e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission file number: 001-32875
BURGER KING HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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75-3095469
(I.R.S. Employer
Identification No.) |
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5505 Blue Lagoon Drive, Miami, Florida
(Address of Principal Executive Offices)
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33126
(Zip Code) |
(305) 378-3000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (check one);
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of April 26, 2010, there were 135,689,733 shares of the registrants Common Stock
outstanding.
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
2
PART I Financial Information
Item 1. Financial Statements
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
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As of |
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March 31, |
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June 30, |
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2010 |
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2009 |
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(In millions, except share data) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
158.1 |
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$ |
121.7 |
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Trade and notes receivable, net |
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139.3 |
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130.0 |
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Prepaids and other current assets |
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75.0 |
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86.4 |
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Deferred income taxes, net |
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17.8 |
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32.5 |
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Total current assets |
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390.2 |
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370.6 |
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Property and equipment, net of accumulated depreciation of $681.2 million and $607.4 million, respectively |
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1,014.9 |
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1,013.2 |
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Intangible assets, net |
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1,050.7 |
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1,062.7 |
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Goodwill |
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30.8 |
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26.4 |
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Net investment in property leased to franchisees |
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138.7 |
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135.3 |
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Other assets, net |
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103.4 |
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98.9 |
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Total assets |
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$ |
2,728.7 |
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$ |
2,707.1 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts and drafts payable |
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$ |
73.5 |
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$ |
127.0 |
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Accrued advertising |
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83.3 |
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67.8 |
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Other accrued liabilities |
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221.5 |
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220.0 |
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Current portion of long term debt and capital leases |
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86.9 |
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67.5 |
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Total current liabilities |
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465.2 |
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482.3 |
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Term debt, net of current portion |
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689.8 |
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755.6 |
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Capital leases, net of current portion |
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66.1 |
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65.8 |
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Other liabilities, net |
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335.6 |
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354.5 |
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Deferred income taxes, net |
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61.0 |
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74.1 |
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Total liabilities |
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1,617.7 |
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1,732.3 |
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Commitments and Contingencies (See Note 14) |
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Stockholders equity: |
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Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding |
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Common stock, $0.01 par value; 300,000,000 shares authorized; 135,544,730 and 134,792,121 shares issued and outstanding at March 31, 2010 and June 30, 2009, respectively |
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1.4 |
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1.4 |
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Additional paid-in capital |
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640.9 |
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623.4 |
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Retained earnings |
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567.6 |
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455.4 |
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Accumulated other comprehensive loss |
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(37.5 |
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(45.9 |
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Treasury stock, at cost; 2,977,317 and 2,884,223 shares, at March 31, 2010 and June 30, 2009, respectively |
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(61.4 |
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(59.5 |
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Total stockholders equity |
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1,111.0 |
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974.8 |
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Total liabilities and stockholders equity |
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$ |
2,728.7 |
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$ |
2,707.1 |
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See accompanying notes to condensed consolidated financial statements.
3
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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March 31, |
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March 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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(In millions, except per share data) |
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Revenues: |
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Company restaurant revenues |
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$ |
439.2 |
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$ |
448.8 |
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$ |
1,385.2 |
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$ |
1,418.9 |
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Franchise revenues |
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129.9 |
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124.9 |
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408.9 |
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404.5 |
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Property revenues |
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27.8 |
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26.2 |
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85.1 |
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84.1 |
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Total revenues |
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596.9 |
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599.9 |
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1,879.2 |
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1,907.5 |
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Company restaurant expenses: |
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Food, paper and product costs |
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138.0 |
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142.7 |
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437.8 |
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456.9 |
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Payroll and employee benefits |
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138.2 |
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143.8 |
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429.4 |
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439.1 |
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Occupancy and other operating costs |
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113.3 |
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110.0 |
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341.9 |
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343.6 |
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Total company restaurant expenses |
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389.5 |
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396.5 |
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1,209.1 |
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1,239.6 |
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Selling, general and administrative expenses |
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117.8 |
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115.7 |
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374.7 |
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366.2 |
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Property expenses |
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15.2 |
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13.4 |
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44.7 |
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42.1 |
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Other operating (income) expense, net |
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(4.5 |
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(1.3 |
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0.6 |
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7.9 |
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Total operating costs and expenses |
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518.0 |
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524.3 |
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1,629.1 |
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1,655.8 |
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Income from operations |
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78.9 |
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75.6 |
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250.1 |
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251.7 |
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Interest expense |
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12.2 |
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13.0 |
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37.4 |
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44.2 |
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Interest income |
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(0.3 |
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(0.4 |
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(0.8 |
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(2.2 |
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Total interest expense, net |
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11.9 |
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12.6 |
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36.6 |
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42.0 |
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Income before income taxes |
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67.0 |
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63.0 |
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213.5 |
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209.7 |
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Income tax expense |
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26.0 |
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15.9 |
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75.7 |
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68.5 |
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Net income |
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$ |
41.0 |
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$ |
47.1 |
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$ |
137.8 |
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$ |
141.2 |
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Earnings per share: |
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Basic |
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$ |
0.30 |
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$ |
0.35 |
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$ |
1.02 |
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$ |
1.05 |
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Diluted |
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$ |
0.30 |
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$ |
0.34 |
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$ |
1.00 |
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$ |
1.03 |
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Weighted average shares outstanding: |
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Basic |
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135.3 |
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134.6 |
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135.6 |
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134.8 |
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Diluted |
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137.2 |
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136.7 |
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137.4 |
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136.8 |
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Dividends per common share |
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$ |
0.06 |
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$ |
0.06 |
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$ |
0.19 |
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$ |
0.19 |
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See accompanying notes to condensed consolidated financial statements.
4
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Nine Months Ended |
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March 31, |
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2010 |
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2009 |
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(In millions) |
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Cash flows from operating activities: |
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Net income |
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$ |
137.8 |
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$ |
141.2 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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79.9 |
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72.2 |
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Gain on hedging activities |
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(1.1 |
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(0.9 |
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(Gain) loss on remeasurement of foreign denominated transactions |
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14.1 |
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77.1 |
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Gain on refranchisings, dispositions of assets and release of unfavorable lease obligation |
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(5.8 |
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(6.8 |
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Impairment on non-restaurant properties |
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1.4 |
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0.2 |
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Bad debt expense, net of recoveries |
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0.5 |
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3.2 |
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Share-based compensation |
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13.0 |
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11.4 |
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Deferred income taxes |
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(1.4 |
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(17.1 |
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Changes in current assets and liabilities, excluding acquisitions and dispositions: |
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Trade and notes receivables |
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(10.1 |
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4.0 |
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Prepaids and other current assets |
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12.9 |
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2.5 |
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Accounts and drafts payable |
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(55.7 |
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(51.7 |
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Accrued advertising |
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15.9 |
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(0.3 |
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Other accrued liabilities |
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(0.1 |
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(5.2 |
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Other long-term assets and liabilities |
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(2.0 |
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(18.4 |
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Net cash provided by operating activities |
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199.3 |
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211.4 |
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Cash flows from investing activities: |
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Payments for property and equipment |
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(90.1 |
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(124.6 |
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Proceeds from refranchisings, disposition of assets and restaurant closures |
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10.0 |
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19.8 |
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Payments for acquired franchisee operations, net of cash acquired |
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(13.6 |
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(67.5 |
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Return of investment on direct financing leases |
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6.1 |
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5.9 |
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Other investing activities |
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2.7 |
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(4.4 |
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Net cash used for investing activities |
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(84.9 |
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(170.8 |
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Cash flows from financing activities: |
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Repayments of term debt and capital leases |
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(50.7 |
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(3.8 |
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Borrowings under revolving credit facility |
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38.5 |
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94.4 |
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Repayments of revolving credit facility |
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(38.5 |
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(104.4 |
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Dividends paid on common stock |
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(25.6 |
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(25.4 |
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Proceeds from stock option exercises |
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2.8 |
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2.4 |
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Excess tax benefits from share-based compensation |
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2.0 |
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3.5 |
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Repurchases of common stock |
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(2.4 |
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(20.0 |
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Net cash used for financing activities |
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(73.9 |
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(53.3 |
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Effect of exchange rates on cash and cash equivalents |
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(4.1 |
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(13.2 |
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Increase (decrease) in cash and cash equivalents |
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36.4 |
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(25.9 |
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Cash and cash equivalents at beginning of period |
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121.7 |
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166.0 |
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Cash and cash equivalents at end of period |
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$ |
158.1 |
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$ |
140.1 |
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See accompanying notes to condensed consolidated financial statements.
5
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
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Nine Months Ended |
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March 31, |
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2010 |
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2009 |
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(In millions) |
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Supplemental cash flow disclosures: |
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Interest paid |
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$ |
36.8 |
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$ |
43.1 |
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Income taxes paid |
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$ |
30.3 |
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$ |
96.5 |
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Non-cash investing and financing activities: |
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Acquisition of property with capital lease obligations |
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$ |
2.1 |
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$ |
1.7 |
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Net investment in direct financing leases |
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$ |
8.0 |
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$ |
5.6 |
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See accompanying notes to condensed consolidated financial statements.
6
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Organization
Burger King Holdings, Inc. (BKH or the Company) is a Delaware corporation formed on July
23, 2002. The Company is the parent of Burger King Corporation (BKC), a Florida corporation that
franchises and operates fast food hamburger restaurants, principally under the Burger King® brand.
The Company generates revenues from three sources: (i) retail sales at Company restaurants;
(ii) franchise revenues, consisting of royalties based on a percentage of sales reported by
franchise restaurants and franchise fees paid by franchisees; and (iii) property income from
restaurants that the Company leases or subleases to franchisees.
Note 2. Basis of Presentation and Consolidation
The Company has prepared the accompanying Condensed Consolidated Financial Statements
(Financial Statements) in accordance with the rules and regulations of the Securities and
Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all
of the information and footnotes required by United States generally accepted accounting principles
(GAAP) for complete financial statements. Therefore, the Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements contained in the Companys Annual
Report on Form 10-K for the fiscal year ended June 30, 2009 filed with the SEC on August 27, 2009.
In the opinion of management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation have been included in the Financial Statements. The results for
interim periods do not necessarily indicate the results that may be expected for any other interim
period or for the full year.
The Financial Statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany balances and transactions have been eliminated in
consolidation.
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.
Concentrations of Risk
The Companys operations include Company and franchise restaurants located in 74 countries and
U.S. territories. Of the 12,115 restaurants in operation as of March 31, 2010, 1,458 were Company
restaurants and 10,657 were franchise restaurants.
Four distributors service approximately 85% of our U.S. system restaurants and the loss of any
one of these distributors would likely adversely affect our business. In many of the Companys
international markets, a single distributor services all the Burger King restaurants in the market.
The loss of any of one of these distributors would likely have an adverse effect on the market
impacted, and depending on the market, could have an adverse impact on the Companys financial
results.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value, and
consist primarily of restaurant food items and paper supplies. Inventories are included in prepaids
and other current assets in the accompanying condensed consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the Companys consolidated financial
statements and accompanying notes. Management adjusts such estimates and assumptions when facts and
circumstances dictate. Volatile credit, equity, foreign currency, and energy markets, and
7
declines in consumer spending have increased and may continue to affect the 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.
Recently Adopted Accounting Standards
During the quarter ended March 31, 2010, the Company adopted Financial Accounting Standard
Board (FASB) Accounting Standards Update No. 2010-02, Consolidation (Topic 810) Accounting and
reporting for decreases in ownership of a Subsidiary a scope clarification (ASU 2010-02). This
amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies
the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between
guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may
exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the
period that it first adopts FASB Statement of Financial Accounting Standard (SFAS) No. 160 (now
included in Subtopic 810-10). For those entities that have already adopted SFAS No. 160, the
amendments are effective at the beginning of the first interim or annual reporting period ending on
or after December 15, 2009. The amendments should be applied retrospectively to the first period
that an entity adopted SFAS No. 160, for us this was July 1, 2009. The effect of adopting this
standard was not significant.
During the quarter ended March 31, 2010, the company adopted FASB Accounting Standards Update
No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements (ASU 2010-06). ASU 2010-06 amends FASB Accounting Standards Codification
(ASC) 820 Fair Value Measurements and Disclosures to add new disclosure requirements for
significant transfers in and out of Level 1 and 2 measurements and to provide a gross presentation
of the activities within the Level 3 rollforward. ASU 2010-06 also clarifies existing fair value
disclosures about the level of disaggregation and about inputs and valuation techniques used to
measure fair value. The disclosure requirements in ASU 2010-06 are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the requirement to present the
Level 3 rollforward on a gross basis, which is effective for fiscal years beginning after December
15, 2010, and is effective for us on January 1, 2011. The adoption of this guidance was limited to
the form and content of disclosures, and did not have a material effect on our consolidated
financial statements.
In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Subsequent Events
(Topic 855): Amendments to Certain Recognition and Disclosure Requirement, (ASU 2010-09), which
amended ASC Topic 855, Subsequent Events, including removing the requirement for an SEC filer to
disclose the date through which subsequent events have been evaluated. This guidance, except as it
relates to conduit debt obligors, is effective upon issuance. The Company adopted this guidance
February 24, 2010. The adoption of this guidance was limited to the form and content of disclosures
and did not have a material impact on our consolidated financial statements.
On December 15, 2009, the Company adopted FASB Accounting Standard Update (ASU) No. 2009-12,
Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). FASB
ASU 2009-12 amends ASC 820-10, Fair Value Measurements and Disclosures Overall, to permit, as a
practical expedient, a reporting entity to measure the fair value of an investment within the scope
of ASU 2009-12 on the basis of the net asset value per share of the investment. For the Company,
ASU 2009-12 pertains only to alternative investments held in the BKC pension and postretirement
plans as we do not invest in alternative investments outside of these plans. Furthermore, the
disclosure provisions of FASB ASU 2009-12 are not applicable to employers disclosures about
pension and postretirement benefit plan assets. FASB ASC 715, Compensation-Retirement Benefits
(formerly FSP FASB 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets)
prescribes required employers disclosures about pension and other postretirement benefit plan
assets. FASB ASC 715 is effective for our financial statements issued for the fiscal year ending
June 30, 2010.
In the quarter ended September 30, 2009, the Company adopted FASB ASC Topic 105 Generally
Accepted Accounting Principles. FASB ASC 105 does not amend GAAP, but codifies previous accounting
literature and revises the GAAP hierarchy to include only two levels of GAAP: authoritative and
nonauthoritative. All of the content included in the FASB Accounting Standards Codification will be
considered authoritative.
On July 1, 2009, the Company adopted FASB ASC Topic 805 Business Combinations. FASB ASC 805
requires that the acquisition method of accounting be used for all business combinations and for an
acquirer to be identified for each business combination. FASB ASC 805 requires an acquirer to
recognize the assets acquired, liabilities assumed, and any noncontrolling interest
8
in the acquiree at their respective fair values at the acquisition date. Costs incurred by the acquirer to effect
the acquisition are not allocated to the assets acquired or liabilities assumed, but are recognized
separately in earnings. FASB ASC 805 is effective
prospectively for acquisitions by the Company with an acquisition date beginning on or after
July 1, 2009. The effect of adopting this standard was not significant.
On July 1, 2009, the Company adopted FASB ASC Subtopic 810-10 of Topic 810 Consolidation.
FASB ASC Subtopic 810-10 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary and clarifies that a
noncontrolling interest in a subsidiary is an ownership interest that should be reported as equity
in the consolidated financial statements. FASB ASC Subtopic 810-10 establishes a single method of
accounting for changes in a parents ownership interest in a subsidiary that do not result in
deconsolidation and requires a parent to recognize a gain or loss in net income when a subsidiary
is deconsolidated. FASB ASC Subtopic 810-10 also requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the noncontrolling interest
and to disclose, on the face of the consolidated statement of income, the amounts of consolidated
net income attributable to the parent and to the noncontrolling interest. The effect of adopting
this standard was not significant.
Note 3. Share-based Compensation
On August 26, 2009 (the Annual Grant Date), the Company granted non-qualified stock options,
performance-based restricted shares and units (PBRS) and restricted stock units covering
approximately 1.7 million shares, 0.6 million shares and 96,000 shares, respectively, to eligible
employees.
The Companys stock options generally have a four-year vesting period. The grant date fair
value of the stock options granted on the Annual Grant Date was $6.54 per share and was estimated
using the Black-Scholes option pricing model based on the following weighted-average input
assumptions: exercise price of $18.31, risk-free interest rate of 2.92%; expected term of 6.25
years; expected volatility of 37.15%; and expected dividend yield of 1.37%.
The amount of PBRS granted to each eligible employee on the Annual Grant Date was based on the
Company achieving 100% of the performance target set for fiscal year 2010. PBRS generally have a
three-year vesting period from the grant date, which includes the one-year performance period. The
number of PBRS awards that actually vest are determined based on achievement of a Company
performance target for the year ended June 30, 2010. The grant date fair value of each PBRS was
$18.31, representing the closing share price of the Companys common stock on the grant date.
In November 2009, the Company granted approximately 39,000 deferred shares of restricted stock
to non-employee members of the Companys Board of Directors as an annual grant and 19,000 deferred
shares of restricted stock to nine non-employee directors who elected to receive shares in lieu of
receiving their annual retainer and chair fees in cash. The annual grant vests in quarterly
installments over a one-year period on the first day of each calendar quarter following the grant
date. The retainer grant was fully vested on the grant date. All deferred shares will settle and
shares of common stock will be issued upon termination of service by the board member.
The Company recorded $4.3 million and $13.0 million of share-based compensation expense for
the three and nine months ended March 31, 2010, respectively. The Company recorded $3.8 million
and $11.4 million of share-based compensation expense for the three and the nine months ended March
31, 2009, respectively. Excess tax benefits from the exercise of stock options and settlement of
PBRS of $2.0 million and $3.5 million in the nine months ended March 31, 2010 and 2009,
respectively, were reported as financing cash flows in the accompanying condensed consolidated
statements of cash flows.
9
Note 4. Acquisitions, Closures and Dispositions
Acquisitions
All acquisitions of franchise restaurants subsequent to July 1, 2009 are accounted for using
the acquisition method of accounting. Acquisitions are summarized as follows (in millions, except
for number of restaurants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Number of restaurants acquired |
|
|
35 |
|
|
|
5 |
|
|
|
38 |
|
|
|
81 |
|
Prepaids and other current assets |
|
$ |
4.0 |
|
|
$ |
|
|
|
|
4.0 |
|
|
$ |
0.9 |
|
Property and equipment, net |
|
|
4.9 |
|
|
|
0.2 |
|
|
|
4.9 |
|
|
|
14.4 |
|
Other intangible assets |
|
|
6.4 |
|
|
|
0.7 |
|
|
|
7.2 |
|
|
|
55.6 |
|
Assumed liabilities |
|
|
(2.5 |
) |
|
|
(0.1 |
) |
|
|
(2.5 |
) |
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
12.8 |
|
|
$ |
0.8 |
|
|
$ |
13.6 |
|
|
$ |
67.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closures and Dispositions
Gains and losses on closures and dispositions represent sales of Company properties and other
costs related to restaurant closures and sales of Company restaurants to franchisees, referred to
as refranchisings, and are recorded in other operating (income) expenses, net in the accompanying
condensed consolidated statements of income (See Note 13). Gains and losses recognized in the
current period may reflect closures and refranchisings that occurred in previous periods.
Closures and dispositions are summarized as follows (in millions, except for number of
restaurants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Number of restaurant closures |
|
|
5 |
|
|
|
3 |
|
|
|
23 |
|
|
|
9 |
|
Number of refranchisings |
|
|
|
|
|
|
20 |
|
|
|
12 |
|
|
|
23 |
|
Net loss (gain) on restaurant
closures, refranchisings, and
dispositions of assets |
|
$ |
(3.2 |
) |
|
$ |
(4.5 |
) |
|
$ |
(2.2 |
) |
|
$ |
(4.5 |
) |
Note 5. Prepaids and Other Current Assets, net
Included in prepaids and other current assets, net were inventories totaling $18.3 million and
$15.8 million; prepaid expenses of $43.5 million and $31.0 million; foreign currency forward
contracts of $13.2 million and $0.3 million; and refundable income taxes of zero and $39.3 million
as of March 31, 2010 and June 30, 2009, respectively.
10
Note 6. Earnings Per Share
Basic and diluted earnings per share are calculated as follows (in millions, except for per
share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted
earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
41.0 |
|
|
$ |
47.1 |
|
|
$ |
137.8 |
|
|
$ |
141.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
135.3 |
|
|
|
134.6 |
|
|
|
135.6 |
|
|
|
134.8 |
|
Effect of dilutive securities |
|
|
1.9 |
|
|
|
2.1 |
|
|
|
1.8 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted |
|
|
137.2 |
|
|
|
136.7 |
|
|
|
137.4 |
|
|
|
136.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.30 |
|
|
$ |
0.35 |
|
|
$ |
1.02 |
|
|
$ |
1.05 |
|
Diluted earnings per share |
|
$ |
0.30 |
|
|
$ |
0.34 |
|
|
$ |
1.00 |
|
|
$ |
1.03 |
|
Antidilutive shares (1) |
|
|
4.3 |
|
|
|
2.3 |
|
|
|
4.3 |
|
|
|
2.5 |
|
|
|
|
(1) |
|
These shares were not included in the computation of weighted average shares-diluted
because they would have been anti-dilutive for the periods presented. |
Note 7. Comprehensive Income
The components of total comprehensive income are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
41.0 |
|
|
$ |
47.1 |
|
|
$ |
137.8 |
|
|
$ |
141.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
1.9 |
|
|
|
(2.4 |
) |
|
|
6.9 |
|
|
|
(7.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of derivatives (1) |
|
|
0.9 |
|
|
|
0.2 |
|
|
|
1.8 |
|
|
|
(21.8 |
) |
Pension and post-retirement benefit plans (2) |
|
|
0.5 |
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
3.3 |
|
|
|
(2.2 |
) |
|
|
8.4 |
|
|
|
(28.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
44.3 |
|
|
$ |
44.9 |
|
|
$ |
146.2 |
|
|
$ |
112.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts are presented net of tax of $0.5 million for each of the three months ended March
31, 2010 and 2009, respectively, and $1.3 million and $13.4 million for the nine months ended March 31, 2010 and 2009, respectively. |
|
(2) |
|
The tax effect for the three-month period ended March 31, 2010 was not significant. For the
nine months ended March 31, 2010, amount is presented net of tax of $0.5 million. |
Note 8. Other Accrued Liabilities and Other Liabilities
Included in other accrued liabilities, as of March 31, 2010 and June 30, 2009, were accrued
payroll and employee-related benefits costs totaling $54.4 million and $69.4 million, respectively.
The decrease in accrued payroll and employee-related benefits costs was
primarily due to the payment of the Companys annual incentive bonus to employees during the
three months ended September 30, 2009.
11
Included in other liabilities, as of March 31, 2010 and June 30, 2009, were accrued pension
liabilities of $52.8 million and $53.8 million, respectively; interest rate swap liabilities of
$28.4 million and $32.4 million, respectively; casualty insurance reserves of $26.2 million and
$27.7 million, respectively; retiree health benefits of $21.7 million and $21.1 million,
respectively; and unfavorable leases of $139.9 million and $155.5 million, respectively.
Note 9. Long-Term Debt
As of March 31, 2010 and June 30, 2009, the Company had $771.2 million and $818.3 million of
long-term debt outstanding, respectively, including the current portion, consisting of $81.4
million and $62.7 million, respectively. During the nine months ended March 31, 2010, the Company
repaid $46.9 million of principal on its Term Loan A. In addition, the Company borrowed and repaid
$38.5 million under the revolving credit facility. The next scheduled principal payment on the
Companys senior secured debt is June 30, 2010, in the amount of $15.6 million on Term Loan A. The
maturity dates of Term Loan A, Term Loan B-1 and any amounts drawn under the revolving credit
facility are June 2011, June 2012 and June 2011, respectively. The weighted average interest rate
for the three months ended March 31, 2010 and 2009 was 4.7% and 4.8%, respectively, which included
the impact of interest rate swaps on 73% and 68% of our term debt, respectively. The weighted
average interest rate for the nine months ended March 31, 2010 and 2009 was 4.6% and 5.2%,
respectively, which included the impact of interest rate swaps on 72% and 70% of our term debt,
respectively (See Note 10).
Note 10. Fair Value Measurements and Derivative Instruments
Fair Value Measurements
The following table presents (in millions) financial assets and liabilities measured at fair
value on a recurring basis, which include derivatives designated as cash flow hedging instruments,
derivatives not designated as hedging instruments, and other investments, which consists of money
market accounts and mutual funds held in a rabbi trust established by the Company to fund a portion
of the Companys current and future obligations under its Executive Retirement Plan, as well as
their location on the Companys condensed consolidated balance sheets as of March 31, 2010 and June
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 |
|
Fair Value Measurements at March 31, 2010 |
|
|
Carrying Value and Balance Sheet Location |
|
Assets (Liabilities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
Prepaids |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
Other |
|
Significant |
|
|
and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
Current |
|
Other Assets, |
|
Other Accrued |
|
Other |
|
Instruments |
|
Inputs |
|
Inputs |
Description |
|
Assets |
|
net |
|
Liabilities |
|
liabilities, net |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Derivatives designated as cash flow
hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(28.4 |
) |
|
$ |
|
|
|
$ |
(28.4 |
) |
|
$ |
|
|
Foreign currency forward contracts (asset) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
Foreign currency forward contracts
(liability) |
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
(0.2 |
) |
|
$ |
(28.4 |
) |
|
$ |
|
|
|
$ |
(28.5 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (asset) |
|
$ |
13.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
13.1 |
|
|
$ |
|
|
Foreign currency forward contracts
(liability) |
|
|
|
|
|
|
|
|
|
|
(3.9 |
) |
|
|
|
|
|
|
|
|
|
|
(3.9 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
13.1 |
|
|
$ |
|
|
|
$ |
(3.9 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
9.2 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments held in a rabbi trust |
|
$ |
|
|
|
$ |
20.9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
20.9 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
20.9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
20.9 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 |
|
Fair Value Measurements at March 31, 2010 |
|
|
Carrying Value and Balance Sheet Location |
|
Assets (Liabilities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
Prepaids |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
Other |
|
Significant |
|
|
and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
Current |
|
Other Assets, |
|
Other Accrued |
|
Other |
|
Instruments |
|
Inputs |
|
Inputs |
Description |
|
Assets |
|
net |
|
Liabilities |
|
liabilities, net |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Derivatives designated as
cash flow hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(32.4 |
) |
|
$ |
|
|
|
$ |
(32.4 |
) |
|
$ |
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(32.4 |
) |
|
$ |
|
|
|
$ |
(32.4 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as
hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward
contracts (asset) |
|
$ |
0.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.3 |
|
|
$ |
|
|
Foreign currency forward
contracts (liability) |
|
|
|
|
|
|
|
|
|
|
(20.3 |
) |
|
|
|
|
|
|
|
|
|
|
(20.3 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
0.3 |
|
|
$ |
|
|
|
$ |
(20.3 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(20.0 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments held in a rabbi trust |
|
$ |
|
|
|
$ |
17.9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17.9 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
17.9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17.9 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
The Companys derivatives are valued using a discounted cash flow analysis that incorporates
observable market parameters, such as interest rate yield curves and currency rates, classified as
Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments
that are necessary to reflect the probability of default by the counterparty or the Company.
At March 31, 2010, the fair value of the Companys variable rate term debt was estimated at
$768.2 million, compared to a carrying amount of $769.3 million. At June 30, 2009, the fair value
of the Companys variable rate term debt was estimated at $791.9 million, compared to a carrying
amount of $816.4 million. Fair value of variable rate term debt was estimated using inputs based on
bid and offer prices and are similar to Level 2 inputs within the valuation hierarchy.
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring
basis, that is these assets and liabilities are not measured at fair value on an ongoing basis but
are subject to periodic impairment tests. For the Company, these items primarily include long-lived
assets, goodwill and other intangible assets.
Disclosures about Derivative Instruments and Hedging Activities
The Company enters into derivative instruments for risk management purposes, including
derivatives designated as hedging instruments and those utilized as economic hedges. The Company
uses derivatives to manage exposure to fluctuations in interest rates and currency exchange rates.
Interest Rate Swaps
The Company enters into receive-variable, pay-fixed interest rate swap contracts to hedge a
portion of the Companys forecasted variable-rate interest payments on its underlying Term Loan A
and Term Loan B-1 debt (the Term Debt). Interest payments on the Term Debt are made quarterly and
the variable rate on the Term Debt is reset at the end of each fiscal quarter. The interest rate
swap contracts are designated as cash flow hedges and to the extent they are effective in
offsetting the variability of the variable-rate interest payments, changes in the derivatives fair
value are not included in current earnings but are included in accumulated other comprehensive
income (AOCI) in the accompanying condensed consolidated balance sheets. These changes in fair
value are subsequently reclassified into earnings as a component of interest expense each quarter
as interest payments are made on the Term Debt. At March 31, 2010, interest rate swap contracts
with a notional amount of $575.0 million were outstanding.
13
In September 2006, the Company settled interest rate swaps designated as cash flow hedges,
which had a fair value of $11.5 million, and terminated the hedge relationship. The fair value of
the settled swaps is recorded in AOCI and is being recognized as a reduction to interest expense
each quarter over the remaining term of the Term Debt. At March 31, 2010, $0.9 million remained in
AOCI.
Foreign Currency Forward Contracts
The Company enters into foreign currency forward contracts, which typically have maturities
between one and fifteen months, to economically hedge the remeasurement of certain foreign
currency-denominated intercompany loans receivable and other foreign-currency denominated assets
recorded in the Companys condensed consolidated balance sheets. Remeasurement represents changes
in the expected amount of cash flows to be received or paid upon settlement of the intercompany
loan receivables and other foreign-currency denominated assets and liabilities resulting from a
change in currency exchange rates. The Company also enters into foreign currency forward contracts
in order to manage the foreign exchange variability in forecasted royalty cash flows due to
fluctuations in exchange rates. At March 31, 2010, foreign currency forward contracts with a
notional amount of $513.6 million were outstanding.
Credit Risk
By entering into derivative instrument contracts, the Company exposes itself, from time to
time, to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. When the fair value of a derivative contract is
in an asset position, the counterparty has a liability to the Company, which creates credit risk
for the Company. The Company attempts to minimize this risk by selecting counterparties with
investment grade credit ratings, limiting its exposure to any single counterparty and regularly
monitoring its market position with each counterparty.
Credit-Risk Related Contingent Features
The Companys derivative instruments do not contain any credit-risk related contingent
features.
The following table presents the required quantitative disclosures for the Companys
derivative instruments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Three Months Ended |
|
|
March 31, 2010 |
|
March 31, 2009 |
|
|
Interest Rate |
|
Foreign Currency |
|
|
|
|
|
Interest Rate |
|
Foreign Currency |
|
|
|
|
Swaps |
|
Forward Contracts |
|
Total |
|
Swaps |
|
Forward Contracts |
|
Total |
Derivatives designated as cash flow hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income (effective
portion) |
|
$ |
(4.1 |
) |
|
$ |
0.2 |
|
|
$ |
(3.9 |
) |
|
$ |
(2.8 |
) |
|
$ |
0.1 |
|
|
$ |
(2.7 |
) |
Gain (loss) reclassified from AOCI into interest expense, net (1) |
|
$ |
(5.3 |
) |
|
$ |
|
|
|
$ |
(5.3 |
) |
|
$ |
(3.8 |
) |
|
$ |
|
|
|
$ |
(3.8 |
) |
Gain (loss) reclassified from AOCI into royalty income |
|
$ |
|
|
|
$ |
(0.3 |
) |
|
$ |
(0.3 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Gain (loss) recognized in interest expense, net (ineffective portion)
(2) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Gain (loss) recognized in royalty income, net (ineffective portion) (2) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other operating expense, net |
|
$ |
|
|
|
$ |
21.7 |
|
|
$ |
21.7 |
|
|
$ |
|
|
|
$ |
15.1 |
|
|
$ |
15.1 |
|
|
|
|
(1) |
|
Includes $0.4 million of gain for each of the three months ended March 31, 2010 and 2009
related to the terminated hedges. |
|
(2) |
|
The amount of ineffectiveness recorded in earnings during the three months ended March
31, 2010 and 2009 was not significant. |
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
For the Nine Months Ended |
|
|
March 31, 2010 |
|
March 31, 2009 |
|
|
Interest Rate |
|
Foreign Currency |
|
|
|
|
|
Interest Rate |
|
Foreign Currency |
|
|
|
|
Swaps |
|
Forward Contracts |
|
Total |
|
Swaps |
|
Forward Contracts |
|
Total |
Derivatives designated as cash flow hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income (effective
portion) |
|
$ |
(12.6 |
) |
|
$ |
|
|
|
$ |
(12.6 |
) |
|
$ |
(41.1 |
) |
|
$ |
|
|
|
$ |
(41.1 |
) |
Gain (loss) reclassified from AOCI into interest expense, net (1) |
|
$ |
(15.8 |
) |
|
$ |
|
|
|
$ |
(15.8 |
) |
|
$ |
(6.3 |
) |
|
$ |
|
|
|
$ |
(6.3 |
) |
Gain (loss) reclassified from AOCI into royalty income |
|
$ |
|
|
|
$ |
(0.8 |
) |
|
$ |
(0.8 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Gain (loss) recognized in interest expense, net (ineffective portion)
(2) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Gain (loss) recognized in royalty income, net (ineffective portion) (2) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other operating expense, net |
|
$ |
|
|
|
$ |
14.7 |
|
|
$ |
14.7 |
|
|
$ |
|
|
|
$ |
69.5 |
|
|
$ |
69.5 |
|
|
|
|
(1) |
|
Includes $1.1 million and $0.9 million of gain for the nine months ended March 31, 2010
and 2009, respectively, related to the terminated hedges. |
|
(2) |
|
The amount of ineffectiveness recorded in earnings during the nine months ended March
31, 2010 and 2009 was not significant. |
Note 11. Income Taxes
The U.S. Federal tax statutory rate reconciles to the effective tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
U.S. federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income taxes, net of federal income tax benefit |
|
|
3.0 |
|
|
|
2.7 |
|
|
|
3.0 |
|
|
|
2.7 |
|
Costs and taxes related to foreign operations |
|
|
0.2 |
|
|
|
0.6 |
|
|
|
1.5 |
|
|
|
(1.1 |
) |
Foreign tax differential |
|
|
(2.0 |
) |
|
|
(4.5 |
) |
|
|
(5.7 |
) |
|
|
(4.5 |
) |
Foreign exchange differential on tax benefits |
|
|
0.7 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
1.6 |
|
Change in valuation allowance |
|
|
0.9 |
|
|
|
1.4 |
|
|
|
0.3 |
|
|
|
1.9 |
|
Change in accrual for tax uncertainties |
|
|
0.7 |
|
|
|
(10.0 |
) |
|
|
0.9 |
|
|
|
(2.2 |
) |
Other |
|
|
0.3 |
|
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
38.8 |
% |
|
|
25.2 |
% |
|
|
35.5 |
% |
|
|
32.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had $19.0 million and $19.5 million of unrecognized tax benefits at March 31, 2010
and June 30, 2009, respectively, which if recognized, would affect the effective income tax rate.
During the three and nine months ended March 31, 2010, the change in unrecognized tax benefit was a
decrease of approximately $0.2 million and $0.5 million, respectively, which if recognized, would
affect the effective income tax rate.
In the next twelve months, it is reasonably possible that the Company will reduce unrecognized
tax benefits by a range of approximately $1.4 million to $3.1 million, primarily as a result of the
expiration of certain statutes of limitations and the completion of certain tax audits.
The Company recognizes potential accrued interest and penalties related to unrecognized tax
benefits in income tax expense. The total amount of accrued interest and penalties at March 31,
2010 and June 30, 2009, respectively, was $3.5 million and $3.7 million, respectively, which was
included as a component of the unrecognized tax benefits noted above. Potential interest and
penalties associated with uncertain tax positions recognized during the nine months ended March 31,
2010 and 2009 were not significant. To the extent interest and penalties are not assessed with
respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of
the overall income tax provision.
The Company files income tax returns, including returns for its subsidiaries, with federal,
state, local and foreign jurisdictions. Generally, the Company is subject to routine examination by
taxing authorities in these jurisdictions, including significant international tax jurisdictions,
such as the United Kingdom, Germany, Spain, Switzerland, Singapore and Mexico. None of the foreign
15
jurisdictions is individually material. The Company is currently under audit by the U.S.
Internal Revenue Service for the years ended June 30, 2008 and June 30, 2007. The Company also has
various state and foreign income tax returns in the process of examination. From time to time,
these audits result in proposed assessments where the ultimate resolution may result in the Company
owing additional taxes. The Company believes that its tax positions comply with applicable tax law
and that it has adequately provided for these matters.
Note 12. Retirement Plan and Other Postretirement Benefits
The Companys liability under its Executive Retirement Plan (the ERP liability) was $23.4
million and $17.9 million at March 31, 2010 and June 30, 2009, respectively. The value of
investments held in a rabbi trust (the rabbi trust) established to fund a portion of the ERP
liability was $20.9 million and $17.9 million at March 31, 2010 and June 30, 2009, respectively.
The Company records net (gains) losses related to the change in value of these investments, along
with an offsetting amount related to the increase (decrease) in deferred compensation, in selling,
general and administrative expenses in the accompanying consolidated statements of income to
reflect its exposure to the funded portion of the ERP liability.
The following table presents net (gains) and losses related to the investments held in the
rabbi trust, and the offsetting increase (decrease) in deferred compensation expense related to the
funded portion of the ERP liability as a component of selling, general and administrative expenses
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net (gains) losses on investments held in the rabbi trust |
|
$ |
(1.9 |
) |
|
$ |
0.7 |
|
|
$ |
(4.7 |
) |
|
$ |
6.5 |
|
Increase (decrease) in deferred compensation funded portion |
|
|
1.9 |
|
|
|
(0.7 |
) |
|
|
4.7 |
|
|
|
(6.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the quarter ended September 30, 2009, the Company elected to cease future participant
deferrals and Company contributions into the rabbi trust; however, participant deferrals and
Company contributions will be credited with a hypothetical rate of return based on the investment
options and allocations in various mutual funds selected by each participant (the unfunded portion
of the ERP liability). The deferred compensation expense related to the unfunded portion of the
ERP liability is included as a component of selling, general and administrative expenses and was
not significant.
A summary of the components of net periodic benefit cost for the Companys pension plans
(retirement benefits) and post retirement plans (other benefits) is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefits |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Service cost-benefits earned during the period |
|
$ |
0.9 |
|
|
$ |
0.4 |
|
|
$ |
1.8 |
|
|
$ |
1.3 |
|
Interest costs on projected benefit obligations |
|
|
2.9 |
|
|
|
2.9 |
|
|
|
8.9 |
|
|
|
8.7 |
|
Expected return on plan assets |
|
|
(2.6 |
) |
|
|
(2.6 |
) |
|
|
(7.9 |
) |
|
|
(7.4 |
) |
Recognized net actuarial loss |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1.1 |
|
|
$ |
0.7 |
|
|
$ |
2.5 |
|
|
$ |
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit costs were less than $1.0 million for each of the three months ended
March 31, 2010 and 2009, respectively, and for each of the nine months ended March 31, 2010 and
2009, respectively.
Note 13. Other Operating (Income) Expense, Net
Other operating income, net, for the three months ended March 31, 2010 of $4.5 million
includes $3.2 million of net gains related to the disposal of property and expenses arising from
restaurant closures, $1.3 million of net gains related to the remeasurement of
16
foreign denominated
assets and the impact related to the use of foreign currency forward contracts used to hedge the
currency exchange impact on such assets, and $0.6 million of net gains from the settling of
transactions denominated in foreign currencies.
Other operating income, net, for the three months ended March 31, 2009 of $1.3 million
includes a $3.5 million gain from the refranchising of Company
restaurants in the U.S. and Canada,
partially offset $1.9 million of net expense related to the remeasurement of foreign denominated
assets and the impact related to the use of foreign currency forward contracts used to hedge the
currency exchange impact on such assets.
Other operating expense, net, for the nine months ended March 31, 2010 of $0.6 million
includes a $3.5 million gain related to the refranchising of 12 Company restaurants in the U.S.,
and net gains of $0.5 million related to the remeasurement of foreign denominated assets and the
impact related to the use of foreign currency forward contracts used to hedge the currency exchange
impact on such assets. These gains were partially offset by $2.2 million of net losses related to
the disposal of property and expenses arising from restaurant closures, a $2.4 million charge
related to consumption tax in EMEA and a $0.7 million contract termination fee.
Other operating expense, net, for the nine months ended March 31, 2009 of $7.9 million
includes $1.5 million of charges associated with the acquisition of franchise restaurants from a
large franchisee in the U.S. and $7.5 million of net expense related to the remeasurement of
foreign denominated assets and the impact related to the use of foreign currency forward contracts
used to hedge the currency exchange impact on such assets. These expenses were partially offset by
a $3.5 million gain from the refranchising of Company restaurants in the U.S. and Canada.
Note 14. Commitments and Contingencies
Guarantees
The Company guarantees certain lease payments of franchisees arising from leases assigned in
connection with sales of Company restaurants to franchisees, by remaining secondarily liable for
base and contingent rents under the assigned leases of varying terms. The maximum contingent rent
amount is not determinable as the amount is based on future revenues. In the event of default by
the franchisees, the Company has typically retained the right to acquire possession of the related
restaurants, subject to landlord consent. The aggregate contingent obligation arising from these
assigned lease guarantees, excluding contingent rents, was $61.5 million as of March 31, 2010,
expiring over an average period of seven years.
Other commitments arising from normal business operations were $11.4 million as of March 31,
2010, of which $9.2 million was guaranteed under bank guarantee arrangements. These guarantees are
primarily related to restaurant and office leases and future advertising spending.
Letters of Credit
As of March 31, 2010, the Company had $30.6 million in irrevocable standby letters of credit
outstanding, which were issued primarily to certain insurance carriers to guarantee payments of
deductibles for various insurance programs, such as health and commercial liability insurance. Such
letters of credit are secured by the collateral under the Companys senior secured credit facility.
As of March 31, 2010, no amounts had been drawn on any of these irrevocable standby letters of
credit.
As of March 31, 2010, the Company had posted bonds totaling $3.1 million, which related to
certain utility deposits and capital projects.
Vendor Relationships
In fiscal 2000, the Company entered into long-term, exclusive contracts with The Coca-Cola
Company and with Dr Pepper/Seven Up, Inc. to supply the Company and its 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
17
limit.
As of March 31, 2010, the Company estimates that it will take approximately 13 years to complete
the Coca-Cola and Dr Pepper/Seven Up, Inc. purchase commitments. In the event of early termination
of these arrangements, the Company may be required to make termination payments that could be
material to the Companys results of operations and financial position. Additionally, in connection
with these contracts, the Company received upfront fees, which are being amortized over the term of
the contracts. As of March 31, 2010 and June 30, 2009, the deferred amounts totaled $15.2 million
and $16.1 million, respectively. These deferred amounts are amortized as a reduction to food, paper
and product costs in the accompanying condensed consolidated statements of income.
As of March 31, 2010, the Company had $2.9 million in aggregate contractual obligations for
the year ending June 30, 2010 with vendors providing information technology and telecommunication
services under multiple arrangements. These contracts extend up to five years with a termination
fee ranging from than $0.7 million to $3.4 million during those years. The Company also has
separate arrangements for telecommunication services with an aggregate contractual obligation of
$8.0 million extending up to two years with no early termination fee.
The Company also enters into commitments to purchase advertising. As of March 31, 2010,
commitments to purchase advertising totaled $88.2 million. These commitments run through December
2012.
Litigation
On September 10, 2008, a class action lawsuit was filed against the Company in the United
States District Court for the Northern District of California. The complaint alleged that all 92
Burger King restaurants in California leased by the Company and operated by franchisees violate
accessibility requirements under federal and state law. In September 2009, the court issued a
decision on the plaintiffs motion for class certification. In its decision, the court limited the
class action to the 10 restaurants visited by the named plaintiffs, with a separate class of
plaintiffs for each of the 10 restaurants and 10 separate trials. In March 2010, the Company agreed
to settle this lawsuit with respect to the 10 restaurants by agreeing to pay $7.5 million, with the
Company funding $2.5 million and the balance funded by the Companys insurer. The insurer will
also reimburse the Company for $1.5 million in legal and consulting fees. The settlement is
subject to final court approval. In April 2010, the Company received a demand from the law firm
representing the plaintiffs in the class action lawsuit, notifying the Company that the firm was
prepared to bring a class action covering the other 82 restaurants. If a lawsuit is filed, the
Company intends to vigorously defend against all claims in the lawsuit, but the Company is unable
to predict the ultimate outcome of this litigation.
The National Franchisee Association, Inc. filed two class action lawsuits on May 4, 2009,
claiming to represent Burger King franchisees and alleging that BKC, The Coca-Cola Company and Dr
Pepper Snapple Group had no right to amend their existing supply agreements to reduce certain
payments, known as restaurant operating funds, to Burger King restaurants without the
franchisees consent. In February 2010, the Company and a group of franchisees formed a task force
to resolve the dispute. The task force came to a marketing solution that rendered the cases moot,
and the parties have dismissed the lawsuits.
From time to time, the Company is involved in 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 the Companys intellectual property.
In the opinion of management, disposition of the matters will not materially affect the Companys
financial condition or results of operations.
Other
The Company carries insurance programs to cover claims such as workers compensation, general
liability, automotive liability, executive risk and property and is self-insured for healthcare
claims for eligible participating employees. Through the use of insurance program deductibles
(ranging from $0.5 million to $1.0 million) and self-insurance, the Company retains a significant
portion of the expected losses under these programs. Insurance reserves have been recorded based on
the Companys estimate of the anticipated ultimate costs to settle all claims, both reported and
incurred-but-not-reported (IBNR), and such reserves include judgments and independent actuarial
assumptions about economic conditions, the frequency or severity of claims and claim development
patterns, and claim reserve, management and settlement practices. As of March 31, 2010 and June 30,
2009, the Company had $35.0 million and $36.5 million in accrued liabilities to cover such claims,
respectively.
18
Note 15. Segment Reporting
The Company operates in the fast food hamburger restaurant category of the quick service
restaurant segment of the restaurant industry. Revenues include retail sales at Company
restaurants, franchise revenues, consisting of royalties based on a percentage of sales reported by
franchise restaurants and franchise fees paid by franchisees, and property revenues. The business
is managed in three distinct geographic segments: (1) United States (U.S.) and Canada; (2)
Europe, the Middle East and Africa and Asia Pacific (EMEA/APAC); and (3) Latin America.
The following tables present revenues and income from operations by geographic segment (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
407.1 |
|
|
$ |
425.1 |
|
|
$ |
1,268.3 |
|
|
$ |
1,307.1 |
|
EMEA/APAC |
|
|
163.8 |
|
|
|
151.2 |
|
|
|
530.8 |
|
|
|
518.0 |
|
Latin America |
|
|
26.0 |
|
|
|
23.6 |
|
|
|
80.1 |
|
|
|
82.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
596.9 |
|
|
$ |
599.9 |
|
|
$ |
1,879.2 |
|
|
$ |
1,907.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other than the U.S. and Germany, no other individual country represented 10% or more of the
Companys total revenues. Revenues in the U.S. totaled $372.0 million and $1,157.7 million for the
three and nine months ended March 31, 2010, respectively, compared to $391.3 million and $1,192.2
million for the three and nine months ended March 31, 2009, respectively. Revenues in Germany
totaled $66.1 million and $221.5 million for the three and nine months ended March 31, 2010,
respectively, compared to $68.5 million and $234.3 million for the three and nine months ended
March 31, 2009, respectively.
The unallocated amounts reflected in the table below include corporate support costs in areas
such as facilities, finance, human resources, information technology, legal, marketing and supply
chain management, which benefit all of the Companys geographic segments and system wide
restaurants and are not allocated specifically to any of the geographic segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Income from Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
85.8 |
|
|
$ |
88.2 |
|
|
$ |
267.1 |
|
|
$ |
262.4 |
|
EMEA/APAC |
|
|
16.6 |
|
|
|
11.0 |
|
|
|
59.4 |
|
|
|
57.0 |
|
Latin America |
|
|
8.5 |
|
|
|
7.0 |
|
|
|
27.3 |
|
|
|
26.8 |
|
Unallocated |
|
|
(32.0 |
) |
|
|
(30.6 |
) |
|
|
(103.7 |
) |
|
|
(94.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations |
|
$ |
78.9 |
|
|
|
75.6 |
|
|
$ |
250.1 |
|
|
|
251.7 |
|
Interest expense, net |
|
|
11.9 |
|
|
|
12.6 |
|
|
|
36.6 |
|
|
|
42.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
67.0 |
|
|
|
63.0 |
|
|
|
213.5 |
|
|
|
209.7 |
|
Income tax expense |
|
|
26.0 |
|
|
|
15.9 |
|
|
|
75.7 |
|
|
|
68.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
41.0 |
|
|
$ |
47.1 |
|
|
$ |
137.8 |
|
|
$ |
141.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16. Subsequent Event
The Company evaluated events and transactions for potential recognition or disclosure through
the date the financial statements were filed.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with our unaudited condensed consolidated
financial statements and the related notes thereto included in Part I, Item 1 Financial
Statements. In addition to historical consolidated financial information, this discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Actual results could
differ from these expectations as a result of factors including those described in our Annual
Report on Form 10-K for the year ended June 30, 2009, our Quarterly Reports on Form 10-Q for the
quarters ended September 30, 2009 and December 31, 2009, and under Part II, Item 1A Risk Factors,
and Cautionary Note Regarding Forward-Looking Statements and elsewhere in this report. Unless the
context otherwise requires, all references to we, us, our and Company refer to Burger King
Holdings, Inc. and its subsidiaries.
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, for
any future period may decrease. Unless otherwise stated, sales growth, comparable sales growth and
average restaurant sales are presented on a system-wide basis, which means they include sales at
both Company restaurants and franchise restaurants. Franchise sales represent sales at all
franchise restaurants and revenues to our franchisees. We do not record franchise sales as
revenues; however, our franchise revenues include royalties based on franchise sales. System-wide
results are driven primarily by our franchise restaurants, as approximately 90% of our system-wide
restaurants are franchised.
Overview
We operate in the fast food hamburger restaurant, or FFHR, category of the quick service
restaurant, or QSR, segment of the restaurant industry. We are the second largest FFHR chain in the
world as measured by the number of restaurants and system-wide sales. Our system of restaurants
includes restaurants owned by us, as well as our franchisees. We track our results of operations
and manage our business by using three key business measures: comparable sales growth, average
restaurant sales and sales growth. As of March 31, 2010, we owned or franchised a total of 12,115
restaurants in 74 countries and U.S. territories, of which 7,557 were located in the U.S. and
Canada. At that date, of the total number of worldwide restaurants, 1,458 restaurants were Company
restaurants and 10,657 were owned by our franchisees. Our restaurants feature flame-broiled
hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other
reasonably-priced food items.
Our business operates in three reportable segments: (1) the U.S. and Canada; (2) Europe, the
Middle East, Africa and Asia Pacific, or EMEA/APAC; and (3) Latin America. We generate revenues
from three sources: (1) retail sales at Company restaurants; (2) franchise revenues, consisting of
royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid
by franchisees; and (3) property income from restaurants that we lease or sublease to franchisees.
Approximately 90% of our restaurants are franchised, and we do not expect the percentage of
franchise restaurants to change significantly as we implement our growth strategy. The 90/10 ratio
of franchise restaurants to Company restaurants applies on a worldwide basis, but may not reflect
the ratio of franchise restaurants to Company restaurants in any specific market or region. We
believe that this restaurant ownership mix is beneficial to us because the capital required to grow
and maintain our system is funded primarily by franchisees while giving us a sizable base of
Company restaurants to demonstrate credibility with franchisees in launching new initiatives.
However, our franchise dominated business model also presents a number of drawbacks and risks, such
as our limited control over franchisees and limited ability to facilitate changes in restaurant
ownership. In addition, our operating results are closely tied to the success of our franchisees,
and we are dependent on franchisees to open new restaurants as part of our growth strategy.
Our international operations are impacted by fluctuations in currency exchange rates. In
Company markets located outside of the U.S., we generate revenues and incur expenses denominated in
local currencies. These revenues and expenses are translated using the average rates during the
period in which they are recognized, and are impacted by changes in currency exchange rates. In
many of our franchise markets, our franchisees pay royalties to us in currencies other than the
local currency in which they operate; however, as the royalties are calculated based on local
currency sales, our revenues are still impacted by fluctuations in currency exchange rates.
As of March 31, 2010, the Company was approximately 32% owned by the private equity funds
controlled by TPG Capital, the Goldman Sachs Funds and Bain Capital Partners (collectively, the
Sponsors).
20
Business Highlights
Our accomplishments and key activities since December 31, 2009 include:
|
|
|
positive net restaurant growth across all business segments with 37 openings during the
quarter; |
|
|
|
worldwide system restaurant count of 12,115 at March 31, 2010, our highest restaurant
count in the history of the brand; |
|
|
|
entry into Russia with the opening of two restaurants in Moscow in January 2010; and |
|
|
|
20 basis point improvement in U.S. and Canada company restaurant margin to 12.9% from
12.7% in the third quarter of fiscal 2009. |
As part of our True North plan of growing the brand, running great restaurants, investing
wisely and focusing on our people, we intend to continue to focus on the following:
|
|
|
driving further sales growth; |
|
|
|
enhancing restaurant profitability; |
|
|
|
employing innovative marketing strategies and offering superior value and
quality; |
|
|
|
expanding our large international platform; |
|
|
|
accelerating our new restaurant development and expansion; and |
|
|
|
using proactive portfolio management, including closures of under-performing
restaurants and strategic refranchisings and acquisitions, to drive financial performance
and development. |
Seasonality
Our business is moderately seasonal. Restaurant sales are typically higher in the spring and
summer months (our fourth and first fiscal quarters) when weather is warmer than in the fall and
winter months (our second and third fiscal quarters). Restaurant sales during the winter are
typically highest in December, during the holiday shopping season. Our restaurant sales and Company
restaurant margins are typically lowest during our third fiscal quarter, which occurs during the
winter months and includes February, the shortest month of the year. Furthermore, adverse weather
conditions which typically occur in the winter months can have material adverse effects on
restaurant sales. Because our business is moderately seasonal, results for any one quarter are not
necessarily indicative of the results that may be achieved for any other quarter or for the full
fiscal year. The timing of religious holidays may also impact restaurant sales.
Key Business Measures
The Company uses three key business measures as indicators of the Companys operational
performance: comparable sales growth, average restaurant sales and sales growth. We believe that
these measures are important indicators of the overall direction, trends of sales and the
effectiveness of the Companys advertising, marketing and operating initiatives and the impact of
these on the entire Burger King® system.
These key business measures have been provided for the three and nine months ended March 31,
2010 and 2009. Comparable sales growth and sales growth are provided by reportable segment and are
analyzed on a constant currency basis, which means they are calculated using the average exchange
rate of the prior year period for both periods under comparison to remove the effects of
21
currency
fluctuations from these trend analyses. We believe these constant currency measures provide a more
meaningful analysis of our business by identifying the underlying business trends, without
distortion from the effect of currency movements.
Comparable Sales Growth
Comparable sales growth refers to the change in restaurant sales in one period from a
comparable period in the prior year for restaurants that have been open for 13 months or longer as
of the end of the most recent period. Company comparable sales growth refers to comparable sales
growth for Company restaurants and franchise comparable sales growth refers to comparable sales
growth for franchise restaurants. We believe that comparable sales growth is a key indicator of our
performance, as influenced by our strategic initiatives and those of our competitors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
For the |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(In constant currencies) |
|
(In constant currencies) |
Company Comparable Sales Growth: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
(4.0 |
)% |
|
|
1.6 |
% |
|
|
(2.7 |
)% |
|
|
1.7 |
% |
EMEA / APAC |
|
|
(3.9 |
)% |
|
|
(4.0 |
)% |
|
|
(2.0 |
)% |
|
|
0.3 |
% |
Latin America |
|
|
(5.2 |
)% |
|
|
(5.1 |
)% |
|
|
(5.2 |
)% |
|
|
(0.4 |
)% |
Total Company Comparable Sales Growth |
|
|
(4.0 |
)% |
|
|
(0.2 |
)% |
|
|
(2.6 |
)% |
|
|
1.3 |
% |
Franchise Comparable Sales Growth: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
(6.4 |
)% |
|
|
1.6 |
% |
|
|
(4.9 |
)% |
|
|
2.2 |
% |
EMEA / APAC |
|
|
1.7 |
% |
|
|
(0.1 |
)% |
|
|
1.4 |
% |
|
|
3.5 |
% |
Latin America |
|
|
(1.4 |
)% |
|
|
1.9 |
% |
|
|
(2.8 |
)% |
|
|
3.9 |
% |
Total Franchise Comparable Sales Growth |
|
|
(3.7 |
)% |
|
|
1.1 |
% |
|
|
(2.9 |
)% |
|
|
2.7 |
% |
Comparable Sales Growth: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
(6.1 |
)% |
|
|
1.6 |
% |
|
|
(4.6 |
)% |
|
|
2.2 |
% |
EMEA/APAC |
|
|
1.1 |
% |
|
|
(0.6 |
)% |
|
|
1.0 |
% |
|
|
3.1 |
% |
Latin America |
|
|
(1.6 |
)% |
|
|
1.3 |
% |
|
|
(3.0 |
)% |
|
|
3.6 |
% |
Total Worldwide Comparable Sales Growth |
|
|
(3.7 |
)% |
|
|
1.0 |
% |
|
|
(2.9 |
)% |
|
|
2.5 |
% |
Three and nine months ended March 31, 2010
We experienced negative worldwide comparable sales of 3.7% (in constant currencies) for the
three months ended March 31, 2010. As previously reported, worldwide comparable sales were severely
impacted during the months of January and February by adverse weather conditions in the Central and
Eastern portions of the U.S. Worldwide comparable sales improved in March as the impact of weather
became less significant. In addition to adverse weather conditions, worldwide comparable sales for
the three-month period were negatively impacted by lower levels of guest spending due to value
promotions in the U.S., such as the $1 1/4 lb. Double Cheeseburger promotion, partially offset by the
national launch of the premium Steakhouse XT burger line in February 2010, and continued traffic
declines in Latin America. Comparable sales growth in the EMEA/APAC segment, mainly driven by
positive comparable sales growth in Spain, Turkey, Australia and New Zealand, positively
contributed to our worldwide quarterly results.
Negative worldwide comparable sales of 2.9% (in constant currencies) for the nine months ended
March 31, 2010 were adversely impacted by a continued weak labor market, lower discretionary
spending, competitive discounting and the adverse weather conditions in the U.S. noted above.
Negative worldwide comparable sales for the nine-month period were partially offset by positive
comparable sales growth in the EMEA/APAC segment.
We experienced negative comparable sales growth in the U.S. and Canada of 6.1% (in constant
currencies) for the three months ended March 31, 2010. As previously reported, U.S. and Canada
comparable sales of negative 8.2% for the two-month period ended February 28, 2010 were severely
impacted by adverse weather conditions in the Central and Eastern portions of the U.S., where over
75% of this segments system restaurants are located. Comparable sales in the U.S. and Canada were
negative 2.0% in March, a
22
significant improvement over the prior months, albeit still negative, as
the impact of weather became less significant. In addition to adverse weather conditions, U.S. and
Canada comparable sales for the three-month period were negatively impacted by a continued
weak labor market and lower levels of guest spending due to value promotions in the U.S., such
as the $1 1/4 lb. Double Cheeseburger promotion, partially offset by the return to a more balanced
menu with the national launch of the premium Steakhouse XT burger line in February and positive
traffic in March. According to The NPD Group, Inc., which prepares and disseminates CREST® data,
QSR traffic in the U.S. declined -3% versus a year ago in the quarter ended February 2010. During
the quarter, U.S. marketing efforts focused on both ends of our barbell menu strategy, with
continued emphasis on value, including the $1 1/4 lb. Double Cheeseburger promotion, and the roll-out
of the premium Steakhouse XT burger line, which highlights the brands signature flame-broiled
taste. Marketing initiatives during the quarter included a U.S. campaign with NASCAR® Sprint Cup
Series driver Tony Stewart and the semi-annual winter mail coupon drop to 77 million households, as
well as Superfamily promotions such as Hoodwinked Too, The Spectacular Spiderman, Polly Pocket
and Pinkalicious, which were also leveraged across many international markets.
Negative comparable sales growth in the U.S. and Canada of 4.6% (in constant currencies) for
the nine months ended March 31, 2010, was driven by lower levels of guest spending due to value
promotions in the U.S., such as the $1 1/4 lb. Double Cheeseburger promotion, as well as the adverse
macroeconomic factors and weather conditions noted above in the three-month discussion, partially
offset by positive traffic in the U.S. during the second quarter and in March, primarily due to the
$1 1/4 lb. Double Cheeseburger promotion. Since the introduction of the $1 1/4 lb. Double Cheeseburger
in mid-October, we have experienced a shift in our product mix and a decrease in average check,
with a higher value sales mix that is more in line with our competitors. While we believe this
trend will continue in the near future, we expect our barbell menu strategy of balancing
higher-margin products with value offerings will mitigate the impact of this product mix shift.
Products and promotions featured during the nine-month period include the promotions and marketing
initiatives noted for the three month period as well as a multifaceted promotion with The Twilight
Saga: New Moon aimed at broadening the brands appeal with female SuperFans, value-focused
promotions, such as the $1 Whopper Jr.® sandwich and 2 for $4 Original Chicken sandwiches, Whopper®
sandwich limited time offers, such as the BBQ Stackticon, and SuperFamily promotions such as
SpongeBob SquarePants, Planet 51 , G.I. Joe, Cloudy with a Chance of Meatballs and
Transformers 2.
Positive comparable sales growth in EMEA/APAC of 1.1% and 1.0% (in constant currencies) for
the three and nine months ended March 31, 2010, respectively, was driven by the strength of Spain,
Turkey and our major APAC markets, including Australia, New Zealand and Korea. Comparable sales
growth was positive for both periods despite the fact that Germany, one of our major markets in
this segment, experienced negative comparable sales due to traffic declines caused by adverse
economic conditions and competitive discounting. Although positive for the nine month period,
comparable sales growth in the U.K. turned negative during the three months ended March 31, 2010,
primarily due to adverse weather conditions and the fact that the U.K. market was lapping over
strong comparable sales in the prior year period. During both periods, we focused in EMEA/APAC on
promoting our barbell menu strategy with a combination of value and premium offerings such as
value-oriented King Deals, Stunner Deals and the Chili Cheese Burger limited time offer and
higher margin indulgent products including the Chicken TenderCrisp® sandwich, Whopper® sandwich
promotions and various limited time offers.
Negative comparable sales growth in Latin America of 1.6% and 3.0% (in constant currencies)
for the three and nine months ended March 31, 2010, respectively, was the result of a decline in
traffic compared to the same periods in the prior year, particularly in Mexico and Central America,
driven by continued adverse socioeconomic conditions, lower influx of remittances from the U.S., a
slowdown in tourism and the devaluation of local currencies. During the three-month
period, we continued to leverage our barbell menu strategy with everyday branded value platforms
such as Come Como Rey (Eat Like a King) and BK Ofertas (King Deals) and affordably indulgent
promotional products such as the Bourbon Whopper® sandwich. Products and promotions featured
during the nine-month period include the products and promotions noted above for the three-month
period, as well as national launch of the Mega Angus XT sandwich in Mexico, the Transformers BBQ
Stackticon and Whopper® Furioso (aka Angry Whopper®) promotion burgers regionally, the Whopper®
Jackpot sweepstakes as well as strong kids properties such as Transformers, Pokémon, G.I. Joe
and Cloudy with a Chance of Meatballs, SpongeBob SquarePants and Planet 51.
23
Average Restaurant Sales
Average restaurant sales, or ARS, is calculated as the total sales averaged over total store
months for all restaurants open during a defined period. We believe that ARS is an important
measure of the financial performance of our restaurants and changes in the overall direction and
trends of sales. ARS is influenced by comparable sales performance and restaurant openings and
closures and includes the impact of movements in currency exchange rates. For the three and nine
months ended March 31, 2010, ARS was $294,000 and $935,000, respectively, including the favorable
impact of currency exchange rates of $12,000 and $14,000, respectively, compared to $294,000 and
$949,000 for the three and nine months ended March 31, 2009. For the three months ended March 31,
2010, ARS remained unchanged, primarily as a result of the favorable impact of currency exchange
rates, offset by the impact of negative worldwide comparable sales growth. For the nine months
ended March 31, 2010, ARS decreased by 1.5%, primarily as a result of negative worldwide comparable
sales. Trailing twelve months ARS was $1,244,000 including the unfavorable impact of currency
exchange rates of $6,000, compared to $1,287,000, for the periods ended March 31, 2010 and 2009,
respectively.
Sales Growth
Sales growth refers to the change in sales at all Company and franchise restaurants from one
period to another. We believe that sales growth is an important indicator of the overall direction
and trends of sales and income from operations on a system-wide basis. Sales growth is influenced
by restaurant openings and closures and comparable sales growth, as well as the effectiveness of
our advertising and marketing initiatives and featured products and the macroeconomic and
competitive factors that impact comparable sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
For the |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(In constant currencies) |
Sales Growth: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
(5.5 |
)% |
|
|
2.8 |
% |
|
|
(3.9 |
)% |
|
|
3.0 |
% |
EMEA/APAC |
|
|
7.3 |
% |
|
|
6.3 |
% |
|
|
8.2 |
% |
|
|
9.6 |
% |
Latin America |
|
|
3.0 |
% |
|
|
7.2 |
% |
|
|
0.9 |
% |
|
|
11.2 |
% |
Total System-wide Sales Growth |
|
|
(1.5 |
)% |
|
|
4.1 |
% |
|
|
(0.1 |
)% |
|
|
5.5 |
% |
Worldwide sales growth for the three and nine months ended March 31, 2010 was negative,
primarily as result of negative comparable sales growth, primarily in U.S and Canada, partially
offset by increased restaurant count on a system-wide basis.
The U.S. and Canada experienced negative sales growth during the three and nine months ended
March 31, 2010, reflecting the impact of negative comparable sales, partially offset by a net
increase of 35 restaurants during the trailing twelve months ended March 31, 2010. We had 7,557
restaurants in the U.S. and Canada as of March 31, 2010, compared to 7,522 restaurants as of March
31, 2009.
EMEA/APAC demonstrated sales growth during the three and nine months ended March 31, 2010,
reflecting openings of new restaurants and positive comparable sales, primarily driven by Spain and
our major APAC markets, including Australia, New Zealand and Korea. We had 3,449 restaurants in
EMEA/APAC as of March 31, 2010, compared to 3,232 restaurants as of March 31, 2009, reflecting a 7%
increase in the number of restaurants.
Latin America experienced positive sales growth for the three and nine months ended March 31,
2010, reflecting openings of new restaurants, partially offset by negative comparable sales growth,
primarily driven by Mexico. We had 1,109 restaurants in Latin America as of March 31, 2010,
compared to 1,056 restaurants as of March 31, 2009, reflecting a 5% increase in the number of
restaurants.
24
Other Operating Data
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Restaurant Count Data: |
|
|
|
|
|
|
|
|
Number of Company restaurants: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
1,030 |
|
|
|
1,054 |
|
EMEA/APAC(1) |
|
|
333 |
|
|
|
296 |
|
Latin America(2) |
|
|
95 |
|
|
|
88 |
|
|
|
|
|
|
|
|
Total Company restaurants |
|
|
1,458 |
|
|
|
1,438 |
|
Number of franchise restaurants: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
6,527 |
|
|
|
6,468 |
|
EMEA/APAC(1) |
|
|
3,116 |
|
|
|
2,936 |
|
Latin America(2) |
|
|
1,014 |
|
|
|
968 |
|
|
|
|
|
|
|
|
Total franchise restaurants |
|
|
10,657 |
|
|
|
10,372 |
|
|
|
|
|
|
|
|
Total system-wide restaurants |
|
|
12,115 |
|
|
|
11,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Other Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable sales growth |
|
|
(3.7 |
)% |
|
|
1.0 |
% |
|
|
(2.9 |
)% |
|
|
2.5 |
% |
Sales growth |
|
|
(1.5 |
)% |
|
|
4.1 |
% |
|
|
(0.1 |
)% |
|
|
5.5 |
% |
Average restaurant sales (in thousands) |
|
$ |
294.0 |
|
|
$ |
294.0 |
|
|
$ |
935.0 |
|
|
$ |
949.0 |
|
Segment Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
310.0 |
|
|
$ |
327.7 |
|
|
$ |
967.0 |
|
|
$ |
1,001.0 |
|
EMEA/APAC(1) |
|
|
114.4 |
|
|
|
108.2 |
|
|
|
372.9 |
|
|
|
371.3 |
|
Latin America(2) |
|
|
14.8 |
|
|
|
12.9 |
|
|
|
45.3 |
|
|
|
46.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant revenues |
|
$ |
439.2 |
|
|
$ |
448.8 |
|
|
$ |
1,385.2 |
|
|
$ |
1,418.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses as a percentage of revenue (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and products costs |
|
|
32.1 |
% |
|
|
32.2 |
% |
|
|
32.3 |
% |
|
|
33.3 |
% |
Payroll and employee benefits |
|
|
31.4 |
% |
|
|
32.2 |
% |
|
|
31.1 |
% |
|
|
31.2 |
% |
Occupancy and other operating costs |
|
|
23.6 |
% |
|
|
22.9 |
% |
|
|
22.9 |
% |
|
|
22.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses |
|
|
87.1 |
% |
|
|
87.3 |
% |
|
|
86.3 |
% |
|
|
87.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA/APAC(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and products costs |
|
|
28.8 |
% |
|
|
29.6 |
% |
|
|
28.9 |
% |
|
|
28.6 |
% |
Payroll and employee benefits |
|
|
34.2 |
% |
|
|
34.0 |
% |
|
|
33.0 |
% |
|
|
32.7 |
% |
Occupancy and other operating costs |
|
|
30.9 |
% |
|
|
28.8 |
% |
|
|
28.8 |
% |
|
|
26.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses |
|
|
93.9 |
% |
|
|
92.4 |
% |
|
|
90.7 |
% |
|
|
88.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin America(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and products costs |
|
|
37.8 |
% |
|
|
40.0 |
% |
|
|
39.1 |
% |
|
|
38.2 |
% |
Payroll and employee benefits |
|
|
12.2 |
% |
|
|
12.3 |
% |
|
|
12.4 |
% |
|
|
12.2 |
% |
Occupancy and other operating costs |
|
|
31.1 |
% |
|
|
27.7 |
% |
|
|
29.1 |
% |
|
|
28.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses |
|
|
81.1 |
% |
|
|
80.0 |
% |
|
|
80.6 |
% |
|
|
79.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and products costs |
|
|
31.4 |
% |
|
|
31.8 |
% |
|
|
31.6 |
% |
|
|
32.2 |
% |
Payroll and employee benefits |
|
|
31.5 |
% |
|
|
32.0 |
% |
|
|
31.0 |
% |
|
|
31.0 |
% |
Occupancy and other operating costs |
|
|
25.8 |
% |
|
|
24.5 |
% |
|
|
24.7 |
% |
|
|
24.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses |
|
|
88.7 |
% |
|
|
88.3 |
% |
|
|
87.3 |
% |
|
|
87.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise revenues (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
74.9 |
|
|
$ |
77.2 |
|
|
$ |
233.7 |
|
|
$ |
241.0 |
|
EMEA/APAC(1) |
|
|
43.8 |
|
|
|
37.0 |
|
|
|
140.4 |
|
|
|
127.6 |
|
Latin America(2) |
|
|
11.2 |
|
|
|
10.8 |
|
|
|
34.8 |
|
|
|
36.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise revenues(4) |
|
$ |
129.9 |
|
|
$ |
125.0 |
|
|
$ |
408.9 |
|
|
$ |
404.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
85.8 |
|
|
$ |
88.2 |
|
|
$ |
267.1 |
|
|
$ |
262.4 |
|
EMEA/APAC(1) |
|
|
16.6 |
|
|
|
11.0 |
|
|
|
59.4 |
|
|
|
57.0 |
|
Latin America(2) |
|
|
8.5 |
|
|
|
7.0 |
|
|
|
27.3 |
|
|
|
26.8 |
|
Unallocated(5) |
|
|
(32.0 |
) |
|
|
(30.6 |
) |
|
|
(103.7 |
) |
|
|
(94.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income from operations |
|
$ |
78.9 |
|
|
$ |
75.6 |
|
|
$ |
250.1 |
|
|
$ |
251.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (in millions)(6) |
|
$ |
106.4 |
|
|
$ |
99.0 |
|
|
$ |
330.0 |
|
|
$ |
323.9 |
|
25
|
|
|
(1) |
|
Refers to our operations in Europe, the Middle East, Africa, and Asia Pacific. |
|
(2) |
|
Refers to our operations in Mexico, Central and South America, the Caribbean and Puerto Rico. |
|
(3) |
|
Calculated using dollars expressed in hundreds of thousands. |
|
(4) |
|
Franchise revenues consist primarily of royalties paid by franchisees. Royalties earned are
based on a percentage of franchise sales, which were $3,085.6 million and $9,775.3 million for
the three and nine months ended March 31, 2010, respectively (including the favorable impact
from the movement of currency exchange rates of $128.2 million and $149.7 million for the
three and nine month periods, respectively), and $2,985.0 million and $9,597.0 million for the
three and nine months ended March 31, 2009, respectively. Franchise sales represent sales at
all franchise restaurants and revenues to our franchisees. We do not record franchise sales
as revenues. |
|
(5) |
|
Unallocated includes corporate support costs in areas such as facilities, finance, human
resources, information technology, legal, marketing and supply chain management which benefit
all of the Companys geographic segments and system-wide restaurants and are not allocated
specifically to any of the geographic segments. |
|
(6) |
|
EBITDA is defined as earnings (net income) before interest, taxes, depreciation and
amortization, and is used by management to measure operating performance of the business. We
also use EBITDA as a measure to calculate certain incentive based compensation and certain
financial covenants related to our credit facility and as a factor in our tangible and
intangible asset impairment test. Management believes EBITDA is a useful measure as it
reflects certain operating drivers of our business, such as sales growth, operating costs,
selling, general and administrative expenses and other operating income and expense. |
The following table is a reconciliation of our net income to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Net income |
|
$ |
41.0 |
|
|
$ |
47.1 |
|
|
$ |
137.8 |
|
|
$ |
141.2 |
|
Interest expense, net |
|
|
11.9 |
|
|
|
12.6 |
|
|
|
36.6 |
|
|
|
42.0 |
|
Income tax expense |
|
|
26.0 |
|
|
|
15.9 |
|
|
|
75.7 |
|
|
|
68.5 |
|
Depreciation and amortization |
|
|
27.5 |
|
|
|
23.4 |
|
|
|
79.9 |
|
|
|
72.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
106.4 |
|
|
$ |
99.0 |
|
|
$ |
330.0 |
|
|
$ |
323.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Results of Operations for the Three Months Ended March 31, 2010 and 2009
The following table presents our results of operations for the three months ended March 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
Amount |
|
|
Amount |
|
|
(Decrease) |
|
|
|
(In millions, except per share data) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues |
|
$ |
439.2 |
|
|
$ |
448.8 |
|
|
|
(2 |
)% |
Franchise revenues |
|
|
129.9 |
|
|
|
124.9 |
|
|
|
4 |
% |
Property revenues |
|
|
27.8 |
|
|
|
26.2 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
596.9 |
|
|
|
599.9 |
|
|
|
(1 |
)% |
Company restaurant expenses |
|
|
389.5 |
|
|
|
396.5 |
|
|
|
(2 |
)% |
Selling, general and administrative expenses (1) |
|
|
117.8 |
|
|
|
115.7 |
|
|
|
2 |
% |
Property expenses |
|
|
15.2 |
|
|
|
13.4 |
|
|
|
13 |
% |
Other operating (income) expense, net (1) |
|
|
(4.5 |
) |
|
|
(1.3 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
518.0 |
|
|
|
524.3 |
|
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
78.9 |
|
|
|
75.6 |
|
|
|
4 |
% |
Interest expense |
|
|
12.2 |
|
|
|
13.0 |
|
|
|
(6 |
)% |
Interest income |
|
|
(0.3 |
) |
|
|
(0.4 |
) |
|
|
(25 |
)% |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
11.9 |
|
|
|
12.6 |
|
|
|
(6 |
)% |
Income before income taxes |
|
|
67.0 |
|
|
|
63.0 |
|
|
|
6 |
% |
Income tax expense |
|
|
26.0 |
|
|
|
15.9 |
|
|
|
64 |
% |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
41.0 |
|
|
$ |
47.1 |
|
|
|
(13 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic |
|
$ |
0.30 |
|
|
$ |
0.35 |
|
|
|
(14 |
)% |
Earnings per share diluted |
|
$ |
0.30 |
|
|
$ |
0.34 |
|
|
|
(12 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
135.3 |
|
|
|
134.6 |
|
|
|
|
|
Weighted average shares diluted |
|
|
137.2 |
|
|
|
136.7 |
|
|
|
|
|
|
|
|
(1) |
|
Certain prior year amounts have been reclassified from other operating (income) expense, net to general and administrative expenses. |
Revenues
Company restaurant revenues
Total Company restaurant revenues decreased by $9.6 million, or 2%, to $439.2 million for the
three months ended March 31, 2010, compared to the same period in the prior year, primarily due to
negative worldwide Company comparable sales of 4.0% (in constant currencies). This decrease was
partially offset by $14.0 million of favorable impact from the movement of currency exchange rates
and a net increase of 20 Company restaurants during the trailing twelve-months ended March 31,
2010, primarily due to the acquisition of 35 restaurants from a franchisee in Singapore on March 1,
2010 as part of our ongoing portfolio management initiative.
In the U.S. and Canada, Company restaurant revenues decreased by $17.7 million, or 5%, to
$310.0 million for the three months ended March 31, 2010, compared to the same period in the prior
year. This decrease was the result of negative Company comparable
27
sales growth in the U.S. and Canada of 4.0% (in constant currencies), primarily driven by
negative Company comparable sales in the U.S., partially offset by positive Company comparable
sales in Canada. Company restaurant revenues were also adversely impacted by a net decrease of 24
Company restaurants during the trailing twelve-month period, including the net refranchising of 25
Company restaurants as part of our ongoing portfolio management initiative. These factors were
partially offset by $5.3 million of favorable impact from the movement of currency exchange rates
in Canada.
In EMEA/APAC, Company restaurant revenues increased by $6.2 million, or 6%, to $114.4 million
for the three months ended March 31, 2010, compared to the same period in the prior year. This
increase was primarily driven by $7.1 million of favorable impact from the movement of currency
exchange rates, and the net increase of 37 Company restaurants during the trailing twelve-month
period ended March 31, 2010, which included the acquisition of 35 restaurants from a franchisee in
Singapore on March 1, 2010. These factors were partially offset by the impact from negative
Company comparable sales growth in EMEA/APAC of 3.9% (in constant currencies), primarily driven by
negative Company comparable sales growth in markets such as Germany and the U.K, partially offset
by positive Company comparable sales growth in Spain.
In Latin America, where all Company restaurants are located in Mexico, Company restaurant
revenues increased by $1.9 million, or 15%, to $14.8 million for the three months ended March 31,
2010, compared to the same period in the prior year. The increase was primarily the result of a
net increase of seven Company restaurants during the trailing twelve-month period ended March 31,
2010 and $1.6 million of favorable impact from the movement of currency exchange rates, partially
offset by negative Company comparable sales growth of 5.2% (in constant currencies).
Franchise revenues
Total franchise revenues increased by $5.0 million, or 4%, to $129.9 million for the three
months ended March 31, 2010, compared to the same period in the prior year. Total franchise
revenues increased as a result of $4.9 million of favorable impact from the movement of currency
exchange rates, a net increase of 285 franchise restaurants during the trailing twelve-month
period, and a higher effective royalty rate in the U.S. These factors were partially offset by
negative worldwide franchise comparable sales of 3.7% (in constant currencies), driven primarily by
negative franchise comparable sales in the U.S and Canada and Latin America segments, partially
offset by positive franchise comparable sales in the EMEA/APAC segment.
In the U.S. and Canada, franchise revenues decreased by $2.3 million, or 3%, to $74.9 million
for the three months ended March 31, 2010, compared to the same period in the prior year. This
decrease was primarily the result of negative franchise comparable sales growth in the U.S. and
Canada of 6.4% (in constant currencies), primarily driven by negative franchise comparable sales in
the U.S., partially offset by positive franchise comparable sales in Canada. These factors were
partially offset by a net increase of 59 franchise restaurants during the trailing twelve-month
period and an increase in the effective royalty rate in the U.S. The impact from the movement of
currency exchange rates was not significant in this segment for the period.
Franchise revenues in EMEA/APAC increased by $6.8 million, or 18%, to $43.8 million for the
three months ended March 31, 2010, compared to the same period in the prior year. This increase was
primarily driven by $4.0 million of favorable impact from the movement of currency exchange rates,
the net increase in franchise restaurants of 180 during the trailing twelve-month period ended
March 31, 2010 and positive franchise comparable sales growth of 1.7% (in constant currencies),
reflecting strong performance in markets such as Spain, Turkey, Australia, New Zealand and Korea.
Latin America franchise revenues increased by $0.5 million, or 5%, to $11.2 million for the
three months ended March 31, 2010, compared to the same period in the prior year. The increase
was primarily the result of a net increase of 46 franchise restaurants during the trailing
twelve-month period ended March 31, 2010 and $0.7 million of favorable impact from the movement of
currency exchange rates, partially offset by negative franchise comparable sales growth of 1.4% (in
constant currencies). Despite the negative franchise comparable sales growth in Latin America,
Brazil and the Southern Cone markets demonstrated strong performance for the three-month period due
to better macroeconomic conditions compared to the rest of Latin America.
28
Property Revenues
Total property revenues increased by $1.6 million, or 6%, to $27.8 million for the three
months ended March 31, 2010, compared to the same period in the prior year. Total property
revenues increased as a result of $0.6 million of favorable impact from the movement of currency
exchange rates for the three-month period, and the net effect of changes to our property portfolio,
which includes the impact of the refranchising of Company restaurants and opening of new restaurants
leased to franchisees. These factors were partially offset by decreased revenues from percentage
rents as a result of negative franchise comparable sales in the U.S.
In the U.S. and Canada, property revenues increased by $2.0 million, or 10%, to $22.2 million
for the three months ended March 31, 2010, compared to the same period in the prior year. This
increase was primarily due to the net effect of changes to our property portfolio, partially offset
by decreased revenues from percentage rent as a result of negative franchise comparable sales
growth in the U.S.
Property revenues in EMEA/APAC decreased by $0.4 million, or 7%, to $5.6 million for the three
months ended March 31, 2010, compared to the same period in the prior year, due to a reduction in
the number of properties in our portfolio. This decrease was offset by a $0.4 million favorable
impact from the movement of currency exchange rates.
Operating Costs and Expenses
The Company benefited from decreases in total food, paper and product costs as well as
decreases in total payroll and employee benefits costs, both in actual dollars and as a percentage
of Company restaurant revenues, for the three months ended March 31, 2010, compared to the same
period in the prior year. Total occupancy and other operating costs increased in both actual
dollars and as a percentage of Company restaurant revenues for the period.
Food, paper and product costs
Total food, paper and product costs decreased by $4.7 million, or 3%, to $138.0 million during
the three months ended March 31, 2010, compared to the same period in the prior year, primarily as
a result of the impact of negative worldwide Company comparable sales, which resulted in reduced
purchasing levels, benefits realized from changes in product specifications in the U.S. and Canada,
lower commodity costs in EMEA/APAC and Latin America, increased vendor rebates in the U.S. and
Canada and a one time expense recorded in the prior year related to the disposal of toy premium
inventory in the U.S. These factors were partially offset by a $4.4 million unfavorable impact from
the movement of currency exchange rates, the net increase of 20 Company restaurants during the
twelve months ended March 31, 2010, including the acquisition of 35 restaurants from a franchisee
in Singapore, and higher beef prices in the U.S., partially offset by lower chicken prices due to
favorable contract terms.
As a percentage of Company restaurant revenues, total food, paper and product costs decreased
by 0.4% to 31.4%, during the three months ended March 31, 2010, compared to the same period in the
prior year, primarily due to the positive factors noted above as well as the benefits realized from
strategic pricing initiatives across all segments. These factors were partially offset by higher
beef prices in the U.S. and the negative impact of value promotions on our gross profit percentage.
Gross profit percentage is calculated by expressing gross profit as a percentage of revenues.
In the U.S. and Canada, food, paper and product costs decreased by $6.2 million, or 6%, to
$99.5 million during the three months ended March 31, 2010, compared to the same period in the
prior year, primarily as a result of the impact of negative Company comparable sales in the U.S.,
which resulted in reduced purchasing levels, the net reduction of 24 Company restaurants, including
the net refranchising of 25 Company restaurants, during the trailing twelve-month period ended
March 31, 2010, benefits realized from changes in product specifications, increased vendor rebates
and a one time expense recorded in the prior year related to the disposal of toy premium inventory
in the U.S. These factors were partially offset by the unfavorable impact from the movement of
currency exchange rates in Canada of $1.8 million and higher beef prices in the U.S.,
partially offset by lower chicken prices due to favorable contract terms.
Food, paper and product costs in the U.S. and Canada as a percentage of Company restaurant
revenues remained relatively unchanged at 32.1%. The positive factors noted above and the benefits
realized from strategic pricing initiatives were largely offset by higher beef prices and the
negative impact of the $1 1/4 lb. Double Cheeseburger promotion in the U.S. on our gross profit
percentage. However, this negative impact was mitigated to some extent by the return to a more
balanced product mix with the February launch of the Steakhouse XT burger line in the U.S.
29
The cost of our U.S. food basket is expected to increase in the fourth quarter of fiscal 2010
compared to the same period in the prior year, primarily driven by higher beef prices, which is
expected to be partially offset by lower chicken prices due to favorable contract terms.
In EMEA/APAC, food, paper and product costs increased by $1.1 million, or 4%, to $32.9 million
for the three months ended March 31, 2010, compared to the same period in the prior year, primarily
as a result of the unfavorable impact from the movement of currency exchange rates of $2.0 million,
primarily in EMEA, and the net increase of 37 Company restaurants during the trailing twelve-month
period ended March 31, 2010. These factors were partially offset by the impact of negative Company
comparable sales growth, primarily in Germany and the U.K., which resulted in reduced purchasing
levels, and lower commodity prices in the U.K. Food, paper and product costs as a percentage of
Company restaurant revenues decreased by 0.8% to 28.8%, primarily due to the benefits realized from
strategic pricing initiatives and lower commodity prices in the U.K.
In Latin America, food, paper and product costs increased by $0.4 million, or 8%, to $5.6
million for the three months ended March 31, 2010, compared to the same period in the prior year,
primarily as a result of the unfavorable impact from the movement of currency exchange rates of
$0.6 million, and a net increase of seven Company restaurants during the twelve months ended March
31, 2010. These increases were partially offset by the impact of negative Company comparable sales
growth in Mexico, which resulted in reduced purchasing levels, and decreases in commodity prices.
Food, paper and product costs as a percentage of Company restaurant revenues decreased by 2.2% to
37.8%, primarily as a result of the decrease in commodity costs as noted above and the benefits
realized from strategic pricing initiatives.
Payroll and employee benefits costs
Total payroll and employee benefits costs decreased by $5.6 million, or 4%, to $138.2 million
during the three months ended March 31, 2010, compared to the same period in the prior year. This
decrease was primarily due to efficiencies gained from improvements in variable labor controls in
the U.S., partially offset by a $4.4 million unfavorable impact from the movement of currency
exchange rates and the net increase of 20 Company restaurants during the twelve months ended March
31, 2010, including the acquisition of 35 restaurants from a franchisee in Singapore.
As a percentage of Company restaurant revenues, total payroll and employee benefits costs
decreased by 0.5% to 31.5%, with the benefits realized from strategic pricing initiatives and
improvements in variable labor controls and scheduling in our U.S. restaurants, partially offset by
the adverse impact of sales deleverage on our fixed labor costs due to negative Company comparable
sales across all segments as well as the adverse impact of value promotions, primarily in the U.S.
In the U.S. and Canada, payroll and employee benefits costs decreased by $8.1 million, or 8%,
to $97.3 million during the three months ended March 31, 2010, compared to the same period in the
prior year, primarily due to improvements in variable labor controls and scheduling in our U.S.
restaurants and the net reduction of 24 Company restaurants, including the net refranchising of 25
Company restaurants, during the trailing twelve months ended March 31, 2010. These factors were
partially offset by a $1.8 million unfavorable impact from the movement of currency exchange rates
in Canada. As a percentage of Company restaurant revenues, payroll and employee benefits costs
decreased by 0.8% to 31.4%, with the benefits realized from improvements in variable labor controls
and scheduling in our U.S. restaurants, partially offset by the adverse impact of sales deleverage
and value promotions on our fixed labor costs.
In EMEA/APAC, payroll and employee benefits costs increased by $2.3 million, or 6%, to $39.1
million during the three months ended March 31, 2010, compared to the same period in the prior
year, primarily as a result of a $2.4 million unfavorable impact from the movement of currency
exchange rates and the net increase of 37 Company restaurants, including the acquisition of 35
restaurants from a franchisee in Singapore, during the trailing twelve-month period ended March 31,
2010. As a percentage of Company restaurant revenues, payroll and employee benefit costs increased
by 0.2% to 34.2% primarily as a result of the adverse impact of sales deleverage on our fixed labor
costs, primarily in EMEA.
There was no significant change in payroll and employee benefits costs in Latin America during
the three months ended March 31, 2010 compared to the same period in the prior year.
30
Occupancy and other operating costs
Total occupancy and other operating costs increased by $3.3 million, or 3%, to $113.3 million
during the three months ended March 31, 2010, compared to the same period in the prior year,
primarily from a $4.1 million unfavorable impact from the movement of currency exchange rates, the
net increase of 20 Company restaurants during the twelve months ended March 31, 2010, including the
acquisition of 35 restaurants from a franchisee in Singapore, higher depreciation expense due to a
higher depreciable asset base over the prior year and increased repair and maintenance costs in EMEA/APAC. These factors were
partially offset by lower utility costs and a favorable adjustment to the self-insurance reserve in
the U.S. and Canada.
As a percentage of Company restaurant revenues, total occupancy and other operating costs
increased by 1.3% to 25.8% during the three months ended March 31, 2010, compared to the same
period in the prior year, primarily as a result of the increased depreciation expense and repair
and maintenance costs noted above, as well as the adverse impact of sales deleverage on our fixed
occupancy and other operating costs due to negative Company comparable sales across all segments.
In the U.S. and Canada, occupancy and other operating costs decreased by $2.1 million, or 3%,
to $73.3 million during the three months ended March 31, 2010, compared to the same period in the
prior year. This decrease was primarily driven by the net reduction of 24 Company restaurants,
including the net refranchising of 25 Company restaurants, during the trailing twelve months ended
March 31, 2010, a favorable adjustment to the self-insurance reserve and lower utility costs. These
factors were partially offset by a $1.4 million unfavorable impact from the movement of currency
exchange rates in Canada and higher depreciation expense due to a higher depreciable asset base
over the prior year related to our POS system rollout and restaurant reimaging program. As a
percentage of Company restaurant revenues, occupancy and other operating costs increased by 0.7% to
23.6%, primarily as a result of the increased depreciation expense noted above and the adverse
impact of sales deleverage on our fixed occupancy and other operating costs, partially offset by a
favorable adjustment to the self-insurance reserve as noted above and lower utility costs.
In EMEA/APAC, occupancy and other operating costs increased by $4.2 million, or 14%, to $35.4
million during the three months ended March 31, 2010, compared to the same period in the prior
year, primarily due to a $2.2 million unfavorable impact from the movement of currency exchange
rates, primarily in EMEA, the net increase of 37 Company restaurants, including the acquisition of
35 restaurants from a franchisee in Singapore, increased repair and maintenance costs, primarily in
Germany, and a non-recurring benefit realized from a lease termination recorded in the prior year.
As a percentage of Company restaurant revenues, occupancy and other operating costs increased by
2.1% to 30.9%, primarily due to the adverse impact of sales deleverage on our fixed occupancy and
other operating costs.
In Latin America, occupancy and other operating costs increased by $1.2 million, or 35%, to
$4.6 million during the three months ended March 31, 2010, compared to the same period in the prior
year, primarily attributable to a $0.5 million unfavorable impact from the movement of currency
exchange rates, and the net increase of seven Company restaurants during the twelve months ended
March 31, 2010. As a percentage of Company restaurant revenues, occupancy and other operating costs
increased by 3.4% to 31.1%, primarily as a result of the negative impact of sales deleverage on our
fixed occupancy and other operating costs, higher utility costs and higher depreciation expense
from new restaurants.
Selling, general and administrative expenses
Selling expenses decreased by $0.9 million, or 4%, to $21.6 million for the three months ended
March 31, 2010, compared to the same period in the prior year, primarily due to a $1.9 million
reduction in contributions to the marketing funds in our Company restaurant markets as a result of
lower sales at our Company restaurants. This decrease was offset by a $0.6 million unfavorable
impact from the movement of currency exchange rates.
General and administrative expenses increased by $3.0 million, or 3%, to $96.2 million for the
three months ended March 31, 2010, largely driven by the unfavorable impact from the movement of
currency exchange rates of $3.1 million and higher depreciation expense of $0.8 million due to a
higher depreciable asset base compared to the prior year. These items were partially offset by
miscellaneous cost reductions and bad debt recoveries.
31
Property Expenses
Total property expenses increased by $1.8 million, or 13%, to $15.2 million for the three
months ended March 31, 2010, compared to the same period in the prior year, primarily attributable
to a $0.5 million unfavorable impact from the movement of currency exchange rates and increased
rent expense resulting from the net effect of changes to our property portfolio in the U.S. These
factors were partially offset by decreased rent expense from a reduction in the number of
properties leased to franchisees in EMEA.
Other operating (income) expense, net
Other operating income, net, for the three months ended March 31, 2010 of $4.5 million
includes $3.2 million of net gains related to the disposal of property and expenses arising from
restaurant closures, net gains of $1.3 million related to the remeasurement of foreign denominated
assets and the impact related to the use of foreign currency forward contracts used to hedge the
currency exchange impact on such assets, and $0.6 million of net gains from the settling of
transactions denominated in foreign currencies.
Other operating income, net, for the three months ended March 31, 2009 of $1.3 million
includes a $3.5 million gain from the refranchising of Company restaurants in the U.S. and Canada,
partially offset by $1.9 million of net expense related to the remeasurement of foreign denominated
assets and the impact related to the use of foreign currency forward contracts used to hedge the
currency exchange impact on such assets.
Income from Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Income from Operations: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
85.8 |
|
|
$ |
88.2 |
|
EMEA/APAC |
|
|
16.6 |
|
|
|
11.0 |
|
Latin America |
|
|
8.5 |
|
|
|
7.0 |
|
Unallocated |
|
|
(32.0 |
) |
|
|
(30.6 |
) |
|
|
|
|
|
|
|
Total income from operations |
|
$ |
78.9 |
|
|
$ |
75.6 |
|
|
|
|
|
|
|
|
Income from operations increased by $3.3 million, or 4%, to $78.9 million during the three
months ended March 31, 2010, compared to the same period in the prior year, primarily as a result
of a $5.0 million increase in franchise revenues and a $3.2 million increase in other operating
income, net. These factors were partially offset by a $2.1 million increase in selling, general
and administrative expenses and a $2.6 million decrease in Company restaurant margin. (See Note 15
to the accompanying unaudited condensed consolidated financial statements for segment information
disclosures).
For the three months ended March 31, 2010, the favorable impact on revenues from the movement
of currency exchange rates was partially offset by the unfavorable impact of currency exchange
rates on Company restaurant expenses and selling, general and administrative expenses, resulting in
a net favorable impact on income from operations of $2.6 million.
In the U.S. and Canada, income from operations decreased by $2.4 million, or 3%, to $85.8
million during the three months ended March 31, 2010, compared to the same period in the prior
year, primarily as a result of a decrease in Company restaurant margin of $1.3 million and a
decrease in franchise revenues of $2.3 million. These factors were partially offset by an increase
in other operating income, net of $1.5 million, and a decrease in selling, general and
administrative expenses of $1.2 million. The impact from the movement of currency exchange rates
was not significant.
In EMEA/APAC, income from operations increased by $5.6 million, or 51%, to $16.6 million
during the three months ended March 31, 2010, compared to the same period in the prior year,
primarily as a result of a $6.8 million increase in franchise revenues, and a $1.4 million
increase in other operating income, net, partially offset by a decrease in Company restaurant margin of $1.4
million and a $1.5 million increase in selling, general and administrative expenses. The increase
also reflects $1.9 million of favorable impact from the movement of currency exchange rates.
32
Due to challenging economic conditions in Germany, we assessed the recoverability of our
long-lived assets in each operating market in Germany during the quarter ended March 31, 2010.
Based on the results of our recoverability test, the undiscounted estimated future cash flows
exceeded the net book value of the related assets in each operating market and no impairment was
recorded.
Key assumptions used in the recoverability test included projections of comparable sales
growth, future economic expectations, as well as the successful implementation of certain marketing
and operating initiatives to improve business results. In the event that our economic expectations
are not met or our initiatives do not achieve anticipated results, estimated future cash flows
could be negatively impacted, which may result in a material impairment charge.
In Latin America, income from operations increased by $1.5 million, or 21%, to $8.5 million
during the three months ended March 31, 2010, compared to the same period in the prior year,
primarily as a result of a $0.5 million increase in franchise revenues, a $0.3 decrease in other
operating expense, net, and an increase in Company restaurant margin of $0.1 million, partially
offset by a $0.5 million increase in selling, general and administrative expenses. The increase
also reflects $0.6 million of favorable impact from the movement of currency exchange rates.
Our unallocated corporate expenses increased by $1.4 million during the three months ended
March 31, 2010, compared to the same period in the prior year, primarily as a result of an increase
in employee incentives and benefits of $1.1 million and increased depreciation expense of $0.8
million, partially offset by a $0.5 million decrease in professional fees.
Interest Expense, net
Interest expense, net decreased by $0.7 million during the three months ended March 31, 2010,
compared to the same period in the prior year, reflecting a decrease in borrowings and rates paid
on borrowings during the period. The weighted average interest rates for the three months ended
March 31, 2010 and 2009 were 4.7% and 4.8% respectively, which included the impact of interest rate
swaps on 73% and 68% of our term debt, respectively.
Income Tax Expense
Income tax expense was $26.0 million for the three months ended March 31, 2010, resulting in
an effective tax rate of 38.8%, primarily as a result of the current mix of income from multiple
tax jurisdictions and currency fluctuations. Income tax expense was $15.9 million for the three
months ended March 31, 2009, resulting in an effective tax rate of 25.2%, primarily due to the
resolution of tax audits.
Net Income
Our net income decreased by $6.1 million, or 13%, to $41.0 million during the three months
ended March 31, 2010, compared to the same period in the prior year, primarily as a result of a
$10.1 million increase in income tax expense, a decrease in Company restaurant margin of $2.6
million and a $2.1 million increase in selling, general and administrative expenses. These factors
were partially offset by an increase in franchise revenues of $5.0 million and an increase of $3.2
million in other operating income, net.
33
Results of Operations for the Nine Months Ended March 31, 2010 and 2009
The following table presents our results of operations for the nine months ended March 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
Amount |
|
|
Amount |
|
|
(Decrease) |
|
|
|
(In millions, except per share data) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues |
|
$ |
1,385.2 |
|
|
$ |
1,418.9 |
|
|
|
(2 |
)% |
Franchise revenues |
|
|
408.9 |
|
|
|
404.5 |
|
|
|
1 |
% |
Property revenues |
|
|
85.1 |
|
|
|
84.1 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,879.2 |
|
|
|
1,907.5 |
|
|
|
(1 |
)% |
Company restaurant expenses |
|
|
1,209.1 |
|
|
|
1,239.6 |
|
|
|
(2 |
)% |
Selling, general and administrative expenses
(1) |
|
|
374.7 |
|
|
|
366.2 |
|
|
|
2 |
% |
Property expenses |
|
|
44.7 |
|
|
|
42.1 |
|
|
|
6 |
% |
Other operating (income) expense, net (1) |
|
|
0.6 |
|
|
|
7.9 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
1,629.1 |
|
|
|
1,655.8 |
|
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
250.1 |
|
|
|
251.7 |
|
|
|
(1 |
)% |
Interest expense |
|
|
37.4 |
|
|
|
44.2 |
|
|
|
(15 |
)% |
Interest income |
|
|
(0.8 |
) |
|
|
(2.2 |
) |
|
|
(64 |
)% |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
36.6 |
|
|
|
42.0 |
|
|
|
(13 |
)% |
Income before income taxes |
|
|
213.5 |
|
|
|
209.7 |
|
|
|
2 |
% |
Income tax expense |
|
|
75.7 |
|
|
|
68.5 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
137.8 |
|
|
$ |
141.2 |
|
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic |
|
$ |
1.02 |
|
|
$ |
1.05 |
|
|
|
(3 |
)% |
Earnings per share diluted |
|
$ |
1.00 |
|
|
$ |
1.03 |
|
|
|
(3 |
)% |
Weighted average shares basic |
|
|
135.6 |
|
|
|
134.8 |
|
|
|
|
|
Weighted average shares diluted |
|
|
137.4 |
|
|
|
136.8 |
|
|
|
|
|
|
|
|
(1) |
|
Certain prior year amounts have been reclassified from other operating (income) expense, net to general and
administrative expenses. |
Revenues
Company restaurant revenues
Total Company restaurant revenues decreased by $33.7 million, or 2%, to $1,385.2 million for
the nine months ended March 31, 2010, compared to the same period in the prior year, primarily due
to negative worldwide Company comparable sales of 2.6% (in constant currencies). This decrease was
partially offset by $15.6 million of favorable impact from the movement of currency exchange rates
and the net increase in Company restaurant count, primarily due to the acquisition of 35 franchise
restaurants in Singapore.
In the U.S. and Canada, Company restaurant revenues decreased by $34.1 million, or 3%, to
$967.0 million for the nine months ended March 31, 2010, compared to the same period in the prior
year. This decrease was the result of negative Company comparable
34
sales growth in the U.S. and Canada of 2.7% (in constant currencies), primarily driven by negative Company comparable sales in
the U.S., partially offset by positive Company comparable sales in Canada. Company restaurant
revenues were also adversely impacted by a net decrease of 24 Company restaurants during the
trailing twelve-month period, including the net refranchising of 25 Company restaurants as part of
our ongoing portfolio management initiative. These factors were partially offset by $8.0 million
of favorable impact from the movement of currency exchange rates in Canada.
Company restaurant revenues in EMEA/APAC remained relatively unchanged at $372.9 million for
the nine months ended March 31, 2010, compared to the same period in the prior year, due to
negative Company comparable sales growth in EMEA/APAC of 2.0% (in constant currencies), primarily
driven by negative Company comparable sales in Germany and the U.K., partially offset by positive
Company comparable sales growth in Spain and U.K. This decrease was offset by $10.2 million of
favorable impact from the movement of currency exchange rates and the net increase of 37 Company
restaurants during the trailing twelve-month period.
During the nine months ended March 31, 2010, Company restaurant revenues in Latin America
decreased by $1.2 million, or 3%, to $45.3 million compared to the same period in the prior year,
primarily due to negative Company comparable sales of 5.2% (in constant currencies) and $2.6
million of unfavorable impact from the movement of currency exchange rates, partially offset by a
net increase of seven Company restaurants during the trailing twelve-month period.
Franchise revenues
Total franchise revenues increased by $4.4 million, or 1%, to $408.9 million for the nine
months ended March 31, 2010, compared to the same period in the prior year. Total franchise
revenues increased as a result of $5.5 million of favorable impact from the movement of currency
exchange rates, the net increase in franchise restaurant count and a higher effective royalty rate
in the U.S. partially offset by the unfavorable impact of negative worldwide franchise comparable
sales of 2.9% (in constant currencies).
In the U.S. and Canada, franchise revenues decreased by $7.3 million, or 3%, to $233.7
million for the nine months ended March 31, 2010, compared to the same period in the prior year.
This decrease was primarily the result of negative franchise comparable sales growth in the U.S.
and Canada of 4.9% (in constant currencies), primarily driven by negative franchise comparable
sales in the U.S., partially offset by positive franchise comparable sales in Canada. These factors
were partially offset by a net increase of 59 franchise restaurants during the trailing
twelve-month period and an increase in the effective royalty rate in the U.S. The impact from the
movement of currency exchange rates was not significant in this segment for the period.
Franchise revenues in EMEA/APAC increased by $12.8 million, or 10%, to $140.4 million for the
nine months ended March 31, 2010, compared to the same period in the prior year. This increase was
primarily driven by $4.9 million of favorable impact from the movement of currency exchange rates,
the net increase in franchise restaurants of 180 during the trailing twelve-month period ended
March 31, 2010 and positive franchise comparable sales growth of 1.4% (in constant currencies),
reflecting strong performance in markets such as Spain, Turkey, Australia, New Zealand and Korea.
During the nine months ended March 31, 2010, franchise revenues in Latin America decreased by
$1.1 million, or 3%, to $34.8 million, compared to the same period in the prior year, primarily the
result of negative franchise comparable sales growth of 2.8% (in constant currencies). These
factors were partially offset by the net increase in franchise restaurants during the trailing
twelve-month period and a $0.2 million favorable impact from the movement of currency exchange
rates.
Property Revenues
Total property revenues increased by $1.0 million, or 1%, to $85.1 million for the nine months
ended March 31, 2010, compared to the same period in the prior year. Total property revenues
increased as a result of $0.3 million of favorable impact from the movement of currency exchange
rates for the nine month period, and the net effect of changes to our property portfolio, which
includes the impact of the refranchising of Company restaurants and opening of new restaurants
leased to franchisees. These factors were partially offset by decreased revenues from percentage
rents as a result of negative franchise comparable sales in the U.S.
In the U.S. and Canada, property revenues increased by $2.6 million, or 4%, to $67.6 million
for the nine months ended March 31, 2010, compared to the same period in the prior year. This
increase was primarily due to the net effect of changes to our property portfolio, partially offset
by decreased revenues from percentage rents as a result of negative franchise comparable sales
growth.
35
Property revenues in EMEA/APAC decreased by $1.6 million, or 8%, to $17.5 million for the nine
months ended March 31, 2010, compared to the same period in the prior year, due to a reduction in
the number of properties in our portfolio. The impact from the movement of currency exchange rates
was not significant for the nine-month period.
Operating Costs and Expenses
The Company benefited from decreases in total food, paper and product costs, both in actual
dollars and as a percentage of Company restaurant revenues, for the nine months ended March 31,
2010, compared to the same period in the prior year. In addition, total payroll and employee
benefits costs also decreased, both in actual dollars and as a percentage of Company restaurant
revenues, for the period primarily due to improvements in variable labor controls and scheduling in
our U.S. restaurants. Although total occupancy and other operating costs also decreased in actual
dollars for the period, these costs increased as a percentage of Company restaurant revenues
primarily due to the adverse impact of sales deleverage on our fixed labor costs due to negative
Company comparable sales across all segments.
Food, paper and product costs
Total food, paper and product costs decreased by $19.1 million, or 4%, to $437.8 million
during the nine months ended March 31, 2010, compared to the same period in the prior year,
primarily as a result of the impact of negative worldwide Company comparable sales growth, which
resulted in reduced purchasing levels, benefits realized from changes in product specifications in
the U.S. and Canada, lower commodity costs in the U.S. and Canada for the first two quarters of
fiscal 2010 and increased vendor rebates in the U.S. and Canada. These factors were partially
offset by the unfavorable impact from the movement of currency exchange rates of $4.4 million, a
net increase of 20 Company restaurants during the twelve months ended March 31, 2010, including the
acquisition of 35 restaurants from a franchisee in Singapore, and higher commodity costs in
EMEA/APAC and Latin America during the first two quarters of fiscal 2010. In Canada, Mexico and
the U.K., our suppliers purchase goods in currencies other than the local currency in which they
operate and pass on all, or a portion of the currency exchange impact to us. We refer to this as
the negative currency exchange impact of cross border purchases, which contributed to the increase
in our food, paper and product costs in Mexico and the U.K.
As a percentage of Company restaurant revenues, total food, paper and product costs decreased
by 0.6% to 31.6% during the nine month period, primarily due to the positive factors noted above as
well as the benefits realized from strategic pricing initiatives across all segments. These
decreases were partially offset by the negative impact of value promotions on our gross profit
percentage.
In the U.S. and Canada, food, paper and product costs decreased by $21.0 million, or 6% to
$312.3 million during the nine months ended March 31, 2010, compared to the same period in the
prior year, primarily as a result of the impact of negative Company comparable sales growth in the
U.S., which resulted in reduced purchasing levels, the net reduction of 24 Company restaurants,
including the net refranchising of 25 Company restaurants, during the trailing twelve months ended
March 31, 2010, benefits realized from changes in product specifications, increased vendor rebates
and lower commodity costs during the first two quarters of fiscal 2010. These factors were
partially offset by the unfavorable impact from the movement of currency exchange rates in Canada
of $2.6 million and higher beef prices during the third quarter of fiscal 2010.
Food, paper and product costs in the U.S. and Canada as a percentage of Company restaurant
revenues decreased by 1.0% to 32.3%, primarily due to the positive factors noted above as well as
the benefits realized from strategic pricing initiatives, partially offset by the negative impact
of the $1 1/4 lb. Double Cheeseburger promotion in the U.S. on our gross profit percentage. However,
our gross profit percentage improved during the nine-month period because of strategic pricing
initiatives and, in the third quarter, a more balanced product mix in the U.S. with the national
launch of the Steakhouse XT burger line in February 2010, which mitigated the negative impact of
the $1 1/4 lb. Double Cheeseburger promotion on our gross profit percentage.
In EMEA/APAC, food, paper and product costs increased by $2.1 million, or 2%, to $107.8
million for the nine months ended March 31, 2010, compared to the same period in the prior year,
primarily as a result of the unfavorable impact from the movement of currency exchange rates of
$2.9 million, a net increase of 37 Company restaurants during the twelve months ended March 31,
2010, including the acquisition of 35 restaurants from a franchisee in Singapore, and increases in
commodity costs across all markets in the segment during the first two quarters of fiscal 2010,
including the negative currency exchange impact of cross border purchases in the
36
U.K. These factors were partially offset by the impact of negative Company comparable sales growth primarily in
Germany, which resulted in reduced purchasing levels. Food, paper and product costs as a percentage
of Company restaurant revenues increased by 0.3% to 28.9% primarily due to the increases in commodity costs noted above, partially offset
by the benefits realized from strategic pricing initiatives, primarily in EMEA.
In Latin America, food, paper and product costs remained relatively unchanged at $17.7 million
for the nine months ended March 31, 2010, compared to the same period in the prior year. The
favorable impact from the movement of currency exchange rates of $1.0 million and the impact of
negative Company comparable sales growth in Mexico were offset by higher commodity costs during the
first two quarters of fiscal 2010, including the negative currency exchange impact of cross border
purchases and the indexing by our vendors of local purchases to the U.S. dollar, and a net increase
of seven Company restaurants during the twelve months ended March 31, 2010. Food, paper and product
costs as a percentage of Company restaurant revenues increased by 0.9% to 39.1%, primarily as a
result of the higher commodity costs noted above, partially offset by the benefits realized from
strategic pricing initiatives.
Payroll and employee benefits costs
Total payroll and employee benefits costs decreased by $9.7 million, or 2%, to $429.4 million
during the nine months ended March 31, 2010, compared to the same period in the prior year. This
decrease was primarily due to improvements in variable labor controls and scheduling in our U.S.
restaurants, partially offset by the unfavorable impact from the movement of currency exchange
rates of $5.8 million and a net increase of 20 Company restaurants during the twelve months ended
March 31, 2010, including the acquisition of 35 restaurant from a franchisee in Singapore.
As a percentage of Company restaurant revenues, total payroll and employee benefits costs
remained relatively unchanged during the nine month period at 31.0%. The adverse impact of sales
deleverage on our fixed labor costs due to negative Company comparable sales across all segments
was offset by the improvements in variable labor controls and scheduling in our U.S. restaurants as
noted above.
In the U.S. and Canada, payroll and employee benefits costs decreased by $11.5 million, or 4%,
to $300.8 million during the nine months ended March 31, 2010, compared to the same period in the
prior year, primarily as a result of the net reduction of 24 Company restaurants, including the net
refranchising of 25 Company restaurants, during the trailing twelve-months ended March 31, 2010 and
improvements in variable labor controls and scheduling in our U.S. restaurants. Partially
offsetting these decreases was the unfavorable impact from the movement of currency exchange rates
of $2.6 million in Canada and minimum wage increases in certain U.S. markets. As a percentage of
Company restaurant revenues, payroll and employee benefits costs decreased by 0.1% to 31.1%
primarily as a result of the improvements in variable labor controls and scheduling in our U.S.
restaurants, partially offset by the adverse impact of sales deleverage on our fixed labor costs.
In EMEA/APAC, payroll and employee benefits costs increased by $1.8 million, or 2%, to $123.0
million during the nine months ended March 31, 2010, compared to the same period in the prior year,
primarily as a result of a $3.5 million unfavorable impact from the movement of currency exchange
rates, mostly in EMEA and a net increase of 37 Company restaurants during the twelve months ended
March 31, 2010, including the acquisition of 35 restaurants from a franchisee in Singapore.
Partially offsetting these increases were decreased labor costs in EMEA, primarily due to the
refranchising of six Company restaurants in Germany during the fourth quarter of fiscal 2009. As a
percentage of Company restaurant revenues, payroll and employee benefit costs increased by 0.3% to
33%, primarily due to the benefits realized from strategic pricing initiatives primarily in EMEA,
partially offset by the adverse impact of sales deleverage on our fixed labor costs due to negative
comparable sales in Germany.
There was no significant change in payroll and employee benefits costs in Latin America during
the nine months ended March 31, 2010 compared to the same period in the prior year.
Occupancy and other operating costs
Total occupancy and other operating costs decreased by $1.7 million, or 1%, to $341.9 million
during the nine months ended March 31, 2010, compared to the same period in the prior year,
primarily as a result of favorable adjustments to the self-insurance reserve in the U.S. and
Canada, lower utility costs, and the non-recurrence of start-up expenses associated with the
acquisition of franchise restaurants in the U.S. recorded in the prior year. These decreases were
partially offset by a $4.2 million unfavorable impact
37
from the movement of currency exchange rates, a net increase of 20 Company restaurants during the twelve months ended March 31, 2010, including
the acquisition of 35 restaurants from a franchisee in Singapore and increased start-up expenses
related to new restaurant openings in EMEA/APAC.
As a percentage of Company restaurant revenues, occupancy and other operating costs increased
during the nine month period by 0.5% to 24.7%, primarily as a result of the adverse impact of sales
deleverage on our fixed occupancy and other operating costs due to negative Company comparable
sales across all segments. This increase was partially offset by the benefits realized from
favorable adjustments to the self-insurance reserve in the U.S. and Canada, lower utility costs and
the non-recurrence of acquisition start-up expenses referred to above.
In the U.S. and Canada, occupancy and other operating costs decreased by $9.2 million, or 4%,
to $221.2 million during the nine months ended March 31, 2010, compared to the same period in the
prior year. This decrease was primarily driven by a net reduction of 24 Company restaurants,
including the net refranchising of 25 Company restaurants, during the trailing twelve months ended
March 31, 2010, favorable adjustments to the self-insurance reserve in the U.S., lower utility
costs and the non-recurrence of acquisition start-up expenses referred to above. These factors were
partially offset by increased depreciation expense due to a higher depreciable asset base over the
prior year and $2.0 million of unfavorable impact from the movement of currency exchange rates. As
a percentage of Company restaurant revenues, occupancy and other operating costs remained
relatively unchanged at 22.9%, primarily as a result of the benefits realized from adjustments to
our self-insurance reserve, lower utility and start-up expenses, offset by the adverse impact of
sales deleverage on our fixed occupancy and other operating costs.
In EMEA/APAC, occupancy and other operating costs increased by $7.2 million, or 7%, to $107.5
million during the nine months ended March 31, 2010, compared to the same period in the prior year,
primarily due to a $2.9 million unfavorable impact from the movement of currency exchange rates,
primarily in EMEA, a net increase of 37 Company restaurants during the twelve months ended March
31, 2010, including the acquisition of 35 restaurants from a franchisee in Singapore, an increase
in start-up expenses related to new restaurant openings and higher repair and maintenance costs,
primarily in Germany. As a percentage of Company restaurant revenues, occupancy and other operating
costs increased by 1.9% to 28.8%, primarily due to the adverse impact of sales deleverage on our
fixed occupancy and other operating costs as well as increased start-up expenses and higher repair
and maintenance costs as noted above.
In Latin America, occupancy and other operating costs increased by $0.3 million, or 2%, to
$13.2 million during the nine months ended March 31, 2010, compared to the same period in the prior
year, primarily attributable to a net increase of seven Company restaurants during the twelve
months ended March 31, 2010, partially offset by $0.7 million of favorable impact from the movement
of currency exchange rates, the non-recurrence of accelerated depreciation related to a single
Company restaurant closure in the prior year and lower utility costs. As a percentage of Company
restaurant revenues, occupancy and other operating costs increased by 0.3% to 29.1% primarily as a
result of the negative impact of sales deleverage on our fixed occupancy and other operating costs
partially offset by the non-recurrence of accelerated depreciation and lower utility costs.
Selling, general and administrative expenses
Selling expenses decreased by $1.4 million, or 2%, to $68.7 million for the nine months ended
March 31, 2010, compared to the same period in the prior year, primarily due to a $3.1 million
reduction in contributions to the marketing funds in our Company restaurant markets as a result of
lower sales at our Company restaurants. Partially offsetting this decrease was an increase of $0.8
million of higher local marketing expenditures aimed at driving incremental sales and a $0.7
million unfavorable impact from the movement of currency exchange rates.
General and administrative expenses increased by $9.9 million, or 3%, to $306.0 million for
the nine months ended March 31, 2010, largely driven by an increase in consulting fees of $6.3
million, primarily related to information technology initiatives, the unfavorable impact from the
movement of currency exchange rates of $4.5 million, salary and fringe benefit costs of $3.6
million, incremental depreciation expense of $1.9 million due to a higher depreciable asset base
compared to prior year, and share-based compensation of $1.5 million. These items were partially
offset by miscellaneous cost savings of $5.3 million and bad debt recoveries of $3.2 million.
38
Property Expenses
Total property expenses increased by $2.6 million, or 6%, to $44.7 million for the nine months
ended March 31, 2010, compared to the same period in the prior year, primarily attributable to
increased rent expense resulting from the net effect of changes to our
property portfolio in the U.S. These factors were partially offset by decreased rent expense
from a reduction in the number of properties leased to franchisees in EMEA.
Other operating (income) expense, net
Other operating expense, net, for the nine months ended March 31, 2010 of $0.6 million
includes a $3.5 million gain related to the refranchising of 12 Company restaurants in the U.S.,
and net gains of $0.5 million related to the remeasurement of foreign denominated assets and the
impact related to the use of foreign currency forward contracts used to hedge the currency exchange
impact on such assets. These gains were partially offset by $2.2 million of net losses related to
the disposal of property and expenses arising from restaurant closures, a $2.4 million charge
related to consumption tax in EMEA and a $0.7 million contract termination fee.
Other operating expense, net, for the nine months ended March 31, 2009 of $7.9 million
includes $1.5 million of charges associated with the acquisition of franchise restaurants from a
large franchisee in the U.S. and $7.5 million of net expense related to the remeasurement of
foreign denominated assets and the impact related to the use of foreign currency forward contracts
used to hedge the currency exchange impact on such assets. These expenses were partially offset by
a $3.5 million gain from the refranchising of Company restaurants in the U.S. and Canada.
Income from Operations
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Income from Operations: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
267.1 |
|
|
$ |
262.4 |
|
EMEA/APAC |
|
|
59.4 |
|
|
|
57.0 |
|
Latin America |
|
|
27.3 |
|
|
|
26.8 |
|
Unallocated |
|
|
(103.7 |
) |
|
|
(94.5 |
) |
|
|
|
|
|
|
|
Total income from operations |
|
$ |
250.1 |
|
|
$ |
251.7 |
|
|
|
|
|
|
|
|
Income from operations decreased by $1.6 million, or 1%, to $250.1 million during the nine
months ended March 31, 2010, compared to the same period in the prior year, primarily as a result
of a $8.5 million increase in selling, general and administrative expenses, a reduction in net
property revenue of $1.6 million, and a decrease in Company restaurant margin of $3.2 million,
partially offset by a $4.4 million increase in franchise revenues and a $7.3 million decrease in
other operating expense, net. (See Note 15 to the accompanying unaudited condensed consolidated
financial statements for segment information disclosures).
For the nine months ended March 31, 2010, the favorable impact on revenues from the movement
of currency exchange rates was partially offset by the unfavorable impact of currency exchange
rates on Company restaurant expenses and selling, general and administrative expenses, resulting in
a net favorable impact on income from operations of $1.4 million.
In the U.S. and Canada, income from operations increased by $4.7 million, or 2%, to $267.1
million during the nine months ended March 31, 2010, compared to the same period in the prior year,
primarily as a result of an increase in other operating income, net of $8.9 million and an increase
in Company restaurant margin of $7.6 million. These factors were partially offset by increase in
selling, general and administrative expenses of $1.8 million, a decrease in franchise revenues of
$7.3 million and a reduction in net property income of $1.8 million. The impact from the movement
of currency exchange rates was not significant.
39
In EMEA/APAC, income from operations increased by $2.4 million, or 4%, to $59.4 million during
the nine months ended March 31, 2010, compared to the same period in the prior year, primarily as a
result of an $12.8 million increase in franchise revenues and a $1.5 million decrease in selling,
general and administrative expenses, partially offset by decrease in Company restaurant margin of
$9.5 million and an increase in other operating expenses, net of $2.2 million. The increase
also reflects $1.2 million of favorable impact from the movement of currency exchange rates.
Due to challenging economic conditions in Germany, we assessed the recoverability of our
long-lived assets in each operating market in Germany during the quarter ended March 31, 2010.
Based on the results of our recoverability test, the undiscounted estimated future cash flows
exceeded the net book value of the related assets in each operating market and no impairment was
recorded.
Key assumptions used in the recoverability test included projections of comparable sales
growth, future economic expectations, as well as the successful implementation of certain marketing
and operating initiatives to improve business results. In the event that our economic expectations
are not met or our initiatives do not achieve anticipated results, estimated future cash flows
could be negatively impacted, which may result in a material impairment charge.
In Latin America, income from operations increased by $0.5 million, or 2%, to $27.3 million
during the nine months ended March 31, 2010, compared to the same period in the prior year,
primarily as a result of a $1.0 million decrease in selling, general and administrative expenses
and a decrease in other operating expenses, net of $0.5 million partially offset by a decrease in
Company restaurant margin of $1.3 million.
Our unallocated corporate expenses increased by $9.2 million during the nine months ended
March 31, 2010, compared to the same period in the prior year, primarily as a result of a $3.2
million increase in consulting fees, primarily related to information technology initiatives, a
$1.6 million increase in share-based compensation expense, a $1.5 million increase in depreciation
expense for corporate assets and increased employee benefits and severance expense of $1.5 million,
partially offset by a $1.0 million reduction in accrued incentive compensation.
Interest Expense, net
Interest expense, net decreased by $5.4 million during the nine months ended March 31, 2010,
compared to the same period in the prior year, primarily reflecting a decrease in rates paid on
borrowings during the period. The weighted average interest rates for the nine months ended March
31, 2010 and 2009 were 4.6% and 5.2% respectively, which included the impact of interest rate swaps
on 72% and 70% of our term debt, respectively.
Income Tax Expense
Income tax expense was $75.7 million for the nine months ended March 31, 2010, resulting in an
effective tax rate of 35.5%, primarily as a result of the current mix of income from multiple tax
jurisdictions and currency fluctuations. Income tax expense was $68.5 million for the nine months
ended March 31, 2009, resulting in an effective tax rate of 32.7%, primarily due to currency
fluctuations, the current mix of income from multiple tax jurisdictions and the resolution of tax
audits.
Net Income
Our net income decreased by $3.4 million, or 2%, to $137.8 million during the nine months
ended March 31, 2010, compared to the same period in the prior year, primarily as a result of an
$8.5 million increase in selling, general and administrative expenses, a $7.2 million increase in
income tax expense the benefit, a decrease in Company restaurant margin of $3.2 million and a
reduction in net property revenue of $1.6 million. These factors were partially offset by a
decrease of $7.3 million in other operating expense, net, a $5.4 million decrease in interest
expense, net and an increase in franchise revenues of $4.4 million.
40
Liquidity and Capital Resources
Overview
Cash provided by operations was $199.3 million during the nine months ended March 31, 2010,
compared to $211.4 million during the nine months ended March 31, 2009.
During the nine months ended March 31, 2010, we borrowed and repaid $38.5 million under our
revolving credit facility. We also repaid $46.9 million of our Term Loan A debt. The maturity dates
of Term Loan A, Term Loan B-1 and any amounts drawn under the revolving credit facility are June
2011, June 2012 and June 2011, respectively. Our leverage ratio, as defined by our credit
agreement, was 1.6x and 1.7x as of March 31, 2010 and June 30, 2009. The weighted average interest
rate for the nine months ended March 31, 2010 and 2009 was 4.6% and 5.2%, respectively, which
included the impact of interest rate swaps on 72% and 70% of our term debt, respectively.
We declared and paid three quarterly dividends of $0.0625 per share of common stock during the
nine months ended March 31, 2010, resulting in $25.6 million of cash payments to shareholders of
record.
We had cash and cash equivalents of $158.1 million as of March 31, 2010. In addition, as of
March 31, 2010, we had a borrowing capacity of $119.4 million under our $150.0 million revolving
credit facility.
We expect that cash on hand, cash flow from operations and our borrowing capacity under our
revolving credit facility will allow us to meet cash requirements, including capital expenditures,
tax payments, dividends and debt service payments over the next twelve months and for the
foreseeable future.
Comparative Cash Flows
Operating Activities
Cash provided by operating activities was $199.3 million during the nine months ended March
31, 2010, compared to cash provided by operating activities of $211.4 million during the nine
months ended March 31, 2009. The $199.3 million provided during the nine months ended March 31,
2010 includes net income of $137.8 million, including non-cash items such as $79.9 million of
depreciation and amortization, $13.0 million of share-based compensation, and a $14.1 million loss
on the re-measurement of foreign denominated transactions, partially offset by a $5.8 million in
gains on refranchising and asset dispositions. In addition, cash provided by operating activities
was offset by a usage of cash from a change in working capital of $37.1 million. The $211.4 million
provided during the nine months ended March 31, 2009 includes net income of $141.2 million,
including non-cash items such as a $77.1 million loss on the re-measurement of foreign denominated
transactions, offset by a usage of cash from a change in working capital of $50.7 million.
Investing Activities
Cash used for investing activities was $84.9 million during the nine months ended March 31,
2010 and $170.8 million during the nine months ended March 31, 2009. The $84.9 million cash usage
during the nine months ended March 31, 2010 includes $90.1 million of payments for property and
equipment and $13.6 million used for acquisitions of franchise restaurants, partially offset by
$10.0 million cash received from refranchisings, asset dispositions and restaurant closures, $6.1
million from return of investment on direct financing leases and $2.7 million from other investing
activities. The $170.8 million cash usage during the nine months ended March 31, 2009 includes
$67.5 million used for acquisitions of franchise restaurants, $124.6 million of payments for
property and equipment and $4.4 million for other investing activities, partially offset by
$19.8 million from asset dispositions and restaurant closures and $5.9 million from return of
investment on direct financing leases.
Capital expenditures for new restaurants include the costs to build new Company restaurants,
as well as properties for new restaurants that we lease to franchisees. Capital expenditures for
existing restaurants consist of the purchase of real estate related to existing restaurants, as
well as renovations to Company restaurants, including restaurants acquired from franchisees,
investments in new equipment and normal annual capital investments for each Company restaurant to
maintain its appearance in accordance with our standards. Capital expenditures for existing
restaurants also include investments in improvements to properties we lease and sublease to
franchisees, including contributions we make toward leasehold improvements completed by franchisees
on properties we control.
41
Other capital expenditures include investments in information technology
systems and corporate facilities. The following table presents capital expenditures by type of
expenditure:
|
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|
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|
|
|
For the |
|
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In millions) |
|
New restaurants |
|
$ |
24.5 |
|
|
$ |
38.8 |
|
Existing restaurants |
|
|
53.5 |
|
|
|
71.7 |
|
Other, including corporate |
|
|
12.1 |
|
|
|
14.1 |
|
|
|
|
|
|
|
|
Total |
|
$ |
90.1 |
|
|
$ |
124.6 |
|
|
|
|
|
|
|
|
We expect capital expenditures of approximately $150 million to $175 million in fiscal 2010 to
develop new restaurants, to fund our restaurant reimaging program and to make improvements to
restaurants we acquire, to fund operational initiatives in our restaurants and for other corporate
expenditures.
Financing Activities
Cash used by financing activities was $73.9 million during the nine months ended March 31,
2010, compared to $53.3 million cash provided during the nine months ended March 31, 2009. Cash
used by financing activities during the nine months ended March 31, 2010 primarily consisted of
principal repayments of $38.5 million under our revolving credit facility, $46.9 million of
payments under our Term Loan A debt, repayments of capital leases of $3.8 million, three quarterly
cash dividend payments totaling $25.6 million and the repurchase of common stock of $2.4 million
primarily in connection with the settlement of PBRS granted in August 2006, offset by $38.5 million
in proceeds from borrowings under the revolving credit facility, $2.0 million of excess tax
benefits from exercises of stock options and settlement of PBRS and $2.8 million in proceeds from
stock option exercises. Cash used by financing activities during the nine months ended March 31,
2009 primarily consisted of principal repayments on the revolving credit facility of $104.4
million, repayments of capital leases of $3.7 million, three quarterly cash dividend payments
totaling $25.4 million and the repurchase of common stock of $20.0 million, partially offset by
$94.4 million in proceeds from borrowings under the revolving credit facility, $3.5 million of
excess tax benefits from share-based compensation and $2.4 million in proceeds from stock option
exercises.
Commitments and Off-Balance Sheet Arrangements
For information on Commitments and Off-Balance Sheet Arrangements, see Note 14 to our
unaudited condensed consolidated financial statements.
New Financial Accounting Standards Board (FASB) Accounting Standards Updates Issued But Not
Yet Adopted
In June 2009, the FASB issued ASC topic 860-20, Sale of Financial Assets (formerly SFAS 166,
Accounting for Transfers of Financial Assets an Amendment of FASB Statement No. 140 (SFAS 166).
ASC 860-20 amends ASC Topic 860 by removing the concept of a qualifying special-purpose entity
(QSPE) and eliminates the exception from applying FASB ASC 810-10 Consolidation of Variable
Interest Entities, to qualifying special-purpose entities. Furthermore, it establishes specific
conditions to account for a transfer of financial assets as a sale, changes the requirements for
derecognizing financial assets and requires additional disclosure. ASC topic 860-20 will be
effective as of the beginning of the first annual reporting period that begins after November 15,
2009, which for us will be our fiscal year beginning on July 1, 2010. We do not anticipate that the
adoption of ASC topic 860-20 will have a significant impact on the Company.
In June 2009, the FASB issued ASC topic 810, Consolidation (formerly SFAS 167, Amendments
to FASB Interpretation No. 46(R) (SFAS 167)). ASC topic 810 is a revision to pre-existing guidance
that requires an enterprise to perform an analysis to identify the primary beneficiary of a
Variable Interest Entity (VIE), a qualitatively on-going re-assessment on whether the enterprise
42
is the primary beneficiary of the VIE and additional disclosures that will provide users of
financial statements with more transparent information about an enterprises involvement in a VIE.
In addition, this statement revises the methods utilized for determining whether an entity is a VIE
and the events that trigger a reassessment of whether an entity is a VIE. ASC topic 810 will be
effective as of the beginning of the first annual reporting period that begins after November 15,
2009, which for us will be our fiscal year beginning on July 1, 2010. We do not anticipate that the
adoption of ASC topic 810 will have a significant impact on the Company.
In December 2008, the FASB issued ASC topic 715-20, Compensation Retirement Benefits
(formerly FSP No. FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets.
ASC topic 715-20 provides guidance on an employers disclosures about plan assets of a defined
benefit pension or other postretirement plan. ASC topic 715-20 requires entities to disclose more
information about how investment allocation decisions are made, more information about major
categories of plan assets, including concentrations of risk and fair-value measurements, and the
fair-value techniques and inputs used to measure plan assets. ASC topic 715-20 also includes a
technical amendment to pre-existing guidance that requires a nonpublic entity to disclose net
period benefit cost for each annual period for which a statement of income is presented. ASC topic
715-20 is effective for financial statements issued for fiscal years ending after December 15,
2009, which for us will be our fiscal year ending June 30, 2010. We do not anticipate that the
adoption of ASC topic 715-20 will have a significant impact on the Company.
43
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures about Market Risk |
Market Risk
There were no material changes during the nine months ended March 31, 2010 to the disclosures
made in Part II, Item 7A of the Companys Annual Report on Form 10-K for the year ended June 30,
2009, except as noted below.
We have entered into foreign currency forward contracts intended to economically hedge our
income statement exposure to fluctuations in exchange rates associated with our intercompany loans
denominated in foreign currencies and certain foreign currency-denominated assets. These forward
contracts are primarily denominated in Euros but are also denominated in British Pounds, Canadian
Dollars and Singapore Dollar. Fluctuations in the value of these forward contracts are recognized
in our condensed consolidated statements of income as incurred. However, the fluctuations in the
value of these forward contracts largely offset the impact of changes in the value of the
underlying risk that they are intended to hedge, which is also reflected in our condensed
consolidated statements of income. As of March 31, 2010, we had foreign currency forward contracts
to hedge the net U.S. dollar equivalent of $388.6 million of intercompany loans and foreign
currency-denominated assets. This U.S. dollar equivalent by currency is as follows: $302.0
million in Euros; $48.3 million in British Pounds; $22.6 million in Canadian Dollars; and $15.7
million in Singapore Dollar.
We have also entered into foreign currency forward contracts to hedge our exposure to
fluctuations in exchange rates associated with the receipt of forecasted foreign-denominated
royalty cash flows. These forward contracts are denominated in Canadian Dollars and Australian
Dollars. We have designated these forward contracts as cash flow hedges; as a result, the change in
fair value of these forward contracts are recognized in stockholders equity until the forecasted
foreign-denominated royalties are recognized as income in our consolidated statements of income,
and the related foreign-denominated royalty receivable is settled in the following month, at which
time the applicable portion of the fair value of the forward contract is reclassified from
stockholders equity to our condensed consolidated statements of income. At March 31, 2010, we had
foreign currency forward contracts to hedge the U.S. dollar equivalent of $1.0 million in
Australian Dollars and $0.5 million in Canadian Dollars of forecasted foreign-denominated royalty
cash flows.
We are exposed to losses in the event of nonperformance by counterparties on these forward
contracts. We attempt to minimize this risk by selecting counterparties based on credit ratings,
limiting our exposure to any single counterparty and regularly monitoring our market position with
each counterparty.
As of March 31, 2010, we had interest rate swaps with an aggregate notional value of $575.0
million that qualify as cash flow hedges. A 1% change in interest rates on our existing debt of
$771.2 million would result in an increase or decrease in interest expense of approximately $1.9
million in a given year, as we have hedged $575.0 million of our future interest payments.
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Item 4. |
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Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the participation of management,
including the Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of the Companys disclosure controls and procedures as of
March 31, 2010. Based on that evaluation, the CEO and CFO concluded that the Companys disclosure
controls and procedures were effective as of such date.
Internal Control Over Financial Reporting
The Companys management, including the CEO and CFO, confirm that there were no changes in the
Companys internal control over financial reporting during the fiscal quarter ended March 31, 2010
that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
44
Cautionary Note Regarding Forward-Looking Statements
Certain statements made in this report that reflect managements expectations regarding future
events and economic performance are forward-looking in nature and, accordingly, are subject to
risks and uncertainties. These forward-looking statements include statements regarding our beliefs
and expectations regarding our restaurant ownership mix and the ability of our franchisees to fund
the capital required to grow and maintain our system; our beliefs and expectations regarding our
intention to focus on sales growth and restaurant profitability and expand our large international
platform; our expectations regarding restaurant openings/closures; our intention to accelerate new
restaurant development and expansion; our intention to continue to employ innovative marketing
strategies and offer superior value and quality; our ability to use proactive portfolio management
to drive financial performance and development; our expectations regarding the shift in our product
mix and our ability to mitigate the impact of this product shift with our barbell menu strategy;
our expectations regarding the cost of our U.S. food basket in the fourth quarter of fiscal 2010;
our estimates regarding our liquidity, capital expenditures in fiscal year 2010 and sources of
both, and our ability to fund our future operations, obligations and strategic initiatives; our
assumptions and expectations regarding the recoverability of long-lived assets in Germany; our
estimates regarding the fulfillment of certain volume purchase commitments; our expectations
regarding the impact of our hedging contracts on our income statements during fiscal year 2010; our
expectations regarding unrecognized tax benefits; and our expectations regarding the impact of new
accounting pronouncements. 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:
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|
|
Global economic or other business conditions that may affect the desire or
ability of our customers to purchase our products such as inflationary pressures, higher
unemployment rates, increases in gas prices, declines in median income growth, consumer
confidence and consumer discretionary spending and changes in consumer preferences, 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; |
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|
Risks related to adverse weather conditions and other uncontrollable events, and
the impact of such events on our operating results; |
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|
Our ability to compete domestically and internationally in an intensely
competitive industry; |
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|
Our ability to successfully implement our international growth strategy and
risks related to our international operations; |
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|
|
|
Risks arising from the significant and rapid fluctuations in
the currency exchange markets and the decisions and positions that we take to hedge such
volatility; |
|
|
|
|
Risks related to continued losses in our German business, including the
potential for an impairment of our long-lived assets and a valuation allowance on a portion
of our deferred tax asset balance, which would have a negative impact on our future
effective income tax rate, operating results and financial condition; |
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|
Our ability and the ability of our franchisees to manage increases in operating
costs, including future mandated health care costs, if we or our franchisees choose not to
pass, or cannot pass, these increased costs on to our guests; |
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Our relationship with, and the success of, our franchisees; |
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The effectiveness of our marketing and advertising programs and franchisee
support of these programs; |
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|
Risks related to franchisee financial distress due to issues arising with their
Burger King® restaurants or losses from other businesses, which could result in, among other
things, restaurant closures, delayed or reduced payments to us of royalties and rents and
increased exposure to third parties, such as landlords;
|
45
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|
|
The ability of our franchisees to refinance their business or to obtain new
financing for development, restaurant remodels and equipment initiatives on acceptable terms
or at all, and the strength of the financial institutions that have historically provided
financing to franchisees; |
|
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|
Risks related to disruptions and catastrophic events, including disruption in
the financial markets, war, terrorism and other international conflicts, public health
issues such as the H1N1 flu pandemic, and natural disasters, and the impact of such events
on our operating results; |
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|
Risks related to food safety, including foodborne illness and food tampering,
and the safety of toys and other promotional items available in our restaurants; |
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Risks related to the loss of any of our major distributors, particularly in
those international markets where we have a single distributor, and interruptions in the
supply, or increases in the cost, of necessary products to us due to adverse weather and
climate conditions or otherwise; |
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|
Our ability to execute on our reimaging program in the U.S. and Canada to
increase sales and profitability and our ability to successfully execute our portfolio
management strategy; |
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|
Our ability to implement our growth strategy and strategic initiatives given
restrictions imposed by our senior credit facility; |
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|
Risks related to the ability of counterparties to our secured credit facility,
interest rate swaps and foreign currency forward contracts to fulfill their commitments
and/or obligations; |
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|
Risks related to interruptions or security breaches of our computer systems and
risks related to the lack of integration of our worldwide technology systems; |
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|
Our ability to continue to extend our hours of operation, at least in the U.S.
and Canada, to capture a larger share of both the breakfast and late night dayparts; |
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|
Changes in consumer perceptions of dietary health and food safety and negative
publicity relating to our products; |
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|
Our ability to retain or replace executive officers and key members of
management with qualified personnel; |
|
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|
|
Risks related to changes in the mix of earnings in countries with different
statutory tax rates, changes in the valuation of deferred tax assets and liabilities and
continued losses in certain international Company restaurant markets that could trigger a
valuation allowance or negatively impact our ability to utilize foreign tax credits to
offset our U.S. income taxes; |
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Risks related to the reasonableness of our tax estimates, including sales,
excise, GST, VAT and other taxes; |
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|
Our ability to realize our expected tax benefits from the realignment of our
European and Asian businesses; |
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Our ability to manage changing labor conditions in the U.S. and internationally; |
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Adverse legal judgments, settlements or pressure tactics; and |
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Adverse legislation or regulation. |
These risks are not exhaustive and may not include factors which could adversely impact our
business and financial performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible for our management to
predict all risk factors, nor can we assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
46
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.
47
Part II Other Information
Item 1. Legal Proceedings
Castenada v. Burger King Corp. and Burger King Holdings, Inc., No. CV08-4262 (U.S.
District Court for the Northern District of California). On September 10, 2008, a class action
lawsuit was filed against the Company in the United States District Court for the Northern District
of California. The complaint alleged that all 92 Burger King restaurants in California leased by
the Company and operated by franchisees violate accessibility requirements under federal and state
law. In September 2009, the court issued a decision on the plaintiffs motion for class
certification. In its decision, the court limited the class action to the 10 restaurants visited by
the named plaintiffs, with a separate class of plaintiffs for each of the 10 restaurants and 10
separate trials. In March 2010, the Company agreed to settle this lawsuit with respect to the 10
restaurants by agreeing to pay $7.5 million, with the Company funding $2.5 million and the balance
funded by the Companys insurer. The insurer will also reimburse the Company for $1.5 million in
legal and consulting fees. The settlement is subject to final court approval. In April 2010, the
Company received a demand from the law firm representing the plaintiffs in the class action
lawsuit, notifying the Company that the firm was prepared to bring a class action covering the
other 82 restaurants. If a lawsuit is filed, the Company intends to vigorously defend against all
claims in the lawsuit, but the Company is unable to predict the ultimate outcome of this
litigation.
National Franchisee Association v. Burger King Corporation and The Coca-Cola Company,
No. 09 CV 939 W NLS and National Franchisee Association v. Burger King Corporation and Dr
Pepper Snapple Group f/k/a Dr Pepper/Seven Up, Inc., Case No. 09 CV 939 W NLS (U.S. District
Court for the Southern District of California). The National Franchisee Association, Inc. filed
these two class action lawsuits on May 4, 2009, claiming to represent Burger King franchisees and
alleging that BKC, The Coca-Cola Company and Dr Pepper Snapple Group had no right to amend their
existing supply agreements to reduce certain payments, known as restaurant operating funds, to
Burger King restaurants without the franchisees consent. In February 2010, the Company and a
group of franchisees formed a task force to resolve the dispute. The task force came to a
marketing solution that rendered the cases moot, and the parties dismissed the lawsuits.
Item 1A. Risk Factors
Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2009,
filed on August 27, 2009, as supplemented by Item 1A of Part II of our Quarterly Report for the
three months ended September 30, 2009 filed on November 2, 2009 and our Quarterly Report for the
three months ended December 31, 2009 filed on February 5, 2010, includes a detailed discussion of
the risk factors that could materially affect our business, financial condition or future
prospects.. We encourage you to read these risk factors in their entirety.
Item 5. Other Information
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers
Item 5.02(e)
Effective April 1, 2010, Burger King Corporation (BKC) entered into an Amended and Restated
Employment Agreement with John W. Chidsey, the Companys Chairman and Chief Executive Officer (the
New Employment Agreement). The New Employment Agreement includes certain amendments to the
Amended and Restated Employment Agreement dated as of December 16, 2008 between BKC and Mr. Chidsey
primarily to comply with Section 162(m) of the Internal Revenue Code (the Code), as follows: (i)
in the event of a change in control (as defined in the New Employment Agreement) of the Company,
the Company performance goals applicable to performance-based restricted stock or any other
equity-based award that is intended to qualify as qualified performance-based compensation
(within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder) will
be deemed to be met at the target level as of the effective date of the change in control, (ii) as
previously reported in the Companys Quarterly Report on Form 10-Q for the three months ended
December 31, 2009 filed on February 5, 2010, Mr. Chidseys annual perquisite allowance was
increased by $13,500 (from $50,000 to $63,500), and (iii) the severance calculation in the event
Mr. Chidseys employment is terminated without cause or he terminates his employment with good
reason or due to his death or disability (as such terms are defined in the New Employment
Agreement) will be an amount equal to four times his annual
48
base
salary plus two times his annual perquisite allowance (or six times his annual base salary and three times his annual
perquisite allowance, if his termination occurs after a change in control), rather than an amount
equal to two times his annual base salary, annual perquisite allowance and target annual cash bonus
(or three times, if his termination occurs after a change in control of the Company). The
foregoing change to the severance calculation was made solely to comply with Section 162 (m) of the
Code, and will not result in increased severance compensation since Mr. Chidseys target annual
cash bonus is 100% of his annual base salary. All other material items of Mr. Chidseys prior
Employment Agreement remained the same.
A copy of the Amended and Restated Employment Agreement dated as of April 1, 2010 between Burger
King Corporation and John W. Chidsey is filed herewith as Exhibit 10.59.
Item 6. Exhibits
The exhibits listed in the accompanying index are filed as part of this report.
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Exhibit |
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Number |
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Description |
10.59
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Amended and Restated Employment Agreement dated as of April 1,
2010 between Burger King Corporation and John W. Chidsey |
|
|
|
31.1
|
|
Certification of Chief Executive Officer of Burger King Holdings,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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|
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31.2
|
|
Certification of Chief Financial Officer of Burger King Holdings,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer of Burger King Holdings,
Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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|
|
32.2
|
|
Certification of the Chief Financial Officer of Burger King
Holdings, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
BURGER KING HOLDINGS, INC.
(Registrant)
|
|
Date: April 30, 2010 |
By: |
/s/ Ben K. Wells
|
|
|
|
Name: |
Ben K. Wells |
|
|
|
Title: |
Chief Financial Officer
(principal financial and accounting officer)
(duly authorized officer) |
|
50
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.59
|
|
Amended and Restated Employment Agreement dated as of April 1,
2010 between Burger King Corporation and John W. Chidsey |
|
|
|
31.1
|
|
Certification of Chief Executive Officer of Burger King Holdings,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer of Burger King Holdings,
Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer of Burger King Holdings,
Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of the Chief Financial Officer of Burger King
Holdings, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
51