10-K 1 d264345d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2011

or

 

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

For the transition period from              to             

Commission file number: 001-32875

 

 

BURGER KING HOLDINGS, INC.

(Exact name of Registrant as Specified in Its Charter)

 

Delaware   75-3095469

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

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

(305) 378-3000

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes        ¨  No  þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes        þ  No  ¨

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  ¨        No  þ*

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

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

 

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  þ    Smaller reporting company   ¨
  

(Do not check if a smaller reporting company)

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

As of March 13, 2012, there were 100,000 shares of the Registrant’s Common Stock outstanding, all of which were owned by Burger King Worldwide Holdings, Inc., the Registrant’s parent holding company. The Registrant’s Common Stock is not publicly traded.

DOCUMENTS INCORPORATED BY REFERENCE:

None

*The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, but is not subject to such filing requirements.

 

 

 


Table of Contents

BURGER KING HOLDINGS, INC.

2011 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

PART I   

Item 1.

   Business      3   

Item 1A.

   Risk Factors      12   

Item 1B.

   Unresolved Staff Comments      25   

Item 2.

   Properties      25   

Item 3.

   Legal Proceedings      26   

Item 4.

   Mine Safety Disclosure      26   
PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
     27   

Item 6.

   Selected Financial Data      27   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      66   

Item 8.

   Financial Statements and Supplementary Data      68   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      144   

Item 9A.

   Controls and Procedures      144   
PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance      144   

Item 11.

   Executive Compensation      144   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      144   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      144   

Item 14.

   Principal Accounting Fees and Services      144   
PART IV   

Item 15.

   Exhibits and Financial Statement Schedules      145   

Burger King®, Whopper®, and Have It Your Way® are trademarks of Burger King Corporation. References to Fiscal 2010 and Fiscal 2009 in this Form 10-K are to the fiscal years ended June 30, 2010 and 2009, respectively, references to the Transition Period are to the six months ended December 31, 2010 and references to 2011 are to the year ending December 31, 2011. Unless the context otherwise requires, all references to “we”, “us”, “our” and “Company” refer to Burger King Holdings, Inc. and its subsidiaries.

In this document, we rely on and refer to information regarding the restaurant industry, the quick service restaurant segment and the fast food hamburger restaurant category that has been prepared by the industry research firm The NPD Group, Inc. (which prepares and disseminates Consumer Reported Eating Share Trends, or CREST® data) or compiled from market research reports, analyst reports and other publicly available information. All industry and market data that are not cited as being from a specified source are from internal analysis based upon data available from known sources or other proprietary research and analysis.

 

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Item 1. Business

Overview

Burger King Holdings, Inc. (“we” or the “Company”) is a Delaware corporation formed on July 23, 2002. We are the parent of Burger King Corporation (also referred to as “BKC”), a Florida corporation that franchises and operates fast food hamburger restaurants, principally under the Burger King brand (also referred to as the “Brand”). We are the world’s second largest fast food hamburger restaurant, or FFHR, chain as measured by the total number of restaurants. As of December 31, 2011, we owned or franchised a total of 12,512 restaurants in 81 countries and U.S. territories, of which 1,295 restaurants were Company restaurants and 11,217 were owned by our franchisees. Of these restaurants, 5,012, or 40%, are located outside the U.S. and Canada and account for over 33% of our revenue. Our restaurants feature flame-grilled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other affordably-priced food items. During our more than 50 years of operating history, we have developed a scalable and cost-efficient quick service hamburger restaurant model that offers customers fast food at affordable prices.

We generate revenues from two sources: (1) retail sales at Company restaurants; and (2) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees as well as property income we derive from properties we lease or sublease to our franchisees. Approximately 90% of our current restaurants are franchised and we have a higher percentage of franchise restaurants to Company restaurants than our major competitors in the FFHR category. We believe that our high percentage of franchise restaurants provides us with a strategic advantage because the capital required to grow and maintain the Burger King® system is funded primarily by franchisees. Our franchise dominated business model also presents a number of drawbacks and risks, such as our limited control over franchisees and limited ability to facilitate changes in restaurant ownership. In addition, our operating results are closely tied to the success of our franchisees, and we are dependent on franchisees to open new restaurants as part of our growth strategy.

Our History

Our history dates back more than a half-century, having been founded in 1954 when James McLamore and David Edgerton opened the first Burger King restaurant in Miami, Florida. The Whopper® sandwich was introduced in 1957. In 2006, we completed a successful initial public offering, and listed our stock on the New York Stock Exchange. On October 19, 2010, we were acquired by 3G Special Situations Fund II, L.P. (“3G”), an affiliate of 3G Capital Partners, Ltd., an investment firm based in New York (“3G Capital”). As a result of the acquisition, our common stock ceased to be traded on the New York Stock Exchange after close of market on October 19, 2010.

Our Industry

We operate in the FFHR category of the quick service restaurant, or QSR, segment of the restaurant industry. In the United States, the QSR segment is the largest segment of the restaurant industry and has demonstrated steady growth over a long period of time. According to The NPD Group, Inc., which prepares and disseminates CREST® data, QSR sales have grown at an annual rate of 3% over the past 10 years, totaling approximately $240 billion for the 12-month period ended December 2011 and are projected to increase at an annual rate of 3% between 2011 and 2016.

According to The NPD Group, Inc., the FFHR category is the largest category in the QSR segment, generating sales of $69.8 billion in the United States for the 12-month period ended December 2011, representing 29% of total QSR sales. According to The NPD Group, Inc., sales for the FFHR category are expected to increase at an average rate of 4% per year over the next five years. For the 12-month period ended December 2011, Burger King accounted for approximately 12% of total FFHR sales in the United States.

 

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Our Business Strategy

We believe there are significant opportunities for our Company and the entire Burger King system by:

 

   

Accelerating international development:    The expansion of our international restaurant network is an integral part of our global portfolio realignment project. As part of this project we expect to accelerate our international development with strategic partners and joint ventures. In 2011, we entered into a joint venture and master development agreement with a franchisee to drive development in Brazil, and we are actively seeking strategic partners to accelerate our international expansion in other countries. Generally, these strategic arrangements grant one or more franchisees the exclusive right to develop and manage Burger King restaurants in a specific country or region. We expect to focus our international expansion plans predominantly in high-growth emerging markets, including Brazil, China, Russia, Turkey, the Middle East, Africa, India and other countries where, among other things, we believe our current penetration is low relative to our potential. We entered Vietnam, Morocco, Slovenia, Macedonia and Luxembourg in 2011 and expect to open restaurants in additional new markets during 2012 and beyond.

 

   

Driving sales and traffic in the U.S. and Canada:    We have identified the following four priorities that we believe will enable us to drive future sales and traffic in the U.S. and Canada:

 

   

Marketing Communications.    We have established a data driven marketing process which is clearly focused on driving restaurant sales and traffic, while targeting a broader consumer base with more inclusive messaging. Through our food-centric marketing communication strategy, we believe we can refocus our consumers on food, which is our core asset.

 

   

Menu.    The strength of our menu has been built on our brand equities of using our distinct flame-grilled cooking platform to make better tasting burgers. Our menu strategy seeks to optimize our menu by focusing on our core products, such as our flagship Whopper® sandwich, while continuing to enhance our menu to appeal to a broader range of consumers. We have launched an initiative to focus on our food, through new product launches and improving our current products, such as our soft-serve ice cream, crispy thick cut french fries, specialty drinks and the introduction of additional platforms.

 

   

Operations.    We have restructured our field teams to significantly increase our field presence and more closely align field compensation with restaurant performance. We believe our new field structure will help improve our restaurant operations, including speed of service and restaurant cleanliness. We call this our “field optimization project”.

 

   

Image.    We have lowered the cost of remodeling restaurants using elements of our contemporary “20/20 design”, which draws inspiration from our signature flame-grilled cooking process. We have provided our franchisees in the United States with financial incentives and access to a third-party financing program to assist them in their remodeling efforts.

 

   

Enhancing restaurant-level margins and profitability:    We believe we have a substantial opportunity to improve margins in our restaurants through both top line growth and cost management initiatives. We believe that these priorities will help to increase Company restaurant profitability to the levels of our most successful franchisees. We also continue to work with our franchisees to improve the profitability of the entire system.

 

   

Driving corporate-level G&A efficiencies:    We are focused on identifying opportunities to drive corporate-level G&A efficiencies by (1) maintaining our “Zero Based Budgeting” program, which is a method of annual planning designed to build a strong ownership culture by requiring departmental budgets to estimate and justify costs and expenditures from a “zero base,” rather than focusing on the prior year’s base, and (2) tying a portion of management’s incentive compensation specifically to our G&A budget. See “Management’s Discussion and Analysis of Results of Operations” in Part II, Item 7 of this Form 10-K.

 

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Actively pursuing refranchising opportunities:    As part of our global portfolio realignment project, we are focused on actively refranchising Company restaurants to new and existing franchisees to further improve our profitability and cash flow through reduced capital expenditures and increased royalty revenues.

Global Operations

We operate in four operating segments: (i) the U.S. and Canada; (ii) Europe, the Middle East and Africa, or EMEA; (iii) Latin America and the Caribbean, or LAC and (iv) Asia Pacific, or APAC. Additional financial information about geographic segments is incorporated herein by reference to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and Segment Reporting in Part II, Item 8 in Note 19 of this Form 10-K. Our restaurants are limited-service restaurants of distinctive design and are generally located in high-traffic areas. We believe our restaurants appeal to a broad spectrum of consumers, with multiple day parts appealing to different customer groups.

United States and Canada (U.S. and Canada)

As of December 31, 2011, we had 939 Company restaurants and 6,561 franchise restaurants operating in the U.S. and Canada.

Our Company restaurants in the U.S. and Canada generated $1.2 billion in revenues during 2011, or 75% of our total U.S. and Canada revenues and 50% of our total worldwide revenues.

We grant franchises to operate restaurants using Burger King trademarks, trade dress and other intellectual property, uniform operating procedures, consistent quality of products and services and standard procedures for inventory control and management. Our growth and success have been built, in significant part, upon our substantial franchise operations. We franchised our first restaurant in 1961, and as of December 31, 2011, there were 6,561 franchise restaurants, owned by 720 franchise operators, in the U.S. and Canada. We earned $397.1 million in franchise and property revenues in the U.S. and Canada during 2011, or 57% of our total worldwide franchise and property revenues. Franchisees report gross sales on a monthly basis and pay royalties based on reported sales.

Europe, the Middle East and Africa (EMEA)

EMEA is the second largest region in the Burger King system behind the United States, as measured by number of restaurants. As of December 31, 2011, EMEA had 2,882 restaurants in 38 countries and territories, including 192 Company restaurants located in Germany, the U.K., and Spain. While Germany continues to be the largest market in EMEA with 678 restaurants as of December 31, 2011, Turkey is one of our fastest growing markets with net openings of 72 restaurants during the twelve months ended December 31, 2011. We have expanded our network of restaurants in EMEA over the past few years via contiguous growth in Central and Eastern Europe and the Middle East and Africa, including entry into the Czech Republic, Russia and Oman. Throughout the EMEA region, we continue to evaluate opportunities to accelerate development, including through the establishment of master franchisees with exclusive development rights and joint ventures with new and existing franchisees.

Our Company restaurants in EMEA generated $330.7 million in revenues during 2011, or 63% of our total EMEA revenues and 14% of our total worldwide revenues.

We earned $194.9 million in franchise and property revenues in EMEA during 2011, or 28% of our total worldwide franchise and property revenues. Certain EMEA markets, including Hungary and Portugal, are operated by a single franchisee, while others, such as the U.K., Germany and Spain, have multiple franchisees.

 

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Latin America and the Caribbean (LAC)

As of December 31, 2011, we had 1,222 restaurants in 27 countries and territories in LAC. There were 97 Company restaurants in LAC, all located in Mexico, and 1,125 franchise restaurants in the segment as of December 31, 2011. Mexico is the largest market in this segment, with a total of 415 restaurants as of December 31, 2011, or 34% of the region. We believe that there are significant growth opportunities in South America. In July 2011, we formed a joint venture with a new franchisee in Brazil and granted the joint venture exclusive development rights for the country.

Asia Pacific (APAC)

As of December 31, 2011, APAC had 908 restaurants in 14 countries and territories, including China, Singapore, Malaysia, Thailand, Australia, Philippines, New Zealand, South Korea, Indonesia and Japan. In APAC, we have 67 Company restaurants, all of which are located in China and Singapore, and 841 franchise restaurants. Australia is the largest market in APAC, with 347 restaurants as of December 31, 2011, all of which are franchised and operated under Hungry Jack’s®, a brand that we own in Australia and New Zealand. Australia is the only market in which we operate under a brand other than Burger King. We believe there is significant opportunity to grow the brand in existing and new markets in APAC.

Franchise Agreements

General.    We grant franchises to operate restaurants using Burger King trademarks, trade dress and other intellectual property, uniform operating procedures, consistent quality of products and services and standard procedures for inventory control and management. For each franchise restaurant, we generally enter into a franchise agreement covering a standard set of terms and conditions. Recurring fees consist of monthly royalty and advertising payments. Franchise agreements are not assignable without our consent, and we have a right of first refusal if a franchisee proposes to sell a restaurant. Defaults (including non-payment of royalties or advertising contributions, or failure to operate in compliance with the terms of the Manual of Operating Data) can lead to termination of the franchise agreement. These transactions must meet our minimum approval criteria to ensure that franchisees are adequately capitalized and that they satisfy certain other requirements.

U.S. and Canada.    In the U.S. and Canada, we typically enter into a separate franchise agreement for each restaurant. The typical franchise agreement in the U.S. and Canada has a 20-year term (for both initial grants and renewals of franchises) and contemplates a one-time franchise fee of $50,000 which must be paid in full before the restaurant opens for business, or in the case of renewal, before expiration of the current franchise term. Most existing franchise restaurants pay a royalty of 4% in the U.S. and 4.5% in Canada. Since June 2003, most new franchise restaurants opened and franchise agreements renewed in the United States generated royalties at the rate of 4.5% of gross sales for the full franchise term. The weighted average royalty rate in the U.S. and Canada was 4.0% as of December 31, 2011. In addition to their royalties, franchisees in the U.S. and Canada are generally required to make a contribution to the advertising fund equal to a percentage of gross sales, typically 4%, on a monthly basis. In 2011, we offered franchisees reduced up front franchise fees and limited-term royalty rate reductions to accelerate development of new restaurants. In addition, in an effort to improve the image of our restaurants in the U.S, we offered U.S. franchisees reduced up front franchise fees and limited-term royalty and advertising fund rate reductions to remodel restaurants in our 20/20 image.

International.    Internationally, we typically enter into franchise agreements for each restaurant with an up front franchise fee of $50,000 per restaurant and monthly royalties and advertising contributions each of up to 5% of gross sales. However, in many of our international markets, we have granted either master franchise agreements or development agreements that provide franchisees broader development rights and obligations. In Australia and Turkey, we have entered into master franchise agreements with a franchisee in each country which permits that franchisee to sub-franchise restaurants within its territory. In New Zealand and certain Middle East and Persian Gulf countries, we have entered into arrangements with franchisees under which they have agreed to nominate third party franchisees to develop and operate restaurants within their respective territories under

 

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franchise agreements with us. As part of these arrangements, the franchisees have agreed to provide certain support services to third party franchisees on our behalf, and, in some cases, we have agreed to share royalties and franchise fees paid by such third party franchisees. We have also entered into exclusive development agreements with franchisees in a number of international markets. In addition, we have established a joint venture with a new franchisee to accelerate development in Brazil, and we expect to continue to use this investment vehicle as one of the strategies to increase our presence globally.

Franchise Restaurant Leases.    We typically do not own the land or the building associated with our franchise restaurants and our standard franchise agreement does not contain a lease component. Rather, to the extent that we lease or sublease the property to a franchisee, we will enter into a separate lease agreement. For properties that we lease from third-party landlords and sublease to franchisees, leases generally provide for fixed rental payments and may provide for contingent rental payments based on a restaurant’s annual gross sales. Franchisees who lease land only or land and building from us do so on a “triple net” basis. Under these triple net leases, the franchisee is obligated to pay all costs and expenses, including all real property taxes and assessments, repairs and maintenance and insurance. As of December 31, 2011, we leased or subleased to franchisees 997 properties in the U.S. and Canada and 84 properties internationally, primarily sites located in the U.K. and Germany. These properties represented approximately 15% and 2%, respectively, of our total franchise restaurant count in such regions. We do not own or lease any properties to franchisees in APAC or LAC.

Product Offerings and Development

The strength of our menu has been built on the brand equities of allowing consumers to customize their hamburgers “their way” and using our distinct flame-grilled cooking platform to make better tasting hamburgers. We intend to continue to focus on our core products, and to drive average check and traffic, while improving menu options through new product launches, including additional healthy products. We have introduced, and expect to continue to introduce, new menu offerings which will complement our core products. Product innovation begins with an intensive research and development process that analyzes each potential new menu item, including market tests to gauge consumer taste preferences, and includes an ongoing analysis of the economics of food cost, margin and final price point. We believe new product development is critical to our long-term success.

As part of our commitment to providing nutritional alternatives to our customers with children, we are part of the Council for Better Business Bureau’s (CBBB) Children Food and Beverage Advertising Initiative (CFBAI) in 2007 and pledged to restrict 100 percent of national advertising aimed at children under 12 to BK® Kids Meals that meet stringent nutrition criteria. In the U.S., we currently have three existing BK®Kids Meal lunch/dinner options that meet these strict nutritional criteria and a breakfast meal for children. Burger King Corporation (“BKC”) also provides BK Positive Steps nutrition materials in restaurants nationwide, has transitioned to zero grams of artificial trans fat in all ingredients and cooking oils in the U.S., and has partnered with the National Restaurant Association’s “Kids Live Well” program and USDA to promote MyPlate information to both kids and adults. In 2011, we also launched the BK Crown TM/MC program, a consumer loyalty program which provides activities and games for children and the opportunity to give back to the community.

Operating Procedures

All of our restaurants must adhere to strict standardized operating procedures and requirements which we believe are critical to the image and success of the Burger King brand. Each restaurant is required to follow the Manual of Operating Data, an extensive operations manual containing mandatory restaurant operating standards, specifications and procedures prescribed from time to time to assure uniformity of operations and consistently high quality products at Burger King restaurants. In the U.S. and Canada, we recently implemented a field optimization project to expand and enhance our field organization to better support our franchisees in an effort to drive sales, increase profits and improve restaurant operations.

 

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Restaurant Design and Image

System-wide, our restaurants consist of several different building types with various seating capacities, including free-standing buildings, as well as restaurants located in airports, strip malls and shopping malls, toll road rest areas and educational and sports facilities. Our 20/20 restaurant design draws inspiration from our signature flame-grilled cooking process and incorporates a variety of innovative elements to a backdrop that evokes the industrial look of corrugated metal, brick, wood and concrete. Approximately 1,114 restaurants using this design have been built in our international regions. In addition, we have developed a more cost effective “20/20” remodeling solution which we believe will drive meaningful sales lifts to improve the return on capital for ourselves and our franchisees. In 2011, we instituted an initiative in the U.S. to accelerate the pace of 20/20 image remodels by offering financial incentives to franchisees. By December 31, 2011, we had commitments to remodel over 1,000 restaurants by U.S. franchisees. We also introduced a third party lending program to provide financing to U.S. franchisees to facilitate their remodeling efforts.

New Restaurant Development

U.S. and Canada.    We employ a sophisticated and disciplined market planning and site selection process through which we identify trade areas and approve restaurant sites throughout the U.S. and Canada that we believe provides for quality expansion. We have established a development committee to oversee all new restaurant development within the U.S. and Canada. Our development committee’s objective is to ensure that every proposed new restaurant location is carefully reviewed and that each location meets the stringent requirements established by the committee, which include factors such as site accessibility and visibility, traffic patterns, signage, parking, site size in relation to building type and certain demographic factors.

International.    In several of our international markets, there is a single franchisee that owns and operates all of the restaurants within a country. In those international markets that are not allocated to a single franchisee, our market planning and site selection process is managed by regional teams, who are knowledgeable about the local market.

Advertising and Promotion

We believe sales in the QSR segment can be significantly affected by the frequency and quality of advertising and promotional programs. We believe that three of our major competitive advantages are our strong brand equity, market position and our global franchise network which allow us to drive sales through our advertising and promotional programs.

Our current global marketing strategy is based on a food-centric marketing communication approach to refocus our consumers on our core asset: our food. We have established a data driven marketing process which is clearly focused on driving restaurant sales and traffic, while targeting a broader consumer base with more inclusive messaging. We concentrate our marketing on television advertising, which we believe is the most effective way to reach our customers. We also use radio and internet advertising and other marketing tools on a more limited basis.

In the U.S. and Canada and those international markets where we operate Company restaurants, we and our franchisees make monthly contributions, generally 4% – 5% of restaurant gross sales, to Company managed advertising funds. In many markets where we do not have Company restaurants, franchisees make this contribution into a franchisee managed advertising fund. In other markets, the Company manages the advertising fund. As part of our global marketing strategy, we provide these franchisees with advertising support and guidance in order to deliver a consistent global brand message. Advertising contributions are used to pay for expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions and other support functions. In addition to the mandated advertising fund contributions, U.S. franchisees may elect to participate in certain local advertising campaigns at the Designated Market Area level by making contributions beyond those required for participation in the national advertising fund.

 

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In the United States and in those other countries where we have Company restaurants or manage the advertising fund, we coordinate the development, budgeting and expenditures for all marketing programs, as well as the allocation of advertising and media contributions, among national, regional and local markets, subject in the United States to minimum expenditure requirements for media costs and certain restrictions as to new media channels. We are required, however, under our U.S. franchise agreements, to discuss the types of media in our advertising campaigns and the percentage of the advertising fund to be spent on media with the recognized franchisee association, currently the National Franchisee Association, Inc. In the U.S. and certain other markets, we typically conduct a non-binding poll of our franchisees before introducing any nationally- or locally-advertised price or discount promotion to gauge the level of support for the campaign.

Supply and Distribution

We establish the standards and specifications for most of the goods used in the development and operation of our restaurants and for the direct and indirect sources of supply of most of those items. These requirements help us assure the quality and consistency of the food products sold at our restaurants and protect and enhance the image of the Burger King system and the Burger King brand.

In general, we approve the manufacturers of the food, packaging and equipment products and other products used in Burger King restaurants, as well as the distributors of these products to Burger King restaurants. Franchisees are generally required to purchase these products from approved suppliers and distributors. We consider a range of criteria in evaluating existing and potential suppliers and distributors, including product and service consistency, delivery timeliness and financial condition.

Restaurant Services, Inc., or RSI, is a not-for-profit, independent purchasing cooperative formed in 1992 to leverage the purchasing power of the Burger King system in the United States. As the purchasing agent for the Burger King system in the United States, RSI negotiates the purchase terms for most equipment, food, beverages (other than branded soft drinks) and other products such as promotional toys and paper products used in our restaurants. RSI is also authorized to purchase and manage distribution services on behalf of the Company restaurants and franchisees who appoint RSI as their agent for these purposes. As of December 31, 2011, RSI was appointed the distribution manager for approximately 94% of the restaurants in the United States. A subsidiary of RSI acts as purchasing agent for food and paper products for our Company and franchise restaurants in Canada under a contract with us. As of December 31, 2011, four distributors serviced approximately 85% of U.S. system restaurants and the loss of any one of these distributors would likely adversely affect our business.

There is currently no designated purchasing agent that represents franchisees in our international regions. We approve suppliers and distributors and use similar standards and criteria to evaluate international suppliers that we use for U.S. suppliers. Franchisees may propose additional suppliers, subject to our approval and established business criteria.

In Fiscal 2000, we entered into long-term exclusive contracts with soft drink vendors to supply Company restaurants and franchise restaurants with their products, which obligate 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 December 31, 2011, we estimate that it will take approximately 14 years for these purchase commitments to be completed. If these agreements were terminated, we would be obligated to pay significant termination fees and certain other costs.

Quality Assurance

We are focused on achieving a high level of guest satisfaction through the periodic monitoring of restaurants for compliance with our operations platforms. We measure our customer experience principally through Guest

 

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Trac®, a rating system based on survey data submitted by our customers. We review the overall performance of our operations platforms and focuses on evaluating and improving restaurant operations and guest satisfaction.

We have uniform operating standards and specifications relating to selection of menu items, maintenance and cleanliness of the premises and employee conduct. In addition, all Burger King restaurants are required to be operated in accordance with quality assurance and health standards which we establish, as well as standards set by federal, state and local governmental laws and regulations. These standards include food preparation rules regarding, among other things, minimum cooking and holding times and temperatures, sanitation and cleanliness. Additionally, we and an independent outside vendor administer the Restaurant Food Safety certification, which is intended to bring heightened awareness to food safety, and includes immediate follow-up procedures to take any action needed to protect the safety of our customers.

We closely supervise the operation of all of our Company restaurants to help ensure that standards and policies are followed and that product quality, guest service and cleanliness of the restaurants are maintained. In the U.S. and Canada, we recently implemented a field optimization project to significantly increase our field presence, which we believe will help improve restaurant operations. Detailed reports from management information systems are tabulated and distributed to management on a regular basis to help maintain compliance. In addition, we conduct scheduled and unscheduled inspections of Company and franchise restaurants throughout the Burger King system.

Intellectual Property

We own valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information. As of December 31, 2011, we owned approximately 2,928 trademark and service mark registrations and applications and approximately 1,376 domain name registrations around the world, some of which are of material importance to our business. Depending on the jurisdiction, trademarks and service marks generally are valid as long as they are used and/or registered. We also have established the standards and specifications for most of the goods and services used in the development, improvement and operation of Burger King restaurants. These proprietary standards, specifications and restaurant operating procedures are trade secrets owned by us. Additionally, we own certain patents relating to equipment used in our restaurants and provide proprietary product and labor management software to our franchisees. Patents are of varying duration.

Competition

We operate in the FFHR category of the QSR segment of the broader restaurant industry. We compete in the United States and internationally with many well-established food service companies on the basis of product choice, quality, affordability, service and location. Our competitors include a variety of independent local operators, in addition to well-capitalized regional, national and international restaurant chains and franchises. In the FFHR industry our principal competitors are McDonald’s Corporation, or McDonald’s, and The Wendy’s Company, or Wendy’s, as well as regional hamburger restaurant chains, such as Carl’s Jr., Jack in the Box and Sonic. To a lesser extent, we also compete for consumer dining dollars with national, regional and local (i) quick service restaurants that offer alternative menus, (ii) casual and “fast casual” restaurant chains, and (iii) convenience stores and grocery stores. Furthermore, the restaurant industry has few barriers to entry, and therefore new competitors may emerge at any time.

Government Regulation

We are subject to U.S. and international laws affecting the operation of our restaurants. Each of our restaurants must comply with licensing requirements and regulations by a number of governmental authorities, which include zoning, health, safety, sanitation, building and fire agencies in the jurisdiction in which the

 

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restaurant is located. Our restaurant operations are also subject to domestic and international laws governing union organizing, working conditions, work authorization requirements, health insurance, overtime and wages. Domestically, federal and state laws govern the rates at which our hourly employees are paid. Internationally, many countries provide employees with significant protections regarding their salaries. We are also subject to the regulations of the U.S. Citizenship and Immigration Services and U.S. Immigration and Customs Enforcement, and tariffs and regulations on imported commodities and equipment and laws regulating foreign investment.

We are subject to laws relating to information security, privacy, cashless payments and consumer credit, protection and fraud. An increasing number of governments and industry groups worldwide have established data privacy laws and standards for the protection of personal information, including social security numbers and financial information.

In the U.S., our facilities must comply with the Americans with Disabilities Act, or the ADA, which requires that all public accommodations and commercial facilities meet federal requirements related to access and use by disabled persons. As described more fully under “Item 3. Legal Proceedings,” we recently reached a settlement in an action in California alleging that all of the Burger King restaurants in California leased by the Company and operated by franchisees violated accessibility requirements under federal and state law.

The offer and sale of franchises are subject to the rules and regulations of the Federal Trade Commission, or the FTC, and various state laws and similar foreign agencies. A number of states in which we are currently franchising regulate the sale of franchises and require registration of the franchise disclosure document with state authorities and the delivery of a franchise disclosure document to prospective franchisees. We are currently operating under exemptions from registration in several of these states based upon our net worth and experience. These state laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply.

As a manufacturer and distributor of food products, we are subject to food safety regulations, including supervision by the U.S. Food and Drug Administration and its international equivalents, which govern the manufacture, labeling, packaging and safety of food. In addition, we may become subject to legislation or regulation seeking to tax and/or regulate high-fat, high-calorie and high-sodium foods, particularly in the United States, the U.K. and Spain. Certain counties, states and municipalities, such as California, Vermont, New York City, and King County, Washington, have approved menu labeling legislation that requires restaurant chains to provide caloric information on menu boards, and menu labeling legislation has also been adopted on the federal level. Regulators in Canada and in other countries are proposing to take steps to reduce the level of exposure to acrylamide, a potential carcinogen that naturally occurs in the preparation of foods such as french fries.

Public interest groups and lawmakers have increasingly focused on the marketing of high-calorie, high-fat and high-sodium foods to children in a stated effort to combat childhood obesity. For example, regulators in the U.K. have adopted restrictions on television advertising of foods high in fat, salt or sugar targeted at children. In addition, laws have been enacted in certain places that limit distribution of free toy premiums only to customers purchasing kids’ meals that meet certain nutritional requirements. The federal public attorney in Sao Paulo, Brazil filed a civil lawsuit against Burger King and other fast food restaurant companies in June 2009 to prohibit promotional sales of toys in our restaurants in Brazil. We have signed the EU Pledge, which is a voluntary commitment to the European Commission to change our advertising to children under the age of 12 in the European Union.

Environmental Matters

We are subject to various federal, state and local environmental regulations. Various laws concerning the handling, storage and disposal of hazardous materials and restaurant waste and the operation of restaurants in environmentally sensitive locations may impact aspects of our operations; however, compliance with applicable

 

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environmental regulations is not believed to have a material effect on capital expenditures, financial condition, results of operations, or our competitive position. Increased focus by U.S. and overseas governmental authorities on environmental matters is likely to lead to new governmental initiatives, particularly in the area of climate change. To the extent that these initiatives caused an increase in our supplies or distribution costs, they may impact our business both directly and indirectly. Furthermore, climate change may exacerbate adverse weather conditions which could adversely impact our operations and/or increase the cost of our food and other supplies in ways which we cannot predict at this time.

Seasonal Operations

Our business is moderately seasonal. Restaurant sales are typically higher in the spring and summer months when weather is warmer than in the fall and winter months. Restaurant sales during the winter are typically highest in December, during the holiday shopping season. Our restaurant sales and Company restaurant margins are typically lowest during the winter months, which include February, the shortest month of the year. Furthermore, adverse weather conditions can have material adverse effects on restaurant sales. The timing of religious holidays may also impact restaurant sales. Because our business is moderately seasonal, results for any one quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.

Our Employees

As of December 31, 2011, we had approximately 34,248 employees in our Company restaurants and our restaurant support centers.

Financial Information about Business Segments and Regions

Financial information about our business segments (U.S. & Canada, EMEA, LAC and APAC) is incorporated herein by reference from Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and in Financial Statements and Supplementary Data in Part II, Item 8 of this Form 10-K.

Available Information

The Company makes available free of charge on or through the Investor Relations section of its internet website at www.bk.com, this report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission (“SEC”). This information is also available at www.sec.gov, an internet site maintained by the SEC that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The material may also be read and copied by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549. Information on the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330. The references to our website address and the SEC’s website address do not constitute incorporation by reference of the information contained in these websites and should not be considered part of this document.

 

Item 1A. Risk Factors

Special Note Regarding Forward-Looking Statements

Certain statements made in this report that reflect management’s expectations regarding future events and economic performance are forward-looking in nature and, accordingly, are subject to risks and uncertainties. These forward-looking statements include statements regarding our intent to focus on sales growth and profitability; our intent to focus on international expansion to increase the number of new restaurants, particularly in high growth emerging markets; our beliefs and expectations regarding the mix of franchise

 

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restaurants and Company restaurants, including our expectations that the percentage of franchise restaurants will increase; our beliefs and expectations regarding our ability to drive sales and traffic in the U.S and Canada through execution of our four priorities of marketing communications, menu, operations and image; our beliefs and expectations regarding the strength of our menu and our ability to optimize our menu by focusing on core products while continuing to enhance our menu to appeal to a broader range of consumers; our expectations regarding opportunities to enhance restaurant-level margins and profitability; our beliefs and expectations regarding our ability to drive corporate-level G&A efficiencies; our beliefs and expectations regarding our ability to actively pursue refranchising opportunities to improve our profitability and cash flow; our ability to manage fluctuations in foreign currency exchange and interest rates; our estimates regarding our liquidity, capital expenditures and sources of both, and our ability to fund future operations and obligations; our estimates regarding the fulfillment of certain volume purchase commitments; our expectations regarding the impact of accounting pronouncements; our intention to renew hedging contracts; and our expectations regarding unrecognized tax benefits. 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, including, but not limited to, the risks and uncertainties discussed below.

Risks related to our business

Our success depends on our ability to compete with our major competitors, many of which have greater resources than us.

The restaurant industry is intensely competitive and we compete in the United States and internationally with many well-established food service companies on the basis of product choice, quality, affordability, service and location. Our competitors include a variety of independent local operators, in addition to well-capitalized regional, national and international restaurant chains and franchises. In the FFHR industry our principal competitors are McDonald’s and Wendy’s as well as regional hamburger restaurant chains, such as Carl’s Jr., Jack in the Box and Sonic. To a lesser extent, we also compete for consumer dining dollars with national, regional and local (i) quick service restaurants that offer alternative menus, (ii) casual and “fast casual” restaurant chains, and (iii) convenience stores and grocery stores. Furthermore, the restaurant industry has few barriers to entry, and therefore new competitors may emerge at any time.

Our ability to compete will depend on the success of our plans to improve existing products, to develop and roll-out new products and product line extensions, to effectively respond to consumer preferences and to manage the complexity of our restaurant operations as well as the impact of our competitors’ actions. Some of our competitors have substantially greater financial resources, higher revenues and greater economies of scale than we do. These advantages may allow them to (1) react to changes in pricing, marketing and the QSR segment in general more quickly and more effectively than we can, (2) rapidly expand new product introductions, (3) spend significantly more on advertising, marketing and other promotional activities than we do, which may give them a competitive advantage through higher levels of brand awareness among consumers and (4) devote greater resources to accelerate their restaurant remodeling and rebuilding efforts. Moreover, certain of our major competitors have completed the reimaging of a significant percentage of their store base. These competitive advantages arising from greater financial resources and economies of scale may be exacerbated in a difficult economy, thereby permitting our competitors to gain market share. Such competition may adversely affect our revenues and profits by reducing revenues of Company restaurants and royalty payments from franchise restaurants.

The market for retail real estate is highly competitive. Based on their size advantage and/or their greater financial resources, some of our competitors may have the ability to negotiate more favorable ground lease terms than we can and some landlords and developers may offer priority or grant exclusivity to some of our competitors for desirable locations. As a result, we may not be able to obtain new leases or renew existing leases on acceptable terms, if at all, which could adversely affect our sales and brand-building initiatives.

 

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Economic conditions have, and may continue to, adversely affect consumer discretionary spending which could negatively impact our business and operating results.

We believe that our sales, guest traffic and profitability are strongly correlated to consumer discretionary spending, which is influenced by general economic conditions, unemployment levels, the availability of discretionary income and, ultimately, consumer confidence. A protracted economic slowdown, increased unemployment and underemployment of our customer base, decreased salaries and wage rates, increased energy prices, inflation, foreclosures, rising interest rates or other industry-wide cost pressures adversely affect consumer behavior by weakening consumer confidence and decreasing consumer spending for restaurant dining occasions. During the recent recession, as a result of these factors we experienced reduced revenues and sales deleverage, spreading fixed costs across a lower level of sales and causing downward pressure on our profitability. These factors also reduced sales at franchise restaurants, resulting in lower royalty payments from franchisees.

We have a substantial level of indebtedness which may have an adverse effect on our business or limit our ability to take advantage of business, strategic or financing opportunities.

BKC, our wholly-owned subsidiary, has incurred a significant amount of indebtedness, which we have guaranteed. As of December 31, 2011, we had aggregate outstanding indebtedness of $2,623.6 million, excluding original issue discount on our senior secured credit facilities, including $797.5 million of 9 7/8% senior notes due 2018 (the “Senior Notes”) and $1,779.8 million outstanding under our senior secured credit facilities (the “Credit Agreement”). In addition, our parent, Burger King Capital Holdings, has $672.0 million in aggregate principal amount at maturity of 11.0% senior discount notes due 2019 (the “Discount Notes”), and the cash required to service the Discount Notes is expected to be funded through distributions from us. Subject to certain restrictions under our existing indebtedness, we and BKC may also incur significant additional indebtedness in the future, some of which may be secured debt. This may have the effect of increasing our total leverage.

As a consequence of our indebtedness, (1) demands on our cash resources may increase and (2) we are subject to significant operating and financial restrictions on us that may limit our ability to engage in acts that may be in our best interest, including restrictions on our ability to, among other things, (i) incur additional indebtedness and guarantee indebtedness, (ii) prepay, redeem or repurchase certain debt, (iii) make loans and investments, including loans to our franchisees or strategic partners, (iv) sell or otherwise dispose of assets or (v) incur liens. In addition, the restrictive covenants in the Credit Agreement require BKC to maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control.

A breach of our covenants under the Senior Notes Indenture or the Credit Agreement could result in an event of default under the applicable indebtedness. Furthermore, if our parent were to breach its covenants under the Discount Notes Indenture, it would result in a default under that indenture, which would result in a cross-default under our indebtedness. Any such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In the event our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries would not have sufficient assets to repay that indebtedness.

We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic, industry and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity

 

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capital or restructure or refinance our indebtedness, including the notes. We may not be able to affect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The Senior Notes Indenture and the Credit Agreement restrict our ability to dispose of assets and use the proceeds from those dispositions and also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.

In addition, we conduct a substantial portion of our operations through our subsidiaries. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries do not have any obligation to pay amounts due on our indebtedness (unless they are guarantors thereof) or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity, and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the Senior Notes Indenture and the agreements governing certain of our other existing indebtedness limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

Our franchise dominated business model presents a number of disadvantages and risks.

We have a higher percentage of franchise restaurants to Company restaurants than our major competitors in the FFHR category, and we expect the number of franchise restaurants to increase as we continue to implement our growth plans. Our highly franchised business model presents a number of drawbacks, such as our limited influence over franchisees and reliance on franchisees to implement major initiatives, limited ability to facilitate changes in restaurant ownership, limitations on enforcement of franchise obligations due to bankruptcy or insolvency proceedings and inability or unwillingness of franchisees to participate in our strategic initiatives. For example, our success in executing one of our key strategies (reimaging our restaurants base) will depend on the ability and willingness of our franchisees to reinvest in remodeling or rebuilding their restaurants. As part of our global portfolio realignment project, we intend to increase the number of franchised restaurants; therefore, the problems associated with these drawbacks may be exacerbated and may present a significant challenge for management.

Our principal competitors may have greater influence over their respective restaurant systems than we do because of their significantly higher percentage of Company restaurants and/or ownership of franchisee real estate. McDonald’s and Wendy’s have a higher percentage of Company restaurants than we do, and, as a result, they may have a greater ability to implement operational initiatives and business strategies, including their marketing and advertising programs.

Franchisee support of our marketing and advertising programs is critical for our success.

The support of our franchisees is critical for the success of our marketing programs and any new capital intensive or other strategic initiatives we seek to undertake, and the successful execution of these initiatives will depend on our ability to maintain alignment with our franchisees. While we can mandate certain strategic initiatives through enforcement of our franchise agreements, we need the active support of our franchisees if the implementation of these initiatives is to be successful. In addition, our efforts to build alignment with franchisees may result in a delay in the implementation of our marketing and advertising programs and other key initiatives. Our franchisees may not continue to support our marketing programs and strategic initiatives. The failure of our franchisees to support our marketing programs and strategic initiatives could adversely affect our ability to implement our business strategy and could materially harm our business, results of operations and financial condition.

 

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Our operating results are closely tied to the success of our franchisees; however, our franchisees are independent operators and we have limited influence over their restaurant operations.

We receive revenues in the form of royalties and fees from our franchisees. As a result, our operating results substantially depend upon our franchisees’ sales volumes, restaurant profitability and financial viability. However, our franchisees are independent operators and we cannot control many factors that impact the profitability of their restaurants. Pursuant to the franchise agreements and our Manual of Operating Data, we can, among other things, mandate menu items, signage, equipment, hours of operation and value menu, establish operating procedures and approve suppliers, distributors and products. However, the quality of franchise restaurant operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements, such as our cleanliness standards, or standards set by federal, state and local governmental laws and regulations. In addition, franchisees may not hire and train qualified managers and other restaurant personnel. While we ultimately can take action to terminate franchisees that do not comply with the standards contained in our franchise agreements and our Manual of Operating Data, we may not be able to identify problems and take action quickly enough and, as a result, our image and reputation may suffer, and our franchise revenues and results of operations could decline.

We have experienced seven consecutive quarters of negative comparable sales in the U.S. and Canada, and this trend has impacted the sales volumes, restaurant profitability and financial viability of a number of our franchisees. If comparable sales do not improve in the short term, the number of franchisees in financial distress will likely increase, which could result in, among other things, restaurant closures, delayed or reduced payments to us of royalties, advertising contributions and rents, and an inability for such franchisees to obtain financing to fund development, restaurant remodels or equipment initiatives on acceptable terms or at all. Furthermore, franchisees may not be willing or able to renew their franchise agreements with us due to low sales volumes, or high real estate costs, or may be unable to renew due to the failure to secure lease renewals. If we experience a significant decrease in our number of franchisees it would adversely affect our operating results.

The concentration of our restaurants in limited geographic areas subjects us to additional risk.

Our results of operations are substantially affected not only by global economic conditions, but also by the local economic conditions in the markets in which we have significant operations. In the United States, over 50% of our Company restaurants are located in three states, Florida, North Carolina and Indiana. In EMEA, 100% of our Company restaurants and over 56% of our franchise restaurants are located in three countries, Germany, the U.K. and Spain, with these markets representing over 19% of our total revenues. In LAC, 100% of our Company restaurants and over 28% of our franchise restaurants are located in Mexico. In APAC, 100% of our Company restaurants are located in Singapore and China and over 52% of our franchise restaurants are located in Australia and Korea. Many of the markets in which we and our franchisees operate have been particularly affected by the economic downturn and the timing and strength of any economic recovery is uncertain in many of our most important markets.

The success of our global portfolio realignment project is dependent on transactions with strategic partners and may not yield the long term financial results that we expect. We may not be able to successfully (1) attract desirable strategic partners; (2) complete agreements with strategic partners, and/or (3) manage relationships with strategic partners going forward, any of which could adversely affect our business.

We believe that our future growth and profitability will depend on our ability to successfully implement our global portfolio realignment project, including refranchising Company restaurants and accelerating international development with strategic partners and joint ventures. As part of our global portfolio realignment project, we expect to accelerate the pace of refranchisings of our current Company restaurant portfolio. We currently conduct a portion of our international operations through joint ventures and are actively seeking strategic partners for joint venture relationships as part of our overall strategy for international expansion. These new joint venture arrangements may give our joint venture partners the exclusive right to develop and manage Burger King

 

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restaurants in a specific country or region. A joint venture partnership involves special risks, such as our joint venture partners may at any time have economic, business or legal interests or goals that are inconsistent with those of the joint venture or us, or our joint venture partners may be unable to meet their economic or other obligations and we may be required to fulfill those obligations alone. We cannot control the actions of our joint venture partners, including any nonperformance, default or bankruptcy of joint venture partners. If we cannot successfully manage the relationship with a joint venture partner, we may not be able to terminate the agreement with the joint venture partner, or enter into other agreements for the development and management of restaurants in a country or region covered by the joint venture agreement. While we believe that our joint venture arrangements provide us with experienced local business partners in foreign countries, events or issues, including disagreements with our partners, may occur that require attention of our senior executives and may result in expenses or losses that erode the profitability of our foreign operations. Failure by us, or an entity in which we have a joint venture interest, to adequately manage the risks associated with any joint ventures could have a material adverse effect on the financial condition or results of operations of our joint ventures and, in turn, our business and operations.

In addition, our ability to implement our global portfolio realignment project in certain geographical areas may be limited by tax, accounting or other regulatory considerations.

Our future prospects depend on our ability to implement our strategy of increasing our restaurant portfolio.

We plan to significantly increase worldwide restaurant count. A significant component of our future growth strategy involves increasing our net restaurant count in our international markets. We and our franchisees face many challenges in opening new restaurants, including, among others:

 

   

the selection and availability of suitable restaurant locations;

 

   

the impact of local tax, zoning, land use and environmental rules and regulations on our ability and the ability of our franchisees to develop restaurants, and the impact of any material difficulties or failures that we and our franchisees experience in obtaining the necessary licenses and approvals for new restaurants;

 

   

the negotiation of acceptable lease terms;

 

   

the availability of bank credit and, for franchise restaurants, the ability of franchisees to obtain acceptable financing terms;

 

   

securing acceptable suppliers;

 

   

employing and training qualified personnel; and

 

   

consumer preferences and local market conditions.

In the past, we have approved franchisees that were unsuccessful in implementing their expansion plans, particularly in new markets. There can be no assurance that we will be able to identify franchisees who meet our criteria, or if we identify such franchisees, that they will successfully implement their expansion plans.

Our international operations subject us to additional risks and costs and may cause our profitability to decline.

As of December 31, 2011, our restaurants were operated, directly by us or by franchisees, in 81 countries and U.S. territories (including Guam and Puerto Rico, which are considered part of our international business). During 2011, our revenues from international operations represented 33% of total revenues and we intend to continue expansion of our international operations. As a result, our business is increasingly exposed to risks inherent in foreign operations. These risks, which can vary substantially by market, are described in many of the risk factors discussed in the section and include the following:

 

   

governmental laws, regulations and policies adopted to manage national economic conditions, such as increases in taxes, austerity measures that impact consumer spending, monetary policies that may impact inflation rates and currency fluctuations;

 

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the risk of single franchisee markets and single distributor markets;

 

   

the risk of markets in which we have granted subfranchising rights;

 

   

the effects of legal and regulatory changes and the burdens and costs of our compliance with a variety of foreign laws;

 

   

changes in the laws and policies that govern foreign investment and trade in the countries in which we operate;

 

   

risks and costs associated with political and economic instability, corruption, anti-American sentiment and social and ethnic unrest in the countries in which we operate;

 

   

the risks of operating in developing or emerging markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations and the enforceability of contract rights and intellectual property rights;

 

   

risks arising from the significant and rapid fluctuations in currency exchange markets and the decisions and positions that we take to hedge such volatility;

 

   

changing labor conditions and difficulties in staffing our international operations;

 

   

the impact of labor costs on our margins given our labor-intensive business model and the long-term trend toward higher wages in both mature and developing markets and the potential impact of union organizing efforts on day-to-day operations of our restaurants;

 

   

the effects of increases in the taxes we pay and other changes in applicable tax laws;

 

   

our ability to identify and secure appropriate real estate sites and to manage the costs and profitability of our growth in light of competitive pressures and other operating conditions that may limit pricing flexibility.

These factors may increase in importance as we expect to open new franchise restaurants in international markets as part of our growth strategy.

Our business is subject to fluctuations in foreign currency exchange and interest rates.

Our international operations are impacted by fluctuations in currency exchange rates and changes in currency regulations. In countries outside of the United States where we operate Company restaurants, we generally generate revenues and incur operating expenses and selling, general and administrative expenses denominated in local currencies. These revenues and expenses are translated using the average rates during the period in which they are recognized and are impacted by changes in currency exchange rates. Further, in some of our international markets, such as Canada, Mexico and the U.K., our suppliers purchase goods in currencies other than the local currency in which they operate and pass all or a portion of the currency exchange impact on to us. In many countries where we do not have Company restaurants, our franchisees pay royalties to us in currencies other than the local currency in which they operate. However, as the royalties are calculated based on local currency sales, our revenues are still impacted by fluctuations in currency exchange rates.

Fluctuations in interest rates may also affect our business. We attempt to minimize this risk and lower our overall borrowing costs through the utilization of derivative financial instruments, primarily interest rate caps. These instruments are entered into with financial institutions and have reset dates and critical terms that match those of our forecasted interest payments. Accordingly, any changes in interest rates we pay are partially offset by changes in the market value associated with derivative financial instruments. We do not attempt to hedge all of our debt and, as a result, may incur higher interest costs for portions of our debt which are not hedged. In addition, we enter into forward contracts to reduce our exposure to volatility from foreign currency fluctuations associated with certain foreign currency-denominated assets. However, for a variety of reasons, we do not hedge our revenue exposure in other currencies. Therefore, we are exposed to volatility in those other currencies, and this volatility may differ from period to period. As a result, the foreign currency impact on our operating results for one period may not be indicative of future results.

 

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As a result of entering into these hedging contracts with major financial institutions, we may be subject to counterparty nonperformance risk. Should there be a counterparty default, we could be exposed to the net losses on the hedged arrangements or be unable to recover anticipated net gains from the transactions.

Increases in the cost of food, paper products and energy could harm our profitability and operating results.

Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs. Any increase in food prices, especially those of beef or chicken, could adversely affect our operating results. The market for beef and chicken is particularly volatile and is subject to significant price fluctuations due to seasonal shifts, climate conditions, demand for corn (a key ingredient of cattle and chicken feed), ethanol policy, industry demand, international commodity markets, food safety concerns, product recalls, government regulation and other factors, all of which are beyond our control and, in many instances unpredictable. If the price of beef, chicken or other products that we use in our restaurants increases in the future and we choose not to pass, or cannot pass, these increases on to our guests, our operating margins would decrease. In recent fiscal quarters, a rise in the price of beef has negatively impacted our restaurant margins and we expect these elevated price levels to persist into fiscal year 2012.

Our exposure to risks from increases in food and supply costs may be greater than that of some of our competitors as we do not have ultimate control over the purchasing of these products in the United States or Canada. In the United States, we have established a cooperative with our franchisees to negotiate food prices on behalf of all Company and franchise restaurants. This cooperative does not utilize commodity option or future contracts to hedge commodity prices for beef or other food products and does not typically enter into long-term pricing arrangements. Furthermore, we do not hedge commodity prices in markets outside the United States. As a result, we typically purchase beef and many other commodities at market prices, which fluctuate on a daily basis. Increases in commodity prices could result in higher restaurant operating costs, and the highly competitive nature of our industry may limit our ability to pass increased costs on to our guests.

Increases in energy costs for our Company restaurants, principally electricity for lighting restaurants and natural gas for our broilers, could adversely affect our operating margins and our financial results if we choose not to pass, or cannot pass, these increased costs to our guests. In addition, our distributors purchase gasoline needed to transport food and other supplies to us. Any significant increases in energy costs could result in the imposition of fuel surcharges by our distributors that could adversely affect our operating margins and financial results if we chose not to pass, or cannot pass, these increased costs to our guests.

Increases in labor costs could slow our growth or harm our business.

We are an extremely labor intensive business. Consequently, our success depends in part upon our ability to manage our labor costs and its impact on our margins. We currently seek to minimize the long-term trend toward higher wages in both mature and developing markets through increases in labor efficiencies, however we may not be successful.

Furthermore, we must continue to attract, motivate and retain regional operational and restaurant general managers with the qualifications to succeed in our industry and the motivation to apply our core service philosophy. If we are unable to continue to recruit and retain sufficiently qualified managers or to motivate our employees to sustain high service levels, our business and our growth could be adversely affected. Despite current economic conditions, attracting and retaining qualified managers and employees remains challenging and our inability to meet these challenges could require us to pay higher wages and/or additional costs associated with high turnover. In addition, increases in the minimum wage or labor regulations and the potential impact of union organizing efforts in the countries in which we operate could increase our labor costs. Additional labor costs could adversely affect our margins.

In March 2010, comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR 3590) and Health Care Education and Affordability Reconciliation Act (HR 4872) (collectively,

 

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the “Acts”) was passed and signed into law. Among other things, the health care reform legislation includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and health care benefits. Provisions of the health care reform legislation become effective at various dates over the next several years. The Department of Health and Human Services, the National Association of Insurance Commissioners, the Department of Labor and the Treasury Department have yet to issue necessary enabling regulations and guidance with respect to the health care reform legislation.

Due to the breadth and complexity of the health care reform legislation, the lack of implementing regulations and interpretive guidance, and the phased-in nature of the implementation, it is difficult to predict the overall impact of the health care reform legislation on our business and the businesses of our U.S. franchisees over the coming years. Possible adverse effects of the health care reform legislation include reduced revenues, increased costs, exposure to expanded liability and requirements for us to revise the ways in which we conduct business or risk of loss of business. In addition, our results of operations, financial position and cash flows could be materially adversely affected. Our U.S. franchisees face the potential of similar adverse effects, and many of them are small business owners who may have significant difficulty absorbing the increased costs.

Our operating results depend on the effectiveness of our marketing and advertising programs.

Our revenues are heavily influenced by brand marketing and advertising. Our marketing and advertising programs may not be successful, which may lead us to fail to attract new guests and retain existing guests. If our marketing and advertising programs are unsuccessful, our results of operations could be materially and adversely affected. Moreover, because franchisees and Company restaurants contribute to our advertising fund based on a percentage of their gross sales, our advertising fund expenditures are dependent upon sales volumes at system-wide restaurants. If system-wide sales decline, there will be a reduced amount available for our marketing and advertising programs. In addition, in response to the recession, we have emphasized certain value offerings in our marketing and advertising programs to drive traffic at our stores. The disadvantage of value offerings is that the low-price offerings may condition our guests to resist higher prices in a more favorable economic environment.

If we fail to successfully implement our restaurant reimaging initiative, our ability to increase our revenues may be adversely affected.

Our restaurant reimaging initiative depends on the ability, and willingness, of franchisees to accelerate the remodeling of their existing restaurants. We have implemented a more cost effective remodeling solution which focuses spending on improvements that we believe will drive meaningful sales lifts to maximize return on capital. However, our franchisees may not be willing to commit to engage in such remodeling. The average cost to remodel a stand-alone restaurant in the United States ranges from $275,000 to $550,000 and the average cost to replace the existing building with a new building ranges from $1.1 million to $1.5 million. Even if they are willing to participate, many of our franchisees will need to borrow funds in order to finance these capital expenditures. We do not provide our franchisees with financing and therefore their ability to access borrowed funds depends on their independent relationships with various regional and national financial institutions. If our franchisees are unable to obtain financing at commercially reasonable rates, or not at all, they may be unwilling or unable to invest in the reimaging of their existing restaurants, and our future growth could be adversely affected. We currently offer, and may in the future continue to offer, our franchisees financial incentives and access to third-party financing programs in order to accelerate our restaurant reimaging initiatives. However, the cost of these financial incentives may have an adverse impact on our franchise revenues and operating results.

Food safety and food-borne illness concerns may have an adverse effect on our business.

Food safety is a top priority, and we dedicate substantial resources to ensure that our customers enjoy safe, quality food products. However, food-borne illnesses, such as pathogenic E. coli, bovine spongiform encephalopathy or “mad cow disease,” hepatitis A, salmonella, and other food safety issues have occurred in the

 

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food industry in the past, and could occur in the future. Furthermore, our reliance on third-party food suppliers and distributors increases the risk that food-borne illness incidents could be caused by factors outside of our control and that multiple locations would be affected rather than a single restaurant. New illnesses resistant to any precautions may develop in the future, or diseases with long incubation periods could arise, such as mad cow disease, which could give rise to claims or allegations on a retroactive basis. Any report or publicity linking us or one of our franchisees to instances of food-borne illness or other food safety issues, including food tampering or contamination, could adversely affect our brands and reputation as well as our revenues and profits. Outbreaks of disease, as well as influenza, could reduce traffic in our stores. If our customers become ill from food-borne illnesses, we could also be forced to temporarily close some restaurants. In addition, instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of competitors could adversely affect our sales as a result of negative publicity about the foodservice industry generally.

The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our supply chain, significantly increase our costs and/or lower margins for us and our franchisees. In addition, our industry has long been subject to the threat of food tampering by suppliers, employees or guests, such as the addition of foreign objects in the food that we sell. Reports, whether or not true, of injuries caused by food tampering have in the past severely injured the reputations of restaurant chains in the quick service restaurant segment and could affect us in the future as well.

Our results can be adversely affected by unforeseen events, such as adverse weather conditions, natural disasters or catastrophic events.

Unforeseen events, such as adverse weather conditions, natural disasters or catastrophic events, can adversely impact our restaurant sales. Natural disasters such as earthquakes, hurricanes, and severe adverse weather conditions and health pandemics, such as the outbreak of the H1N1 flu, whether occurring in the United States or abroad, can keep customers in the affected area from dining out and result in lost opportunities for our restaurants. Because a significant portion of our restaurant operating costs is fixed or semi-fixed in nature, the loss of sales during these periods hurts our operating margins and can result in restaurant operating losses.

Shortages or interruptions in the availability and delivery of food, beverages and other supplies may increase costs or reduce revenues.

We and our franchisees are dependent upon third parties to make frequent deliveries of perishable food products that meet our specifications. Shortages or interruptions in the supply of food items and other supplies to our restaurants could adversely affect the availability, quality and cost of items we buy and the operations of our restaurants. Such shortages or disruptions could be caused by inclement weather, natural disasters such as floods, drought and hurricanes, increased demand, problems in production or distribution, the inability of our vendors to obtain credit, food safety warnings or advisories or the prospect of such pronouncements, or other conditions beyond our control. A shortage or interruption in the availability of certain food products or supplies could increase costs and limit the availability of products critical to restaurant operations.

Four distributors service approximately 85% of our U.S. system restaurants and in many of our international markets, we have a single distributor that delivers products to all of our restaurants. Our distributors operate in a competitive and low-margin business environment. If one of our principal distributors is in financial distress and therefore unable to continue to supply us and our franchisees with needed products, we may need to take steps to ensure the continued supply of products to restaurants in the affected markets, which could result in increased costs to distribute needed products. If a principal distributor for our Company restaurants and/or our franchisees fails to meet its service requirements for any reason, it could lead to a disruption of service or supply until a new distributor is engaged, which could have an adverse effect on our business.

 

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The loss of key management personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.

We are dependent on the efforts and abilities of our senior management, and our success will also depend on our ability to attract and retain additional qualified employees. Failure to attract personnel sufficiently qualified to execute our strategy, or to retain existing key personnel, could have a material adverse effect on our business.

Changes in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.

We are subject to income and other taxes in the United States and numerous foreign jurisdictions. Our effective income tax rate in the future could be adversely affected by a number of factors, including: changes in the mix of earnings in countries with different statutory tax rates; changes in the valuation of deferred tax assets and liabilities; continued losses in certain international Company restaurant markets that could trigger a valuation allowance; changes in tax laws; the outcome of income tax audits in various jurisdictions around the world; taxes imposed upon sales of Company restaurants to franchisees; and any repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.

Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of a tax audit or related litigation could have a material effect on our income tax provision, net income (loss) or cash flows in the period or periods for which that determination is made.

In addition, as a result of our recent issuance of high yield notes and our new credit facility, our effective tax rate and our ability to utilize our foreign tax credits may be adversely impacted.

Leasing and ownership of a significant portfolio of real estate exposes us and our franchisees to possible liabilities and losses.

Many of our Company and franchised restaurants are presently located on leased premises. As leases underlying our Company and franchised restaurants expire, we or our franchisees may be unable to negotiate a new lease or lease extension, either on commercially acceptable terms or at all, which could cause us or our franchisees to close restaurants in desirable locations. As a result, our sales and our brand building initiatives could be adversely affected. We generally cannot cancel these leases; therefore, if an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term.

We may not be able to adequately protect our intellectual property, which could harm the value of our brand and branded products and adversely affect our business.

We depend in large part on our brand, which represents 40% of the total assets on our balance sheet as of December 31, 2011, and we believe that our brand is very important to our success and our competitive position. We rely on a combination of trademarks, copyrights, service marks, trade secrets, patents and other intellectual property rights to protect our brand and branded products. The success of our business depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products in both domestic and international markets. We have registered certain trademarks and have other trademark registrations pending in the United States and foreign jurisdictions. Not all of the trademarks that we currently use have been registered in all of the countries in which we do business, and they may never be registered in all of these countries. We may not be able to adequately protect our trademarks, and our use of these trademarks may result in liability for trademark infringement, trademark dilution or unfair competition. The steps we have taken to protect our intellectual property in the United States and in foreign countries may not be adequate and our proprietary rights could be challenged, circumvented, infringed or invalidated. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.

 

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We may not be able to prevent third parties from infringing our intellectual property rights, and we may, from time to time, be required to institute litigation to enforce our trademarks or other intellectual property rights or to protect our trade secrets. Further, third parties may assert or prosecute infringement claims against us and we may or may not be able to successfully defend these claims. Any such litigation could result in substantial costs and diversion of resources and could negatively affect our revenue, profitability and prospects regardless of whether we are able to successfully enforce our rights.

Recent public and private concerns about the health risks associated with fast food may adversely affect our financial results.

Class action lawsuits have been filed, and may continue to be filed, against various quick service restaurants alleging, among other things, that quick service restaurants have failed to disclose the health risks associated with high-fat or high-sodium foods and that quick service restaurant marketing practices have targeted children and encouraged obesity. Adverse publicity about these allegations may negatively affect us and our franchisees, regardless of whether the allegations are true, by discouraging customers from buying our products. In addition, we face the risk of lawsuits and negative publicity resulting from illnesses and injuries, including injuries to infants and children, allegedly caused by our products, toys and other promotional items available in our restaurants or our playground equipment. In addition to decreasing our revenue and profitability and diverting our management resources, adverse publicity or a substantial judgment against us could negatively impact our business, results of operations, financial condition and brand reputation, hindering our ability to attract and retain franchisees and grow our business in the United States and internationally.

Changes in governmental regulations may adversely affect restaurant operations and our financial results.

In the United States, each of our Company and franchise restaurants is subject to licensing and regulation by health, sanitation, safety and other agencies in the state and/or municipality in which the restaurant is located. State and local government authorities may enact laws, rules or regulations that impact restaurant operations and the cost of conducting those operations. In many of our markets, including the United States and Europe, we are subject to increasing regulation regarding our operations, which may significantly increase our cost of doing business. In developing markets, we face the risks associated with new and untested laws and judicial systems. Among the more important regulatory risks regarding our operations we face are the following:

 

   

the impact of the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions, family leave mandates and a variety of other laws enacted by states that govern these and other employment matters;

 

   

the impact of immigration and other local and foreign laws and regulations on our business;

 

   

disruptions in our operations or price volatility in a market that can result from governmental actions, including price controls, currency and repatriation controls, limitations on the import or export of commodities we use or government-mandated closure of our or our vendors’ operations;

 

   

the impact of the United States federal menu labeling law which requires the listing of specified nutritional information on menus and menu boards on consumer demand for our products;

 

   

the risks of operating in foreign markets in which there are significant uncertainties, including with respect to the application of legal requirements and the enforceability of laws and contractual obligations; and

 

   

the impact of costs of compliance with privacy, consumer protection and other laws, the impact of costs resulting from consumer fraud and the impact on our margins as the use of cashless payments increases.

We are also subject to a Federal Trade Commission rule and to various state and foreign laws that govern the offer and sale of franchises. Various state and foreign laws regulate certain aspects of the franchise

 

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relationship, including terminations and the refusal to renew franchises. The failure to comply with these laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales, fines, other penalties or require us to make offers of rescission or restitution, any of which could adversely affect our business and operating results. We could also face lawsuits by our franchisees based upon alleged violations of these laws.

The Americans with Disabilities Act (“ADA”), prohibits discrimination on the basis of disability in public accommodations and employment. We have, in the past, been required to make certain modifications to our restaurants pursuant to the ADA. In addition, future mandated modifications to our facilities to make different accommodations for disabled persons and modifications required under the ADA could result in material unanticipated expense to us and our franchisees.

If we fail to comply with existing or future laws and regulations, we may be subject to governmental or judicial fines or sanctions. In addition, our and our franchisees’ capital expenditures could increase due to remediation measures that may be required if we are found to be noncompliant with any of these laws or regulations.

The personal information that we collect may be vulnerable to breach, theft or loss that could adversely affect our reputation, results of operation and financial condition.

In the ordinary course of our business, we collect, process, transmit and retain personal information regarding our employees and their families, franchisees, vendors and consumers, including social security numbers, banking and tax ID information, health care information and credit card information. Some of this personal information is held and managed by certain of our vendors. Although we use security and business controls to limit access and use of personal information, a third party may be able to circumvent those security and business controls, which could result in a breach of employee, consumer or franchisee privacy. A major breach, theft or loss of personal information regarding our employees and their families, our franchisees, vendors or consumers that is held by us or our vendors could result in substantial fines, penalties and potential litigation against us which could negatively impact our results of operations and financial condition. Furthermore, as a result of legislative and regulatory rules, we may be required to notify the owners of the personal information of any data breaches, which could harm our reputation and financial results, as well as subject us to litigation or actions by regulatory authorities.

Information technology system failures or interruptions or breaches of our network security may interrupt our operations, subject us to increased operating costs and expose us to litigation.

We rely heavily on our computer systems and network infrastructure across our operations including, but not limited to, point-of-sale processing at our restaurants. Despite our implementation of security measures, all of our technology systems are vulnerable to damage, disability or failures due to physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. If our technology systems were to fail, and we were unable to recover in a timely way, we could experience an interruption in our operations which could have a material adverse effect on our financial condition and results of operations. Furthermore, to the extent that some of our worldwide reporting systems require or rely on manual processes, it could increase the risk of a breach.

In addition, a number of our systems and processes are not fully integrated worldwide and, as a result, require us to manually estimate and consolidate certain information that we use to manage our business. To the extent that we are not able to obtain transparency into our operations from our systems, it could impair the ability of our management to react quickly to changes in the business or economic environment.

 

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Compliance with or cleanup activities required by environmental laws may hurt our business.

We are subject to various federal, state, local and foreign environmental laws and regulations. These laws and regulations govern, among other things, discharges of pollutants into the air and water as well as the presence, handling, release and disposal of and exposure to, hazardous substances. These laws and regulations provide for significant fines and penalties for noncompliance. If we fail to comply with these laws or regulations, we could be fined or otherwise sanctioned by regulators. Third parties may also make personal injury, property damage or other claims against us associated with releases of, or actual or alleged exposure to, hazardous substances at, on or from our properties.

Environmental conditions relating to prior, existing or future restaurants or restaurant sites, including franchised sites, may have a material adverse effect on us. Moreover, the adoption of new or more stringent environmental laws or regulations could result in a material environmental liability to us and the current environmental condition of the properties could be harmed by tenants or other third parties or by the condition of land or operations in the vicinity of our properties.

We are owned and controlled by 3G Capital and its interests may conflict with other stakeholders.

We are 99% owned by 3G, which in turn is controlled by 3G Capital. As a result 3G Capital has the power to elect all of the members of our board of directors and effectively has control over major decisions regardless of whether other stakeholders believe that any such decisions are in their own best interests. The interests of 3G Capital as equity holder may conflict with the interests of the other stakeholders. 3G Capital may have an incentive to increase the value of its investment or cause us to distribute funds at the expense of our financial condition and affect our ability to make payments on the Senior Notes. In addition, 3G Capital may have an interest in pursuing acquisitions, divestitures, financings, capital expenditures or other transactions that it believes could enhance its equity investments even though such transactions might involve risks to other stakeholders. 3G Capital is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us.

We outsource certain aspects of our business to third party vendors which subjects us to risks, including disruptions in our business and increased costs.

We have outsourced certain administrative functions, including account payment and receivable processing, to a third-party service provider. We also outsource certain information technology support services and benefit plan administration, and may outsource other functions in the future to achieve cost savings and efficiencies. If the service providers to which we outsource these functions to do not perform effectively, we may not be able to achieve the expected cost savings and may have to incur additional costs in connection with such failure to perform. Depending on the function involved, such failures may also lead to business disruption, transaction errors, processing inefficiencies, the loss of sales and customers, the loss of or damage to intellectual property through security breach, and the loss of sensitive data through security breach or otherwise. Any such damage or interruption could have a material adverse effect on our business, cause us to face significant fines, customer notice obligations or costly litigation, harm our reputation with our customers or prevent us from paying our suppliers or employees or receiving payments on a timely basis.

 

Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

Our global restaurant support center and U.S. headquarters is located in Miami, Florida and consists of approximately 213,000 square feet which we lease. We extended the Miami lease for our global restaurant support center in May 2008 through September 2018 with an option to renew for one five-year period. We lease properties

 

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for our EMEA headquarters in Zug, Switzerland and our APAC headquarters in Singapore. We believe that our existing headquarters and other leased and owned facilities are adequate to meet our current requirements.

The following table presents information regarding our restaurant properties as of December 31, 2011:

 

            Leased         
     Owned(1)      Land      Building/Land &
Building
     Total
Leases
     Total  

United States and Canada:

              

Company restaurants

     295         201         443         644         939   

Franchisee-operated properties

     467         323         207         530         997   

Non-operating restaurant locations

                     45         45         45   

Offices and other(2)

                     5         5         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     762         524         700         1,224         1,986   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International:

              

Company restaurants

     14         47         295         342         356   

Franchisee-operated properties

     4         3         77         80         84   

Non-operating restaurant locations

             1         7         8         8   

Offices and other(2)

     1                 14         14         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     19         51         393         444         463   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Owned refers to properties where we own the land and the building.

 

(2) Other properties include a consumer research center and storage facilities.

 

Item 3. Legal Proceedings

Ramalco Corp. et al. v. Burger King Corporation, No. 09-43704CA05 (Circuit Court of the Eleventh Judicial Circuit, Dade County, Florida). On July 30, 2008, BKC was sued by four Florida franchisees over our decision to mandate extended operating hours in the United States. The plaintiffs sought damages, declaratory relief and injunctive relief. The court dismissed the plaintiffs’ original complaint in November 2008. In December 2008, the plaintiffs filed an amended complaint. In August 2010, the court entered an order reaffirming the legal bases for dismissal of the original complaint, again holding that BKC had the authority under its franchise agreements to mandate extended operating hours. In February 2012, the plaintiffs filed a notice of voluntary dismissal with prejudice without either side paying any financial compensation or any change to BKC’s extended hours policy.

Castenada v. Burger King Corp. and Burger King Corporation., No. CV08-4262 (U.S. District Court for the Northern District of California). On September 10, 2008, a class action lawsuit was filed against the Company in the United States District Court for the Northern District of California. The complaint alleged that all 96 Burger King restaurants in California leased by the Company and operated by franchisees violate accessibility requirements under federal and state law. In September 2009, the court issued a decision on the plaintiffs’ motion for class certification. In its decision, the court limited the class action to the 10 restaurants visited by the named plaintiffs, with a separate class of plaintiffs for each of the 10 restaurants and 10 separate trials. In March 2010, the Company agreed to settle the lawsuit with respect to the 10 restaurants and, in July 2010, the court gave final approval to the settlement. In February 2011, a class action lawsuit styled Vallabhapurapu v. Burger King Corporation, No. C11-00667 (U.S. District Court for the Northern District of California) was filed with respect to the other 86 restaurants. In January 2012, BKC agreed to settle the lawsuit. The parties are finalizing the terms of the proposed settlement which will be submitted to the court for approval.

From time to time, we are involved in other legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property.

 

Item 4. Mine Safety Disclosures

Not Applicable.

 

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Part II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Our Common Stock

Prior to our acquisition by 3G, our common stock was listed on the New York Stock Exchange under the ticker symbol “BKC”. As a result of the acquisition, our common stock is no longer traded on the New York Stock Exchange. Our Senior Notes Indenture requires that we continue to file periodic reports with the SEC as if we were subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). See Note 8 to our audited Consolidated Financial Statements included in Part II, Item 8 “Financial Statements and Supplementary Data”.

Dividend Policy

As a wholly-owned subsidiary of Burger King Worldwide Holdings, Inc., we will from time to time declare and pay dividends to our parent whenever our Board approves such dividend. Our ability to declare and pay a dividend is subject to certain restrictions under Florida law and to the covenants in our credit facility. Please see Note 14 to our audited Consolidated Financial Statements included in Part II, Item 8 “Financial Statements and Supplementary Data” for a discussion of amounts paid as a dividend to our parent during the year ended December 31, 2011.

 

Item 6. Selected Financial Data

On October 19, 2010 (the “Acquisition Date”), we were acquired by an affiliate of 3G Capital in a transaction accounted for as a business combination (the “Acquisition”). Unless the context otherwise requires, all references to “we”, “us”, “our” and “Successor” refer to Burger King Holdings, Inc. and all its subsidiaries, including BKC, for the periods subsequent to the Acquisition. All references to our “Predecessor” refer to Burger King Holdings, Inc. and all its subsidiaries, including BKC, for all periods prior to the Acquisition, which operated under a different ownership and capital structure. In addition, the Acquisition was accounted for under the acquisition method of accounting, which resulted in purchase price allocations that affect the comparability of results of operations for periods before and after the Acquisition.

The following tables present selected consolidated financial and other data for us and our Predecessor for each of the periods indicated. All references to 2011 in this section are to year ended December 31, 2011 and have been derived from our audited consolidated financial statements and notes thereto included in this report. All references to the Transition Period in this section are to the six months ended December 31, 2010, derived by adding the results of operations of our Predecessor from July 1, 2010 to October 18, 2010 to our results of operations from October 19, 2010 to December 31, 2010 and have been derived from our audited consolidated financial statements and notes thereto included in this report. The selected historical financial data as of December 31, 2011 and 2010 have been derived from our audited consolidated financial statements and notes thereto included in this report. All references to Fiscal 2010, 2009, 2008 and 2007 refer to the Predecessor’s fiscal years ended June 30, 2010, 2009, 2008 and 2007. The selected historical financial data for our Predecessor as of June 30, 2010 and for the period July 1, 2010 to October 18, 2010 and Fiscal 2010 and 2009 have been derived from our Predecessor’s audited consolidated financial statements and the notes thereto included in this report. The selected historical financial data for our Predecessor as of June 30, 2009, 2008 and 2007 and for Fiscal 2008 and 2007 have been derived from the audited consolidated financial statements and the notes thereto of our Predecessor, which are not included in this report.

The combined financial data for the Transition Period has been derived from the audited consolidated financial statements of our Predecessor and us, but has not been audited on a combined basis. This data does not comply with generally accepted accounting principles and is not intended to represent what our operating results would have been if the Acquisition had occurred at the beginning of the period because the periods being combined are under two different bases of accounting as a result of the Acquisition.

 

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The selected consolidated financial and other operating data presented below contain all normal recurring adjustments that, in the opinion of management, are necessary to present fairly our financial position and results of operations as of and for the periods presented. The selected historical consolidated financial and other operating data included below and elsewhere in this report are not necessarily indicative of future results. The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and “Financial Statements and Supplementary Data” in Part II, Item 8 of this report.

As of the Acquisition Date, all of our common shares were indirectly held by 3G; therefore we have not reported earnings per share.

 

    Successor     Combined     Successor         Predecessor  
    2011     Transition
Period
    October 19,  2010
to
December 31, 2010
        July 1, 2010
to
October 18, 2010
    Fiscal
2010
    Fiscal
2009
    Fiscal
2008
    Fiscal
2007
 
   

(In millions, except per share data)

 

 

Statement of Operations Data:

                   

Revenues:

                   

Company restaurant revenues

  $ 1,638.7      $ 846.2      $ 331.7          $ 514.5      $ 1,839.3      $ 1,880.5      $ 1,795.9      $ 1,658.0   

Franchise and property revenues

    697.0        338.3        135.1            203.2        662.9        656.9        658.8        575.7   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    2,335.7        1,184.5        466.8            717.7        2,502.2        2,537.4        2,454.7        2,233.7   

Income (loss) from operations(1)

  $ 363.0      $ 32.9      $ (68.6       $ 101.5      $ 332.9      $ 339.4      $ 354.2      $ 294.6   

Net income (loss)

  $ 107.0      $ (30.5   $ (101.6       $ 71.1      $ 186.8      $ 200.1      $ 189.6      $ 148.1   

Cash dividends per common share

    N/A        N/A        N/A          $ 0.06      $ 0.25      $ 0.25      $ 0.25      $ 0.13   
    Successor     Combined     Successor         Predecessor  
    2011     Transition
Period
    October 19, 2010 to
December 31, 2010
        July 1, 2010 to
October 18, 2010
    Fiscal
2010
    Fiscal
2009
    Fiscal
2008
    Fiscal
2007
 
    (In millions)  

Other Financial Data:

                   

Net cash provided by (used for) operating activities

  $ 406.2      $ (5.2   $ (126.5       $ 121.3      $ 310.4      $ 310.8      $ 243.4      $ 110.4   

Net cash used for investing activities

    (41.4     (3,349.4     (3,344.6         (4.8     (134.9     (242.0     (199.3     (77.4

Net cash provided by (used for) financing activities

    (108.2     3,366.9        3,396.4            (29.5     (96.9     (105.5     (62.0     (126.9

Capital expenditures

    82.1        46.6        28.4            18.2        150.3        204.0        178.2        87.3   

Adjusted EBITDA(2)

    585.0        230.1        95.2            134.9        460.9        455.6        460.6        387.3   

 

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     Successor          Predecessor  
     December 31,
2011
     December 31,
2010
         June 30,
2010
     June 30,
2009
     June 30,
2008
     June 30,
2007
 
     (In millions)  

Balance Sheet Data:

                   

Cash and cash equivalents

   $ 458.8       $ 207.0           $ 187.6       $ 121.7       $ 166.0       $ 169.4   

Total assets(3)

     5,583.5         5,683.1             2,747.2         2,707.1         2,686.5         2,516.8   

Total debt and capital lease obligations(3)

     2,714.8         2,792.1             826.3         888.9         947.4         942.5   

Total liabilities(3)

     4,134.3         4,239.0             1,618.8         1,732.3         1,842.0         1,801.2   

Total stockholders’ equity(3)

     1,449.2         1,444.1             1,128.4         974.8         844.5         715.6   

 

     Successor     Combined     Predecessor  
     2011     Transition Period     Fiscal 2010     Fiscal 2009     Fiscal 2008     Fiscal 2007  

Other Operating Data:

              

Systemwide sales growth(4)(5)

     1.7     2.2     2.1     4.2     8.3     4.9

Comparable sales growth(4)(5)(6)

     (0.5 )%      (2.7 )%      (2.3 )%      1.2     5.4     3.4

Company Restaurant Margin Percentage(7)

     11.7     12.9     12.2     12.6     14.3     15.0

 

(1) Amount includes $3.2 million of Transaction costs, $46.5 million of global restructuring and related professional fees, $10.6 million of field optimization project costs and $7.6 million of global portfolio realignment project costs for 2011. Amount includes $77.7 million of Transaction costs and $67.2 million of global restructuring and related professional fees for October 19, 2010 to December 31, 2010.

 

(2) EBITDA is defined as earnings (net income or loss) before interest, taxes, depreciation and amortization, and is used by management to measure operating performance of the business. Adjusted EBITDA represents EBITDA as further adjusted to exclude specifically identified items that management believes do not directly reflect our core operations. Adjusted EBITDA is a tool intended to assist our management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our core operations. We also believe that EBITDA and adjusted EBITDA improve the comparability of Predecessor and Successor results of operations because the application of acquisition accounting resulted in non-comparable depreciation and amortization for Predecessor and Successor periods.

During the quarter ended December 31, 2011, we revised our measure of segment income from operating income to adjusted EBITDA and have revised our historical segment information to conform to this presentation. Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization, adjusted to exclude specifically identified items that management believes do not directly reflect our core operations and assists management in comparing segment performance by removing the impact of certain items that management believes do not reflect our core operations.

EBITDA and adjusted EBITDA are also used as part of our incentive compensation program for our executive officers and others and are factors in our tangible and intangible asset impairment tests. EBITDA and adjusted EBITDA are intended to provide additional information only and do not have any standard meaning prescribed by generally accepted accounting principles in the U.S., or U.S. GAAP.

We also believe EBITDA and adjusted EBITDA are useful to investors, analysts and other external users of our consolidated financial statements because they are widely used by investors to measure operating performance without regard to items such as income taxes, net interest expense, depreciation and amortization, non-cash stock compensation expense and other infrequent or unusual items, which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired.

 

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Because of their limitations, neither EBITDA nor adjusted EBITDA should be considered as a measure of discretionary cash available to us to reinvest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. Moreover, our presentation of adjusted EBITDA is different than adjusted EBITDA as defined in our debt agreements.

The following table is a reconciliation of our net income (loss) to EBITDA and adjusted EBITDA:

 

    Successor     Combined     Successor         Predecessor  
    2011     Transition
Period
    October 19,  2010
to
December 31, 2010
        July 1, 2010
to
October 18, 2010
    Fiscal
2010
    Fiscal
2009
    Fiscal
2008
    Fiscal
2007
 
   

(In millions)

 

 

Net income (loss)

  $ 107.0      $ (30.5   $ (101.6       $ 71.1      $ 186.8      $ 200.1      $ 189.6      $ 148.1   

Interest expense, net

    194.8        72.7        58.1            14.6        48.6        54.6        61.2        67.0   

Loss on early extinguishment of debt

    21.4                                                      0.8   

Income tax expense (benefit)

    39.8        (9.3     (25.1         15.8        97.5        84.7        103.4        78.7   

Depreciation and amortization

    136.4        58.8        27.6            31.2        111.7        98.1        95.6        88.8   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    499.4        91.7        (41.0         132.7        444.6        437.5        449.8        383.4   

Share-based compensation and non-cash incentive compensation expense(a)

    6.4        5.8                   5.8        17.0        16.2        11.4        4.9   

Transaction costs(b)

    3.2        77.7        77.7                                          

Global restructuring and related professional fees(c)

    46.5        67.2        67.2                                          

Field optimization project(d)

    10.6                                                        

Global portfolio realignment project(e)

    7.6                                                        

Other operating (income) expense, net(f)

    11.3        (12.3     (8.7         (3.6     (0.7     1.9        (0.6     (1.0
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 585.0      $ 230.1      $ 95.2          $ 134.9      $ 460.9      $ 455.6      $ 460.6      $ 387.3   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Represents share-based compensation expense associated with employee stock options, as well as the portion of annual non-cash incentive compensation that eligible employees elected to receive as common equity.

 

  (b) Represents expenses incurred related to the acquisition of BKH. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Events and Factors Affecting Comparability — The Transactions” in Part II, Item 7 of this report.

 

  (c) Represents severance benefits, other severance-related costs and related professional fees incurred in connection with our global restructuring efforts, the voluntary resignation severance program offered for a limited time to eligible employees based at our Miami headquarters and additional reductions in corporate and field positions in the U.S. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Events and Factors Affecting Comparability — Global Restructuring and Related Professional Fees” in Part II, Item 7 of this report.

 

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  (d) Represents severance related costs, compensation costs for overlap staffing, travel expenses, consulting and training costs incurred in connection with our efforts to expand and enhance our U.S. field organization. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Events and Factors Affecting Comparability — Field Optimization Project” in Part II, Item 7 of this report.

 

  (e) Represents costs associated with an ongoing project to realign our global restaurant portfolio by refranchising our Company restaurants and establishing strategic partners and joint ventures to accelerate development. These costs primarily include severance related costs and professional service fees. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Events and Factors Affecting Comparability — Global Portfolio Realignment Project” in Part II, Item 7 of this report.

 

  (f) Represents income and expenses that are not directly derived from our primary business such as gains and losses on asset and business disposals, write-offs associated with restaurant closures, impairment charges, charges recorded in connection with acquisitions of franchise operations, gains and losses on currency transactions, gains and losses on foreign currency forward contracts and other miscellaneous items.

 

(3) Amounts as of December 31, 2011 and 2010 reflect the application of acquisition accounting as a result of the Acquisition. Refer to Note 1 to our audited Consolidated Financial Statements included in Part II, Item 8 “Financial Statements and Supplementary Data”.

 

(4) Comparable sales growth and sales growth are analyzed on a constant currency basis, which means they are calculated by translating current year results at prior year average exchange rates, to remove the effects of currency fluctuations from these trend analyses. We believe these constant currency measures provide a more meaningful analysis of our business by identifying the underlying business trends, without distortion from the effect of foreign currency movements.

 

(5) Unless otherwise stated, comparable sales growth and sales growth are presented on a system-wide basis, which means they include Company restaurants and franchise restaurants. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues. However, our royalty revenues are calculated based on a percentage of franchise sales. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Business Metrics” in Part II, Item 7 of this report.

 

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

 

(7) Company restaurant margin is derived by subtracting Company restaurant expenses from Company restaurant revenues, and is typically analyzed as a percentage of Company restaurant revenues, a metric we refer to as Company restaurant margin percentage.

 

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Burger King Holdings, Inc. and Subsidiaries Restaurant Count

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

 

     Successor          Predecessor  
     December 31,
2011
     December 31,
2010
         December 31,
2009
     June 30,
2010
     June 30,
2009
 

Number of Company restaurants:

                

U.S. & Canada

     939         984             1,029         987         1,043   

EMEA

     192         203             277         241         278   

Latin America

     97         96             94         97         92   

APAC

     67         61             22         62         16   
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

 

Total Company restaurants

     1,295         1,344             1,422         1,387         1,429   
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

 

Number of franchise restaurants:

                  

U.S. & Canada

     6,561         6,566             6,516         6,562         6,491   

EMEA

     2,690         2,525             2,387         2,439         2,302   

Latin America

     1,125         1,044             1,011         1,041         986   

APAC

     841         772             742         745         717   
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

 

Total franchise restaurants

     11,217         10,907             10,656         10,787         10,496   
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

 

Number of system-wide restaurants:

                  

U.S. & Canada

     7,500         7,550             7,545         7,549         7,534   

EMEA

     2,882         2,728             2,664         2,680         2,580   

Latin America

     1,222         1,140             1,105         1,138         1,078   

APAC

     908         833             764         807         733   
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

 

Total system-wide restaurants

     12,512         12,251             12,078         12,174         11,925   
  

 

 

    

 

 

        

 

 

    

 

 

    

 

 

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with Part II, Item 6 “Selected Financial Data” and our audited Consolidated Financial Statements and the related notes thereto included in Item 8 “Financial Statements and Supplementary Data”. 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 under Item 1A, “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and elsewhere in this report.

All references to 2011 in this section are to our fiscal year ended December 31, 2011. References to 2010 in this section are to the twelve months ended December 31, 2010, derived by adding the unaudited results of operations of our Predecessor from January 1, 2010 to October 18, 2010 to our audited results of operations from October 19, 2010 to December 31, 2010. All references to the Transition Period in this section are to the six months ended December 31, 2010, derived by adding the audited results of operations of our Predecessor from July 1, 2010 to October 18, 2010 to our audited results of operations from October 19, 2010 to December 31, 2010. The combined financial data for 2010 and the Transition Period do not comply with generally accepted accounting principles and are not intended to represent what our operating results would have been if the Acquisition had occurred at the beginning of the period because the periods being combined are under two different bases of accounting as a result of the Acquisition on the Acquisition Date. See “Recent Events and Factors Affecting Comparability — The Transactions.” References to fiscal 2010 and fiscal 2009 in this section are to our Predecessor’s fiscal years ended June 30, 2010, and 2009, respectively. Unless otherwise stated, comparable sales growth, average restaurant sales and sales growth are presented on a system-wide basis, which means that these measures include sales at both Company restaurants and franchise restaurants.

 

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Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our franchise revenues include royalties based on franchise sales. System-wide results are driven primarily by our franchise restaurants, as approximately 90% of our current system-wide restaurants are franchised.

Overview

We operate in the fast food hamburger restaurant, or FFHR, category of the quick service restaurant, or QSR, segment of the restaurant industry. We are the second largest FFHR chain in the world as measured by number of restaurants and system-wide sales. Our system of restaurants includes restaurants owned by us, as well as our franchisees. Our business is comprised of four operating segments: (1) the U.S. and Canada; (2) Europe, the Middle East and Africa, or EMEA; (3) Latin America and the Caribbean, or LAC; and (4) Asia Pacific, or APAC.

As of December 31, 2011, there were 12,512 Burger King restaurants system-wide. We operate 939 restaurants in the U.S. and Canada and 356 restaurants in EMEA, LAC and APAC, and our franchisees operate 6,561 restaurants in the U.S. and Canada and 4,656 restaurants in EMEA, LAC and APAC. Approximately 90% of our current restaurants are franchised and we have a higher percentage of franchise restaurants to Company restaurants than our major competitors in the FFHR category. We believe that our high percentage of franchise restaurants provides us with a strategic advantage because the capital required to grow and maintain our system is funded primarily by franchisees. In addition, our franchisees fund the majority of the advertising that supports the Brand by making advertising contributions. Our franchise dominated business model does, however, present a number of drawbacks and risks, such as our limited control over franchisees and limited ability to facilitate changes in restaurant ownership. In addition, our operating results are closely tied to the success of our franchisees, and we are dependent on franchisees to open new restaurants as part of our growth strategy.

In 2011, sales at Company restaurants comprised 70% of our revenues, with our remaining revenue comprised of revenues we derive from our franchise system, consisting primarily of royalties and franchise fees as well as property income we derive from properties we lease or sublease to our franchisees. We expect the current mix of Company and franchise revenue to shift towards franchise revenue as we continue to implement our global portfolio realignment.

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

 

   

Sales growth refers to the change in sales at all Company and franchise restaurants in one period from the same period in the prior year. We review sales growth as an operating metric to help identify and assess trends in restaurant sales for the Burger King system as a whole, without distortion from the effects of refranchised or acquired restaurants.

 

   

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

 

   

Average restaurant sales refer to the total sales averaged over total store months for all Company and franchise restaurants open during that period.

 

   

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

 

   

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

 

   

Company restaurant margin, or CRM, is derived by subtracting Company restaurant expenses from Company restaurant revenues for a stated period, and is typically analyzed as a percentage of Company restaurant revenues, a metric we refer to as Company restaurant margin %, or CRM %. Company

 

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restaurant expenses are comprised of food, paper and product costs, payroll and employee benefits (“labor” costs) and occupancy and other operating costs, which include rent and depreciation and amortization related to restaurant properties (“occupancy and other operating” costs). Food, paper and product costs vary with sales volume, while labor and occupancy costs are primarily fixed costs with variable components. We review the relationship between our Company restaurant expenses and Company restaurant revenues in the context of how those relationships affect CRM and CRM %.

 

   

Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization adjusted to exclude specifically identified items that management believes do not directly reflect our core operations. These items include share-based compensation and non-cash compensation expense, other operating (income) expenses, net, and all other specifically identified costs associated with non-recurring projects; Transaction costs, global restructuring and related professional fees, field optimization project costs and global portfolio realignment project costs. See Profitability Measures and Non-GAAP Reconciliations.

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

Recent Events and Factors Affecting Comparability

The Transactions

The Acquisition and related financing transactions (collectively referred to as the “Transactions”) as described in Note 1 to the accompanying consolidated financial statements were accounted for using the acquisition method of accounting, or acquisition accounting, in accordance with Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 805, Business Combinations. During the quarter ended December 31, 2011, we finalized our purchase price allocation on a retrospective basis as of the Acquisition Date, with corresponding adjustments to our results of operations. Acquisition accounting resulted in certain items that affect the comparability of the results of operations between us and our Predecessor, including changes in asset carrying values (and related depreciation and amortization).

Additionally, our interest expense is significantly higher following the Transactions than experienced by our Predecessor in prior periods, primarily due to the higher principal amount of debt outstanding following the Transactions, as well as higher interest rates.

Change in Fiscal Year

On November 5, 2010, our Board of Directors approved a change in fiscal year end from June 30 to December 31. The change became effective at the end of the quarter ended December 31, 2010. All references to “fiscal”, unless otherwise noted, refer to the twelve-month fiscal year, which prior to July 1, 2010, ended on June 30.

Change in Presentation

Franchise bad debt expense and amortization of franchise agreements previously classified as selling, general and administrative expenses have been reclassified to franchise and property expenses for all periods presented. These reclassifications have no effect on previously reported net income (loss).

Global Restructuring and Related Professional Fees

In December 2010, we began the implementation of a global restructuring plan that resulted in work force reductions throughout our organization. In June 2011, we implemented a Voluntary Resignation Severance Program (“VRS Program”) offered for a limited time to eligible employees based at our Miami headquarters. In

 

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addition, other involuntary work force reductions were also implemented. As a result of the global restructuring plan, VRS Program and the additional workforce reductions, we incurred $46.5 million of severance benefits and other severance related costs in 2011. This restructuring plan was completed in 2011.

Field Optimization Project

During 2011, we initiated a project to significantly expand and enhance our U.S. field organization to better support our franchisees in an effort to drive sales, increase profits and improve restaurant operations (the “field optimization project”). As a result of the field optimization project, we incurred $10.6 million in 2011 of severance related costs, compensation costs for overlap staffing, travel expenses, consulting fees and training costs. This project was completed in 2011.

Global Portfolio Realignment Project

During 2011, we initiated a project to realign our global restaurant portfolio by refranchising our Company restaurants and establishing strategic partners and joint ventures to accelerate development (the “global portfolio realignment project”). As a result of the global portfolio realignment project, we incurred costs primarily related to severance and professional service fees and we expect to incur additional costs in 2012 as we continue to implement this strategy.

The table below summarizes the factors affecting comparability of results of operations due to acquisition accounting, the Transaction costs, global restructuring and related professional fees, our field optimization project and the global portfolio realignment project.

 

     2011     Transition
Period
 
     (In millions)  

Acquisition Accounting

    

Change in Revenues:

    

Lease straight-line adjustment

   $ (1.3   $ (0.1

Amortization of direct financing leases

     (3.2     (0.2

Amortization of favorable/unfavorable income leases

     6.6        1.3   
  

 

 

   

 

 

 

Total effect on franchise and property revenues

     2.1        1.0   

Change in food, paper & product costs:

    

Change in deferred income recognition

     (1.0     (0.2
  

 

 

   

 

 

 

Total effect on food, paper & product costs

     (1.0     (0.2

Change in occupancy and other operating costs:

    

Depreciation — Buildings, improvements, and equipment

     (11.2     (1.8

Amortization of favorable/unfavorable leases

     (3.4     (0.6
  

 

 

   

 

 

 

Total effect on occupancy and other operating costs

     (14.6     (2.4

Change in selling, general and administrative expenses:

    

Depreciation — Software and furniture & fixtures

     1.8        1.1   
  

 

 

   

 

 

 

Total effect on selling, general and administrative expenses

     1.8        1.1   

Change in franchise and property expenses:

    

Lease straight-line adjustment

     (0.7     (0.1

Depreciation of property leased or subleased to franchisees

     (5.1     (1.3

Amortization of favorable/unfavorable leases

     (4.5     (0.9

Amortization of franchise agreements

     (15.7     (3.1
  

 

 

   

 

 

 

Total effect on franchise and property expenses

     (26.0     (5.4

Total effect on income (loss) from operations

   $ (37.7   $ (5.9
  

 

 

   

 

 

 

Total effect on Adjusted EBITDA(1)

   $ (3.0   $ (0.4
  

 

 

   

 

 

 

 

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     2011     Transition
Period
 
     (In millions)  

Other Projects

    

Selling, general and administrative expenses:

    

Transaction costs

   $ (3.2   $ (77.7

Global restructuring and related professional fees

     (46.5     (67.2

Field optimization project

     (10.6       

Global portfolio realignment project

     (7.6       
  

 

 

   

 

 

 

Total effect of other project costs on income (loss) from Operations

   $ (67.9   $ (144.9
  

 

 

   

 

 

 

 

(1) Represents lease straight-line adjustments and deferred income noted above.

Results of Operations

Tabular amounts in millions of dollars unless noted otherwise.

Consolidated

 

    Results     Variance  
    Successor      Combined     Predecessor     2011 Compared
to 2010
    Transition
Period
Compared to
Six Months
Ended
December 31,
2009
    Fiscal 2010
Compared to
Fiscal 2009
 
    2011      Transition
Period
    Fiscal 2010     $     %     $     %     $     %  
                       Favorable / (Unfavorable)  

Revenues:

                    

Company restaurant revenues

  $ 1,638.7       $ 846.2      $ 1,839.3      $ (100.8     (5.8 )%    $ (99.8     (10.5 )%    $ (41.2     (2.2 )% 

Franchise and property revenues

    697.0         338.3        662.9        32.1        4.8     2.0        0.6     6.0        0.9
 

 

 

    

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Total revenues

    2,335.7         1,184.5        2,502.2        (68.7     (2.9 )%      (97.8     (7.6 )%      (35.2     (1.4 )% 

Company restaurant expenses:

                    

Food, paper and product costs

    524.7         265.4        585.0        25.9        4.7     34.4        11.5     18.7        3.1

Payroll and employee benefits

    481.2         252.5        568.7        48.8        9.2     38.7        13.3     13.5        2.3

Occupancy and other operating costs

    441.5         219.4        461.1        10.4        2.3     9.2        4.0     (3.3     (0.7 )% 
 

 

 

    

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Total Company restaurant expenses

    1,447.4         737.3        1,614.8        85.1        5.6     82.3        10.0     28.9        1.8

Franchise and property expenses

    97.1         43.5        65.4        (20.6     (26.9 )%      (11.1     (34.3 )%      (1.1     (1.7 )% 

Selling, general and administrative expenses

    416.9         383.1        489.8        202.0        32.6     (129.1     (50.8 )%      (1.7     (0.3 )% 

Other operating (income) expenses, net

    11.3         (12.3     (0.7     (29.4     162.4     17.4        NM        2.6        NM   
 

 

 

    

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Total operating costs and expenses

    1,972.7         1,151.6        2,169.3        237.1        10.7     (40.5     (3.6 )%      28.7        1.3

Income (loss) from operations

    363.0         32.9        332.9        168.4        86.5     (138.3     (80.8 )%      (6.5     (1.9 )% 

Interest expense, net

    194.8         72.7        48.6        (98.2     (101.7 )%      (48.0     (194.3 )%      6.0        11.0

Loss on early extinguishment of debt

    21.4                       (21.4     NM               NM               NM   
 

 

 

    

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Income (loss) before income taxes

    146.8         (39.8     284.3        48.8        49.8     (186.3     (127.2 )%      (0.5     (0.2 )% 

Income tax expense (benefit)

    39.8         (9.3     97.5        (1.4       59.0        118.7     (12.8     (15.1 )% 
 

 

 

    

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Net income (loss)

  $ 107.0       $ (30.5   $ 186.8      $ 47.4        79.5   $ (127.3     (131.5 )%    $ (13.3     (6.6 )% 
 

 

 

    

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

NM — Not Meaningful

 

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FX Impact

 

     Successor     Combined      Predecessor  
     2011     Transition
Period
     Fiscal 2010     Fiscal 2009  
     Favorable/(Unfavorable)  

Consolidated revenues

   $ 35.6      $ (17.3    $ 17.4      $ (95.8

Consolidated CRM

     2.6        (1.3      1.2        (8.0

Consolidated SG&A

     (8.2     6.7         (2.8     15.2   

Consolidated income (loss) from operations

     5.3        (1.9      (0.3     (3.5

Consolidated net income (loss)

     5.7        (3.0      (2.2     (1.8

Consolidated adjusted EBITDA

     4.5        (2.5      1.4        (5.7

Key Business Metrics

 

     2011     Transition
Period
    Fiscal
2010
    Fiscal
2009
 

Systemwide sales growth

     1.7     2.2     2.1     4.2

Comparable sales growth

        

Company

     0.1     (3.8 )%      (2.4 )%      0.3

Franchise

     (0.6 )%      (2.5 )%      (2.3 )%      1.4

System

     (0.5 )%      (2.7 )%      (2.3 )%      1.2

Average restaurant sales (in thousands)

   $ 1,248.0      $ 622.0      $ 1,244.0      $ 1,259.0   

NRG

        

Company

     (4     4        10        33   

Franchise

     265        169        239        327   

System

     261        173        249        360   

Net Refranchisings (trailing twelve months)

     45        82        52        (36

Restaurant counts at period end

        

Company

     1,295        1,344        1,387        1,429   

Franchise

     11,217        10,907        10,787        10,496   

System

     12,512        12,251        12,174        11,925   

CRM %

     11.7     12.9     12.2     12.6

2011 compared to 2010

Company restaurants

Company restaurant revenues decreased due to the net refranchising of 45 Company restaurants, primarily in the U.S. and Canada, partially offset by favorable FX impact across all segments.

CRM % decreased due to the effects of acquisition accounting, higher commodity prices in the U.S. and Canada and EMEA and a non-recurring $4.7 million favorable adjustment to our self insurance reserve in 2010. These factors were partially offset by improved labor margins due to benefits realized from improvements in variable labor controls and scheduling in our restaurants as well as changes in U.S. restaurant compensation plans to more closely align incentive compensation with restaurant performance.

Franchise and Property

Franchise and property revenues consist primarily of royalties earned on franchise sales, franchise fees and rents from real estate leased or subleased to franchisees. Franchise and property revenues increased primarily due to new leases and subleases associated with the refranchised restaurants, royalties derived from franchise NRG, favorable FX impact and the impact of acquisition accounting. These factors were partially offset by a decrease

 

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in renewal franchise fees due to the timing of renewals as a result of incentives provided to franchisees to accelerate restaurant remodels in the U.S and the impact of negative franchise comparable sales growth on royalties and contingent rents.

Franchise and property expenses increased primarily due to new leases and subleases associated with additional restaurants leased or subleased to franchisees as a result of the refranchising of Company restaurants, the impact of acquisition accounting, including a $15.7 million increase in franchise agreement amortization to $21.8 million, and unfavorable FX impact. These factors were partially offset by a decrease in bad debt expense.

Selling, general and administrative expenses

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

 

     Successor      Combined      Variance  
     2011      2010      $     %  

Selling expenses

   $ 78.2       $ 86.2       $ (8.0     (9.3 )% 
  

 

 

    

 

 

    

 

 

   

Management general and administrative expenses

     248.5         355.7         (107.2     (30.1 )% 

Share-based compensation and non-cash incentive compensation expense

     6.4         14.1         (7.7     (54.6 )% 

Depreciation and amortization

     15.9         18.0         (2.1     (11.7 )% 

Transaction costs

     3.2         77.7         (74.5     (95.9 )% 

Global restructuring and related professional fees

     46.5         67.2         (20.7     (30.8 )% 

Field optimization project costs

     10.6                 10.6        NM   

Global portfolio realignment project

     7.6                 7.6        NM   
  

 

 

    

 

 

    

 

 

   

Total general and administrative expenses

     338.7         532.7         (194.0     (36.4 )% 
  

 

 

    

 

 

    

 

 

   

Selling, general and administrative expenses

   $ 416.9       $ 618.9       $ (202.0     (32.6 )% 
  

 

 

    

 

 

    

 

 

   

 

NM — Not Meaningful

Selling expenses consist primarily of Company restaurant advertising fund contributions. Selling expenses as a percentage of Company restaurant revenues were flat in comparison to the prior year.

Management general and administrative expenses (“Management G&A”) are comprised primarily of salary and employee related costs for our non-restaurant employees, professional fees and general overhead for our corporate offices, including rent, maintenance and utilities, travel and meeting expenses, IT and technology costs and other general operating expenses. General and administrative expenses also include certain non-cash expenses, including shared-based compensation and the portion of annual non-cash incentive compensation that eligible employees elected to receive as common equity, depreciation and amortization as well as separately managed expenses associated with unusual or non-recurring events, such as costs associated with our global portfolio realignment project. The decrease in Management G&A in 2011 was driven by a decrease in salary and fringe benefits and a decrease in professional fees, which are directly attributable to the benefits derived from our global restructuring and implementation of a Zero Based Budgeting (“ZBB”) program.

The decrease in our total general and administrative expenses was driven by the decreases in Management G&A, Transaction costs, global restructuring and related professional fees and share-based compensation, as well as a decrease in depreciation and amortization resulting from acquisition accounting. These factors were partially offset by costs incurred in connection with our global portfolio realignment project and field optimization project.

 

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Other operating income (expense), net

Our other operating income (expense), net was comprised of the following:

 

     Successor     Combined  
     2011     2010  

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

   $ 6.2      $ (0.8

Litigation settlements and reserves, net

     1.3        5.9   

Foreign exchange net (gains) losses

     (4.6     (27.2

Loss from unconsolidated affiliates

     1.2        0.9   

Other, net

     7.2        3.1   
  

 

 

   

 

 

 

Other operating (income) expenses, net

   $ 11.3      $ (18.1
  

 

 

   

 

 

 

Interest expense, net

Interest expense, net increased, reflecting an increase in borrowings due to the Transactions, as well as higher interest rates.

The weighted average interest rate for 2011 on our long-term debt, including the Senior Notes, was 6.95%, which included the effect of interest rate caps.

The weighted average interest rate for 2010 on our long-term debt, including the Senior Notes, was 6.01%, which included a $13.5 million bridge loan fee related to the Transactions, the effect of interest rate swaps of our Predecessor debt and interest rate caps on our Successor debt.

Loss on early extinguishment

We recorded a loss on early extinguishment of debt of $21.4 million reflecting the write off of deferred financing costs and original issue discount and fees incurred in connection with the amendment of our credit facility in February 2011 and the early extinguishment of debt in December 2011.

Income tax expense

Our effective tax rate was 27.1% in 2011 compared to 39.2% in 2010 as a result of the current mix of income from multiple tax jurisdictions and the Transactions.

Transition Period compared to the Six Months Ended December 31, 2009

The combined financial data for the Transition Period do not comply with generally accepted accounting principles and are not intended to represent what our operating results would have been if the Transactions had occurred at the beginning of the period because the periods being combined are under two different bases of accounting as a result of the Acquisition on October 19, 2010. See “Recent Events and Factors Affecting Comparability — The Transactions.”

Company restaurants

Company restaurant revenues decreased due to the net refranchising of 82 Company restaurants during the trailing 12-month period, principally in EMEA and the U.S. and Canada, partially offset by acquisitions in APAC. Additionally, Company restaurant revenues decreased due to negative Company comparable sales growth in three of our four segments and unfavorable FX impact. These factors were partially offset by Company NRG.

 

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CRM % decreased due to sales deleverage on our fixed payroll and employee benefits and occupancy and other operating costs driven by negative Company comparable sales growth and the impact of acquisition accounting. These factors were partially offset by improvements in variable labor controls and scheduling in our U.S. restaurants, improved labor efficiencies in APAC and the U.K, the benefits realized from strategic pricing initiatives in the U.S. and Canada, a non-recurring $4.7 million favorable adjustment to our self-insurance reserve in the U.S. and Canada and changes in product mix in LAC.

Franchise and Property

The increase in franchise and property revenues was driven by royalties derived from franchise NRG, a higher effective royalty rate in EMEA and the impact of acquisition accounting adjustments. These factors were partially offset by the impact of negative franchise comparable sales growth on royalties and contingent rents, unfavorable FX impact, a reduction in initial franchise fees and the net effect of changes to our portfolio of properties leased to franchisees.

Franchise and property expenses increased primarily due to rent expense associated with the net refranchising of 82 Company restaurants and franchise NRG, an increase in bad debt expense and the impact of acquisition accounting, including a $3.1 million increase in franchise agreement amortization to $6.3 million. These factors were partially offset by favorable FX impact in EMEA.

Selling, general and administrative expenses

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

 

     Combined      Predecessor      Variance  
     Transition
Period
     For the Six
Months Ended
December 31,
2009
     $     %  

Selling expenses

   $ 42.0       $ 47.1       $ (5.1     (10.8 )% 
  

 

 

    

 

 

    

 

 

   

Management general and administrative expenses

     182.2         188.9         (6.7     (3.5 )% 

Share-based compensation and non-cash incentive compensation expense

     5.8         8.7         (2.9     (33.3 )% 

Depreciation and amortization

     8.2         9.3         (1.1     (11.8 )% 

Transaction costs

     77.7                 77.7        0.0

Global restructuring and related professional fees

     67.2                 67.2        0.0
  

 

 

    

 

 

    

 

 

   

Total general and administrative expenses

     341.1         206.9         134.2        64.9
  

 

 

    

 

 

    

 

 

   

Selling, general and administrative expenses

   $ 383.1       $ 254.0       $ 129.1        50.8
  

 

 

    

 

 

    

 

 

   

Selling expenses decreased due to the net refranchising of Company restaurants and a decrease in discretionary local marketing expenditures partially offset by favorable FX impact.

The decrease in Management G&A was driven by a 19% decrease in travel and meeting costs and a 10% decrease in office operating expenses, partially offset by an increase in a sales tax reserve.

The increase in our total general and administrative expenses was primarily due to transaction costs and global restructuring and related professional fees. These factors were partially offset by a decrease in Management G&A.

 

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Table of Contents

Other operating income (expense), net

Our other operating income (expense), net was comprised of the following:

 

     Combined     Predecessor  
     Transition
Period
    For the Six
Months
Ended
December 31,
2009
 

Net losses on disposal of assets, restaurant closures and refranchisings

   $ 2.6      $ 1.0   

Litigation settlements and reserves, net

     6.8        0.7   

Foreign exchange net (gains) losses

     (22.8     1.1   

Loss from unconsolidated affiliates

     0.8          

Other, net

     0.3        2.3   
  

 

 

   

 

 

 

Other operating (income) expenses, net

   $ (12.3   $ 5.1   
  

 

 

   

 

 

 

Interest expense, net and loss on early extinguishment of debt

Interest expense, net increased due to a $13.5 million bridge loan fee related to the Transactions and an increase in borrowings and interest rates. The weighted average interest rate for the period October 19, 2010 to December 31, 2010, related to the $1,510.0 million tranche was 6.82% and related to the €250.0 million tranche was 7.11% under the Term Loan Facility, which included the effect of interest rate caps on 100% of our term debt. The weighted average interest rate for the period July 1, 2010 to October 18, 2010 was 4.4% which included the impact of interest rate swaps on an average of 77% of our term debt.

Income tax expense

Our effective tax rate was (23.4%) in the Transition Period compared to 33.9% for the six months ended December 31, 2009 as a result of the current mix of income from multiple tax jurisdictions and the Transactions.

Fiscal 2010 compared to Fiscal 2009

Company restaurants

Company restaurant revenues decreased due to the net refranchising of 52 Company restaurants and the effects of negative Company comparable sales growth. These factors were partially offset by favorable FX impact and Company NRG.

CRM % decreased due to sales deleverage of our fixed payroll and employee benefits and occupancy and other operating costs driven by negative Company comparable sales growth and an increase in depreciation resulting from an increase in depreciable assets and strategic restaurant initiatives, such as our reimaging program and our new POS system. These factors were partially offset by favorable adjustments to our self-insurance reserve in the U.S., net decreases in commodity costs in the U.S. and Canada and strategic pricing initiatives.

Franchise and Property

The increase in franchise and property revenues was driven by favorable FX impact, royalties derived from positive franchise NRG and a higher effective royalty rate in the U.S. and LAC. These factors were partially offset by the impact of negative franchise comparable sales growth on royalties and contingent rents. Franchise and property expenses increased primarily as a result of additional restaurants leased or subleased to franchisees due to the net refranchising of Company restaurants and franchise NRG.

 

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Table of Contents

Selling, general and administrative expenses

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

 

     Predecessor      Variance  
     Fiscal 2010      Fiscal 2009      $     %  

Selling expenses

   $ 91.3       $ 93.3       $ (2.0     (2.1 )% 
  

 

 

    

 

 

    

 

 

   

Management G&A expenses

     362.3         362.1         0.2        0.1

Share-based compensation and non-cash incentive compensation expense

     17.0         16.2         0.8        4.9

Depreciation and amortization

     19.2         16.5         2.7        16.4
  

 

 

    

 

 

    

 

 

   

Total general and administrative expenses

     398.5         394.8         3.7        0.9
  

 

 

    

 

 

    

 

 

   

Selling, general and administrative expenses

   $ 489.8       $ 488.1       $ 1.7        0.3
  

 

 

    

 

 

    

 

 

   

Selling expenses as a percentage of Company restaurant revenues were flat in comparison to the prior year.

Other operating income (expense), net

Our other operating income (expense), net was comprised of the following:

 

     Predecessor  
     Fiscal 2010     Fiscal 2009  

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

   $ (2.4   $ (8.5

Litigation settlements and reserves, net

     (0.2     0.2   

Foreign exchange net (gains) losses

     (3.3     8.4   

Loss (income) from unconsolidated affiliates

     0.1        (0.4

Other, net

     5.1        2.2   
  

 

 

   

 

 

 

Other operating (income) expenses, net

   $ (0.7   $ 1.9   
  

 

 

   

 

 

 

Interest expense, net

Interest expense, net, decreased due to a net decrease in borrowings and interest rates during the period. The weighted average interest rate for Fiscal 2010 was 4.7%, which included the effect of interest rate swaps on an average of 73% of our term debt. The weighted average interest rate Fiscal 2009 was 5.1%, which included the effect of interest rate swaps on an average of 71% of our term debt.

Income tax expense

Our effective tax rate was 34.3% in Fiscal 2010 compared to 29.7% in Fiscal 2009 primarily due to the resolution of certain federal and state audits and realized tax benefits from the dissolution of dormant foreign entities.

 

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Table of Contents

Profitability Measures and Non-GAAP Reconciliations

Tabular amounts in millions of dollars unless noted otherwise.

 

    Results     Variance  
    Successor     Combined     Predecessor     2011 Compared
to 2010
    Transition
Period
Compared to
Six Months
Ended
December 31,
2009
    Fiscal 2010
Compared to
Fiscal 2009
 
    2011     Transition
Period
    Fiscal 2010     $     %     $     %     $     %  
                      Favorable / (Unfavorable)  

Segment income:

                   

U.S. and Canada

  $ 449.5      $ 222.2      $ 450.5      $ 7.0        1.6   $ (8.7     (3.8 )%    $ 7.8        1.8

EMEA

    146.0        50.9        85.3        58.5        66.9     2.6        5.4     0.6        0.7

Latin America

    63.9        21.8        43.4        20.1        45.9     0.7        3.3            0.0

APAC

    26.7        12.0        18.3        5.2        24.2     3.2        36.4     5.8        46.4
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Total

    686.1        306.9        597.5        90.8        15.3     (2.2     (0.7 )%      14.2        2.4

Unallocated Management G&A

    (101.1     (76.8     (136.6     40.6        (28.7 )%      (5.1     7.1     (8.9     7.0
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Adjusted EBITDA

    585.0        230.1        460.9        131.4        29.0     (7.3     (3.1 )%      5.3        1.2

Share-based compensation and non-cash incentive compensation expense

    6.4        5.8        17.0        7.7        54.6     2.9        33.3     (0.8     (4.9 )% 

Depreciation and amortization

    136.4        58.8        111.7        (18.3     (15.5 )%      (6.4     (12.2 )%      (13.6     (13.9 )% 

Transaction costs

    3.2        77.7               74.5        95.9     (77.7     NM               NM   

Global restructuring and related professional fees

    46.5        67.2               20.7        30.8     (67.2     NM               NM   

Field optimization project costs

    10.6                      (10.6     NM               NM               NM   

Global portfolio realignment project

    7.6                      (7.6     NM               NM               NM   

Other operating (income) expenses, net

    11.3        (12.3     (0.7     (29.4     NM        17.4        NM        2.6        NM   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Income (loss) from operations

    363.0        32.9        332.9        168.4        86.5     (138.3     (80.8 )%      (6.5     (1.9 )% 

Interest expense, net

    194.8        72.7        48.6        (98.2     (101.7 )%      (48.0     (194.3 )%      6.0        11.0

Loss on early extinguishment of debt

    21.4                      (21.4     NM               NM               NM   

Income tax expense (benefit)

    39.8        (9.3     97.5        (1.4     (3.6 )%      59.0        118.7     (12.8     (15.1 )% 
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

Net income

  $ 107.0      $ (30.5   $ 186.8      $ 47.4        79.5   $ (127.3     (131.5 )%    $ (13.3     (6.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

During the quarter ended December 31, 2011, we revised our measure of segment income from operating income to adjusted EBITDA and have revised our historical segment information to conform to this presentation. Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization, adjusted to exclude specifically identified items that management believes do not directly reflect our core operations and assists management in comparing segment performance by removing the impact of certain items that management believes do not reflect our core operations (See Note 19 to our audited Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data”).

2011 compared to 2010

The increase in adjusted EBITDA in 2011 was driven primarily by reductions in Unallocated Management G&A and increases in segment income in each of our four operating segments. Unallocated Management G&A represents corporate support costs in areas such as facilities, finance, human resources, information technology, legal, marketing and supply chain management, which benefit all of our geographic segments and system-wide restaurants and are not allocated specifically to any of the geographic segments.

The increase in income from operations in 2011 was driven by the increase in consolidated adjusted EBITDA and reductions in share-based compensation expense, Transaction costs and global restructuring and related professional fees. These factors were partially offset by an increase in depreciation and amortization, primarily as a result of acquisition accounting, as well as field optimization project costs, global portfolio realignment project costs and a decrease in other income, net.

 

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Our net income increased in 2011 primarily as a result of an increase in income from operations, partially offset by an increase in interest expense, the loss we recorded on the early extinguishment of debt and an increase in income tax expense.

Transition Period compared to the Six Months Ended December 31, 2009

The decrease in consolidated adjusted EBITDA in the Transition Period was driven primarily by an increase in Unallocated Management G&A and a decrease in segment income in the U.S. and Canada, partially offset by increases in segment income for EMEA, LAC and APAC.

The decrease in income from operations in the Transition Period was driven by Transaction costs and the costs of our global restructuring and field optimization project, an increase in depreciation and amortization, primarily as a result of acquisition accounting, and a decrease in consolidated adjusted EBITDA. These factors were partially offset by an increase in other (income) expense, net and decrease in share-based compensation expense.

Our net income decreased in the Transition Period primarily as a result of an increase in interest expense following the Transactions and a decrease in income from operations, partially offset by a decrease in income tax expense.

Fiscal 2010 compared to Fiscal 2009

The increase in consolidated adjusted EBITDA in Fiscal 2010 was driven primarily by increases in segment income in the U.S. and Canada, EMEA and APAC partially offset by an increase in Unallocated Management G&A.

The decrease in income from operations in Fiscal 2010 was driven by an increase in depreciation and amortization and an increase in share-based compensation expense. These factors were partially offset by an increase in adjusted EBITDA and other operating expenses, net.

Our net income decreased in Fiscal 2010 primarily as a result of a decrease in income from operations, and an increase in income tax expense, partially offset by a decrease in interest expense, net.

 

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U.S. and Canada

Tabular amounts in millions of dollars unless noted otherwise.

 

     Successor     Combined          Predecessor     Variance  
     2011     Transition
Period
         Fiscal 2010     2011
Compared
to 2010
    Transition
Period
Compared to
Six Months
Ended
December 31,
2009
    Fiscal 2010
Compared to
Fiscal 2009
 
                             Favorable/(Unfavorable)  

Company:

                 

Company restaurant revenues

   $ 1,172.0      $ 599.1           $ 1,289.5      $ (59.6   $ (57.9   $ (42.3

CRM

     142.2        82.1             170.5        (17.9     (10.7     0.4   

CRM %

     12.1     13.7          13.2     (1.0 )%      (0.4 )%      0.4

Company restaurant expenses as a % of Company restaurant revenue:

                 

Food and paper

     32.3     31.6          32.5     (0.1 )%      0.8     0.5

Payroll and benefits

     30.4     30.9          31.1     0.6     0.1     0.0

Depreciation and amortization

     5.7     5.0          4.9     (0.6 )%      (0.5 )%      (0.8 )% 

Other occupancy and operating

     19.5     18.8          18.3     (0.9 )%      (0.8 )%      0.7

Franchise:

                 

Franchise and property revenues

   $ 397.1      $ 199.6           $ 405.7      $ (4.0   $ (4.6   $ (5.5

Franchise and franchise property expenses

     69.9        28.1             42.2        (19.5     (8.1     (4.4

Segment income

     449.5        222.2             450.5        7.0        (8.7     7.8   

Segment margin

     28.6     27.8          26.6     1.5     1.0     1.2

FX Impact

 

     Successor     Combined          Predecessor  
     2011     Transition
Period
         Fiscal 2010      Fiscal 2009  
     Favorable/(Unfavorable)  

Segment revenues

   $ 6.4      $ 3.6           $ 12.9       $ (22.0

Segment CRM

     0.6        0.3             1.1         (1.2

Segment income

     (1.3     0.2             0.8         (0.6

 

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Key Business Metrics

 

     Successor     Combined          Predecessor  
     2011     Transition
Period
         Fiscal 2010     Fiscal 2009  

Systemwide sales growth

     (3.3 )%      (4.4 )%           (3.1 )%      1.2

Comparable sales growth

             

Company

     (1.9 )%      (4.9 )%           (2.4 )%      0.5

Franchise

     (3.6 )%      (5.0 )%           (4.1 )%      0.4

System

     (3.4 )%      (5.0 )%           (3.9 )%      0.4

NRG

             

Company

     (7     (1          (5     17   

Franchise

     (43     6             20        5   

System

     (50     5             15        22   

Net Refranchisings (trailing twelve months)

     38        44             51        (73

Restaurant counts at period end

             

Company

     939        984             987        1,043   

Franchise

     6,561        6,566             6,562        6,491   

System

     7,500        7,550             7,549        7,534   

2011 compared to 2010

Company restaurants

Company restaurant revenues decreased primarily due to the net refranchising of 38 Company restaurants and the effects of negative Company comparable sales growth. These factors were partially offset by favorable FX impact in Canada.

CRM% decreased primarily due to the impact of sales deleverage on our fixed occupancy and other operating costs, the impact of acquisition accounting, other operating costs to implement new initiatives at our Company restaurants and lower food margins driven by higher commodity prices in the U.S. In addition, CRM% decreased due to a non-recurring $4.7 million favorable adjustment to the self insurance reserve in the U.S. and Canada in 2010. These factors were partially offset by changes in restaurant compensation plans to more closely align incentive compensation with restaurant performance, benefits realized from improvements in variable labor controls and scheduling in our restaurants and benefits derived from strategic pricing initiatives.

Franchise and Property

Franchise and property revenues decreased due to the impact of negative franchise comparable sales growth on royalties and contingent rents and a decrease in renewal franchise fees due to the timing of renewals as a result of incentives provided to franchisees to accelerate restaurant remodels. These factors were partially offset by favorable FX impact in Canada and the impact of acquisition accounting adjustments.

Franchise and property expenses increased primarily due to additional restaurants leased or subleased to franchisees as a result of the net refranchising of Company restaurants, the impact of acquisition accounting, including a $5.2 million increase in franchise agreement amortization to $11.0 million and an increase in bad debt expense.

Segment income and segment margin

Segment income and margin increased due to a decrease in Management G&A partially offset by a decrease in Company restaurant margin and net franchise and property income.

 

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Transition Period compared to the Six Months Ended December 31, 2009

Company restaurants

Company restaurant revenues decreased due to the net refranchising of 44 Company restaurants and the effects of negative Company comparable sales growth. These factors were partially offset by favorable FX impact in Canada.

CRM % decreased primarily due to the impact of sales deleverage on our fixed labor and occupancy and other operating costs, the impact of acquisition accounting, higher commodity prices in the U.S. and an increase in the hourly wage rate in Canada. These factors were partially offset by the successful launch of higher priced premium products and discontinued value promotions, such as the  1/4 lb. Double Cheeseburger. Additional offsets include benefits realized from improvements in variable labor controls and scheduling in our U.S. restaurants and a favorable adjustment to the self insurance reserve as a result of favorable developments in our claim trends and to adjust our incurred but not reported confidence level.

Franchise and Property

Franchise and property revenues decreased due to the impact of negative franchise comparable sales growth on royalties and contingent rents and a reduction in initial and renewal franchise fees. These factors were partially offset by acquisition accounting.

Franchise and property expenses increased primarily as a result of additional restaurants leased or subleased to franchisees due to the net refranchising of Company restaurants, the impact of acquisition accounting, including a $1.1 million increase in franchise agreement amortization to $3.9 million, and an increase in bad debt expense.

FX impact was not significant to franchise and property revenues/expenses.

Segment income and segment margin

Segment income and margin increased due to a decrease in Management G&A partially offset by a decrease in Company restaurant margin and net franchise and property income.

Fiscal 2010 compared to Fiscal 2009

Company restaurants

Company restaurant revenues decreased due to the net refranchising of 51 Company restaurants and the effects of negative Company comparable sales growth. These factors were partially offset by favorable FX impact in Canada.

CRM % increased primarily due to decreases in commodity costs, strategic pricing initiatives, improvements in variable labor controls and favorable adjustments to our self-insurance reserve. These factors were partially offset by the unfavorable impact of sales deleverage on our fixed labor and occupancy costs as a result of negative Company comparable sales growth and additional depreciation expense associated with strategic initiatives.

Franchise and Property

Franchise and property revenues decreased due to negative franchise comparable sales growth and a reduction in renewal franchise fees due to fewer franchise agreement expirations and temporary extensions of expired franchise agreements in the U.S. These factors were partially offset by the net refranchising of Company restaurants and an increase in the effective royalty rate in the U.S. FX impact was not significant in the segment.

 

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Franchise and property expenses increased due to the net effect of changes to our property portfolio as a result of the net refranchising of Company restaurants and positive franchise NRG.

Segment income and segment margin

Segment income and margin increased due to an increase in CRM partially offset by a decrease in net franchise and property income and increases in Management G&A.

EMEA

Tabular amounts in millions of dollars unless noted otherwise.

 

     Successor     Combined          Predecessor     Variance  
     2011     Transition
Period
         Fiscal 2010     2011
Compared to
2010
    Transition
Period
Compared to
Six Months
Ended
December 31,
2009
    Fiscal 2010
Compared to
Fiscal 2009
 
                             Favorable/(Unfavorable)  

Company:

                 

Company restaurant revenues

   $ 330.7      $ 181.9           $ 461.3      $ (59.9   $ (70.6   $ (19.7

CRM

     35.5        21.5             45.3        (1.1     (8.7     (12.8

CRM %

     10.7     11.8          9.8     1.4     (0.1 )%      (2.3 )% 

Company restaurant expenses as a % of Company restaurant revenue:

                 

Food and paper

     29.4     28.4          28.4     (1.1 )%      0.2     0.1

Payroll and benefits

     31.4     32.1          33.6     2.1     0.6     (0.7 )% 

Depreciation and amortization

     3.5     3.0          2.8     (0.3 )%      (0.6 )%      (0.4 )% 

Other occupancy and operating

     25.0     24.7          25.4     0.7     (0.3 )%      (1.3 )% 

Franchise:

                 

Franchise and property revenues

   $ 194.9      $ 91.9           $ 174.1      $ 20.2      $ 0.7      $ 4.5   

Franchise and franchise property expenses

     25.9        13.5             23.0        (1.7     (1.2     3.0   

Segment income

     146.0        50.9             85.3        58.5        2.6        0.6   

Segment margin

     27.8     18.6          13.4     12.3     4.5     0.4

FX Impact

 

     Successor      Combined          Predecessor  
     2011      Transition
Period
         Fiscal 2010      Fiscal 2009  
     Favorable/(Unfavorable)  

Segment revenues

   $ 23.4       $ (23.8        $ 5.1       $ (64.8

Segment CRM

     1.7         (1.8          0.4         (4.7

Segment income

     6.4         (2.5          0.8         (3.9

 

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Key Business Metrics

 

     Successor     Combined          Predecessor  
     2011     Transition
Period
         Fiscal 2010     Fiscal 2009  

Systemwide sales growth

     6.5     7.7          6.0     8.5

Comparable sales growth

             

Company

     5.8     (1.4 )%           (2.3 )%      0.0

Franchise

     4.1     (0.6 )%           0.3     2.4

System

     4.3     (0.7 )%           0.0     2.1

NRG

             

Company

     (4     (1          (1     1   

Franchise

     158        65             101        200   

System

     154        64             100        201   

Net Refranchisings (trailing twelve months)

     7        73             36        6   

Restaurant counts at period end

             

Company

     192        203             241        278   

Franchise

     2,690        2,525             2,439        2,302   

System

     2,882        2,728             2,680        2,580   

2011 compared to 2010

Company restaurants

Company restaurant revenues decreased due to the net refranchising of Company restaurants, driven by the sale of our Netherlands business during September 2010 partially offset by the effects of positive Company comparable sales growth and favorable FX impact.

CRM % increased primarily as a result of the leveraging effect of positive Company comparable sales growth on our fixed labor and occupancy and other operating costs, partially offset by lower food margins driven by higher commodity prices in Germany and the U.K., the sale of the Netherlands entity that occurred in September 2010, wage rate increases in Germany and Spain and the impact of acquisition accounting.

Franchise and Property

Franchise and property revenues increased due to franchise fees and royalties derived from franchise NRG, franchise comparable sales growth and favorable FX impact. These factors were partially offset by decreased rental income from a reduction in the number of properties leased or subleased to franchisees.

Franchise and property expenses increased due to franchise agreement amortization of $8.3 million and unfavorable FX impact. These factors were partially offset by a decrease in bad debt expense and decreased rent expense from a reduction in the number of properties leased or subleased to franchisees.

Segment income and segment margin

Segment income and margin increased due to a decrease in Management G&A, an increase in net franchise and property income and an increase in CRM %.

Transition Period compared to the Six Months Ended December 31, 2009

Company restaurants

Company restaurant revenues decreased due to the net refranchising of Company restaurants in Germany and the Netherlands, the effects of negative Company comparable sales growth and unfavorable FX impact.

 

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CRM % remained relatively flat as the impact of sales deleverage on our fixed labor and occupancy and other operating costs due to negative Company comparable sales growth and the impact of acquisition accounting was offset by improved labor efficiencies in the U.K. and a decrease in start up expenses.

Franchise and Property

Franchise and property revenues increased due to franchise fees and royalties derived from franchise NRG, the net refranchising of Company restaurants and a higher effective royalty rate driven by refranchisings in Germany and the Netherlands. These factors were partially offset by the impact of negative franchise comparable sales growth on royalties and contingent rents, unfavorable FX impact and decreased rent income from a reduction in the number of properties leased to franchisees.

Franchise and property expenses increased due to an increase in bad debt expense and franchise agreement amortization of $1.7 million. These factors were partially offset by favorable FX impact and decreased rent expense from a reduction in the number of properties leased to franchisees.

Segment income and segment margin

Segment income and margin increased primarily due to a decrease in Management G&A and an increase in net franchise and property income.

Fiscal 2010 compared to Fiscal 2009

Company restaurants

Company restaurant revenues decreased due to the impact of negative Company comparable sales growth primarily, driven by negative Company comparable sales growth in Germany, and the net refranchising of Company restaurants. These factors were partially offset by Company comparable sales growth in Spain and the U.K. and favorable FX impact.

CRM % decreased primarily due to the unfavorable impact of sales deleverage on our fixed labor and occupancy costs as a result of negative Company comparable sales growth and an increase in repair and maintenance costs, primarily in Germany in connection with our refranchising initiative.

Franchise and Property

Franchise and property revenues increased due to franchise comparable sales growth, driven by Turkey, Spain, and Italy, franchise NRG and favorable FX impact. These factors were partially offset by a decrease in initial franchise fees due to lower franchise NRG compared to the prior year and the net effect of changes to our property portfolio. Franchise and property expenses decreased due to the net effect of changes to our property portfolio.

Segment income and segment margin

Segment income and margin increased due to a net increase in franchise and property income and decrease in Management G&A expenses partially offset by a decrease in CRM.

 

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LAC

Tabular amounts in millions of dollars unless noted otherwise.

 

     Successor     Combined          Predecessor     Variance  
     2011     Transition
Period
         Fiscal 2010     2011
Compared to
2010
    Transition
Period
Compared to
Six Months
Ended
December 31,
2009
    Fiscal 2010
Compared to
Fiscal 2009
 
                             Favorable/(Unfavorable)  

Company:

                 

Company restaurant revenues

   $ 66.2      $ 31.4           $ 60.6      $ 4.6      $ 1.0      $ 0.5   

CRM

     12.5        4.9             11.8        2.0        (1.2       

CRM %

     18.9     15.6          19.5     1.8     (4.5 )%      (0.1 )% 

Company restaurant expenses as a % of Company restaurant revenue:

                 

Food and paper

     38.2     39.0          39.0     0.7     0.7     (0.6 )% 

Payroll and benefits

     12.0     12.0          12.2     (0.1 )%      0.6     0.1

Depreciation and amortization

     9.7     10.1          7.7     (0.4 )%      (3.4 )%      1.1

Other occupancy and operating

     21.2     23.3          21.6     1.6     (2.4 )%      (0.7 )% 

Franchise:

                 

Franchise and property revenues

   $ 61.9      $ 27.4           $ 48.4      $ 9.6      $ 3.9      $ 1.5   

Franchise and franchise property expenses

     (1.1     1.3             0.2        2.4        (1.2       

Segment income

     63.9        21.8             43.4        20.1        0.7          

Segment margin

     49.9     37.1          39.8     11.4     (2.1 )%      (0.7 )% 

FX Impact

 

     Successor      Combined          Predecessor  
     2011      Transition
Period
         Fiscal 2010     Fiscal 2009  
     Favorable/(Unfavorable)  

Segment revenues

   $ 1.1       $ 1.3           $ (1.6   $ (9.4

Segment CRM

     0.2       $ 0.2             (0.3     (2.0

Segment income

                                (0.9

 

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Key Business Metrics

 

     Successor     Combined          Predecessor  
     2011     Transition
Period
         Fiscal 2010     Fiscal 2009  

Systemwide sales growth

     13.5     18.6          4.8     8.5

Comparable sales growth

             

Company

     4.3     (3.1 )%           (4.1 )%      (3.2 )% 

Franchise

     8.1     6.8          (1.1 )%      2.3

System

     7.9     6.2          (1.3 )%      1.9

NRG

             

Company

     1        2             5        8   

Franchise

     81        33             55        68   

System

     82        35             60        76   

Net Refranchisings (trailing twelve months)

                                 

Restaurant counts at period end

             

Company

     97        96             97        92   

Franchise

     1,125        1,044             1,041        986   

System

     1,222        1,140             1,138        1,078   

2011 compared to 2010

Company restaurants

Company restaurant revenues increased primarily due to positive Company comparable sales growth and slightly favorable FX impact.

CRM % increased primarily as a result of the leveraging effect of positive comparable sales growth on our fixed labor and occupancy and other operating costs, favorability in food margins primarily driven by a new supplier contract and benefits realized from an adjustment to a previous estimate of occupancy and other operating costs. These factors were partially offset by a shift in product mix driven by promotions of lower margin menu items, the impact of acquisition accounting and higher labor costs associated with food delivery and kiosks.

Franchise and Property

Franchise and property revenues increased due to franchise NRG, franchise comparable sales growth, the recognition of cumulative royalties previously deferred and an increase in initial franchise fees driven by an increase in franchise NRG. Franchise and property expenses decreased due to the recovery of previously reserved receivables. FX impact was not significant.

Segment income and segment margin

Segment income and margin increased due to an increase in CRM and CRM %, an increase in net franchise and property income and a decrease in Management G&A.

Transition Period compared to the Six Months Ended December 31, 2009

Company restaurants

Company restaurant revenues increased due to favorable FX impact, partially offset by the effects of negative Company comparable sales growth.

 

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CRM % decreased primarily due to the impact of sales deleverage on our fixed labor and occupancy and other operating costs as a result of negative Company comparable sales growth and higher utility costs, partially offset by changes in product mix and improved labor efficiencies.

Franchise and Property

Franchise and property revenues increased due to franchise NRG, franchise comparable sales growth, an increase in initial franchise fees primarily in Brazil and favorable FX impact. Franchise and property expenses increased primarily as a result of an increase in bad debt expense.

Segment income and segment margin

Segment income increased primarily due to an increase in franchise and property income partially offset by a decrease in CRM.

Segment margin decreased due to a decrease in CRM % partially offset by the factors previously discussed.

Fiscal 2010 compared to Fiscal 2009

Company restaurants

Company restaurant revenues increased due to Company NRG, partially offset by negative Company comparable sales growth and unfavorable FX impact.

CRM remained relatively unchanged.

Franchise and Property

Franchise and property revenues increased due to favorable FX impact and franchise NRG, partially offset by negative franchise comparable sales growth. Franchise and property expenses were flat.

Segment income and segment margin

Segment income and margin remained relatively unchanged.

 

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APAC

Tabular amounts in millions of dollars unless noted otherwise.

 

     Successor     Combined          Predecessor     Variance  
     2011     Transition
Period
         Fiscal 2010     2011
Compared to
2010
    Transition
Period
Compared to
Six Months
Ended
December 31,
2009
    Fiscal 2010
Compared to
Fiscal 2009
 
                             Favorable/(Unfavorable)  

Company:

                 

Company restaurant revenues

   $ 69.8      $ 33.8           $ 27.9      $ 14.1      $ 27.8      $ 20.3   

CRM

     1.1        0.4             (3.1     1.2        2.9        0.1   

CRM %

     1.6     1.2          (11.1 )%      1.8     42.9     31.0

Company restaurant expenses as a % of Company restaurant revenue:

                 

Food and paper

     33.6     34.9          38.5     1.9     11.7     9.8

Payroll and benefits

     18.5     16.3          19.1     (1.4 )%      5.5     1.2

Depreciation and amortization

     7.2     8.5          9.5     0.5     12.1     12.4

Other occupancy and operating

     39.1     39.1          44.0     0.8     13.6     7.6

Franchise:

                 

Franchise and property revenues

   $ 43.1      $ 19.4           $ 34.7      $ 6.3      $ 2.1      $ 5.5   

Franchise and franchise property expenses

     2.4        0.6                    (1.8     (0.6     0.2   

Segment income

     26.7        12.0             18.3        5.2        3.2        5.8   

Segment margin

     23.6     22.6          29.2     0.4     (15.2 )%      (4.7 )% 

FX Impact

 

     Successor     Combined          Predecessor  
     2011     Transition
Period
         Fiscal 2010     Fiscal 2009  
     Favorable/(Unfavorable)  

Segment revenues

   $ 4.7      $ 1.6           $ 1.0      $ 0.4   

Segment CRM

     0.1                           (0.1

Segment income

     (0.6     (0.2          (0.2     (0.3

 

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Key Business Metrics

 

     Successor     Combined     Predecessor  
     2011     Transition
Period
    Fiscal 2010