BURGER KING HOLDINGS, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q
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(Mark One) |
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2008 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number: 001-32875
BURGER KING HOLDINGS, INC.
(Exact Name of Registrant as Specified in 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 is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See 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 October 31, 2008, there were 134,652,685 shares of the registrants Common Stock outstanding.
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
2
PART I Financial Information
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Item 1. |
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Financial Statements |
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
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As of |
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September 30, |
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June 30, |
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2008 |
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2008 |
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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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$ |
118 |
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$ |
166 |
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Trade and notes receivable, net |
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125 |
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139 |
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Prepaids and other current assets |
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91 |
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54 |
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Deferred income taxes, net |
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30 |
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45 |
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Total current assets |
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364 |
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404 |
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Property and equipment, net |
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961 |
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961 |
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Intangible assets, net |
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1,077 |
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1,055 |
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Goodwill |
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27 |
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27 |
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Net investment in property leased to franchisees |
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132 |
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135 |
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Other assets, net |
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101 |
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105 |
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Total assets |
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$ |
2,662 |
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$ |
2,687 |
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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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$ |
94 |
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$ |
130 |
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Accrued advertising |
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90 |
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77 |
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Other accrued liabilities |
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214 |
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242 |
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Current portion of long term debt and capital leases |
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23 |
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7 |
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Total current liabilities |
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421 |
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456 |
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Term debt, net of current portion |
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882 |
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869 |
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Capital leases, net of current portion |
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70 |
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71 |
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Other deferrals and liabilities |
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347 |
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360 |
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Deferred income taxes, net |
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66 |
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86 |
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Total liabilities |
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1,786 |
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1,842 |
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Commitments and Contingencies (See Note 12) |
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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, $0.01 par value; 300,000,000 shares authorized; 134,639,614 and 135,022,753
shares issued and outstanding at September 30, 2008 and June 30, 2008, respectively |
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1 |
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1 |
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Additional paid-in capital |
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609 |
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601 |
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Retained earnings |
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332 |
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290 |
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Accumulated other comprehensive income (loss) |
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(9 |
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(8 |
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Treasury stock, at cost; 2,778,333 and 2,042,887 shares, at September 30, 2008 and June 30, 2008,
respectively |
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(57 |
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(39 |
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Total stockholders equity |
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876 |
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845 |
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Total liabilities and stockholders equity |
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$ |
2,662 |
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$ |
2,687 |
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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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September 30, |
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2008 |
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2007 |
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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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$ |
497 |
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$ |
441 |
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Franchise revenues |
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146 |
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131 |
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Property revenues |
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31 |
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30 |
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Total revenues |
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674 |
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602 |
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Company restaurant expenses: |
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Food, paper and product costs |
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162 |
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137 |
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Payroll and employee benefits |
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151 |
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131 |
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Occupancy and other operating costs |
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122 |
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105 |
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Total company restaurant expenses |
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435 |
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373 |
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Selling, general and administrative expenses |
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125 |
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119 |
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Property expenses |
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15 |
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14 |
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Other operating (income) expense, net |
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9 |
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Total operating costs and expenses |
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584 |
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506 |
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Income from operations |
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90 |
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96 |
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Interest expense |
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15 |
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18 |
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Interest income |
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(1 |
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(2 |
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Total interest expense, net |
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14 |
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16 |
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Income before income taxes |
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76 |
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80 |
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Income tax expense |
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26 |
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31 |
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Net income |
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$ |
50 |
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$ |
49 |
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Earnings per share: |
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Basic |
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$ |
0.37 |
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$ |
0.36 |
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Diluted |
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$ |
0.36 |
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$ |
0.35 |
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Weighted average shares outstanding: |
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Basic |
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135.0 |
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135.2 |
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Diluted |
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137.3 |
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137.7 |
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Dividends per common share |
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$ |
0.06 |
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$ |
0.06 |
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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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Three Months Ended |
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September 30, |
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2008 |
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2007 |
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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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$ |
50 |
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$ |
49 |
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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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26 |
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21 |
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Gain on hedging activities |
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(1 |
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Loss / (Gain) on remeasurement of foreign denominated transactions |
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45 |
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(19 |
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Gain on asset sales and release of unfavorable lease obligation |
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(2 |
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Bad debt expense, net of recoveries |
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1 |
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Stock-based compensation |
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3 |
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2 |
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Deferred income taxes |
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(8 |
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13 |
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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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6 |
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3 |
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Prepaids and other current assets |
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(37 |
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8 |
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Accounts and drafts payable |
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(33 |
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(38 |
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Accrued advertising |
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15 |
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32 |
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Other accrued liabilities |
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(23 |
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(6 |
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Other long-term assets and liabilities |
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7 |
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(23 |
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Net cash provided by operating activities |
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52 |
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39 |
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Cash flows from investing activities: |
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Payments for property and equipment |
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(33 |
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(23 |
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Proceeds from asset disposals and restaurant closures |
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1 |
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8 |
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Payments for acquired franchisee operations, net of cash acquired |
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(67 |
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Return of investment on direct financing leases |
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2 |
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2 |
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Other investing activities |
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1 |
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Net cash used for investing activities |
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(96 |
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(13 |
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Cash flows from financing activities: |
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Repayments of term debt and capital leases |
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(1 |
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(27 |
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Borrowings under revolving credit facility |
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94 |
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Repayments of revolving credit facility |
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(65 |
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Dividends paid on common stock |
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(8 |
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(8 |
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Proceeds from stock option exercises |
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2 |
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1 |
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Excess tax benefits from stock-based compensation |
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3 |
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1 |
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Repurchases of common stock |
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(18 |
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(6 |
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Net cash provided by (used for) financing activities |
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7 |
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(39 |
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Effect of exchange rates on cash and cash equivalents |
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(11 |
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5 |
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Decrease in cash and cash equivalents |
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(48 |
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(8 |
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Cash and cash equivalents at beginning of period |
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166 |
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170 |
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Cash and cash equivalents at end of period |
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$ |
118 |
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$ |
162 |
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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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Three Months Ended |
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September 30, |
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2008 |
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2007 |
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(In millions) |
Supplemental cash flow disclosures: |
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Interest paid
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$ |
15 |
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$ |
17 |
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Income taxes paid
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$ |
36 |
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$ |
17 |
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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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$ |
1 |
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$ |
2 |
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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 and Basis of Presentation
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.
As of September 30, 2008, 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).
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.
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, 2008 filed with the SEC on August 28, 2008
(2008 Form 10-K). 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 the three months ended September 30, 2008 do not necessarily indicate the results that
may be expected for the full year ending June 30, 2009.
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.
Correction of Immaterial Error Related to Prior Periods
During the year ended June 30, 2008, the Company identified an error related to its
classification in the statement of cash flows of lease payments received under its direct financing
leases. The Company determined that in accounting for such payments, it did not properly classify
the portion of the lease payment representing the reduction in the net investment in the lease as
cash flows from investing activities, as required by Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 95, Statement of Cash Flows. The Company
reviewed the impact of this error on the prior periods in accordance with SEC Staff Accounting Bulletin No. 99, Materiality, and determined that the error
was not material to the prior periods. However, the Company has corrected the statement of cash
flows for the three months ended September 30, 2007 by increasing cash flows from investing
activities and decreasing cash flows from operating activities by $2 million.
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. Actual results could differ from those estimates.
Change in Accounting Policy
During the first quarter of fiscal year 2009, the Company changed its classification of
transaction gains and losses resulting from the remeasurement of foreign deferred tax assets,
reflected in its consolidated statements of income. In accordance with SFAS No. 109, Accounting
for Income Taxes (SFAS No. 109), transaction gains and losses resulting from the remeasurement of
foreign deferred tax assets or liabilities may be reported separately or included in deferred tax
expense or benefit, if that presentation is considered
7
more useful. In that regard, in order to
(i) reduce complexity in financial reporting by mitigating the impact that fluctuations in
exchange rates have on the calculation of the Companys effective tax rate, (ii) provide
clarity by reducing the impact attributable to fluctuations in exchange rates on the Companys
effective tax rate, leaving remaining differences between expected and actual tax expense primarily
related to trends in earnings, and (iii) provide transparency to its financial statements by
isolating foreign exchange transaction gains and losses within the same line in the consolidated
statements of income, the Company believes it to be preferable to reclassify the foreign exchange
transaction gains and losses attributable to the remeasurement of foreign deferred tax assets,
previously included within income tax expense, to other operating (income) expense, net. For the
quarter ended September 30, 2008, this change in accounting policy resulted in a decrease to income
tax expense of $3 million with a corresponding increase in foreign exchange transaction gains and
losses included in other operating (income) expense, net. For the quarter ended September 30, 2007,
the impact of this change in accounting policy was insignificant. This accounting policy change
had no effect on net income for the periods presented.
Recently Adopted Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157),
which defines fair value, establishes a framework for measuring fair value and enhances disclosures
about fair value measurements required under other accounting pronouncements, but does not change
existing guidance as to whether or not an instrument is carried at fair value. In February 2008,
the FASB issued Financial Statement of Position (FSP) FAS 157-2, Effective Date of FASB Statement
No. 157, which permits a one-year deferral for the implementation of SFAS No. 157 with regard to
non-financial assets and liabilities that are not recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The Company elected to defer
adoption of SFAS No. 157 for such items and does not currently anticipate that full adoption of
SFAS No. 157 in fiscal year 2010 will materially impact the Companys results of operations or
financial condition. Also, in October 2008, the FASB issued FSP FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active, which clarified the
application of SFAS No. 157 in a market that is not active and also provided an example to
illustrate key considerations in determining the fair value of a financial asset when the market
for that financial asset is not active. FSP FAS 157-3 did not have a significant effect upon the
Companys adoption of SFAS No. 157.
On July 1, 2008, the Company adopted the provisions of SFAS No. 157 related to its financial
assets and financial liabilities. The following table presents the fair values for those assets and
liabilities measured on a recurring basis as of September 30, 2008:
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Fair Value Measurements at September 30, 2008 |
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Significant |
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Quoted Prices in Active |
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Significant Other |
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Unobservable |
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Carrying Value |
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Markets for Identical |
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Observable Inputs |
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Inputs |
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Description |
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Assets |
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Liabilities |
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Instruments (Level 1) |
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(Level 2) |
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(Level 3) |
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Foreign currency
forward contracts |
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$ |
38 |
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$ |
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$ |
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$ |
38 |
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$ |
|
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Interest rate swaps |
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3 |
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3 |
|
|
|
|
|
Other investments |
|
|
20 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
61 |
|
|
$ |
|
|
|
$ |
20 |
|
|
$ |
41 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
forward contracts |
|
$ |
|
|
|
$ |
(10 |
) |
|
$ |
|
|
|
$ |
(10 |
) |
|
$ |
|
|
Interest rate swaps |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
(21 |
) |
|
$ |
|
|
|
$ |
(21 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has entered into interest rate swap contracts with the objective of hedging the
variability of the forecasted cash interest payments associated with its variable-rate debt. The
Company enters into foreign currency forward contracts with the objective of reducing its exposure
to cash flow volatility arising from foreign currency fluctuations associated with certain foreign
currency-denominated intercompany loans and other assets. The fair values of the Companys interest
rate swaps and foreign currency forward contracts were determined based on the present value of
expected future cash flows considering the risks involved, including
nonperformance risk of the
counterparty and of the Company, and using discount rates appropriate for the duration of these
instruments. The Company presents the financial assets and
financial liabilities related to interest rate swaps and foreign currency forwards contracts with
the same counterparty on a gross basis.
8
The Other Investments consist of money market accounts and mutual funds held in a Rabbi trust
which the Company established to invest compensation deferred by participants in the Companys
Executive Retirement Plan and to fund future deferred compensation obligations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159). SFAS No. 159 provides companies with an option to
report selected financial assets and financial liabilities at fair value that are not currently
required to be measured at fair value. Unrealized gains and losses on items for which the fair
value option is elected are reported in earnings at each subsequent reporting date. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007.
The Company adopted SFAS No. 159 on July 1, 2008. The Company did not elect to begin
reporting any financial assets or financial liabilities at fair value upon adoption of SFAS No.
159. In addition, the Company did not elect to report at fair value any new financial assets or
financial liabilities entered into during the quarter ended September 30, 2008.
Inventories
Inventories, totaling $16 million as of both September 30, 2008 and June 30, 2008, 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.
Note 2. Stock-based Compensation
In August 2008, the Company granted non-qualified stock options and performance-based
restricted stock and restricted stock units (PBRS)
covering approximately 1.2 million shares and 0.4 million 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 in August 2008 was $8.54 and was estimated using the
Black-Scholes option pricing model based on the following input assumptions: risk-free interest
rate of 3.33%; expected term of 6.25 years; expected volatility of 31.80%; and expected dividend
yield of 0.96%. There were no other options granted during the three months ended September 30,
2008.
The amount of PBRS granted to each eligible employee in August 2008 was based on the Company
achieving 100% of the performance target set for fiscal year 2009. PBRS generally have a three-year
vesting period from the grant date, which includes the performance period. The grant date fair
value of each PBRS was $26.16, representing the closing share price of the Companys common stock
on the grant date.
The Company recorded $3 million and $2 million of stock-based compensation expense for the
three months ended September 30, 2008 and 2007, respectively. In accordance with SFAS No. 123
(Revised 2004), Share-Based Payment, tax benefits from stock-based compensation
of $3 million and $1 million in the three months ended September 30, 2008 and 2007, respectively,
were reported as financing cash flows.
9
Note 3. Acquisitions, Closures and Dispositions
Acquisitions
All acquisitions of franchise restaurants are accounted for using the purchase method of
accounting under SFAS No. 141, Business Combinations and the guidance under Emerging Issues Task
Force (EITF) Issue No. 04-1, Accounting for Preexisting Relationships between parties to a
Business Combination. For the three months ended September 30, 2008, these acquisitions are
summarized as follows (in millions, except for number of restaurants):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Number of restaurants acquired |
|
|
74 |
|
|
|
4 |
|
Prepaids and other current assets |
|
$ |
1 |
|
|
$ |
|
|
Property and equipment, net |
|
|
14 |
|
|
|
|
|
Other intangible assets |
|
|
55 |
|
|
|
|
|
Assumed liabilities |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
67 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The purchase price allocations for the acquisitions completed during the three months ended
September 30, 2008, are subject to final adjustment.
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 11). Gains and losses recognized in the
current period may reflect closures and refranchisings that occurred in previous periods.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Number of restaurant closures |
|
|
2 |
|
|
|
5 |
|
Number of refranchisings |
|
|
2 |
|
|
|
17 |
|
Net loss on restaurant closures, refranchisings, and dispositions of assets |
|
$ |
1 |
|
|
$ |
1 |
|
Note 4. Earnings Per Share
Basic and diluted earnings per share are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
49,808,379 |
|
|
$ |
48,521,698 |
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
135,024,893 |
|
|
|
135,195,942 |
|
Effect of dilutive securities |
|
|
2,246,862 |
|
|
|
2,538,382 |
|
|
|
|
|
|
|
|
Weighted average shares diluted |
|
|
137,271,755 |
|
|
|
137,734,324 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.37 |
|
|
$ |
0.36 |
|
Diluted earnings per share |
|
$ |
0.36 |
|
|
$ |
0.35 |
|
For the three months ended September 30, 2008 and 2007 there were 1.4 million and 0.7 million
anti-dilutive stock options outstanding, respectively.
10
Note 5. Comprehensive Income
The components of total comprehensive income are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
50 |
|
|
$ |
49 |
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
Net change in fair value of derivatives, net of tax of $1 million and $3 million |
|
|
(2 |
) |
|
|
(5 |
) |
for the three months ended September 30, 2008 and 2007, respectively |
|
|
|
|
|
|
|
|
Amounts reclassified to earnings during the period |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Total other comprehensive ( loss) |
|
|
(1 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
49 |
|
|
$ |
42 |
|
|
|
|
|
|
|
|
Note 6. Other Accrued Liabilities and Other Deferrals and Liabilities
Included in other accrued liabilities as of September 30, 2008 and June 30, 2008, were accrued
payroll and employee-related benefit costs totaling $56 million and $84 million, respectively. The
decrease in accrued payroll and employee-related benefit costs is primarily due to the payment of
the Companys annual incentive bonus to employees during the three months ended September 30, 2008.
Included in other deferrals and liabilities as of September 30, 2008 and June 30, 2008 were
accrued pension liabilities of $50 million in each period; casualty insurance reserves of $27
million and $28 million, respectively; retiree health benefits of $22 million and $21 million,
respectively; and liabilities for unfavorable leases of $178 million and $190 million,
respectively.
Note 7. Long-Term Debt
As of September 30, 2008 and June 30, 2008, the Company had $900 million and $871 million of
long-term debt outstanding, respectively. During the three months ended September 30, 2008, the
Company borrowed $94 million and repaid $65 million under its revolving credit facility. The
current portion of long-term debt was $18 million and $2 million as of September 30, 2008 and June
30, 2008, respectively. The next scheduled principal payment on the Companys long-term debt is
June 30, 2009. The weighted average interest rate for the three months ended September 30, 2008 and
2007 was 5.4% and 6.8%, respectively, which included the benefit of interest rate swaps on 76% and
51% of our term debt, respectively (See Note 8).
Note 8. Derivative Instruments
Interest rate swaps
As of September 30, 2008, the Company had receive-variable, pay-fixed interest rate swap
contracts outstanding with an aggregate notional value of $595 million, a decrease of $60 million
from June 30, 2008, reflecting swap contracts that matured in September 2008. The swaps were being
used to hedge 66% of the Companys forecasted LIBOR-based interest payments on variable rate debt
(hedged forecasted transaction) as of September 30, 2008. The Company has designated the swaps as
cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. At September 30, 2008, the fair values of these swaps are reflected in both other
assets and other deferrals and liabilities, with an offsetting unrealized gain and loss,
respectively, in accumulated other comprehensive income (AOCI), in the accompanying condensed
consolidated balance sheets.
Related to the change in value of these swaps, the Company recognized $2 million as additional
interest expense and less than $1 million as a reduction of interest expense for the three months
ended September 30, 2008 and 2007, respectively. There was no ineffectiveness recorded in earnings
during the three months ended September 30, 2008 and 2007 related to these swaps.
In September 2006, the Company settled swaps that had been designated as a cash flow hedge,
which had an aggregate fair value of $12 million, and terminated the hedge. This balance is being
recognized as a reduction of interest expense over the remaining term of the debt underlying the
terminated hedge. During the three months ended September 30, 2008 and 2007, less than $1 million
and $1 million, respectively, was recognized into pretax earnings as a reduction to interest
expense in the accompanying condensed consolidated statements of income related to the terminated
hedges.
11
Foreign currency forward contracts
The following table represents the gains and losses recorded in other operating (income)
expense, net in the Companys condensed consolidated statement of income from the remeasurement of
foreign currency-denominated intercompany loans and other assets and the change in fair value of
foreign currency forward contracts used to hedge those items (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
(Gain) loss on remeasurement of foreign denominated intercompany loans |
|
$ |
42 |
|
|
$ |
(19 |
) |
(Gain) loss on remeasurement of foreign denominated assets |
|
$ |
3 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on change in fair value of foreign currency forward
contracts |
|
$ |
(40 |
) |
|
$ |
18 |
|
The
$5 million difference between the losses on the remeasurement of foreign currency-denominated intercompany loans and assets and the change in fair value of the foreign currency
forward contracts for the three months ended September 30, 2008, represents $2 million of change in
fair value of the foreign currency forward contracts attributable to the difference in spot and
forward contract rates and $3 million of loss from the remeasurement of a portion of foreign
denominated assets that were not hedged during that period.
The
$1 million difference between the gain from the remeasurement of foreign currency-denominated intercompany loans and the change in fair value of the foreign currency forward
contracts for the three months ended September 30, 2007, represents the change in fair value of the
foreign currency forward contracts attributable to the difference in spot and forward contract
rates.
Note 9. Income Taxes
The U.S. Federal tax statutory rate reconciles to the effective tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
U.S. federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income taxes, net of federal income tax benefit |
|
|
2.6 |
|
|
|
3.0 |
|
Costs and taxes related to foreign operations |
|
|
0.5 |
|
|
|
10.2 |
|
Foreign tax differential |
|
|
(4.8 |
) |
|
|
(4.3 |
) |
Foreign exchange differential on tax benefits |
|
|
(0.6 |
) |
|
|
(0.6 |
) |
Change in valuation allowance |
|
|
0.8 |
|
|
|
(4.4 |
) |
Change in accrual for tax uncertainties |
|
|
0.9 |
|
|
|
0.9 |
|
Other |
|
|
(0.2 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
Effective income tax rate |
|
|
34.2 |
% |
|
|
38.8 |
% |
|
|
|
|
|
|
|
As discussed further in the Companys 2008 Form 10-K, the Company adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(FIN 48) effective July 1, 2007. The amount of unrecognized tax benefits as of June 30, 2008 was
approximately $23 million which, if recognized, would affect the effective income tax rate. During
the three months ended September 30, 2008, the amount of additional unrecognized tax benefit was
approximately $1 million which, if recognized, would affect the effective income tax rate.
12
In the next twelve months, it is reasonably possible the Company will reduce unrecognized tax
benefits by a range of approximately $4 million to $8 million, primarily as a result of the
expiration of certain statutes of limitations and the completion of certain tax audits. Any
increases in unrecognized tax benefits will result primarily from tax positions expected to be
taken on tax returns for fiscal year 2009.
The Company recognizes potential accrued interest and penalties related to unrecognized tax
benefits in income tax expense. The total amount of accrued interest and penalties at June 30, 2008
was $4 million, which was included as a component of the $23 million unrecognized tax benefit at
June 30, 2008. Potential interest and penalties associated with uncertain tax positions recognized
during the three months ended September 30, 2008 were less than $1 million. To the extent interest
and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be
reduced and reflected as a reduction of the overall income tax provision.
The Company files income tax returns, including returns for its subsidiaries, with federal,
state, local and foreign jurisdictions. Generally, the Company is subject to routine examination by
taxing authorities in these jurisdictions, including significant international tax jurisdictions,
such as the United Kingdom, Germany, Spain, Switzerland, Singapore and Mexico. None of the foreign
jurisdictions is individually material. The Company is currently under audit by the U.S. Internal
Revenue Service for the year ended June 30, 2006. 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 10. Retirement Plan and Other Postretirement Benefits
The fair value of restricted investments held in a Rabbi trust, which the Company established
to fund the Companys current and future obligations under its
Executive Retirement Plan, was $20
million and $22 million at September 30, 2008 and 2007, respectively.
A summary of the components of net periodic benefit cost for the Companys pension plans
(retirement benefits) and postretirement plans (other benefits) is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefits |
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Service cost-benefits earned during the period |
|
$ |
|
|
|
$ |
|
|
Interest costs on projected benefit obligations |
|
|
3 |
|
|
|
2 |
|
Expected return on plan assets |
|
|
(3 |
) |
|
|
(2 |
) |
Recognized net actuarial loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Other benefits costs were less than one million for each of the three months ended September
30, 2008 and 2007.
Note 11. Other Operating (Income) Expense, Net
Other operating expense, net for the three months ended September 30, 2008 was $9 million,
compared to zero for the same period in the prior year. This includes a $3 million charge related
to the remeasurement of foreign denominated assets and $2 million of net charges from the use of
foreign currency forward contracts as described in Note 8. It also includes $2 million of charges
associated with the acquisition of franchise restaurants from a large franchisee in the U.S.
Activity recorded in other operating (income) expense during the three months ended September
30, 2007 includes a $1 million charge for litigation reserves, a $1 million charge for a future
payment to be made to our sole distributor in the U.K, and a $1 million charge related to the write
down of non-restaurant properties, offset by a gain of $2 million from the disposal of real estate
and other assets and an unrealized gain of $1 million on investment securities.
13
Note 12. 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 $84 million as of September 30, 2008,
expiring over an average period of six years.
Other commitments arising from normal business operations were $11 million as of September 30,
2008, of which $9 million was guaranteed under bank guarantee arrangements.
Letters of Credit
As of September 30, 2008, the Company had $27 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 September 30, 2008, no amounts had been drawn on any of these irrevocable standby
letters of credit.
As of September 30, 2008, the Company had posted bonds totaling $18 million, which related to
promotional activities and certain utility deposits.
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 limit. As of September 30, 2008, the Company estimates that it will take
approximately 14 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 September 30, 2008 and June 30,
2008, the deferred amounts totaled $17 million in each period ended. These deferred amounts are
amortized as a reduction to food, paper and product costs in the accompanying condensed
consolidated statements of income.
As of September 30, 2008, the Company had $7 million in aggregate contractual obligations for
the year ending June 30, 2009 with vendors providing information technology and telecommunication
services under multiple arrangements. These contracts extend up to three years with a termination
fee ranging from less than $1 million to $2 million during those years. The Company also has
separate arrangements for telecommunication services with an aggregate contractual obligation of
$12 million extending up to three years with no early termination fee.
The Company also enters into commitments to purchase advertising. As of September 30, 2008,
commitments to purchase advertising totaled $152 million. These commitments run through December
2011.
Litigation
On July 30, 2008, the Company was sued by four Florida franchisees over the Companys decision
to mandate extended operating hours in the United States. The plaintiffs seek damages, declaratory
relief and injunctive relief. While the Company believes that it has the right under its franchise
agreement to mandate extended operating hours, the case is in the preliminary stages and the
Company is unable to predict the ultimate outcome of the litigation.
14
On September 10, 2008, the Company and BKC were named as the defendants in a class action
lawsuit filed in California federal district court. The complaint alleges that all Burger King®
restaurants in California leased by BKC and operated by franchisees violate accessibility
requirements of the Americans with Disabilities Act (ADA) as well as the California Disabled
Persons Act (CDPA) and the Unruh Civil Rights Act (Unruh Act). Plaintiff, on behalf of the
class, seeks injunctive relief under the ADA, minimum statutory damages per offense of $4,000 under
the Unruh Act and $1,000 per incident under the CDPA, as well as attorneys fees and costs. The
Company intends to vigorously defend against all claims in this lawsuit. It is not possible at this
time to determine the likelihood of class certification in this case or reasonably estimate the
probability or amount of liability for monetary damages on a class wide basis.
From time to time, the Company is involved in other legal proceedings arising in the ordinary
course of business relating to matters including, but not limited to, disputes with franchisees,
suppliers, employees and customers, as well as disputes over 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 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
September 30, 2008 and June 30, 2008, the Company had $36 million and $34 million in accrued
liabilities to cover such claims, respectively.
Note 13. Segment Reporting
The Company operates in the fast food hamburger category of the quick service 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 |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
447 |
|
|
$ |
392 |
|
EMEA/APAC |
|
|
195 |
|
|
|
183 |
|
Latin America |
|
|
32 |
|
|
|
27 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
674 |
|
|
$ |
602 |
|
|
|
|
|
|
|
|
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 $404 million and $350 million for the three
months ended September 30, 2008 and 2007, respectively. Revenues in Germany totaled $86 million and
$82 million for the three months ended September 30, 2008 and 2007, respectively.
15
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.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Income from Operations: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
85 |
|
|
$ |
97 |
|
EMEA/APAC |
|
|
23 |
|
|
|
20 |
|
Latin America |
|
|
10 |
|
|
|
9 |
|
Unallocated |
|
|
(28 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
Total income from operations |
|
$ |
90 |
|
|
$ |
96 |
|
Interest expense, net |
|
|
14 |
|
|
|
16 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
76 |
|
|
$ |
80 |
|
Income tax expense |
|
|
26 |
|
|
|
31 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
50 |
|
|
$ |
49 |
|
|
|
|
|
|
|
|
|
|
|
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, 2008,
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. 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. Our system of restaurants includes
restaurants owned by us, as well as our franchisees. We are the second largest FFHR chain in the
world as measured by the number of restaurants and system-wide sales. 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 September 30, 2008, we owned or franchised a total
of 11,632 restaurants in 73 countries and U.S. territories, of which 7,508 were located in the U.S.
and Canada. At that date, 1,434 restaurants were Company restaurants and 10,198 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.
We do not record franchise sales as revenues.
16
Business Highlights
Our strategic plan has four strategic global growth pillars: marketing, products, operations
and development. Guided by our strategic plan and strong executive team leadership, our
accomplishments and key activities since June 30, 2008 include:
|
|
|
the opening of 67 net restaurants worldwide in the first
quarter of fiscal 2009 and 342 net
restaurants for the trailing 12-months ended September 30, 2008; |
|
|
|
|
the nineteenth consecutive quarter of worldwide comparable sales growth, our
best comparable sales growth trend in more than a decade, including comparable sales growth
of 3.6% for the first quarter of fiscal 2009; |
|
|
|
|
the eighteenth consecutive quarter of comparable sales growth in the U.S. and
Canada, including comparable sales growth of 3.0% for the first quarter of fiscal 2009; |
|
|
|
|
all-time high average restaurant sales of $1.3 million for the trailing
12-months ended September 30, 2008; |
|
|
|
|
the opening of the first restaurant in Suriname and our re-entry into Uruguay,
which brings the number of countries and U.S territories in which we operate to 73; |
|
|
|
|
promotional tie-ins with family focused marketing properties, such as Pokemon
and Crayola; |
|
|
|
|
new product offerings such as BK Fresh Apple Fries, which received the Kid
Friendly Product of the Year award from the Glycemic Research Institute (GRI) in
Washington, D.C., and Kraft® Macaroni and Cheese; and |
|
|
|
|
continued execution of our portfolio management strategy, including strategic
acquisitions of 74 restaurants during the three months ended September 30, 2008. |
Our focus continues to be on the following:
|
|
|
driving further sales growth; |
|
|
|
|
enhancing restaurant profitability; |
|
|
|
|
expanding our large international platform; |
|
|
|
|
accelerating our new restaurant development and expansion; |
|
|
|
using proactive portfolio management, including closures of under-performing
restaurants and strategic refranchisings and acquisitions, to drive financial performance
and development; and |
|
|
|
|
employing innovative marketing strategies and expanding product offerings. |
Seasonality
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.
Key Business Measures
The following key business measures have been provided for the three months ended September
30, 2008 and 2007. 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 same exchange
rates over the periods under comparison to remove the effects of currency fluctuations from these
trend analyses. We believe these constant currency measures provide a more meaningful analysis of
our business by identifying the underlying business trends, without distortion from the effect of
currency movements.
17
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, in each case by reportable segment. We believe comparable sales
growth is a key indicator of our performance, as influenced by our strategic initiatives and those
of our competitors.
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In Constant Currencies) |
|
Company Comparable Sales Growth: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
1.3 |
% |
|
|
3.6 |
% |
EMEA / APAC |
|
|
3.4 |
% |
|
|
2.5 |
% |
Latin America |
|
|
2.3 |
% |
|
|
(0.6 |
)% |
Total Company Comparable Sales Growth |
|
|
1.9 |
% |
|
|
3.1 |
% |
Franchise Comparable Sales Growth: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
3.2 |
% |
|
|
7.0 |
% |
EMEA / APAC |
|
|
5.0 |
% |
|
|
4.9 |
% |
Latin America |
|
|
5.4 |
% |
|
|
4.2 |
% |
Total Franchise Comparable Sales Growth |
|
|
3.9 |
% |
|
|
6.3 |
% |
Comparable Sales Growth: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
3.0 |
% |
|
|
6.6 |
% |
EMEA/APAC |
|
|
4.8 |
% |
|
|
4.6 |
% |
Latin America |
|
|
5.2 |
% |
|
|
3.8 |
% |
Total Worldwide Comparable Sales Growth |
|
|
3.6 |
% |
|
|
5.9 |
% |
Our worldwide comparable sales growth for the three months ended September 30, 2008 was driven
by our strategic pricing initiatives, our barbell menu strategy of innovative indulgent products
and value menu items as well as the continued development of our breakfast and late night dayparts.
In the U.S. and Canada, positive comparable sales during the first quarter of fiscal 2009 were
driven primarily by our strategic pricing initiatives as well as successful product promotions such
as the Steakhouse Burger in the U.S., the introduction of the new BK Kids Meal (including Kraft®
Macaroni and Cheese and BK Fresh Apple Fries) and the Spicy Chicken BK Wrapper offering on the
BK® Value Menu. Promotional tie-ins with marketing properties, such as Pokemon, Neopets® and
Crayola, also positively impacted comparable sales.
In EMEA/APAC comparable sales continued to improve in most major countries in this segment,
including the U.K., Australia, Spain and South Korea, with continued focus on operational
improvements, marketing and advertising and on high quality premium offerings. Positive comparable
sales in this segment were driven primarily by our strategic pricing initiatives as well as
successful product promotions, such as Whopper® sandwich limited time offers throughout the region,
BK Fusion Real Ice Cream and the Long Chicken sandwich limited time offer in Spain.
Latin America achieved strong results in comparable sales for the first quarter of fiscal 2009
driven by our barbell menu strategy featuring an everyday value platform, such as our new Come
Como Rey (Eat Like a King) value menu in Mexico, plus indulgent products, such as our new
Steakhouse burger rolled out in Central America and the Caribbean. Successful promotional tie-ins
with movie properties, such as Indiana Jones and the Kingdom of the Crystal Skull with our
Adventure Whopper® sandwich and Batman, the Dark Knight with our hero BK Stacker combo meal,
also positively impacted comparable sales.
18
Average Restaurant Sales
Average restaurant sales, or ARS, is an important measure of the financial performance of our
restaurants and changes in the overall direction and trends of sales. ARS is influenced mostly by
comparable sales performance and restaurant openings and closures and includes the impact of
movement in currency exchange rates. For the three months ended September 30, 2008, ARS was
$343,000 compared to $327,000 for the three months ended September 30, 2007, an increase of 5%.
The trailing 12-month ARS reached a record high of $1.32 million for the period ended September 30,
2008, as compared to $1.22 million for the period ended September 30, 2007, an increase of 8%. As
of September 30, 2008, the last 50 free-standing restaurants that opened in the U.S. and have
operated for at least 12 months generated ARS of $1.35 million, which is approximately 6% higher
than the current U.S. system average.
Our ARS improvement during the first three months of fiscal 2009 was primarily due to improved
worldwide comparable sales growth, the opening of new restaurants with higher than average sales
volumes and, to a lesser extent, the closure of under-performing restaurants. We and our
franchisees opened 342 net restaurants during the twelve months ended September 30, 2008. We
believe that continued improvement in the ARS of existing restaurants and strong sales at new
restaurants, combined with the closure of under-performing restaurants, will result in financially
stronger operators throughout our system.
Sales Growth
Sales growth refers to the change in sales at all Company and franchise restaurants from one
period to another. 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.
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In Constant Currencies) |
|
Sales Growth: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
3.7 |
% |
|
|
6.7 |
% |
EMEA/APAC |
|
|
10.7 |
% |
|
|
11.6 |
% |
Latin America |
|
|
16.3 |
% |
|
|
14.4 |
% |
Total System-wide Sales Growth |
|
|
6.5 |
% |
|
|
8.5 |
% |
Sales growth continued on a positive trend during the three months ended September 30, 2008,
as comparable sales and restaurant count continued to increase on a system-wide basis. We expect
net restaurant openings to accelerate in most regions.
Our sales growth in the U.S. and Canada during the three months ended September 30, 2008
reflects positive comparable sales growth. We had 7,508 restaurants in the U.S. and Canada as of
September 30, 2008, compared to 7,482 restaurants as of September 30, 2007.
EMEA/APAC demonstrated sales growth during the three months ended September 30, 2008,
reflecting openings of new restaurants and positive comparable sales in most major markets. We had
3,106 restaurants in EMEA/APAC as of September 30, 2008 compared to 2,892 restaurants as of
September 30, 2007, reflecting a 7% increase in the number of restaurants.
Latin Americas sales growth was driven by new restaurant openings and strong comparable sales
during the three months ended September 30, 2008. We had 1,018 restaurants in Latin America as of
September 30, 2008, compared to 916 restaurants as of September 30, 2007, reflecting an 11%
increase in the number of restaurants.
Other Operating Data
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Restaurant Count Data: |
|
|
|
|
|
|
|
|
Number of Company restaurants: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
1,056 |
|
|
|
901 |
|
EMEA/APAC(1) |
|
|
293 |
|
|
|
311 |
|
Latin America(2) |
|
|
85 |
|
|
|
77 |
|
|
|
|
|
|
|
|
Total Company restaurants |
|
|
1,434 |
|
|
|
1,289 |
|
Number of franchise restaurants: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
6,452 |
|
|
|
6,581 |
|
EMEA/APAC(1) |
|
|
2,813 |
|
|
|
2,581 |
|
Latin America(2) |
|
|
933 |
|
|
|
839 |
|
|
|
|
|
|
|
|
Total franchise restaurants |
|
|
10,198 |
|
|
|
10,001 |
|
|
|
|
|
|
|
|
Total system-wide restaurants |
|
|
11,632 |
|
|
|
11,290 |
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Other Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable sales growth |
|
|
3.6 |
% |
|
|
5.9 |
% |
Sales growth |
|
|
6.5 |
% |
|
|
8.5 |
% |
Average restaurant sales (in thousands) |
|
$ |
343 |
|
|
$ |
327 |
|
Segment Data: |
|
|
|
|
|
|
|
|
Company restaurant revenues (in millions): |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
340 |
|
|
$ |
290 |
|
EMEA/APAC(1) |
|
|
138 |
|
|
|
135 |
|
Latin America(2) |
|
|
19 |
|
|
|
16 |
|
|
|
|
|
|
|
|
Total Company restaurant revenues |
|
$ |
497 |
|
|
$ |
441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses as a
percentage of revenue (3): |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
|
|
|
|
|
|
|
Food, paper and products costs |
|
|
34.4 |
% |
|
|
32.1 |
% |
Payroll and employee benefits |
|
|
30.5 |
% |
|
|
30.5 |
% |
Occupancy and other operating costs |
|
|
23.0 |
% |
|
|
22.1 |
% |
|
|
|
|
|
|
|
Total Company restaurant expenses |
|
|
87.9 |
% |
|
|
84.7 |
% |
|
|
|
|
|
|
|
EMEA/APAC(1) |
|
|
|
|
|
|
|
|
Food, paper and products costs |
|
|
27.7 |
% |
|
|
28.2 |
% |
Payroll and employee benefits |
|
|
32.6 |
% |
|
|
30.3 |
% |
Occupancy and other operating costs |
|
|
26.8 |
% |
|
|
27.1 |
% |
|
|
|
|
|
|
|
Total Company restaurant expenses |
|
|
87.1 |
% |
|
|
85.6 |
% |
|
|
|
|
|
|
|
Latin America(2) |
|
|
|
|
|
|
|
|
Food, paper and products costs |
|
|
36.6 |
% |
|
|
36.3 |
% |
Payroll and employee benefits |
|
|
12.4 |
% |
|
|
12.5 |
% |
Occupancy and other operating costs |
|
|
32.2 |
% |
|
|
27.5 |
% |
|
|
|
|
|
|
|
Total Company restaurant expenses |
|
|
81.2 |
% |
|
|
76.3 |
% |
|
|
|
|
|
|
|
Worldwide |
|
|
|
|
|
|
|
|
Food, paper and products costs |
|
|
32.6 |
% |
|
|
31.1 |
% |
Payroll and employee benefits |
|
|
30.3 |
% |
|
|
29.7 |
% |
Occupancy and other operating costs |
|
|
24.5 |
% |
|
|
23.9 |
% |
|
|
|
|
|
|
|
Total Company restaurant expenses |
|
|
87.4 |
% |
|
|
84.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise revenues (in millions): |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
84 |
|
|
$ |
79 |
|
EMEA/APAC(1) |
|
|
49 |
|
|
|
41 |
|
Latin America(2) |
|
|
13 |
|
|
|
11 |
|
|
|
|
|
|
|
|
Total franchise revenues(4) |
|
$ |
146 |
|
|
$ |
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations (in millions): |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
85 |
|
|
$ |
97 |
|
EMEA/APAC(1) |
|
|
23 |
|
|
|
20 |
|
Latin America(2) |
|
|
10 |
|
|
|
9 |
|
Unallocated(5) |
|
|
(28 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
Total Income from operations |
|
$ |
90 |
|
|
$ |
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (in millions)(6) |
|
$ |
116 |
|
|
$ |
117 |
|
20
|
|
|
(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 $3.5 billion and $3.2 billion for each of
the three months ended September 30, 2008 and 2007, 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. |
|
(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.
Management believes that EBITDA is a useful measure as it incorporates certain operating
drivers of our business such as sales growth, operating costs, selling, general and
administrative expenses and other income and expense. EBITDA is also one of the measures used
by us to calculate incentive compensation for management and corporate-level employees. |
|
|
|
While EBITDA is not a recognized measure under generally accepted accounting principles
(GAAP), management uses this financial measure to evaluate and forecast our business
performance. The non-GAAP measure has certain material limitations, including: |
|
|
|
it does not include interest expense, net. Because we have borrowed money for general
corporate purposes, interest expense is a necessary element of our costs and ability to
generate profits and cash flows; |
|
|
|
|
it does not include depreciation and amortization expenses. Because we use capital
assets, depreciation and amortization are necessary elements of our costs and ability to
generate profits; and |
|
|
|
|
it does not include provision for taxes. The payment of taxes is a necessary element
of our operations. |
|
|
|
|
|
Management compensates for these limitations by using EBITDA as only one of its measures for
evaluating the Companys business performance. In addition, capital expenditures, which impact
depreciation and amortization, interest expense and income tax expense, are reviewed separately
by management. Management believes that EBITDA provides both management and investors with a
more complete understanding of the underlying operating results and trends and an enhanced
overall understanding of our financial performance and prospects for the future. EBITDA is not
intended to be a measure of liquidity or cash flows from operations nor a measure comparable to
net income, as it does not take into account certain requirements such as capital expenditures
and related depreciation, principal and interest payments and tax payments. |
The following table is a reconciliation of our net income to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
Net income |
|
$ |
50 |
|
|
$ |
49 |
|
Interest expense, net |
|
|
14 |
|
|
|
16 |
|
Income tax expense |
|
|
26 |
|
|
|
31 |
|
Depreciation and amortization |
|
|
26 |
|
|
|
21 |
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
116 |
|
|
$ |
117 |
|
|
|
|
|
|
|
|
21
Results
of Operations for the Three Months Ended September 30, 2008 and
2007
The following table presents our results of operations for the three months ended September
30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
Amount |
|
|
Amount |
|
|
(Decrease) |
|
|
|
(In millions, except per share data) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues |
|
$ |
497 |
|
|
$ |
441 |
|
|
|
13 |
% |
Franchise revenues |
|
|
146 |
|
|
|
131 |
|
|
|
11 |
% |
Property revenues |
|
|
31 |
|
|
|
30 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
674 |
|
|
|
602 |
|
|
|
12 |
% |
Company restaurant expenses |
|
|
435 |
|
|
|
373 |
|
|
|
17 |
% |
Selling, general and administrative expenses |
|
|
125 |
|
|
|
119 |
|
|
|
5 |
% |
Property expenses |
|
|
15 |
|
|
|
14 |
|
|
|
7 |
% |
Other operating (income) expense, net |
|
|
9 |
|
|
|
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
584 |
|
|
|
506 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
90 |
|
|
|
96 |
|
|
|
(6 |
)% |
Interest expense |
|
|
15 |
|
|
|
18 |
|
|
|
(17 |
)% |
Interest income |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(50 |
)% |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
14 |
|
|
|
16 |
|
|
|
(13 |
)% |
Income before income taxes |
|
|
76 |
|
|
|
80 |
|
|
|
(5 |
)% |
Income tax expense |
|
|
26 |
|
|
|
31 |
|
|
|
(16 |
)% |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
50 |
|
|
$ |
49 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic (1) |
|
$ |
0.37 |
|
|
$ |
0.36 |
|
|
|
3 |
% |
Earnings per share diluted (1) |
|
$ |
0.36 |
|
|
$ |
0.35 |
|
|
|
3 |
% |
Weighted average shares basic |
|
|
135.0 |
|
|
|
135.2 |
|
|
|
|
|
Weighted average shares diluted |
|
|
137.3 |
|
|
|
137.7 |
|
|
|
|
|
|
|
|
(1) |
|
- Earnings per share is calculated using whole dollars and shares. |
NM |
|
- Not meaningful. |
Revenues
Company restaurant revenues
Company restaurant revenues increased by $56 million, or 13%, to $497 million during the three
months ended September 30, 2008, compared to the same period in the prior year, primarily as a
result of the addition of 145 Company restaurants (net of closures and refranchisings) during the
twelve months ended September 30, 2008, and worldwide Company comparable sales growth of 1.9%. The
net increase of 145 Company restaurants includes the net acquisition of 130 franchise restaurants,
primarily in the U.S. and Canada. Revenues from the acquired restaurants totaled $42 million for
the period. Approximately $9 million, or 16%, of the increase in Company restaurant revenues was
generated by the favorable impact from the movement of currency exchange rates, primarily
in EMEA.
In the U.S. and Canada, Company restaurant revenues increased by $50 million, or 17%, to $340
million during the three months ended September 30, 2008 compared to the same period in the prior
year, primarily as a result of a net increase of 155 Company
restaurants during the twelve months ended September 30, 2008, including the net acquisition
of 141 franchise restaurants, and Company comparable sales growth of 1.3% for the period in this
segment. Revenues from the acquired restaurants totaled $42 million for the period. The impact on
Company restaurant revenues from the movement of currency exchange rates was not
significant in this segment.
22
In EMEA/APAC, Company restaurant revenues increased by $3 million, or 2%, to $138 million
during the three months ended September 30, 2008, compared to the same period in the prior year,
primarily as a result of Company comparable sales growth of 3.4% for the period in this segment and
an $8 million favorable impact from the movement of currency exchange rates in EMEA. Partially
offsetting these factors was a decrease in revenues from a net reduction of 18 Company restaurants
during the twelve months ended September 30, 2008, due to the refranchising of 11 Company
restaurants in Germany and the net closure of 7 Company restaurants in the U.K.
In Latin America, Company restaurant revenues increased by $3 million, or 19%, to $19 million
during the three months ended September 30, 2008, compared to the same period in the prior year,
primarily as a result of a net increase of eight Company restaurants during the twelve months ended
September 30, 2008, Company comparable sales growth of 2.3% for the period in this segment and a $1
million favorable impact from the movement of currency exchange rates.
Franchise revenues
Total franchise revenues increased by $15 million, or 11%, to $146 million during the three
months ended September 30, 2008, compared to the same period in the prior year, driven by a net
addition of 197 franchise restaurants during the twelve months ended September 30, 2008, worldwide
franchise comparable sales growth of 3.9% for the period, higher effective royalty rates in the
U.S. and approximately a $3 million favorable impact from the movement of currency exchange rates,
primarily in EMEA. This increase was partially offset by a reduction in royalty payments due to the
Companys net acquisition of 130 franchise restaurants during the twelve months ended September 30,
2008.
In the U.S. and Canada, franchise revenues increased by $5 million, or 6%, to $84 million
during the three months ended September 30, 2008, compared to the same period in the prior year,
primarily as a result of franchise comparable sales growth of 3.2% in this segment and higher
effective royalty rates in the U.S. This increase was partially offset by the elimination of
royalties from 129 fewer franchise restaurants compared to the same period in the prior year due to
the net acquisition of 141 franchise restaurants by the Company, offset by the net opening of 12
new franchise restaurants during the twelve months ended September 30, 2008. The impact on
franchise revenues from the movement of currency exchange rates was not significant in this
segment.
In EMEA/APAC, franchise revenues increased by $8 million, or 20%, to $49 million during the
three months ended September 30, 2008, compared to the same period in the prior year, driven by a
net increase of 232 franchise restaurants during the twelve months ended September 30, 2008,
franchise comparable sales growth of 5.0% for the period in this segment and a $3 million favorable
impact from the movement of currency exchange rates.
Latin America franchise revenues increased by $2 million, or 18%, to $13 million during the
three months ended September 30, 2008, compared to the same period in the prior year, as a result
of the net addition of 94 franchise restaurants during the twelve months ended September 30, 2008
and franchise comparable sales growth of 5.4% for the period in this segment. The impact on
franchise revenues from the movement of currency exchange rates was not significant in this
segment.
Property Revenues
Total property revenues increased by $1 million, or 3%, to $31 million, for the three months
ended September 30, 2008, compared to the same period in the prior year, primarily as a result of
worldwide franchise comparable sales growth of 3.9% resulting in increased contingent rents,
partially offset by the net effect of changes to our property portfolio, which includes the impact
of the closure or acquisition of restaurants leased to franchisees.
In the U.S. and Canada, property revenues remained unchanged at $23 million for the three
months ended September 30, 2008, compared to the same period in the prior year, primarily from
increased contingent rents as a result of franchise comparable sales growth of 3.2% in this segment
offset by the impact of franchise restaurants leased to franchisees that were closed or acquired by
us.
23
In EMEA/APAC, property revenues increased by $1 million, or 14%, to $8 million, for the three
months ended September 30, 2008, compared to the same period in the prior year, primarily from
increased contingent rents as a result of franchise comparable sales growth of 5.0% in this
segment, partially offset by the effect of a net reduction in the number of properties we lease or
sublease to franchisees.
Operating Costs and Expenses
Food, paper and product costs
Total food, paper and product costs increased by $25 million, or 19%, to $162 million during
the three months ended September 30, 2008, compared to the same period in the prior year, as a
result of the net addition of 145 Company restaurants during the twelve months ended September 30,
2008, a significant increase in commodity costs and a $3 million unfavorable impact from the
movement of currency exchange rates, primarily in EMEA. As a percentage of Company restaurant
revenues, food, paper and product costs increased 1.5% to 32.6%, primarily due to the increase in
commodity and other food costs across all segments, partially offset by benefits derived from
positive Company comparable sales of 1.9% for the period. Commodity costs have increased
significantly across all segments, with the cost of many of our core commodities reaching
historical highs during the first quarter of fiscal 2009. However, since the end of July 2008, we
have seen a significant reduction in the price of several of these commodities.
In the U.S. and Canada, food, paper and product costs increased by $24 million, or 26%, to
$117 million during the three months ended September 30, 2008, compared to the same period in the
prior year, primarily as a result of the net addition of 155 Company restaurants during the twelve
months ended September 30, 2008 as well as a significant increase in commodity costs. Food, paper
and product costs as a percentage of Company restaurant revenues increased 2.3% to 34.4%, primarily
due to an increase in the cost of beef, cheese, chicken and other food costs, partially offset by
benefits derived from positive Company comparable sales of 1.3% in this segment. The pricing index
of our core commodities, as provided by our purchasing agent in the U.S. and Canada, increased by
17.0% during the first quarter of fiscal 2009 compared to the same period in the prior year. Prices
of beef, cheese and oils reached their historical highs during the first quarter of fiscal 2009 and
have moderated since the end of July 2008.
In EMEA/APAC, food, paper and product costs remained unchanged at $38 million for the three
months ended September 30, 2008, compared to the same period in the prior year, with the impact
from an increase in commodity costs and a $2 million unfavorable impact from the movement of
currency exchange rates being offset by the net reduction of 18 Company restaurants during the
twelve months ended September 30, 2008. Food, paper and product costs as a percentage of Company
restaurant revenues decreased by 0.5% to 27.7%, benefiting primarily from positive Company
comparable sales of 3.4% in this segment, which included the impact of our strategic pricing
initiatives, partially offset by a significant increase in commodity costs.
In Latin America, food, paper and product costs increased by $1 million, or 17%, to $7 million
during the three months ended September 30, 2008, compared to the same period in the prior year, as
a result of the net addition of eight Company restaurants during the twelve months ended September
30, 2008 and an increase in commodity costs. Food, paper and product costs as a percentage of
Company restaurant revenues remained relatively unchanged at 36.6% for the three months ended
September 30, 2008 compared to 36.3% in the same period in the prior year.
Payroll and employee benefits costs
Total payroll and employee benefits costs increased by $20 million, or 15%, to $151 million
during the three months ended September 30, 2008, compared to the same period in the prior year.
This increase was primarily due to the net addition of 145 Company restaurants during the twelve
months ended September 30, 2008, government mandated and contractual increases in hourly wages in
Germany and a $3 million unfavorable impact from the movement of currency exchange rates, primarily
in EMEA. As a percentage of Company restaurant revenues, payroll and employee benefits costs
increased by 0.6% to 30.3%, reflecting increases in hourly wages in Germany partially offset by
worldwide Company comparable sales growth of 1.9% for the period.
In
the U.S. and Canada, payroll and employee benefits costs increased by $15 million, or 17%, to $104
million during the three months ended September 30, 2008, compared to the same period in the prior
year, primarily as a result of the net addition of 155 Company restaurants during the twelve months
ended September 30, 2008. As a percentage of Company restaurant revenues, payroll and employee
benefits costs remained unchanged at 30.5% for the three months ended September 30, 2008 compared
to the same period in the prior year.
24
In EMEA/APAC, payroll and employee benefits costs increased by $4 million, or 10%, to $45
million during the three months ended September 30, 2008, compared to the same period in the prior
year, primarily as a result of government mandated and contractual increases in hourly wages in
Germany and a $3 million unfavorable impact from the movement of currency exchange rates, partially
offset by the net reduction of 18 Company restaurants during the twelve months ended September 30,
2008. As a percentage of Company restaurant revenues, payroll and employee benefits costs increased
by 2.3% to 32.6% as a result of increases in hourly wages in Germany, partially offset by positive
Company comparable sales growth of 3.4% in this segment.
There was no significant change in payroll and employee benefits costs in Latin America during
the three months ended September 30, 2008 compared to the same period in the prior year.
Occupancy and other operating costs
Occupancy and other operating costs increased by $17 million, or 16%, to $122 million during
the three months ended September 30, 2008, compared to the same period in the prior year. This
increase is primarily attributable to the net addition of 145 Company restaurants during the twelve
months ended September 30, 2008, increased utility costs and rents, start-up costs related to new
and acquired Company restaurants in the U.S. and a $2 million unfavorable impact from the movement
of currency exchange rates, primarily in EMEA. As a percentage of Company restaurant revenues,
occupancy and other operating costs increased by 0.6% to 24.5% as a result of the impact of those
same factors, partially offset by the closure of under-performing restaurants in the U.K.
(including benefits from the release of unfavorable lease obligations) and worldwide Company comparable
sales growth of 1.9% for the period.
In the U.S. and Canada, occupancy and other operating costs increased by $15 million, or 23%,
to $79 million during the three months ended September 30, 2008, compared to the same period in the
prior year, primarily driven by the net addition of 155 Company restaurants during the twelve
months ended September 30, 2008, which represents a 17% increase in the number of Company
restaurants in this segment year over year, increased utility costs and rents and start-up costs
related to new and acquired Company restaurants. As a percentage of Company restaurant revenues,
occupancy and other operating costs increased by 0.9% to 23.0% as a result of the unfavorable
impact of accelerated depreciation expense related to our restaurant reimaging program, increased
utility costs and rents and start-up costs related to new and acquired Company restaurants,
partially offset by Company comparable sales growth of 1.3% in this segment.
In EMEA/APAC, occupancy and other operating costs remained relatively unchanged at $37 million
during the three months ended September 30, 2008, compared to the same period in the prior year,
primarily due to a $2 million unfavorable impact from the movement in currency exchange rates,
offset by the net reduction of 18 Company restaurants during the twelve months ended September 30,
2008. As a percentage of Company restaurant revenues, occupancy and other operating costs decreased
by 0.3% to 26.8%, reflecting the benefits realized from Company comparable sales growth of 3.4% in
this segment and the closure of under-performing restaurants and the refranchising of Company
restaurants in the U.K. (including benefits from the release of
unfavorable lease obligations).
In Latin America, occupancy and other operating costs increased by $2 million, or 36%, to $6
million during the three months ended September 30, 2008, compared to the same period in the prior
year, primarily attributable to the net addition of eight Company restaurants during the twelve
months ended September 30, 2008, increased utility costs and the unfavorable impact of accelerated
depreciation expense related to an anticipated restaurant closure in Mexico. As a percentage of
Company restaurant revenues, occupancy and other operating costs increased by 4.7% to 32.2% as a
result of increased utility costs and the unfavorable impact of accelerated depreciation expense
related to an anticipated restaurant closure, partially offset by Company comparable sales growth
of 2.3% in this segment.
Selling, general and administrative expenses
Selling expenses increased by $1 million, or 4%, to $24 million for the three months ended
September 30, 2008, compared to the same period in the prior year. The increase is primarily
attributable to $1 million of additional sales promotions and advertising expenses generated by
higher Company restaurant revenues. The impact from currency exchange rates was not significant.
25
General and administrative expenses increased by $5 million, or 5%, to $101 million for the
three months ended September 30, 2008, compared to the same period in the prior year. The increase
is primarily attributable to a $1 million increase in corporate salary
and other fringe benefits, a $1 million increase in stock-based compensation, $2 million of
incremental amortization expense related to re-acquired franchise rights from restaurant
acquisitions, and $3 million of unfavorable impact from currency exchange rates. These increases
were partially offset by a $2 million in net miscellaneous cost savings.
Property Expenses
Total property expenses increased by $1 million, or 7%, to $15 million for the three months
ended September 30, 2008 compared to the same period in the prior year, primarily as a result of an
increase in contingent rent expense generated by worldwide comparable sales growth, accelerated
depreciation expense from restaurant closures and the non-reoccurrence of a prior year benefit from
the release of an unfavorable lease obligation in EMEA. These increases were partially offset by a net
reduction in the number of properties we lease or sublease to franchisees in EMEA.
Other operating (income) expense, net
Other operating expense, net for the three months ended September 30, 2008 was $9 million,
compared to zero for the same period in the prior year. This includes a $3 million charge related
to the remeasurement of foreign denominated assets and $2 million of net charges from the use of
foreign currency forward contracts. It also includes $2 million of charges associated with the
acquisition of franchise restaurants from a large franchisee in the U.S.
Income from Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Income from Operations: |
|
|
|
|
|
|
|
|
U.S. & Canada |
|
$ |
85 |
|
|
$ |
97 |
|
EMEA/APAC |
|
|
23 |
|
|
|
20 |
|
Latin America |
|
|
10 |
|
|
|
9 |
|
Unallocated |
|
|
(28 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
Total income from operations |
|
$ |
90 |
|
|
$ |
96 |
|
|
|
|
|
|
|
|
Income from operations decreased by $6 million, or 6%, to $90 million during the three months
ended September 30, 2008 compared to the same period in the prior year, primarily as a result of a
decrease in Company restaurant margin of $6 million, an increase in other operating expense, net of
$9 million and a $6 million increase in selling, general and administrative expenses. The decrease
in income from operations was partially offset by a $15 million increase in franchise revenues
driven by worldwide franchise comparable sales growth of 3.9% for the period and an increase in the
effective royalty rate. (See Note 13 to our unaudited condensed consolidated financial statements
for segment information disclosed in accordance with SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information.) The favorable impact that the movement in currency exchange
rates had on revenues was partially offset by the unfavorable impact on operating costs and
expenses, resulting in a $2 million net favorable impact on income from operations.
In the U.S. and Canada, income from operations decreased by $12 million, or 12%, to $85
million during the three months ended September 30, 2008, compared to the same period in the prior
year, primarily as a result of a decrease in Company restaurant margin of $3 million and an
increase in other operating (income) expense, net of $11 million. This decrease was partially
offset by a $5 million increase in franchise revenues, reflecting franchise comparable sales growth
of 3.2% for the period in this segment and an increase in the effective royalty rate in the U.S.
In EMEA/APAC, income from operations increased by $3 million, or 15%, to $23 million during
the three months ended September 30, 2008, compared to the same period in the prior year, primarily
as a result of an $8 million increase in franchise revenues, reflecting franchise comparable sales
growth of 5.0% for the period in this segment and the net increase of 232 franchise restaurants
during the twelve months ended September 30, 2008, and a $2 million decrease in other operating
(income) expense, net, partially offset by a decrease in Company restaurant margin of $3 million
and a $6 million increase in selling, general and
administrative expenses. The favorable impact that the movement in currency exchange rates had
on revenues was partially offset by the unfavorable impact on operating costs and expenses,
resulting in a $2 million net favorable impact on income from operations.
26
In Latin America, income from operations increased by $1 million, or 11%, to $10 million
during the three months ended September 30, 2008, compared to the same period in the prior year,
primarily as a result of a $2 million increase in franchise revenues, reflecting franchise
comparable sales growth of 5.4% for the period in this segment, and a net increase of 94 franchise
restaurants during the twelve months ended September 30, 2008.
Interest Expense, net
Interest expense, net decreased by $2 million during the three months ended September 30,
2008, compared to the same period in the prior year, reflecting a decrease in rates paid on
borrowings during the period. The weighted average interest rates for the three months ended
September 30, 2008 and 2007 were 5.4% and 6.8%, respectively, which included the impact of interest
rate swaps on 76% and 51% of our term debt, respectively.
Income Tax Expense
Income tax expense was $26 million for the three months ended September 30, 2008, resulting in
an effective tax rate of 34.2% primarily due to currency fluctuations and the current mix of income
from multiple tax jurisdictions.
Income tax expense was $31 million for the three months ended September 30, 2007
resulting in an effective tax rate of 38.8%. During the three months ended September 30, 2007, we
recorded a tax charge of $6 million related to law changes in various foreign jurisdictions and a
tax benefit of $3 million due to the release in valuation allowance as it was determined that
certain deferred tax assets would be realized.
Net Income
Our net income increased by $1 million, or 2%, to $50 million during the three months ended
September 2008 compared to the same period in the prior year, primarily as a result of a net
increase in restaurants and strong franchise comparable sales growth, which increased franchise revenues by
$15 million, a $5 million decrease in income tax expense and the benefit from a $2 million decrease
in interest expense, net. These improvements were partially offset by a decrease in Company
restaurant margin of $6 million, a $6 million increase in selling, general and administrative
expenses and $9 million of other operating expense, net.
Liquidity and Capital Resources
Overview
Cash provided by operations was $52 million during the three months ended September 30, 2008,
compared to $39 million during the three months ended September 30, 2007.
During the three months ended September 30, 2008, we borrowed $94 million and repaid $65
million under our revolving credit facility. Our leverage ratio, as defined by our credit
agreement, was 2.0x as of September 30, 2008, compared to 1.8x as of June 30, 2008. The weighted
average interest rate for the three months ended September 30, 2008 and 2007 was 5.4% and 6.8%,
respectively, which included the benefit of interest rate swaps on 76% and 51% of our term debt,
respectively.
During the three months ended September 30, 2008, we declared and paid one quarterly dividend
of $0.0625 per share, resulting in $8 million of cash payments to shareholders of record.
During the three months ended September 30, 2008, we repurchased 734 thousand shares of common
stock under our previously announced share repurchase program at an aggregate cost of $18 million,
which we will retain in treasury for future use. As of October 1, 2008, we had $51 million
remaining under the share repurchase program which expires on
December 31, 2008. We intend to use a portion of our excess cash to
repurchase shares under our share repurchase program depending on market conditions.
We had cash and cash equivalents of $118 million as of September 30, 2008. In addition, as of
September 30, 2008, we had a borrowing capacity of $44 million under our $150 million revolving
credit facility.
27
On July 16, 2008, we acquired 72 restaurants in Nebraska and Iowa from one of our franchisees
for a purchase price of approximately $67 million.
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, debt service payments and share repurchases, if any, over the next twelve
months and for the foreseeable future. If additional funds are needed for strategic initiatives or
other corporate purposes, we believe we could incur additional debt or raise funds through the
issuance of our equity securities.
Comparative Cash Flows
Operating Activities
Cash provided by operating activities was $52 million during the three months ended September
30, 2008 compared to cash provided by operating activities of $39 million during the three months
ended September 30, 2007. The $52 million provided during the three months ended September 30, 2008
includes net income of $50 million, including non-cash items such as a $45 million loss on the
re-measurement of foreign denominated transactions, offset by a usage of cash from a change in
working capital of $72 million. The $39 million provided during the three months ended September
30, 2007 includes net income of $49 million, offset by a $22 million payment to establish the Rabbi
trust to fund the Companys deferred compensation plan.
Investing Activities
Cash used for investing activities was $96 million during the three months ended September 30,
2008 and $13 million during the three months ended September 30, 2007. The $96 million cash usage
during the three months ended September 30, 2008 includes $67 million used for acquisitions of
franchise restaurants and $33 million of payments for property
and equipment, partially offset by $1 million
from asset disposals and restaurant closures and $3 million from return of investment on direct
financing leases and other investing activities. The $13 million cash usage during the three months
ended September 30, 2007 includes $23 million of payments for the purchase of property and
equipment, partially offset by $8 million of proceeds from asset disposals and restaurant closures and $2
million of principal payment 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 own. Other capital expenditures include investments in information technology
systems and corporate facilities. The following table presents capital expenditures by type of
expenditure:
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
New restaurants |
|
$ |
8 |
|
|
$ |
6 |
|
Existing restaurants |
|
|
23 |
|
|
|
13 |
|
Other, including corporate |
|
|
2 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Total |
|
$ |
33 |
|
|
$ |
23 |
|
|
|
|
|
|
|
|
We expect capital expenditures of approximately $170 million to $190 million in fiscal 2009 to
develop new restaurants, to fund our restaurant reimaging program and to make
improvements to restaurants we acquire, for operational initiatives in our restaurants and for
other corporate expenditures. We have expended $33 million in capital expenditures through
September 30, 2008.
28
Financing Activities
Cash provided by financing activities was $7 million during the three months ended September
30, 2008 compared to a $39 million cash usage during the three months ended September 30, 2007.
Cash provided by financing activities during the three months ended September 30, 2008 primarily
consisted of $94 million in proceeds from borrowings under the revolving credit facility, $3
million of excess tax benefits from stock-based compensation and $2 million in proceeds from stock
option exercises, offset by principal repayments on the revolving credit facility of $65 million,
repayments of capital leases of $1 million, a quarterly cash dividend payment of $8 million and the
repurchase of common stock of $18 million. Uses of cash in financing activities during the three
months ended September 30, 2007 included repayments of debt and capital leases of $27 million, a
quarterly cash dividend payment of $8 million and the repurchase of common stock of $6 million,
offset by $1 million in tax benefits from stock-based compensation and $1 million from proceeds of
stock option exercises.
Commitments and Off-Balance Sheet Arrangements
For information on Commitments and Off-Balance Sheet Arrangements, see Note 12 to our
unaudited condensed consolidated financial statements.
New Accounting Pronouncements Issued But Not Yet Adopted
In December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations (SFAS
141R). SFAS No. 141R replaces SFAS No. 141 but retains the fundamental requirements in SFAS No.
141 that the acquisition method of accounting be used for all business combinations and for an
acquirer to be identified for each business combination. SFAS No. 141R defines the acquirer as the
entity that obtains control of one or more businesses in the business combination and establishes
the acquisition date as the date that the acquirer achieves control. SFAS No. 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest
in the acquiree at their 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. SFAS No. 141R is effective prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, which for us will be business
combinations with an acquisition date beginning on or after July 1, 2009. We have not yet
determined the impact that SFAS No. 141R will have on our consolidated balance sheet and income
statement.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51. SFAS No. 160 amends ARB No. 51 to establish
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. SFAS
No. 160 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. SFAS No. 160 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.
SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008, which for us
will be our fiscal year beginning on July 1, 2009. We have not yet determined the impact, if any,
that SFAS No. 160 will have on our consolidated balance sheet and income statement.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133, which establishes, among other things,
the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161
requires qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit risk-related contingent features in derivative
agreements. SFAS No. 161 is effective for interim periods beginning after November 15, 2008, which
for us will be our interim period beginning January 1, 2009.
29
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures about Market Risk |
Market Risk
There were no material changes during the three months ended September 30, 2008 to the
disclosures made in Part II, Item 7A of the Companys Annual Report on Form 10-K for the year ended
June 30, 2008, except as noted below.
We have entered into foreign currency forward contracts intended to hedge our 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 and Canadian Dollars. Fluctuations
in the value of these forward contracts are recognized in our condensed consolidated statements of
income as incurred. The fluctuations in the value of these forward contracts do, however, largely
offset the impact of changes in the value of the underlying risk that they are intended to
economically hedge, which is also reflected in our condensed consolidated statements of income. As
of September 30, 2008, we had foreign currency forward contracts
to hedge the U.S. dollar equivalent of $392 million of foreign
currency-denominated assets. This U.S. dollar equivalent by currency is as follows: $324 million in Euros; $56 million in British Pounds and $12 million in Canadian Dollars. All foreign currency forward
contracts expire prior to September 30, 2009.
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 September 30, 2008, we had interest rate swaps with an aggregate notional value of $595
million that qualify as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended (SFAS No. 133). The interest rate swaps help us manage
exposure to changes in forecasted LIBOR-based interest payments made on variable rate debt. A 1%
change in interest rates on our existing debt of $898 million would result in an increase or
decrease in interest expense of approximately $3 million in a given year, as we have hedged $595
million of our future interest payments.
|
|
|
Item 4. |
|
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the participation of management,
including the Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of the Companys disclosure controls and procedures as of
September 30, 2008. 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 September 30,
2008 that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
Cautionary Note Regarding Forward-Looking Statements
Certain statements made in this report that reflect managements expectations regarding future
events and economic performance are forward-looking in nature and, accordingly, are subject to
risks and uncertainties. These forward-looking statements include statements regarding our beliefs
and expectations regarding our intention to focus on sales growth and profitability and expand our
large international platform; our expectations regarding restaurant openings/closures; our
intention to accelerate new restaurant development; our beliefs and expectations regarding
franchise restaurants, including their growth potential and the factors that will result in
financially stronger operators throughout our franchise base; our intention to continue to employ
innovative marketing strategies and expand product offerings; our intention to focus on Company
restaurant remodels and rebuilds; our ability to use proactive portfolio management to drive
financial performance and development; our estimates regarding our liquidity, capital expenditures
in fiscal 2009 and sources of both, and our ability to fund our future operations, obligations and
strategic initiatives; our intention to increase shareholder value through the use of a portion of
our excess cash to repurchase shares under our repurchase
program; 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 2009; our expectations regarding unrecognized tax benefits; and our expectations
regarding the impact of 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.
30
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:
|
|
|
Our ability to compete domestically and internationally in an intensely
competitive industry; |
|
|
|
|
Our ability to successfully implement our international growth strategy; |
|
|
|
|
Our ability to manage increases in our operating costs, including costs of food and
paper products, rent expense, energy costs and labor costs, which can adversely affect our
operating margins and financial results, particularly in an environment of declining sales
or challenging macroeconomic conditions, if we choose not to pass, or cannot pass, these
increased costs to our guests; |
|
|
|
|
Risks related to our international operations; |
|
|
|
|
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; |
|
|
|
|
Our continued good relationship with, and the success of, our franchisees; |
|
|
|
|
Our continued ability, and the ability of our franchisees, to obtain suitable
locations for new restaurant development; |
|
|
|
|
The ability of our franchisees to obtain financing for new development, restaurant
remodels and equipment initiatives on acceptable terms or at all given the current turmoil
in the global credit markets; |
|
|
|
|
The effectiveness of our marketing and advertising programs and franchisee support
of these programs; |
|
|
|
|
Risks related to franchisee financial distress 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; |
|
|
|
|
Risks related to the renewal of franchise agreements by our franchisees; |
|
|
|
|
The ability of franchisees who are experiencing losses from their other businesses to
continue to make payments to us and invest in our brand; |
|
|
|
|
Risks related to food safety, including foodborne illness and food tampering; |
|
|
|
|
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 of
necessary products to us;
|
|
|
|
|
Our ability to execute on our reimaging program in the U.S. and Canada to increase
sales and profitability, and the short term impact of our reimaging program on revenues and
operating margins due to temporary restaurant closures and accelerated depreciation of
assets; |
|
|
|
|
Our ability to identify and consummate successfully acquisition and development
opportunities in new and existing markets; |
31
|
|
|
Our ability to refinance or modify our bank debt or obtain additional financing to
fund our future cash needs given the current lending environment; |
|
|
|
|
Risks related to the impact of the global financial and credit crisis on the
restaurant industry in general and on our business and results of operations; |
|
|
|
|
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 due to disruptions in the global credit markets, including the bankruptcy
or restructuring of certain financial institutions; |
|
|
|
|
Fluctuations in currency exchange and interest rates, and their impact on both pretax
income and the income tax provision and our ability to manage the impact of volatility in
foreign currencies and interest rate markets; |
|
|
|
|
Risks related to interruptions or security breaches of our computer systems and risks
related to the lack of integration of our worldwide technology systems; |
|
|
|
|
Our ability to continue to extend our hours of operations, at least in the U.S. and
Canada, to capture a larger market of both the breakfast and late night dayparts; |
|
|
|
|
Changes in consumer perceptions of dietary health and food safety and negative
publicity relating to our products; |
|
|
|
|
Our ability to retain or replace executive officers and key members of management
with qualified personnel; |
|
|
|
|
Our ability to utilize foreign tax credits to offset our U.S. income taxes due to
continuing losses in the U.K. and other factors and risks related to the impact of changes
in statutory tax rates in foreign jurisdictions on our deferred taxes and effective tax
rate; |
|
|
|
|
Our ability to realize our expected tax benefits from the realignment of our European
and Asian businesses; |
|
|
|
|
Changes in demographic patterns of current restaurant locations; |
|
|
|
|
Our ability to adequately protect our intellectual property; |
|
|
|
|
Risks related to market conditions, including the market price and trading volume of
our common stock, that would affect the volume of purchases, if any, made under our Share
Repurchase Program; |
|
|
|
|
Our ability to manage changing labor conditions and difficulties in staffing our
international operations; |
|
|
|
|
Risks related to disruptions and catastrophic events, including disruption in the
financial markets, war, terrorism and other international conflicts, public health issues
and natural disasters; |
|
|
|
|
Adverse legal judgments, settlements or pressure tactics; and |
|
|
|
|
Adverse legislation or regulation. |
These risks are not exhaustive and may not include factors which could adversely impact
our business and financial performance. Moreover, we operate in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and it is not possible for our
management to predict all risk factors, nor can we assess the impact of all factors on our business
or the extent to which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
32
Although we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness
of any of these forward-looking statements. You should not rely upon forward-looking statements as
predictions of future events. We do not undertake any responsibility to update any of these
forward-looking statements to conform our prior statements to actual results or revised
expectations.
Part II Other Information
|
|
|
Item 1. |
|
Legal Proceedings |
On September 10, 2008, the Company and Burger King Corporation (BKC) were named as the
defendants in a class action lawsuit filed in the United States District Court for the Northern
District of California styled Castaneda v. Burger King Corp. and
Burger King Holdings, Inc. The complaint alleges that all Burger King® restaurants in California leased by BKC and operated by
franchisees violate accessibility requirements of the Americans with Disabilities Act (ADA) as
well as the California Disabled Persons Act (CDPA) and the Unruh Civil Rights Act (Unruh Act).
Plaintiff, on behalf of the class, seeks injunctive relief under the ADA, minimum statutory damages
per offense of $4,000 under the Unruh Act and $1,000 per incident under the CDPA, as well as
attorneys fees and costs. We intend to vigorously defend against all claims in this lawsuit. It is
not possible at this time to determine the likelihood of class certification in this case or
reasonably estimate the probability or amount of liability for monetary damages on a class wide
basis.
Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2008
includes a detailed discussion of the risk factors that could materially affect our business,
financial condition or future prospects. Set forth below is a discussion of the material changes in
our risk factors previously disclosed in our Annual Report on Form 10-K. The information below
updates, and should be read in conjunction with, the risk factors in our Annual Report on Form
10-K. We encourage you to read these risk factors in their entirety.
Disruptions in the financial markets may adversely impact the availability and cost of credit and
consumer spending patterns.
The ability of our franchisees to obtain financing for new development, restaurant remodels
and equipment initiatives, on acceptable terms or at all, will depend on prevailing economic
conditions and financial, business and other factors beyond their control. The subprime mortgage
crisis and disruptions in the financial markets may adversely impact the availability and cost of
credit. If our franchisees are unable to obtain financing to develop new restaurants or reinvest
in their existing restaurants, our business and financial results could be adversely affected.
The disruptions in the financial markets may also have an adverse effect on the U.S. and world
economy, which could negatively impact consumer spending patterns. There can be no assurances that
government responses to the disruption in the financial markets will restore consumer confidence,
stabilize the markets or increase liquidity and the availability of credit. Any material decline
in the amount of discretionary spending either in the United States or in other countries in which
we operate could reduce traffic in our restaurants or limit our ability to raise prices, either of
which could have a material adverse effect on our financial condition and results of operation.
Counterparties to our secured credit facility, interest rate swaps and foreign currency forward
contracts may not be able to fulfill their obligations due to disruptions in the global credit
markets.
Current economic conditions have been, and continue to be volatile and, in recent weeks, the
volatility has reached unprecedented levels. As a result of concerns about the stability of the
markets and the strength of counterparties, many financial institutions have reduced and, in some
cases, ceased to provide funding to borrowers. Based on information available to us, we have no
indication as of our filing date that the financial institutions syndicated under our secured
credit facility would be unable to fulfill their commitments to us, other than one holder of
33
less
than 2% of our revolving credit facility. Additionally, we enter into interest rate swaps and
foreign currency forward contracts to hedge the variability of the interest payments associated
with our secured credit facility and reduce our exposure to volatility from foreign currency
fluctuations associated with certain foreign currency-denominated assets. We are exposed to losses
in the event of nonperformance by counterparties on these instruments. Continued turbulence in the
global credit markets and the U.S. economy may adversely affect our results of operations,
financial condition and liquidity.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
The following table presents information related to repurchases of the Companys common stock
made during the fiscal quarter ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Number (or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate Value) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
of Shares That May |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
Yet be Purchased |
|
|
Total Number of |
|
|
|
|
|
Average Price Paid |
|
Announced Plans or |
|
Under the Plans or |
Period |
|
Shares Purchased |
|
|
|
|
|
Per Share |
|
Programs (1) (2) |
|
Programs |
July 1-31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
68,390,877 |
|
Aug 1-31, 2008
|
|
|
3,261 |
(3) |
|
|
|
|
|
$ |
26.77 |
|
|
|
|
|
|
$ |
68,390,877 |
|
Sept 1-30, 2008
|
|
|
734,382 |
|
|
|
|
|
|
$ |
24.04 |
|
|
|
734,382 |
|
|
$ |
50,739,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
737,643 |
|
|
|
|
|
|
$ |
24.05 |
|
|
|
734,382 |
|
|
$ |
50,739,395 |
|
|
|
|
(1) |
|
On May 31, 2007, the Companys Board of Directors authorized a $100 million share
repurchase program pursuant to which the Company would repurchase shares directly in the open
market consistent with the Companys insider trading policy and also repurchase shares under plans
complying with Rule 10b5-1 under the Exchange Act during periods when the Company may be prohibited
from making direct share repurchases under such policy. The program expires on December 31, 2008. |
|
(2) |
|
All shares purchased to date pursuant to the Companys share purchase program have been
deposited, and all future shares, if any, will be deposited, into treasury and retained for future
uses. |
|
(3) |
|
All shares purchased were in connection with the Companys obligation to withhold from
restricted stock awards the amount of federal withholding taxes due in respect of such
awards. |
The exhibits listed in the accompanying index are filed as part of this report.
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
18.1 |
|
|
Preferability Letter of KPMG LLP, Independent Registered Accounting Firm. |
|
|
|
|
|
|
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 |
34
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: November 5, 2008 |
By: |
/s/
Ben K. Wells
|
|
|
|
Name: |
Ben K. Wells |
|
|
|
Title: |
Chief Financial Officer
(principal financial and accounting officer) |
|
35
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
18.1 |
|
|
Preferability Letter of KPMG LLP, Independent Registered Accounting Firm. |
|
|
|
|
|
|
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 |
36