.1        (0.3     (9.7 )%      6.6        5.4        (1.2     (22.2 )% 

Global portfolio realignment project costs

    —          9.8        9.8        100.0     —          18.9        18.9        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative expenses

    46.9        60.5        13.6        22.5     94.9        123.5        28.6        23.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

  $ 47.0      $ 61.5      $ 14.5        23.6   $ 95.2      $ 128.2      $ 33.0        25.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling expenses consist primarily of Company restaurant advertising fund contributions and the decrease was primarily a result of the net refranchisings of Company restaurants during 2013. Management general and administrative expenses (“Management G&A”) is comprised primarily of salary and employee related costs for our non-restaurant employees, professional fees and general overhead for our corporate offices. The decrease in Management G&A was driven primarily by a decrease in salary and fringe benefits. The increase in share-based compensation and non-cash incentive compensation expense is mainly due to additional stock options granted during the six months ended June 30, 2014. The increase in depreciation and amortization expenses is due to corporate capital expenditures during the trailing twelve month period. The non-recurrence of global portfolio realignment project costs is due to completion of our global portfolio realignment project during 2013. Selling, general and administrative expenses had an unfavorable FX impact of $0.4 million and $0.7 million during the three and six months ended June 30, 2014, respectively.

 

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Table of Contents

Other operating expenses (income), net

Our other operating expenses (income), net were comprised of the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Net losses (gains) on disposal of assets, restaurant closures and refranchisings

   $ 5.1      $ (4.3   $ 7.9      $ 0.3   

Litigation settlements and reserves, net

     2.1        0.4        2.2        0.5   

Foreign exchange net (gains) losses

     (2.9     2.3        (2.5     5.6   

Equity in net loss from unconsolidated affiliates

     5.9        1.6        9.9        6.8   

Other, net

     1.1        0.3        2.3        1.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other operating expenses (income), net

   $ 11.3      $ 0.3      $ 19.8      $ 14.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gains and losses on closures and dispositions represent sales of Company properties and other costs related to restaurant closures and refranchisings, and are recorded in other operating (income) expenses, net in the accompanying condensed consolidated statements of operations. Gains and losses recognized in the current period may reflect closures and refranchisings that occurred in previous periods. Equity in net loss from unconsolidated affiliates reflects our share of investee net income or loss.

During the three months ended June 30, 2014, net (gains) losses on disposal of assets, restaurant closures and refranchisings consisted of $1.9 million in net losses associated with refranchisings and $3.2 million of net losses associated with asset disposals and restaurant closures. During the three months ended June 30, 2013, net (gains) losses on disposal of assets, restaurant closures and refranchisings consisted of $6.5 million of net gains associated with refranchisings, $1.0 million of net losses from sale of subsidiaries and $1.2 million of net losses associated with asset disposals and restaurant closures.

During the six months ended June 30, 2014, net (gains) losses on disposal of assets, restaurant closures and refranchisings consisted of $2.3 million in net losses associated with refranchisings and $5.6 million of net losses associated with asset disposals and restaurant closures. During the six months ended June 30, 2013, net (gains) losses on disposal of assets, restaurant closures and refranchisings consisted of $2.7 million of net gains associated with refranchisings, $1.0 million of net losses from sale of subsidiaries and $2.0 million of net losses associated with asset disposals and restaurant closures.

During the three and six months ended June 30, 2014, litigation settlements and reserves, net of $2.1 million and $2.2 million, respectively, represent the Company’s best estimate within the range of losses which could be incurred in connection with pending litigation matters. See Note 18 of the accompanying unaudited condensed consolidated financial statements for additional information about accounting for our litigation reserves.

Interest expense, net

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Interest expense, net

   $ 50.6      $ 50.0      $ 100.6      $ 99.1   

Weighted average interest rate on long-term debt

     6.8     6.6     6.7     6.6

During the three and six months ended June 30, 2014 interest expense, net increased compared to the three and six months ended June 30, 2013 due to a higher weighted average interest rate, partially offset by reduced borrowings resulting from principal payments of our term loans.

Income tax expense

Our effective tax rate was 25.6% for the three months ended June 30, 2014, primarily as a result of the mix of income from multiple tax jurisdictions. Our effective tax rate was 24.4% for the three months ended June 30, 2013, as a result of the mix of income during the period from multiple tax jurisdictions and a favorable impact from the sale of foreign subsidiaries.

Our effective tax rate was 25.6% for the six months ended June 30, 2014, primarily as a result of the mix of income from multiple tax jurisdictions. Our effective tax rate was 27.7% for the six months ended June 30, 2013, as a result of the mix of income during the period from multiple tax jurisdictions and the impact of non-deductible expenses related to our global portfolio realignment project, partially offset by a favorable impact from the sale of foreign subsidiaries.

 

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Table of Contents

Net Income

Our net income increased by $12.2 million during the three months ended June 30, 2014 primarily as a result of a $18.3 million increase in income from operations, which was driven by an increase in franchise and property revenues, decreases in franchise and property expenses, decreases in Company restaurant expenses and decreases in selling, general and administrative expenses, partially offset by a decrease in Company restaurant revenues and an increase in other operating expenses (income), net. The increase in income from operations was partially offset by an increase in interest expense, net of $0.6 million and an increase in income tax expense of $5.5 million.

Our net income increased by $36.8 million during the six months ended June 30, 2014 primarily as a result of a $47.2 million increase in income from operations, which was driven by an increase in franchise and property revenues, decreases in Company restaurant expenses and decreases in selling, general and administrative expenses, partially offset by a decrease in Company restaurant revenues, an increase in franchise and property expenses and an increase in other operating expenses (income), net. The increase in income from operations was partially offset by an increase in interest expense, net of $1.5 million and an increase in income tax expense of $8.9 million.

Non-GAAP Reconciliations

The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. EBITDA is defined as earnings (net income or loss) before interest, taxes and depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding the impact of share-based compensation and non-cash incentive compensation expense, other operating expenses (income), net, and all other specifically identified costs associated with non-recurring projects, including global portfolio realignment project costs. Adjusted EBITDA is used by management to measure operating performance of the business, excluding specifically identified items that management believes do not directly reflect our core operations, and represents our measure of segment income.

 

    Results     Variance     Results     Variance  
    Three Months Ended
June 30,
    $     %     Six Months Ended
June 30,
    $     %  
    2014     2013     Favorable / (Unfavorable)     2014     2013     Favorable / (Unfavorable)  

Segment income:

               

U.S. and Canada

  $ 113.3      $ 107.5      $ 5.8        5.4   $ 215.9      $ 205.0      $ 10.9        5.3

EMEA

    53.0        45.0        8.0        17.8     101.1        87.3        13.8        15.8

LAC

    17.4        15.5        1.9        12.3     32.3        30.6        1.7        5.6

APAC

    13.5        11.4        2.1        18.4     25.2        21.8        3.4        15.6

Unallocated Management G&A

    (14.4     (16.9     2.5        14.8     (32.0     (37.2     5.2        14.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    182.8        162.5        20.3        12.5     342.5        307.5        35.0        11.4

Share-based compensation and non-cash incentive compensation expense

    4.2        3.2        (1.0     (31.3 )%      7.7        5.9        (1.8     (30.5 )% 

Global portfolio realignment project costs

    —          9.8        9.8        NM        —          18.9        18.9        NM   

Other operating expenses (income), net

    11.3        0.3        (11.0     NM        19.8        14.5        (5.3     (36.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    167.3        149.2        18.1        12.1     315.0        268.2        46.8        17.4

Depreciation and amortization

    15.8        16.0        0.2        1.2     32.2        32.6        0.4        1.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    151.5        133.2        18.3        13.7     282.8        235.6        47.2        20.0

Interest expense, net

    50.6        50.0        (0.6     (1.2 )%      100.6        99.1        (1.5     (1.5 )% 

Income tax expense

    25.8        20.3        (5.5     (27.1 )%      46.7        37.8        (8.9     (23.5 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 75.1      $ 62.9      $ 12.2        19.4   $ 135.5      $ 98.7      $ 36.8        37.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NM - not meaningful

Adjusted EBITDA in the three and six months ended June 30, 2014 reflects increases in segment income in our all of our segments and a decrease in Unallocated Management G&A. Unallocated Management G&A represents corporate support costs in areas such as facilities, finance, human resources, information technology, legal, marketing and supply chain management, which benefit all of our geographic segments and system-wide restaurants and are not allocated specifically to any of the geographic segments. EBITDA for the three and six months ended June 30, 2014 increased primarily for the same reasons that Adjusted EBITDA increased as well as the non-recurrence of global portfolio realignment project costs, partially offset by an increase in other operating expenses (income), net and an increase in share-based compensation and non-cash incentive compensation expense.

 

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Table of Contents

Results of operations for U.S. & Canada

 

    Three Months Ended     Variance     Six Months
Ended
    Variance  
    June 30,     $     %     June 30,     $     %  
    2014     2013     Favorable / (Unfavorable)     2014     2013     Favorable / (Unfavorable)  

Franchise:

               

Franchise and property revenues

  $ 140.6      $ 137.9      $ 2.7        2.0   $ 271.4      $ 263.8      $ 7.6        2.9

Franchise and property expenses

    27.8        29.0        1.2        4.1     57.2        56.8        (0.4     (0.7 )% 

Company:

               

Company restaurant revenues

    18.3        26.2        (7.9     (30.2 )%      36.8        73.7        (36.9     (50.1 )% 

CRM

    2.6        2.4        0.2        8.3     5.6        6.5        (0.9     (13.8 )% 

CRM %

    14.2     9.2     —          5.0     15.2     8.8     —          6.4

Segment SG&A (1)

    11.9        13.9        2.0        14.4     24.0        28.8        4.8        16.7

Segment depreciation and amortization

    9.8        10.1        0.3        3.0     20.1        20.3        0.2        1.0

Segment income

    113.3        107.5        5.8        5.4     215.9        205.0        10.9        5.3

(1)    Segment selling, general and administrative expenses (“Segment SG&A”) consist of segment selling expenses and segment Management G&A

       

FX Impact Favorable/(Unfavorable)

               

Segment revenues

  $ (0.4   $ (0.3       $ (1.0   $ (0.5    

Segment franchise and property expenses

    0.2        —              0.5        0.1       

Segment income

    (0.3     (0.1         (0.7     (0.2    

Key Business Metrics

               

System-wide sales growth

    (0.3 )%      (0.1 )%          (0.1 )%      (1.4 )%     

Franchise sales

  $ 2,260.5      $ 2,264.8          $ 4,310.3      $ 4,290.8       

System comparable sales growth

    0.4     (0.5 )%          0.3     (1.7 )%     

System NRG

    (22     (31         (65     (59    

Net Refranchisings

    —          94            —          127       

Restaurant counts at period end

               

Company

    52        52            52        52       

Franchise

    7,319        7,365            7,319        7,365       

System

    7,371        7,417            7,371        7,417       

 

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System Comparable Sales Growth

During the three and six months ended June 30, 2014, the U.S. and Canada delivered positive comparable sales growth as a result of our strategy of launching fewer, more impactful products and by the continued popularity of our core offerings.

Franchise and Property

During the three months ended June 30, 2014, the increase in franchise and property revenues, excluding FX impact, was due primarily to an increase of $2.1 million in franchise fees and other revenue driven by an increase in renewal franchise fees, and an increase of $1.6 million in property revenue. Franchise and property revenues had a $0.4 million unfavorable FX impact during the current period.

During the six months ended June 30, 2014, the increase in franchise and property revenues, excluding FX impact, was due primarily to an increase of $4.6 million in property revenue related to new leases and subleases associated with additional restaurants leased or subleased to franchisees as a result of the net refranchisings of 127 Company restaurants during 2013, and an increase of $3.6 million in franchise fees and other revenue driven by an increase in renewal franchise fees. Franchise and property revenues had a $1.0 million unfavorable FX impact during the current period.

During the three and six months ended June 30, 2014, franchise and property expenses were relatively unchanged from the prior year.

Company Restaurants

During the three and six months ended June 30, 2014, Company restaurant revenues decreased primarily due to the net refranchising of 127 Company restaurants during 2013. Company restaurant margin, or CRM, is derived by subtracting Company restaurant expenses from Company restaurant revenues for a stated period, which we analyze as a percentage of Company restaurant revenues, a metric we refer to as Company restaurant margin %, or CRM%. CRM% increased primarily as a result of retaining restaurants with higher than average CRM%.

Segment income

During the three months ended June 30, 2014, segment income increased due to an increase in franchise and property revenues net of expenses, a decrease in Segment SG&A and an increase in CRM. The decrease in Segment SG&A was driven primarily by a decrease in salary and fringe benefits.

During the six months ended June 30, 2014, segment income increased due to an increase in franchise and property revenues net of expenses and a decrease in Segment SG&A, partially offset by a decrease in CRM. The decrease in Segment SG&A was driven primarily by a decrease in salary and fringe benefits.

 

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Results of operations for EMEA

 

     Three Months Ended     Variance     Six Months Ended     Variance  
     June 30,     $     %     June 30,     $      %  
     2014     2013     Favorable / (Unfavorable)     2014     2013     Favorable / (Unfavorable)  

Franchise and property revenues

   $ 67.4      $ 57.1      $ 10.3        18.0   $ 128.4      $ 109.5      $ 18.9         17.3

Franchise and property expenses

     7.2        7.0        (0.2     (2.9 )%      14.2        14.7        0.5         3.4

Segment SG&A

     9.3        10.9        1.6        14.7     17.4        23.3        5.9         25.3

Segment depreciation and amortization

     2.1        2.1        —          —          4.3        5.1        0.8         15.7

Segment income

     53.0        45.0        8.0        17.8     101.1        87.3        13.8         15.8

FX Impact Favorable/(Unfavorable)

                 

Segment revenues

   $ 1.7      $ 0.2          $ 2.2      $ 0.1        

Segment franchise and property expenses

     (0.6     0.1            (1.0     0.1        

Segment income

     1.7        0.5            2.2        0.1        

Key Business Metrics

                 

System-wide sales growth

     11.3     8.7         12.9     8.2     

Franchise sales

   $ 1,234.3      $ 1,068.6          $ 2,383.9      $ 2,019.9        

System comparable sales growth

     0.9     2.9         2.8     1.9     

System NRG

     77        71            106        89        

Net Refranchisings

     —          113            —          113        

Restaurant counts at period end

                 

Company

     —          19            —          19        

Franchise

     3,556        3,191            3,556        3,191        

System

     3,556        3,210            3,556        3,210        

System Comparable Sales Growth

During the three and six months ended June 30, 2014, system comparable sales growth of 0.9% and 2.8%, respectively, in EMEA was driven primarily by comparable sales growth in Turkey, the United Kingdom, and Spain, where premium limited time offerings complemented value promotions, partially offset by weakness in Germany.

Franchise and Property

During the three months ended June 30, 2014, the increase in franchise and property revenues, excluding FX impact, was due primarily to an increase of $6.5 million in franchise royalties primarily driven by NRG of 346 restaurants during the trailing twelve-month period and comparable sales growth, and an increase of $2.9 million in franchise fees and other revenue. Franchise and property revenues had a $1.7 million favorable FX impact during the current period.

During the six months ended June 30, 2014, the increase in franchise and property revenues, excluding FX impact, was due primarily to an increase of $15.4 million in franchise royalties primarily driven by NRG of 346 restaurants during the trailing twelve-month period and comparable sales growth, and an increase of $3.3 million in franchise fees and other revenue. Franchise and property revenues had a $2.2 million favorable FX impact during the current period.

During the three and six months ended June 30, 2014, franchise and property expenses were relatively unchanged from the prior year.

Segment income

During the three and six months ended June 30, 2014, segment income increased primarily due to an increase in franchise and property revenues net of expenses and a decrease in Segment SG&A. This increase was partially offset by the decrease in CRM of $3.7 million and $10.7 million, respectively, during the three and six months ended June 30, 2014, due to the net refranchising of Company restaurants during 2013. The decrease in Segment SG&A was driven primarily by a decrease in selling expenses as a result of the net refranchisings during 2013 and a decrease in salary and fringe benefits.

 

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Results of operations for LAC

 

     Three Months Ended     Variance     Six Months Ended     Variance  
     June 30,     $     %     June 30,     $     %  
     2014     2013     Favorable / (Unfavorable)     2014     2013     Favorable / (Unfavorable)  

Franchise and property revenues

   $ 19.3      $ 17.5      $ 1.8        10.3   $ 36.3      $ 33.2      $ 3.1        9.3

Franchise and property expenses

     0.2        0.1        (0.1     NM        0.6        0.4        (0.2     NM   

Segment SG&A

     1.7        2.0        0.3        15.0     3.5        4.8        1.3        27.1

Segment depreciation and amortization

     —          0.1        0.1        NM        0.1        0.6        0.5        83.3

Segment income

     17.4        15.5        1.9        12.3     32.3        30.6        1.7        5.6

FX Impact Favorable/(Unfavorable)

                

Segment revenues

   $ (1.9   $ (1.0       $ (4.3   $ (2.1    

Segment franchise and property expenses

     —          —              —          —         

Segment income

     (2.0     (1.1         (4.5     (2.4    

Key Business Metrics

                

System-wide sales growth

     14.2     13.0         15.6     11.6    

Franchise sales

   $ 365.3      $ 357.6          $ 703.3      $ 679.1       

System comparable sales growth

     1.1     (2.2 )%          2.5     (1.8 )%     

System NRG

     29        26            33        34       

Net Refranchisings

     —          98            —          98       

Restaurant counts at period end

                

Company

     —          —              —          —         

Franchise

     1,583        1,424            1,583        1,424       

System

     1,583        1,424            1,583        1,424       

NM - not meaningful

System Comparable Sales Growth

During the three and six months ended June 30, 2014, system comparable sales growth of 1.1% and 2.5%, respectively, in LAC was driven primarily by comparable sales growth in Brazil, where new products and limited time offerings resonated well with our guests, partially offset by weakness in Mexico due to ongoing competitive pressures.

Franchise and Property

During the three months ended June 30, 2014, the increase in franchise and property revenues, excluding FX impact, was due to an increase of $2.2 million in franchise royalties primarily driven by NRG of 159 restaurants during the trailing twelve-month period and comparable sales growth, and an increase of $1.5 million in franchise fees and other revenue. Franchise and property revenues had a $1.9 million unfavorable FX impact during the current period.

During the six months ended June 30, 2014, the increase in franchise and property revenues, excluding FX impact, was due to an increase of $5.0 million in franchise royalties primarily driven by NRG of 159 restaurants during the trailing twelve-month period and comparable sales growth, and an increase of $2.4 million in franchise fees and other revenue. Franchise and property revenues had a $4.3 million unfavorable FX impact during the current period.

During the three and six months ended June 30, 2014, franchise and property expenses were relatively unchanged from the prior year.

Segment income

During the three and six months ended June 30, 2014, segment income increased due to an increase in franchise and property revenues net of expense and a decrease in Segment SG&A, partially offset by the non-recurrence of $2.0 million of CRM during the six months ended June 30, 2013, due to the net refranchising of Company restaurants during 2013. The decrease in Segment SG&A was driven primarily by a decrease in selling expenses as a result of the net refranchisings during 2013 and a decrease in salary and fringe benefits.

 

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Results of operations for APAC

 

     Three Months Ended     Variance     Six Months Ended     Variance  
     June 30,     $     %     June 30,     $     %  
     2014     2013     Favorable / (Unfavorable)     2014     2013     Favorable / (Unfavorable)  

Franchise and property revenues

   $ 15.6      $ 13.1      $ 2.5        19.1   $ 29.2      $ 25.7      $ 3.5        13.6

Franchise and property expenses

     0.5        0.6        0.1        NM        1.1        1.1        —          NM   

Segment SG&A

     2.1        1.7        (0.4     (23.5 )%      4.0        3.9        (0.1     (2.6 )% 

Segment depreciation and amortization

     0.5        0.6        0.1        16.7     1.1        1.2        0.1        8.3

Segment income

     13.5        11.4        2.1        18.4     25.2        21.8        3.4        15.6

FX Impact Favorable/(Unfavorable)

                

Segment revenues

   $ 0.1      $ (0.2       $ (0.7   $ (0.3    

Segment franchise and property expenses

     —          —              —          —         

Segment income

     0.1        (0.2         (0.7     (0.3    

Key Business Metrics

                

System-wide sales growth

     14.3     8.9         14.6     9.1    

Franchise sales

   $ 414.5      $ 369.9          $ 807.6      $ 741.6       

System comparable sales growth

     3.7     3.9         3.8     3.3    

System NRG

     47        59            67        65       

Net Refranchisings

     —          —              —          —         

Restaurant counts at period end

                

Company

     —          3            —          3       

Franchise

     1,298        1,072            1,298        1,072       

System

     1,298        1,075            1,298        1,075       

NM - not meaningful

System Comparable Sales Growth

During the three and six months ended June 30, 2014, system comparable sales growth of 3.7% and 3.8%, respectively, in APAC was driven primarily by comparable sales growth in Australia, where new limited time offerings and value promotions performed well, South Korea, where we launched new limited time offerings, and China, where a strong lineup of premium products complemented value items.

Franchise and Property

During the three months ended June 30, 2014, the increase in franchise and property revenues, excluding FX impact, was due to an increase of $1.7 million in franchise royalties primarily driven by NRG of 223 restaurants during the trailing twelve-month period and comparable sales growth, and an increase of $0.7 million in franchise fees and other revenue. Franchise and property revenues had a $0.1 million favorable FX impact during the current period.

During the six months ended June 30, 2014, the increase in franchise and property revenues, excluding FX impact, was due to an increase of $3.6 million in franchise royalties primarily driven by NRG of 223 restaurants during the trailing twelve-month period and comparable sales growth, and an increase of $0.6 million in franchise fees and other revenue. Franchise and property revenues had an unfavorable FX impact of $0.7 million during the current period.

During the three and six months ended June 30, 2014, franchise and property expenses were relatively unchanged from the prior year.

Segment income

During the three and six months ended June 30, 2014, segment income increased primarily due to an increase in franchise and property revenues net of expenses, partially offset by an increase in Segment SG&A. The increase in Segment SG&A was driven primarily by an increase in salary and fringe benefits.

 

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Liquidity and Capital Resources

Our primary sources of liquidity are cash on hand, cash generated by operations and borrowings available under our 2012 Revolving Credit Facility (defined below). We have used, and may in the future use, our liquidity to make required interest and principal payments, to repurchase shares of our common stock, to voluntarily repay and/or repurchase our or one of our affiliate’s outstanding debt, to fund our investing activities and/or to pay dividends. As a result of our borrowings, we are highly leveraged. Our liquidity requirements are primarily due to debt service requirements.

At June 30, 2014, we had cash and cash equivalents of $904.7 million and working capital of $830.1 million. In addition, at June 30, 2014, we had borrowing capacity of $130.0 million under our 2012 Revolving Credit Facility. Based on our current level of operations and available cash, we believe our cash flow from operations, combined with availability under our 2012 Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, debt service requirements and capital spending requirements over the next twelve months.

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 currently plan to utilize cash flows from our foreign subsidiaries to meet our future debt service requirements in the U.S. 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.

Debt Instruments

Our long-term debt is comprised primarily of borrowings under our 2012 Credit Agreement (defined below), amounts outstanding under our Senior Notes and Discount Notes (each also defined below), and obligations under capital leases. For further information about our long-term debt, see Note 8 to the accompanying unaudited Condensed Consolidated Financial Statements included in this report.

As of June 30, 2014, we had $965.6 million in Tranche A Term Loans outstanding and $686.6 million of Tranche B Term Loans outstanding (the “2012 Term Loan Facility”) under our credit agreement dated September 28, 2012 (the “2012 Credit Agreement”). As of June 30, 2014, the interest rate was 2.50% on our outstanding Tranche A Term Loan and 3.75% on our outstanding Tranche B Term Loan. As of June 30, 2014, we had no amounts outstanding under the revolving credit facility available under the 2012 Credit Agreement (the “2012 Revolving Credit Facility”). Based on the amounts outstanding under the 2012 Term Loan Facility and the three-month LIBOR rate as of June 30, 2014, required debt service for the next twelve months is estimated to be approximately $50.1 million in interest payments and $77.9 million in principal payments.

As of June 30, 2014, we had outstanding $794.5 million of 9.875% senior notes due 2018 (the “Senior Notes”). In addition, as of June 30, 2014, we had outstanding $478.0 million of 11.0% senior discount notes due 2019 (the “Discount Notes”), which were issued by Burger King Capital Holdings, LLC and Burger King Capital Finance, Inc., our wholly-owned indirect subsidiaries.

As of June 30, 2014, we were in compliance with all covenants of the 2012 Credit Agreement and the indentures governing our Senior Notes and Discount Notes, and we have the ability to draw on the full borrowing capacity of $130.0 million under our 2012 Revolving Credit Facility.

Comparative Cash Flows

Operating Activities

Cash provided by operating activities was $213.1 million for the six months ended June 30, 2014, compared to $130.2 million during the same period in the prior year. The increase in cash provided by operating activities was driven primarily by an increase in net income, excluding non-cash adjustments, and changes in working capital.

Investing Activities

Cash used for investing activities was $6.6 million for the six months ended June 30, 2014, compared to cash provided by investing activities of $36.2 million during the same period in the prior year. The change in investing activities was driven primarily by a decrease in proceeds from refranchisings, net, partially offset by a decrease in payments for acquired franchisee operations.

 

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Financing Activities

Cash used for financing activities was $87.6 million for the six months ended June 30, 2014, compared to $57.9 million during the same period in the prior year. The increase in cash used for financing activities was driven primarily as a result of higher scheduled debt principal payments and higher dividend payments.

Dividends

On February 12, 2014, our board declared a cash dividend of $0.07 per share, which was paid on March 12, 2014 to shareholders of record on February 26, 2014. On April 24, 2014, our board declared a cash dividend of $0.07 per share, which was paid on May 26, 2014 to shareholders of record at the close of business on May 12, 2014. On July 31, 2014, our Board of Directors approved a cash dividend to shareholders of $0.08 per share that will be paid on August 26, 2014 to shareholders of record at the close of business on August 12, 2014. Future dividends will be determined at the discretion of the Board of Directors.

Commitments and Off-Balance Sheet Arrangements

During the fiscal year ended June 30, 2000, we entered into long-term, exclusive contracts with soft drink vendors to supply Company and franchise restaurants with their products and obligating Burger King restaurants in the United States to purchase a specified number of gallons of soft drink syrup. These volume commitments are not subject to any time limit and as of June 30, 2014, we estimate it will take approximately 17 years for these purchase commitments to be completed. In the event of early termination of this arrangement, we may be required to make termination payments that could be material to our financial position, results of operations and cash flows.

From time to time, we enter into agreements under which we guarantee loans made by third parties to qualified franchisees. As of June 30, 2014, there were $125.5 million of loans outstanding to franchisees that we had guaranteed under six such programs, with additional franchisee borrowing capacity of approximately $202.5 million remaining. Our maximum guarantee liability under these programs is limited to an aggregate of $32.5 million, assuming full utilization of all borrowing capacity. We record a liability in the period the loans are funded. As of June 30, 2014, the liability reflecting the fair value of these guarantee obligations was $5.1 million. No significant payments have been made by us in connection with these guarantees through June 30, 2014.

Critical Accounting Policies and Estimates

This discussion and analysis of financial condition and results of operations is based on our audited Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosures of contingent assets and liabilities. We evaluate our estimates on an ongoing basis and we base our estimates on historical experience and various other assumptions we deem reasonable to the situation. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Volatile credit, equity, foreign currency and energy markets, and declines in consumer spending have increased and may continue to create uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in our estimates could materially impact our results of operations and financial condition in any particular period. For a complete discussion of our critical and significant accounting policies and estimates, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K filed with the SEC on February 21, 2014.

New Accounting Pronouncements

See Note 2 – New Accounting Pronouncements, in the notes to the unaudited condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no material changes during the three months ended June 30, 2014 to the disclosures made in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 21, 2014.

 

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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 Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and Exchange Act Rules 15d-15(e)) as of June 30, 2014. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date.

Internal Control Over Financial Reporting

The Company’s management, including the CEO and CFO, confirm that there were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Cautionary Note Regarding Forward-Looking Statements

Certain statements made in this report reflect management’s 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 fully franchised business model; our expectations and belief regarding our ability to accelerate international development through joint venture structures and master franchise and development agreements; 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 and foreign currency exchange rates and the impact of changes in interest rates and foreign currency exchange rates on the amount of our interest payments, future earnings and cash flows; our belief and estimates regarding accounting and tax matters; our expectations regarding our ability to hedge interest rate risk of our variable rate debt through the purchase of interest rate caps and forward-starting interest rate swaps and to hedge our net investment in a Swiss subsidiary through the purchase of cross-currency swaps; our expectations with respect to amounts we expect to be reclassified into earnings within the next twelve months; 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:

 

    Risks related to our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations under our 2012 Credit Facilities, Senior Notes and Discount Notes;

 

    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;

 

    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 arising from 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;

 

    Our ability to successfully implement our domestic and international growth strategy and risks related to our international operations;

 

    Risk related to relying on master franchisees and subfranchisees to accelerate restaurant growth; and

 

    Risks related to the ability of counterparties to our 2012 Credit Facilities, interest rate caps, cross-currency swaps, forward-starting interest rate swaps, foreign currency forward contracts, and any similar instrument to fulfill their commitments and/or obligations.

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.

 

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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.

Part II – Other Information

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On April 10, 2013, our Board of Directors authorized the repurchase of up to $200 million of our common stock. The repurchase authorization will remain in effect until May 31, 2016 or when the limit is reached. The amount and timing of the repurchases will be determined by management. The share repurchases may be suspended or discontinued at any time. No shares were repurchased during the three months ended June 30, 2014.

 

Item 6. Exhibits

The exhibits listed in the accompanying index are filed as part of this report.

 

Exhibit
Number

  

Description

31.1    Certification of Chief Executive Officer of Burger King Worldwide, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer of Burger King Worldwide, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer of Burger King Worldwide, Inc. pursuant to Section 903 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer of Burger King Worldwide, Inc. pursuant to Section 903 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 WORLDWIDE, INC.
    (Registrant)
Date: August 1, 2014     By:  

/s/ Joshua Kobza

      Name:   Joshua Kobza, principal financial officer
      Title:  

Chief Financial Officer

(principal financial officer)

(duly authorized officer)

 

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INDEX TO EXHIBITS

 

Exhibit

Number

  

Description

  31.1    Certification of Chief Executive Officer of Burger King Worldwide, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of Chief Financial Officer of Burger King Worldwide, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification of Chief Executive Officer of Burger King Worldwide, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2    Certification of Chief Financial Officer of Burger King Worldwide, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Presentation Linkbase Document

 

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