10-K 1 d444026d10k.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, 2012

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: 001-35511

 

 

BURGER KING WORLDWIDE, INC.

(Exact name of Registrant as Specified in Its Charter)

 

Delaware   45-5011014

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

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

(305) 378-3000

Registrant’s telephone number, including area code

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

 

Title of each class   Name of each exchange on which registered
Common Stock, Par Value $0.01 per Share   New York Stock Exchange

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        ¨  No  þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes        þ  No  ¨

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.    ¨

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

The aggregate market value of the common equity held by non-affiliates of the registrant on June 30, 2012, computed by reference to the closing price for such stock on the New York Stock Exchange on such date, was $928,916,314.

The number of shares outstanding of the registrant’s common stock as of February 11, 2013 was 350,332,742 shares.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s definitive proxy statement for the 2013 Annual Meeting of Stockholders, which is to be filed no later than 120 days after December 31, 2012, are incorporated by reference into Part III of this Form 10-K.

 

 

 


Table of Contents

BURGER KING WORLDWIDE, INC.

2012 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

     Page  
PART I   

Item 1.

   Business      3   

Item 1A.

   Risk Factors      15   

Item 1B.

   Unresolved Staff Comments      29   

Item 2.

   Properties      30   

Item 3.

   Legal Proceedings      30   

Item 4.

   Mine Safety Disclosure      30   
PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      31   

Item 6.

   Selected Financial Data      32   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      35   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      63   

Item 8.

   Financial Statements and Supplementary Data      65   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      142   

Item 9A.

   Controls and Procedures      142   
PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance      142   

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      144   

Burger King® and Whopper® 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 2012 and 2011 are to the fiscal years ended December 31, 2012 and 2011, respectively. Unless the context otherwise requires, all references to “we”, “us”, “our” and “Company” refer to Burger King Worldwide, 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 Worldwide, Inc. (“BKW”, the “Company” or “we”) is a Delaware corporation formed on April 2, 2012 and the indirect parent of Burger King Corporation (“BKC”), a Florida corporation that franchises and operates fast food hamburger restaurants, principally under the Burger King® brand. We are the world’s second largest fast food hamburger restaurant, or FFHR, chain as measured by the total number of restaurants. As of December 31, 2012, we owned or franchised a total of 12,997 restaurants in 86 countries and U.S. territories. Of these restaurants, 418 were Company restaurants and 12,579, or approximately 97% of all Burger King restaurants, were owned by our franchisees. Our restaurants are limited service restaurants that feature flame-grilled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other affordably-priced food items. We believe our restaurants appeal to a broad spectrum of consumers, with multiple day parts appealing to different customer groups. 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, delicious food at affordable prices.

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

We believe that we can deliver value to our shareholders and enhance the Burger King brand by focusing our efforts on the stewardship of our brand. We currently have a higher percentage of franchise restaurants than our major competitors in the FFHR category, and our goal is to transition to a nearly 100% franchised business model. We believe that our franchise-dominated business model will increase our profitability and cash flow since the capital required to expand our restaurant portfolio and re-image and maintain existing Burger King restaurants will principally be provided by our franchisees. Furthermore, we believe that our shift away from significant restaurant ownership will permit us to focus on narrowing the average restaurant sales gap with our peers, through menu innovation, franchisee operational support and brand development.

Our History

We were founded in 1954 when James McLamore and David Edgerton opened the first Burger King restaurant in Miami, Florida and in 1957 we introduced our signature Whopper® sandwich. In October 2010 we were acquired by 3G Capital Special Situations Fund II, L.P. (“3G”), which is controlled by 3G Capital Partners, Ltd., an investment firm based in New York (“3G Capital”). On June 20, 2012, upon our merger with a subsidiary of Justice Holdings Limited (“Justice”), we changed our name to Burger King Worldwide, Inc. and listed our shares on the New York Stock Exchange under the symbol “BKW”.

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. (“NPD Group”), which prepares and disseminates CREST® data, QSR consumer spending has grown at an annual rate of 3% over the past 10 years, totaling approximately $248 billion for the 12-month period ended November 2012.

According to NPD Group, the FFHR category is the largest category in the QSR segment, generating consumer spending of $72.0 billion in the United States for the 12-month period ended November 2012, representing 29% of total QSR consumer spending. According to NPD Group, for the 12-month period ended November 2012, Burger King accounted for approximately 12% of total FFHR consumer spending in the United States.

 

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Our Business Strategy

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

 

   

Driving Sales and Traffic in the U.S. and Canada:    We have identified the four priorities, or “pillars,” that we believe will enable us to drive future sales and traffic in the U.S. and Canada.

 

   

Menu.    The strength of our menu has been built on our distinct flame-grilled cooking platform to make better tasting burgers. During 2012, we launched four new menu platforms (salads, wraps, smoothies and desserts) and expanded our chicken, coffee and ancillary menu platforms. We will continue to optimize our menu by focusing on our core products, such as our flagship Whopper sandwich, while broadening the depth and breadth of our menu to appeal to a broader range of consumers.

 

   

Marketing Communications.    We have established a data driven marketing process which is focused on driving restaurant sales and traffic, while targeting a broader consumer base with more inclusive messaging to reach women, parties with children and seniors. We have launched a new food-centric marketing strategy with the tagline “Taste is King”, which we believe will refocus our consumers on our food, which is our core asset. We believe that this food-centric marketing strategy will allow us to strike a balance between value promotions and premium limited time offerings to drive profitable restaurant sales and traffic.

 

   

Operations.    We believe that improving restaurant operations and enhancing the customer experience are key components to increasing the profitability of the Burger King system. As part of our franchisee-focused approach to our business, we have implemented standardized restaurant crew training and restructured our field teams to significantly increase our field presence and more closely align the compensation of these field teams with restaurant performance.

 

   

Image.    We believe that re-imaged Burger King restaurants increase curb appeal and result in increased customer sales. Our goal is to have 40% of our U.S. and Canada Burger King restaurants on a modern image by 2015. We have lowered the cost of remodeling restaurants by improving the supply chain and providing franchisees with financial incentives and access to a third-party financing program to assist them in their remodeling efforts. Re-imaged restaurants have experienced a sales uplift of approximately 10-15% on average, enabling our franchisees the opportunity to achieve an attractive return on their investment.

 

   

Accelerating international development:    We believe that international development will be one of the principal drivers of long-term growth of the business and value for our shareholders. We seek to accelerate our international growth by:

 

   

creating strategic joint ventures with accelerated development targets, in which we retain a significant minority equity interest without deploying new capital; and

 

   

entering into master franchise and development agreements with experienced local operators.

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 where we believe our current penetration is low relative to our potential. We believe this strategy will permit us to capitalize on under-penetrated markets and rising middle class consumer spending.

During 2012, we entered into joint venture agreements for China, Russia, South Africa and Central America and granted master franchise and development rights for each market. We also entered into an agreement with our largest franchisee in Mexico to establish a joint venture in that country, which we expect will close in 2013. In each joint venture, we typically pair a proven local operator with a strong financial partner while retaining an equity stake and board seats. Also during 2012, we entered into development agreements with franchisees in Singapore, Malaysia, Vietnam, Korea, the Nordic countries (Norway, Sweden and Denmark) and Colombia, and we are actively seeking strategic partners to accelerate our international expansion in other countries.

 

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Continuing to Implement our Refranchising Initiative:    As part of our goal to approach a nearly 100% franchised business model, we continue to focus on refranchising Company restaurants to new and existing franchisees. We believe that our refranchising strategy will continue to enhance our cash flow, accelerate our re-imaging initiative and strengthen relationships with key franchisees.

Once we have reached a nearly 100% franchise system, we believe we will be one of the few pure franchise and real estate companies in our QSR peer group. During 2012, we refranchised 871 Company restaurants, of which 752 were located in the United States and 119 were located in other countries, bringing our system to 97% franchised. As a result of our refranchising activity, we have achieved significant progress towards our goal and, as of December 31, 2012, had 12,579 Burger King franchise restaurants and 418 Company restaurants, as compared to 11,217 and 1,295, respectively, as of December 31, 2011.

 

   

Driving corporate-level G&A efficiencies:    We are committed to maintaining our corporate-level G&A at current levels through our “Zero Based Budgeting” program. This annual planning method is 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. As part of our commitment, we tie a significant portion of management’s incentive compensation specifically to our G&A budget.

Global Operations

We operate in four reporting 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. 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. 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 20 of this Form 10-K.

The table below sets forth our restaurant portfolio in each of our four operating segments as of December 31, 2012:

 

     Worldwide     U.S. & Canada     EMEA     LAC     APAC  

Restaurants

          

Company

     418        183        132        100        3   

Franchise

     12,579        7,293        2,989        1,290        1,007   

Total

     12,997        7,476        3,121        1,390        1,010   

% Total

     100     57     24     11     8

 

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

As of December 31, 2012, we had 7,293 franchise restaurants and 183 Company restaurants in the U.S. and Canada, as compared to 6,561 and 939, respectively, as of December 31, 2011. During 2012, we refranchised 752 restaurants in the U.S. and Canada, bringing the region to 98% franchised as of December 31, 2012. In connection with the refranchising to Carrols Restaurant Group, Inc., our largest franchisee (“Carrols”), we received cash, a 28.9% equity interest in Carrols and board seats. During 2012, we also continued to implement our Four Pillars strategy to improve comparable sales growth and franchise profitability by enhancing our Menu, Marketing Communications, Image, and Operations. We believe that this approach will enable us to deliver an enjoyable customer experience and improve the attractiveness of our brand to current and prospective franchisees by driving positive, profitable sales growth.

The table below sets forth our restaurant portfolio in the U.S. and Canada as of December 31, 2012 and 2011:

 

    

Number of Restaurants

 
         2012              2011      

Country:

     

US

     7,183         7,204   

Canada

     293         296   
  

 

 

    

 

 

 

Total

     7,476         7,500   

Europe, the Middle East and Africa (EMEA)

EMEA is the second largest region, as measured by number of restaurants. As of December 31, 2012, we had 2,989 franchise restaurants and 132 Company restaurants in EMEA, as compared to 2,690 and 192, respectively, as of December 31, 2011. While Germany continues to be the largest market in EMEA with 684 restaurants as of December 31, 2012, Turkey and Russia are two of our fastest growing markets with net openings of 78 restaurants and 47 restaurants, respectively, during 2012. During 2012, we refranchised all of our Company restaurants in the United Kingdom, bringing the region to 96% franchised. We plan to refranchise our remaining Company restaurants in Germany and Spain during 2013. We will continue to evaluate opportunities to accelerate development, including through the establishment of master franchises with exclusive development rights and joint ventures with new and existing franchisees. We believe there are significant growth opportunities throughout the EMEA region.

As part of our international growth strategy, we entered into several important agreements in 2012:

 

   

Russia.    In June 2012, we entered into a joint venture agreement in Russia to accelerate unit development in this attractive growth market. We partnered with VTB Capital, the investment arm of Russia’s second largest bank, and Burger King’s largest Russian franchisee, Burger Rus. We granted exclusivity and sub-franchising rights in the Russian market to the joint venture, and received a minority equity stake and board seats, without deploying our own capital.

 

   

South Africa.    In November 2012, we entered into a joint venture agreement with Grand Parade Investments, Ltd. (GPI), a leading operator of hospitality, gaming and leisure companies in the region, to develop the Burger King brand in South Africa. We believe Sub-Saharan Africa represents an attractive long-term growth opportunity, and this agreement will enable Burger King to begin building its brand in the region. We granted the joint venture exclusive development and sub-franchising rights in the country and received a minority equity stake without deploying our own capital. The opening of the first restaurant is planned for Cape Town in 2013.

 

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Autogrill.    In November 2012, we entered into an agreement with Autogrill to develop Burger King restaurants at captive locations such as highways, train stations and airports in France, Switzerland, Poland, Italy, Czech Republic, Germany and the Netherlands. We are underpenetrated in many of these countries compared to our peers, and believe that this agreement is an important first step to accelerate development in the region.

The table below sets forth our restaurant portfolio in our major markets in EMEA and all other markets as of December 31, 2012 and 2011:

 

     Number of Restaurants  
         2012              2011      

Country:

     

Germany

     684         678   

Spain

     522         484   

Turkey

     486         408   

UK

     473         469   

Italy

     91         72   

Russia

     86         39   

Saudi Arabia

     80         64   

Sweden

     79         71   

UAE

     68         60   

Kuwait

     64         61   

Netherlands

     56         54   

Norway

     32         32   

Other

     400         390   
  

 

 

    

 

 

 

Total

     3,121         2,882   

Latin America and the Caribbean (LAC)

As of December 31, 2012, we had 1,290 franchise and 100 Company restaurants in LAC, as compared to 1,125 and 97, respectively, as of December 31, 2011. In 2011, BKW entered into a joint venture agreement with Vinci Partners for Brazil and granted exclusive master franchise and development rights to the joint venture. We received a significant minority stake and board seats in the joint venture without deploying our own capital. We are encouraged by the initial success of our joint venture in Brazil. We believe that there are significant growth opportunities in LAC, particularly in Brazil, Mexico, Colombia and Central America.

As part of our international growth strategy, we entered into several important agreements in 2012:

 

   

Colombia.    In October 2012, we entered into an exclusive agreement with Fondo Escala Capital and Promotora to develop Burger King restaurants in Colombia.

 

   

Mexico.    In December 2012, we entered into an agreement with Alsea S.A.B. de C.V., the parent of our largest franchisee in Mexico, to establish a joint venture in Mexico. Under this agreement, we will contribute all of our Company restaurants in Mexico and grant exclusive master franchise and development rights for Mexico to the joint venture. We will receive a significant minority interest in the joint venture, cash and board seats. We expect this transaction to close in 2013, at which time LAC will become 100% franchised.

 

   

Central America.    In December 2012, we created a joint venture in Central America with BEBOCA LTD, our franchisee in Costa Rica and Panama. This multi-country joint venture is a first of its kind for the Burger King brand worldwide. The new joint venture acquired exclusive master franchise and development rights for Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. We received a significant minority stake in the joint venture without deploying our own capital.

 

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The table below sets forth our restaurant portfolio in our major markets in LAC and in all other markets as of December 31, 2012 and 2011:

 

    

Number of Restaurants

 
       2012          2011    

Country:

     

Mexico

     431         415   

Brazil

     224         140   

Puerto Rico

     183         180   

Argentina

     65         58   

Venezuela

     63         54   

Colombia

     28         18   

Other

     396         357   
  

 

 

    

 

 

 

Total

     1,390         1,222   

Asia Pacific (APAC)

As of December 31, 2012, we had 1,007 franchise and 3 Company restaurants in APAC, as compared to 841 and 67, respectively, as of December 31, 2011. Australia is the largest market in APAC, with 357 restaurants as of December 31, 2012, all of which are franchised and operated under the name 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 are significant growth opportunities in APAC, and we will continue to pursue master franchise agreements and joint ventures throughout the region.

As part of our international growth strategy, we entered into several important agreements in 2012:

 

   

China.    In June 2012, we entered into a joint venture agreement for China to accelerate unit development in this attractive growth market. We partnered with Cartesian Capital Group, a global private equity firm, and members of the Kurdoglu family, who operate BKW’s largest international franchisee, TAB Gida. We contributed our 44 Company restaurants in China to the joint venture in exchange for a significant minority equity stake and board seats, and we granted exclusive development and sub-franchising rights for the Chinese market to the joint venture.

 

   

Singapore / Malaysia.    In September 2012, we sold 38 company-owned restaurants to Rancak Selera, the current Burger King franchisee in Malaysia. As part of the transaction, BKW and Rancak Selera entered into master franchise and development agreements to further develop the Burger King brand in both Malaysia and Singapore over the next 20 years.

The table below sets forth our restaurant portfolio in our major markets in APAC and in all other markets as of December 31, 2012 and 2011:

 

    

Number of Restaurants

 
       2012          2011    

Country:

     

Australia

     357         347   

South Korea

     139         128   

China

     86         56   

New Zealand

     82         79   

Japan

     64         44   

Malaysia

     43         34   

Singapore

     41         45   

Indonesia

     40         30   

Thailand

     29         27   

Other

     129         118   
  

 

 

    

 

 

 

Total

     1,010         908   

 

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U.S. and Canada Re-imaging Program

As part of our Four Pillars strategy for the U.S. and Canada, we have implemented a re-imaging program to enhance our customers’ restaurant experience. We have developed a modern “20/20” restaurant design, which 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. Rigorous consumer testing confirmed the 20/20 image was the right one for Burger King. Re-imaged restaurants have experienced a sales uplift of approximately 10% to 15%, on average. The average cost to re-image a restaurant is approximately $300,000, down from approximately $500,000-$600,000.

Our goal is to have 40% of U.S. and Canada Burger King restaurants on a modern image by 2015. As of December 31, 2012, 19% of the restaurants in the U.S. and Canada are on a modern image, up from 11% as of December 31, 2011. During 2012 we instituted an initiative in the U.S. to accelerate the pace of re-imaging by offering temporary financial incentives to franchisees. We also introduced a third party lending program to provide financing to U.S. franchisees to facilitate their remodeling efforts. We believe that our lower-cost 20/20 image remodel, coupled with favorable financing terms offered by the third party lending program, is a cost effective solution that will drive meaningful sales uplifts and provide an attractive return on investment for our franchisees.

Marketing Fund

Our company restaurants and our franchisees make monthly contributions, generally 4% to 5% of restaurant gross sales, to managed advertising funds. 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.

In the U.S. and Canada and other markets where we have historically owned Company restaurants, the Company manages the advertising fund. In other international markets, franchisees make contributions into franchisee-managed advertising funds. As part of our global marketing strategy, we provide franchisees with advertising support and guidance in order to deliver a consistent global brand message.

In the United States and in 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 United States 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.

In 2012, the advertising fund in the United States was impacted by a temporary reduction in advertising fund contributions paid by the Company and U.S. franchisees associated with incentives to accelerate implementation of restaurant equipment initiatives, and we expect that the reduction in advertising contributions will continue until 2016.

Product Development

New product development is a key driver of our long-term success. We believe the development of new products can drive traffic by expanding our customer base, allow restaurants to expand into new day parts, and

 

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continue to build brand leadership in food quality and taste. Product innovation begins with an intensive, data-driven research and development process that analyzes potential new menu items, including extensive consumer testing and ongoing analysis of the economics of food cost, margin and final price point.

As part of the “Menu” pillar in the U.S. and Canada, we launched four new menu platforms (salads, wraps, smoothies and desserts) and expanded our chicken, coffee and ancillary menu platforms. In 2013, our menu strategy will focus on enhancing core menu items, such as our great tasting line of burgers, while also introducing a variety of new products across multiple platforms. We expect to maintain a rigorous pace of new product innovation through the introduction of new products that will balance premium menu items with value offerings.

Operations Support

Our operations strategy is designed to drive best-in-class restaurant operations by our franchisees and improve friendliness, cleanliness, speed of service and overall guest satisfaction to drive long-term growth. 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.

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. We require each franchisee’s managing owner and designated restaurant manager to complete initial and ongoing training programs provided by us, including minimum periods of classroom and on the job training. In the U.S., 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. Additionally, to improve our focus on in-store operations, we use “GUEST TRAC” surveys in the U.S. and many other countries to assess customer satisfaction with restaurant operations. We have improved our responsiveness to guest experience reporting through a more user-friendly website.

During 2012, we implemented a field optimization project in the U.S. to significantly increase our field presence to support franchise operations, which we believe will help improve restaurant operations. We adopted a new field management structure with “Sales, Profit, and Operations Coaches” who work shoulder-to-shoulder with restaurant teams to increase customer satisfaction, operational efficiency, and franchise profitability. Additionally, we reduced the number of restaurants managed by each coach to 30, down from 90, to enable coaches to work more closely with franchisees. Additionally, we incentivize our coaches so their compensation structure is linked to franchise restaurant performance. A coach’s compensation is measured on business performance and customer satisfaction scores through the GUEST TRAC system to drive sales, profitability and operational excellence across all major indicators of restaurant performance (friendliness, cleanliness, speed of service and food quality).

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. Franchisees report gross sales on a monthly basis and pay royalties based on reported sales.

Franchise agreements are not assignable without our consent, and we generally have a right of first refusal if a franchisee proposes to sell a restaurant. Defaults (including non-payment of royalties or advertising

 

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contributions, or failure to operate in compliance with our standards) can lead to termination of the franchise agreement. Prospective franchisees must meet our minimum approval criteria to ensure that they 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 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. Subject to the incentive programs described below, most existing franchise restaurants pay a royalty of 4.5% in the U.S. and 4.0% 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 3.9% as of December 31, 2012. 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.

During 2012, we offered franchisees reduced up-front franchise fees and limited-term royalty rate reductions to accelerate development of new restaurants. This development incentive program will remain in place during 2013. In addition, in an effort to improve the image of our restaurants in the United States, 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 during 2011 and 2012. These limited-term incentive programs are expected to negatively impact our effective royalty rate until 2021. However, we expect this impact to be partially mitigated as we will also be entering into new franchise agreements in the United States with a 4.5% royalty rate as well as benefits derived from sales increases as a result of our reimaging initiative.

International.    Historically, in our international markets, we entered into franchise agreements for each restaurant with up-front franchise fees and monthly royalties and advertising contributions each of up to 5% of gross sales. However, as part of our international growth strategy, we have increasingly entered into master franchise agreements or development agreements that grant franchisees exclusive development rights and, in some cases, require them to provide support services to other franchisees in their markets. We enter into these agreements with well capitalized partners who are willing to make substantial upfront equity commitments, agree to aggressive development targets, and have strong local management teams. The up-front franchise fees and royalty rate paid by master franchisees vary from country to country, depending on the facts and circumstances of each market.

In some countries, we have entered into master franchise agreements that allow franchisees to sub-franchise restaurants to other franchisees within their territory. In other 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 franchise agreements with us. As part of these arrangements, the franchisees have agreed to provide certain support services to franchisees on our behalf, and, in some cases, we have agreed to share royalties and franchise fees paid by such third party franchisees. As part of our international growth strategy, we are also entering into joint ventures with franchisees and granting master franchise and development rights to these entities. As part of these arrangements, we seek to receive a significant minority equity stake in the joint venture without deploying our capital. We expect to continue to use this investment vehicle as one of the strategies to increase our presence globally.

Franchise Restaurant Leases.    We have not historically required that we own the land or the building associated with our franchise restaurants and our standard franchise agreement does not contain a lease component. However, in implementing our refranchising initiative, we have, in many circumstances, retained the lease or title on the property and building associated with the refranchised restaurants. Consequently, the number of our property leases with franchisees increased significantly during 2012. 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

 

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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, 2012, we leased or subleased to franchisees 1,741 properties in the U.S. and Canada and 132 properties in EMEA, primarily sites located in the U.K. and Germany. These properties represented approximately 24% and 4%, respectively, of our total franchise restaurant count in such regions. As of December 31, 2012, we did not own or lease any properties to franchisees in APAC or LAC.

Supply and Distribution

General. 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 products sold at our restaurants and protect and enhance the image of the Burger King system and the 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.

U.S. and Canada. 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, 2012, RSI was appointed the distribution manager for approximately 91% 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, 2012, 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.

In Fiscal 2000, we entered into long-term exclusive contracts with The Coca-Cola Company and Dr Pepper/Snapple, Inc. to supply Company restaurants and franchise restaurants with their products and 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, 2012, we estimate that it will take approximately 12 years to complete the Coca-Cola and Dr Pepper/Snapple, Inc. purchase commitments. If these agreements were terminated, we would be obligated to pay an aggregate amount equal to approximately $555.0 million as of December 31, 2012 based on an amount per gallon for each gallon of soft drink syrup remaining in the purchase commitments, interest and certain other costs.

International. 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.

Intellectual Property

We own valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information. As of December 31, 2012, we owned approximately 4,053 trademark and service mark registrations and applications and approximately 1,092 domain name registrations around the world, some of which are of material importance to our business. Depending on the jurisdiction, trademarks and

 

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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. Our 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. 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

General. As a manufacturer and distributor of food products, we and our franchisees 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 United Kingdom 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.

U.S. and Canada. We and our franchisees are subject to U.S. and international laws affecting the operation of our restaurants and our business. 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 restaurant is located. Our restaurant operations are also subject to laws governing union organizing, working conditions, work authorization requirements, health insurance, overtime and wages.

We and our franchisees 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.

Our franchising activities are subject to the rules and regulations of the Federal Trade Commission (“FTC”) and various state laws and similar foreign agencies. The rules of the FTC and those of 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.

 

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International. Internationally, we and our franchisees are subject to national and local laws and regulations that often are similar to those affecting us and our franchisees in the U.S., including laws and regulations concerning franchising, zoning, health, safety, sanitation, and building and fire code. We are also subject to the regulations of the U.S. Citizenship and Immigration Services and U.S. Customs and Immigration Enforcement, and tariffs and regulations on imported commodities and equipment and laws regulating foreign investment.

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 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, 2012, we had approximately 10,870 employees in our Company restaurants, restaurant support centers and field operations.

Available Information

The Company makes available free of charge on or through the Investor Relations section of its internet website at www.bk.com, all materials that we file electronically with the Securities and Exchange Commission (“SEC”), including 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 or furnishing such material with the 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.

A copy of our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the charters of the Audit Committee and Compensation Committee of the Board of Directors are posted on the Investor Relations section of our website, www.bk.com.

Our principal executive offices are located at 5505 Blue Lagoon Drive, Miami, Florida 33126 (305-378-3000).

 

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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 belief and expectations regarding our ability to drive sales and traffic in the U.S and Canada through execution of our four pillars strategy 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 belief and expectations regarding the ability of our new field structure to improve our restaurant operations in the U.S. and Canada, including speed of service and restaurant cleanliness; our belief and expectations that our re-imaged restaurants will generate significant sales uplifts and high return on capital for our franchisees; our belief and expectations that our refranchising initiative will be completed by the end of 2013 and will continue to enhance our cash flow, accelerate our re-imaging initiative and strengthen relationships with key franchisees; our belief and expectations that our international growth strategy of utilizing strategic joint ventures and master franchise and development agreements will permit us to capitalize on emerging markets and rising middle class consumer spending; our belief and expectations regarding new market entries in 2013 and beyond; our belief and expectations regarding significant international growth opportunities; 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 we do.

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

 

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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 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.

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.

As of December 31, 2012, we had aggregate outstanding indebtedness of $2,950.2 million, including $1,718.7 million outstanding under our senior secured credit facility (the “2012 Credit Agreement”), $794.5 million of 9 7/8% senior notes due 2018 (the “Senior Notes”) and $407.1 million of 11.0% senior discount notes due 2019 (the “Discount Notes”). 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 2012 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, the Discount Notes Indenture or the Credit Agreement could result in an event of default under the applicable indebtedness. Any such 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

 

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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 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, the Discount 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, the Discount 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 refranchising strategy and 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 (re-imaging our store base) will depend on the ability and willingness of our franchisees to reinvest in remodeling or rebuilding their stores. 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.

A franchisee bankruptcy could have a substantial negative impact on our ability to collect payments due under such franchisee’s franchise agreements and, if applicable, lease agreements with us. In a franchisee bankruptcy, the bankruptcy trustee may reject its franchise arrangements pursuant to Section 365 under the United States Bankruptcy Code, in which case there would be no further royalty payments and/or rent payments from such franchisee, and there can be no assurance as to the proceeds, if any, that may ultimately be recovered in a bankruptcy proceeding of such franchisee in connection with a damage claim resulting from such rejection.

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.

 

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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.

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, 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.

If sales trends or economic conditions worsen for franchisees, their financial results may deteriorate, 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 our franchisees fail to renew their franchise agreements, our royalty revenues may decrease which in turn could materially and adversely affect our business and operating results.

Termination of an arrangement with a master franchisee could adversely impact our results.

Internationally, we are moving to a business model in which we enter into relationships with “master franchisees” to develop and operate restaurants in defined geographic areas. Master franchisees are granted exclusivity rights with respect to entire countries or, in some cases, multiple countries. The termination of an arrangement with a master franchisee or a lack of expansion by certain master franchisees could result in the delay or discontinuation of the development of franchise restaurants, or an interruption in the operation of our brand in a particular market or markets. We may not be able to find another operator to resume development activities in such market or markets. Any such delay, discontinuation or interruption could materially and adversely affect our business and operating results.

Sub-franchisees could take actions that could harm our business and that of our master franchisees.

In certain of our international markets, we enter into agreements with master franchisees that permit the master franchisee to develop and operate restaurants in defined geographic areas. As permitted by our master

 

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franchise agreements, certain master franchisees may elect to sub-franchise rights to develop and operate restaurants in the geographic area covered by the master franchise agreement. Our master franchise agreements contractually obligate our master franchisees to operate their restaurants in accordance with specified operations, safety and health standards and also require that any sub-franchise agreement contain similar requirements. However, we are not party to the agreements with the sub-franchisees and, as a result, are dependent upon our master franchisees to enforce these standards with respect to sub-franchised restaurants. As a result, the ultimate success and quality of any sub-franchised restaurant rests with the master franchisee. If sub-franchisees do not successfully operate their restaurants in a manner consistent with required standards, franchise fees and royalty income paid to the applicable master franchisee and ultimately to us could be adversely affected, and our brand image and reputation may be harmed, which could materially and adversely affect our business and operating results.

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.

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 our remaining Company restaurants and accelerating international development with strategic partners and joint ventures. However, refranchisings may have unexpected and negative short term effects on our results of operations. For example, (i) our general and administrative expenses may increase as a result of severance and other termination costs incurred in connection with refranchisings and may continue to increase as a percentage of revenues, or (ii) we may be required to recognize accounting or tax gains or losses and/or impairments on refranchising transactions, which could adversely affect our results of operations for a specific period. Our ability to achieve the long-term benefits of our refranchising transactions will depend on (i) our ability to identify new or existing franchisees that are willing to acquire the remaining Company restaurants, and (ii) the ability and willingness of these new and existing franchises to remodel the refranchised restaurants and develop new restaurants within the market of the refranchised restaurants, and the pace of such remodeling and development activity.

We currently conduct a portion of our international operations through joint ventures and master franchisees and are actively seeking strategic partners for new joint venture and master franchise relationships as part of our overall strategy for international expansion. These new arrangements may give our joint venture and/or master franchise partners the exclusive right to develop and manage Burger King restaurants in a specific country or countries. 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. Our master franchise arrangements present similar risks and uncertainties. We cannot control the actions of our joint venture partners or master franchisees, including any nonperformance, default or bankruptcy of joint venture partners or master franchisees. While we believe that our joint venture and

 

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master franchise 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.

In addition, the U.S. Foreign Corrupt Practices Act, or “FCPA,” and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these laws. Despite our compliance programs, we cannot assure you that our internal control policies and procedures always will protect us from reckless or negligent acts committed by our employees, agents, joint venture partners or franchisees. Violations of these laws, or allegations of such violations, may have a negative effect on our results of operations, financial condition and reputation.

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, 2012, our restaurants were operated, directly by us or by franchisees, in 86 countries and U.S. territories (including Guam and Puerto Rico, which are considered part of our international business). During 2012, our revenues from international operations represented 43% 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 exclusive development and 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; and

 

   

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

These factors may increase in importance as we expect our franchisees to open new 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 and Mexico, 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 addition, our royalty payments in Europe and in certain other countries are denominated in currencies other than US dollars. Consequently, our franchise revenues from those counties are subject to fluctuations in currency exchange rates. Furthermore, our franchise royalties from our international franchisees are calculated based on local currency sales, consequently our franchise 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 food costs could harm our operating results and the operating results of our franchisees.

Our profitability and the profitability of our franchisees depend in part on our ability to anticipate and react to changes in food and supply costs. 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), corn 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 Company 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 for as long as we operate Company restaurants. In addition, if commodity prices rise, franchisees may experience reduced sales due to decreased consumer demand at retail prices that have been raised to offset increased commodity prices, which may reduce franchisee profitability. Any such decline in franchisee sales will reduce our royalty income, which in turn may materially and adversely affect our business and operating results.

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 is approximately $300,000 and the average cost to replace the existing building with a new building is approximately $1.2 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 E. coli, bovine spongiform encephalopathy or “mad cow disease,” hepatitis A, trichinosis or salmonella, and food safety issues have occurred in the 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.

 

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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.

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 federal income tax returns for fiscal years 2009, 2010, the period from July 1, 2010 to October 18, 2010 and the period from October 19, 2010 to December 31, 2010 are currently under audit by the Internal Revenue Service

 

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and from time to time, we are subject to additional U.S. state and local income tax audits, international income tax audits and sales, franchise and VAT tax audits. Our effective income tax rate and tax payments 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 or our determination that unremitted earnings from foreign subsidiaries for which we have not previously provided for U.S. taxes were no longer permanently reinvested outside the U.S.

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.

A significant portion of our and our franchisee’s real estate portfolios are leased; if we or our franchisees are unable to renew these leases on commercially reasonable terms or at all, then our future financial results could be adversely affected.

Many of our Company and franchise restaurants are presently located on leased premises. As leases underlying our Company and franchisee 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, 2012, 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.

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.

 

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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 and our franchisees are subject to increasing regulation regarding our operations, which may significantly increase the 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;

 

   

the impact of the Patient Protection and Affordable Care Act on the businesses of our U.S franchisees, many of whom are small business owners who may have significant difficulty absorbing the increased costs or may need to revise the ways in which they conduct their business; 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 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.

 

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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. Although our Twitter account was compromised in February 2013, our systems have never been breached and we have not experienced a cyber attack in the past.

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.

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.

 

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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 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 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.

Risks related to our common stock

Concentration of ownership by 3G Capital may prevent other shareholders from influencing significant corporate decisions.

We are approximately 70% 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 shareholders 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 shareholders. 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 our indebtedness. 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. In addition, this significant concentration of share ownership may adversely affect the trading price for our Common Stock because investors often perceive disadvantages in owning stock in companies with a concentrated stockholder base.

Our amended and restated certificate of incorporation provides that the doctrine of corporate opportunity does not apply with respect to 3G, or any of our directors, in a manner that would prohibit them from investing or participating in competing businesses. To the extent they invest in such other businesses, 3G may have differing interests from our other stockholders.

We are a controlled company within the meaning of the New York Stock Exchange rules, and, as a result, we rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies which do not rely on this exemption.

3G owns, in the aggregate, more than 50% of the total voting power of our common stock and, as a result, we are a controlled company under the New York Stock Exchange corporate governance standards. As a controlled company, we are exempt from certain of the New York Stock Exchange corporate governance requirements, including the requirements:

 

   

that a majority of our board of directors consist of independent directors, as defined under the rules of the New York Stock Exchange;

 

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that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Accordingly, for so long as we are a controlled company, holders of our common stock will not have the same protections afforded to stockholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.

Our stock price may be volatile or may decline regardless of our operating performance.

The market price for our common stock may fluctuate significantly in response to a number of factors, many of which we cannot control, including those described under “Risk Factors – Risks Related to Our Business”, and the following:

 

   

changes in the economic or capital markets conditions that could affect valuations of the Company or fast food companies in general;

 

   

changes in financial estimates by any securities analysts who follow our Common Stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our Common Stock;

 

   

downgrades by any securities analysts who follow our common stock;

 

   

future sales of our common stock by our officers, directors and significant stockholders;

 

   

global economic, legal, regulatory factors unrelated to our performance;

 

   

announcements by us or our competitors of significant changes in product offerings, contracts, acquisitions, joint ventures or capital commitments; and

 

   

changes in key personnel.

Future sales of our Common Stock, or the perception in the public markets that these sales may occur, may depress our stock price.

As of December 31, 2012, there were 350,238,771 shares of common stock outstanding. Approximately 70% and 12% of our outstanding common stock is held by 3G and investment funds affiliated with Pershing Square Capital Management L.P., respectively. Sales of a substantial amount of our common stock in the public market, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares.

Certain holders of our common stock may require us to register their shares for resale under the federal securities laws under the terms of certain separate registration rights agreements between us and the holders of these securities, subject to lock-up restrictions in certain cases. Registration of those shares would allow the holders thereof to immediately resell their shares in the public market. Any such sales, or anticipation thereof, could cause the market price of our common stock to decline.

In addition, we have registered shares of common stock that are reserved for issuance under our 2011 Omnibus Incentive Plan and 2012 Omnibus Incentive Plan.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which our stockholders vote.

Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock or shares of our authorized but unissued preferred stock.

 

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For example, we may issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of the then-outstanding shares of our common stock and could materially dilute your ownership. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and bylaws contain provisions that may make the acquisition of the Company more difficult without the approval of our board of directors. These provisions:

 

   

authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

   

provide that the board of directors is expressly authorized to make, alter or repeal our amended and restated bylaws; and

 

   

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of the Company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

We cannot assure you we will pay any cash dividends in the future.

Although we paid a quarterly cash dividend in November 2012 and our board of directors recently declared a quarterly cash dividend, any future dividends will be determined at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, including agreements governing our debt and any future indebtedness we may incur, restrictions imposed by applicable law and other factors our board of directors deems relevant. Realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur.

We may be restricted from paying cash dividends on our common stock in the future.

We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments on our common stock. The amounts available to us to pay cash dividends may be restricted by law, regulation or any debt agreements entered into by our subsidiaries. The terms of our debt agreements will limit our ability to pay cash dividends. In addition, we cannot assure you that the agreements governing any future indebtedness of us or our subsidiaries, or applicable laws or regulations, will permit us to pay dividends on our common stock or otherwise adhere to any dividend policy we may adopt in the future.

 

Item 1B. Unresolved Staff Comments

None.

 

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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 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, 2012:

 

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

United States and Canada:

              

Company restaurants

     34         55         94         149         183   

Franchisee-operated properties

     721         468         552         1,020         1,741   

Non-operating restaurant locations

     33         9         7         16         49   

Offices and other(2)

                    6         6         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     788         532         659         1,191         1,979   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International:

              

Company restaurants

     12         50         173         223         235   

Franchisee-operated properties

     6         2         124         126         132   

Non-operating restaurant locations

             1         4         5         5   

Offices and other(2)

     1                10         10         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     19         53         311         364         383   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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

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, we agreed to settle the lawsuit. Under the settlement, $19.0 million was paid for the benefit of the class members, with $5.0 million funded by our franchisees, $3.9 million by BKC, and the balance by BKC’s insurance carrier. These amounts were funded in December 2012.

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

Our common stock trades on the New York Stock Exchange under the symbol BKW. Trading of our common stock commenced on June 20, 2012, following the completion of our merger with Justice. Prior to that date, no public market existed for our common stock. As of February 11, 2013, there were approximately 91 holders of record of our common stock. The following table sets forth for the periods indicated the high and low sales prices of our common stock on the New York Stock Exchange and dividends declared per share of common stock.

 

     2012  

Dollars Per Share:

   High      Low      Dividend  

Second Quarter(1)

   $ 15.85       $ 14.97       $   

Third Quarter

   $ 15.88       $ 13.03       $   

Fourth Quarter

   $ 17.74       $ 14.10       $ 0.04   

 

(1) Represents period from June 20, 2012 through the end of the quarter.

Dividend Policy

On October 28, 2012, our Board of Directors declared the Company’s first cash dividend of $0.04 per share, which was paid on November 29, 2012 to shareholders of record at the close of business on November 9, 2012. On February 14, 2013, our board declared a cash dividend of $0.05 per share, which will be paid on March 15, 2013 to shareholders of record on February 28, 2013. The terms of our 2012 Credit Agreement, Senior Notes Indenture and Discount Notes Indenture limit our ability to pay cash dividends in certain circumstances. In addition, because we are a holding company, our ability to pay cash dividends on shares of our common stock may be limited by restrictions under our debt agreements.

Although we do not have a dividend policy, our board may, subject to compliance with the covenants contained in our debt agreements and other considerations, determine to pay dividends in the future. See Note 14 to our Consolidated Financial Statements for a discussion of the amounts paid as a dividend to the shareholders of Burger King Worldwide, Inc. (“Worldwide”), principally 3G, in December 2011.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table presents information regarding equity awards outstanding under our compensation plans as of December 31, 2012 (amounts in thousands):

 

    (a)     (b)     (c)  

Plan Category

  Number of Securities
to be Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
    Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
    Number of Securities
Remaining Available
for Future Issuance under
Equity Compensation
Plans (Excluding
Securities Relfected in
Column (a))
 

Equity Compensation Plans Approved by Security Holders

    16,358      $ 3.73        13,786   

Equity Compensation Plans Not Approved by Security Holders

                    
 

 

 

   

 

 

   

 

 

 

Total

    16,358      $ 3.73        13,786   
 

 

 

   

 

 

   

 

 

 

 

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Stock Performance Graph

The following graph depicts the total return to shareholders from June 20, 2012, the date our common stock was listed on the New York Stock Exchange, through December 31, 2012, relative to the performance of the Standard & Poor’s 500 Index and the Standard & Poor’s Restaurant Index, a peer group. The graph assumes an investment of $100 in our common stock and each index on June 20, 2012 and the reinvestment of dividends paid since that date. The stock price performance shown in the graph is not necessarily indicative of future price performance.

 

LOGO

 

     6/20/2012      12/31/2012  

BKW

   $ 100       $ 114   

S&P 500 Index

   $ 100       $ 106   

S&P Restaurant Index

   $ 100       $ 97   

 

Item 6. Selected Financial Data

On October 19, 2010 (the “Acquisition Date”), we were acquired by 3G in a transaction accounted for as a business combination (the “3G Acquisition”). Unless the context otherwise requires, all references to “we”, “us”, “our” and “Successor” refer to the Company and its subsidiaries, collectively, for all periods subsequent to the 3G Acquisition. All references in this section to our “Predecessor” refer to Burger King Holdings, Inc. (“Holdings”) and its subsidiaries for all periods prior to the 3G Acquisition, which operated under a different ownership and capital structure. In addition, the 3G 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 3G Acquisition.

The following tables present our selected historical consolidated financial and other data for us and our Predecessor as of the dates and for each of the periods indicated. All references to 2012 and 2011 in this section are to the years ended December 31, 2012 and December 31, 2011, respectively. The selected historical financial data as of December 31, 2012, December 31, 2011 and for 2012 and 2011 and the period from October 19, 2010 to December 31, 2010 have been derived from our audited consolidated financial statements and notes thereto included in this report. All references to Fiscal 2010, 2009 and 2008 refer to the Predecessor’s fiscal years ended June 30, 2010, 2009 and 2008. 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 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 and 2008 and for Fiscal 2009 and 2008 have been derived from the audited consolidated financial statements and the notes thereto of our Predecessor, which are not included in this report.

 

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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.

 

    Successor         Predecessor  
    2012     2011     Transition Period     Fiscal 2010     Fiscal 2009     Fiscal 2008  
        October 19, 2010
to
December 31, 2010
        July 1, 2010
to
October 18, 2010
       
    (In millions, except per share data)  

Statement of Operations Data:

                 

Revenues:

                 

Company restaurant revenues

  $ 1,169.0      $ 1,638.7      $ 331.7          $ 514.5      $ 1,839.3      $ 1,880.5      $ 1,795.9   

Franchise and property revenues

    797.3        697.0        135.1            203.2        662.9        656.9        658.8   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    1,966.3        2,335.7        466.8            717.7        2,502.2        2,537.4        2,454.7   

Income (loss) from
operations(1)

    417.7        362.5        (85.8         101.5        332.9        339.4        354.2   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)(1)

  $ 117.7      $ 88.1      $ (115.7       $ 71.1      $ 186.8      $ 200.1      $ 189.6   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share:

                 

Basic

  $ 0.34      $ 0.25      $ (0.33       $ 0.52      $ 1.38      $ 1.48      $ 1.40   

Diluted

  $ 0.33      $ 0.25      $ (0.33       $ 0.52      $ 1.36      $ 1.46      $ 1.38   

Dividends per common share

  $ 0.04      $ 1.13      $          $ 0.06      $ 0.25      $ 0.25      $ 0.25   
 

Other Financial Data:

                 

Net cash provided by (used for) operating activities

  $ 224.4      $ 406.2      $ (126.5       $ 121.3      $ 310.4      $ 310.8      $ 243.4   

Net cash provided by (used for) investing activities

    33.6        (41.4     (3,344.6         (4.8     (134.9     (242.0     (199.3

Net cash provided by (used for) financing activities

    (174.6     (108.0     3,396.4            (29.5     (96.9     (105.5     (62.0

Capital expenditures

    70.2        82.1        28.4            18.2        150.3        204.0        178.2   

 

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Table of Contents
    Successor         Predecessor  
    December 31,
2012
    December 31,
2011
    December 31,
2010
        June 30,
2010
    June 30,
2009
    June 30,
2008
 
    (In millions)  

Balance Sheet Data:

               

Cash and cash equivalents

  $ 546.7      $ 459.0      $ 207.0          $ 187.6      $ 121.7      $ 166.0   

Total assets(2)

    5,564.0        5,608.4        5,686.2            2,747.2        2,707.1        2,686.5   

Total debt and capital lease
obligations(2)

    3,049.3        3,139.2        2,792.1            826.3        888.9        947.4   

Total liabilities(2)

    4,389.0        4,559.2        4,239.0            1,618.8        1,732.3        1,842.0   

Total stockholders’ equity(2)

    1,175.0        1,049.2        1,447.2            1,128.4        974.8        844.5   

 

    Successor     Transition
Period
        Predecessor  
    2012     2011     Six Months
Ended
December 31,
2010
        Fiscal 2010     Fiscal 2009     Fiscal 2008  

Other Operating Data:

               

System-wide sales
growth(3)(4)

    5.9     1.7     2.2         2.1     4.2     8.3

Comparable sales
growth(3)(4)(5)

    3.2     (0.5 )%      (2.7 )%          (2.3 )%      1.2     5.4

Franchise Sales (in millions)(4)

  $ 14,672.5      $ 13,653.4      $ 6,721.2          $ 13,055.3      $ 12,788.7      $ 12,892.5   

Company Restaurant Margin Percentage(6)

    11.3     11.7     12.9         12.2     12.6     14.3

 

(1) Amount includes $30.2 million of global portfolio realignment project costs and $27.0 million of business combination agreement expenses for 2012. Amount includes $3.7 million of 2010 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 $94.9 million of 2010 Transaction costs and $67.2 million of global restructuring and related professional fees for October 19, 2010 to December 31, 2010.

 

(2) Amounts in the successor periods reflect the application of acquisition accounting as a result of the 3G Acquisition. Refer to Note 1 to our audited Consolidated Financial Statements included in this report.

 

(3) Comparable sales growth and system-wide 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.

 

(4) Unless otherwise stated, comparable sales growth and system-wide 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.

 

(5) 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 or acquired for thirteen months or longer. Company restaurants refranchised during a period will be included in the calculation of comparable sales growth for franchise restaurants during the period.

 

(6) Company restaurant margin is derived by subtracting Company restaurant expenses from Company restaurant revenues, which we analyze as a percentage of Company restaurant revenues, a metric we refer to as Company restaurant margin percentage.

 

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Burger King Worldwide, 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,
2012
     December 31,
2011
     December 31,
2010
         June 30,
2010
     December 31,
2009
     June 30,
2009
 

Number of Company restaurants:

                     

U.S. & Canada

     183         939         984             987         1,029         1,043   

EMEA

     132         192         203             241         277         278   

Latin America

     100         97         96             97         94         92   

APAC

     3         67         61             62         22         16   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

    

 

 

 

Total Company restaurants

     418         1,295         1,344             1,387         1,422         1,429   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

    

 

 

 

Number of franchise restaurants:

                     

U.S. & Canada

     7,293         6,561         6,566             6,562         6,516         6,491   

EMEA

     2,989         2,690         2,525             2,439         2,387         2,302   

Latin America

     1,290         1,125         1,044             1,041         1,011         986   

APAC

     1,007         841         772             745         742         717   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

    

 

 

 

Total franchise restaurants

     12,579         11,217         10,907             10,787         10,656         10,496   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

    

 

 

 

Number of system-wide restaurants:

                     

U.S. & Canada

     7,476         7,500         7,550             7,549         7,545         7,534   

EMEA

     3,121         2,882         2,728             2,680         2,664         2,580   

Latin America

     1,390         1,222         1,140             1,138         1,105         1,078   

APAC

     1,010         908         833             807         764         733   
  

 

 

    

 

 

    

 

 

        

 

 

    

 

 

    

 

 

 

Total system-wide restaurants

     12,997         12,512         12,251             12,174         12,078         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.

Unless the context otherwise requires, all references in this section to the “Company,” “we,” “us,” “our” or the “Successor” are to the Company and its subsidiaries, collectively, for all periods subsequent to the 3G Acquisition. All references in this section to the “Predecessor” refer to Burger King Holdings, Inc. (“Holdings”) and its subsidiaries for all periods prior to the 3G Acquisition, which operated under a different ownership and capital structure. In addition, the 3G 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 3G Acquisition.

All references to 2012 in this section are to our fiscal year ended December 31, 2012. 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.

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

 

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franchise restaurants. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our franchise revenues include royalties based on franchise sales. System-wide results are driven primarily by our franchise restaurants, as approximately 97% of our current system-wide restaurants are franchised.

Overview

Burger King Worldwide, Inc. (“BKW”, the “Company” or “we”) is a Delaware corporation formed on April 2, 2012 and the indirect parent of Burger King Corporation (“BKC”), a Florida corporation that franchises and operates fast food hamburger restaurants, principally under the Burger King® brand. We are the world’s second largest fast food hamburger restaurant, or FFHR, chain as measured by the total number of restaurants. As of December 31, 2012, we owned or franchised a total of 12,997 restaurants in 86 countries and U.S. territories. Of these restaurants, 418 were Company restaurants and 12,579, or approximately 97% of all Burger King restaurants, were owned by our franchisees. Our restaurants are limited service restaurants that feature flame-grilled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other affordably-priced food items. We believe our restaurants appeal to a broad spectrum of consumers, with multiple day parts appealing to different customer groups. 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, delicious food at affordable prices.

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

2012 Highlights

 

   

System-wide comparable sales growth of 3.2% and system-wide sales growth of 5.9%

 

   

Diluted EPS increased 31.3% to $0.33

 

   

Adjusted EBITDA increased 11.5% to $652.1 million

 

   

Net restaurant growth of 485, increasing the total system restaurant count to 12,997

 

   

Successfully refranchised 871 restaurants, bringing the system to approximately 97% franchised

 

   

Re-imaged approximately 600 system-wide restaurants in the U.S and Canada, increasing units on the modern image to 19% of the region

 

   

Launched the largest menu update in the U.S. and Canada in the history of the brand

 

   

Accelerated international growth, announcing five master franchise joint ventures and seven new development agreements in key growth markets

 

   

Refinanced $1.9 billion of debt, lowering annualized cash interest costs

 

   

Declared a cash dividend of $0.04 per share in the fourth quarter

 

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Recent Events and Factors Affecting Comparability

The 2010 Transactions

The 3G Acquisition and related financing transactions (collectively referred to as the “2010 Transactions”) as described in Note 1 to the accompanying audited 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).

In connection with the 2010 Transactions, we incurred costs of $3.7 million in 2011 and $94.9 million in the period October 19, 2010 to December 31, 2010, consisting of investment banking and legal fees, compensation related expenses and commitment fees associated with the bridge loan available at the closing of the 2010 Transactions.

Additionally, our interest expense is significantly higher following the 2010 Transactions than experienced by our Predecessor in prior periods, primarily due to the higher principal amount of debt outstanding following the 2010 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.

Global Restructuring and Related Professional Fees

Between December 2010 and December 2011, we completed 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 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 and $67.2 million in the period October 19, 2010 to December 31, 2010.

Field Optimization Project

During 2011, we completed 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.

Global Portfolio Realignment Project

During 2011, we initiated a project to realign our global restaurant portfolio by refranchising our Company restaurants and establishing strategic partnerships to accelerate development through joint venture structures and master franchise and development agreements (the “global portfolio realignment project”). As a result of the global portfolio realignment project, we incurred $30.2 million in 2012 and $7.6 million in 2011 of general and administrative expenses consisting primarily of severance and professional fees.

 

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We continue to aggressively pursue refranchising and regional development opportunities as we implement our global portfolio realignment project. We expect to continue to incur expenses which we believe will decline as we finalize the execution of our refranchising strategy. Further, we may record net losses and impairment charges associated with future refranchising activity.

Merger with Justice

Business Combination Agreement Expenses

On April 3, 2012, Burger King Worldwide Holdings, Inc., a Delaware corporation and the indirect parent company of Holdings (“Worldwide”), entered into a Business Combination Agreement and Plan of Merger, dated as of April 3, 2012, by and among Justice Holdings Limited, the Company, Justice Holdco LLC and Worldwide (the “Business Combination Agreement”). This transaction closed on June 20, 2012, the Company changed its name to Burger King Worldwide, Inc. and our stock began trading on the New York Stock Exchange under the ticker symbol “BKW.”

As a result of the increase in our equity value implied by the Business Combination Agreement, we recorded $5.9 million of one-time share-based compensation expense related to share-based awards granted during 2012. We also incurred $21.1 million of professional fees and other transaction costs in 2012 associated with the Business Combination Agreement.

The table below summarizes the factors affecting comparability of selling, general and administrative expenses due to the 2010 Transactions, global restructuring and related professional fees, field optimization project costs, global portfolio realignment project costs and business combination agreement expenses.

 

     2012      2011      October 19, 2010
to
December 31, 2010
 
     (In millions)  

Selling, general and administrative expenses:

        

2010 Transaction costs

   $       $ 3.7       $ 94.9   

Global restructuring and related professional fees

             46.5         67.2   

Field optimization project costs

             10.6           

Global portfolio realignment project costs

     30.2         7.6           

Business combination agreement expenses

     27.0                  
  

 

 

    

 

 

    

 

 

 

Total impact on selling, general and administrative expenses

   $ 57.2       $ 68.4       $ 162.1   
  

 

 

    

 

 

    

 

 

 

Operating Metrics and Key Financial Measures

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

 

   

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

 

   

Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our franchise revenues include royalties based on a percentage of franchise sales.

 

   

Comparable sales growth refers to the change in restaurant sales in one period from the same prior year period for restaurants that have been opened for thirteen months or longer. Company restaurants refranchised during a period will be included in the calculation of comparable sales growth for franchise restaurants during the period.

 

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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.

Comparable sales growth and system-wide 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”).

In addition, we evaluate our Company restaurants and assess our total business based on the following key financial measures:

 

   

Company restaurant margin, or CRM, is derived by subtracting Company restaurant expenses from Company restaurant revenues for a stated period, which we analyze as a percentage of Company restaurant revenues, a metric we refer to as Company restaurant margin %, or CRM %. Company 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 %. As a result of our refranchising initiative, the impact of CRM and CRM% on our operating results has diminished.

 

   

Adjusted EBITDA represents earnings (net income or loss) before interest, taxes, depreciation and amortization adjusted to exclude specifically identified items that management believes do not directly reflect our core operations. 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; 2010 Transaction costs, global restructuring and related professional fees, field optimization project costs, global portfolio realignment project costs and business combination agreement expenses. See Profitability Measures and Non-GAAP Reconciliations.

 

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Results of Operations

Tabular amounts in millions of dollars unless noted otherwise.

Consolidated

 

     Successor         Predecessor     Variance  
                 Transition Period                    
     2012     2011     October 19,
2010 to
December 31,
2010
        July 1,
2010 to
October 18,
2010
    January 1,
2010 to
June 30,
2010
    2012
Compared to
2011
    2011
Compared to
2010
 
                                       Favorable / (Unfavorable)  

Revenues:

                  

Company restaurant revenues

   $ 1,169.0      $ 1,638.7      $ 331.7          $ 514.5      $ 893.3        (28.7 )%      (5.8 )% 

Franchise and property revenues

     797.3        697.0        135.1            203.2        326.6        14.4     4.8
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

Total revenues

     1,966.3        2,335.7        466.8            717.7        1,219.9        (15.8 )%      (2.9 )% 

Company restaurant expenses:

                  

Food, paper and product costs

     382.2        524.7        102.8            162.6        285.2        27.2     4.7

Payroll and employee benefits

     345.1        481.2        98.3            154.2        277.5        28.3     9.2

Occupancy and other operating costs

     309.9        441.5        91.7            127.7        232.5        29.8     2.3
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

Total Company restaurant expenses

     1,037.2        1,447.4        292.8            444.5        795.2        28.3     5.6

Franchise and property expenses

     112.1        97.1        21.3            22.2        33.0        (15.4 )%      (26.9 )% 

Selling, general and administrative expenses

     346.0        417.4        247.2            153.1        235.8        17.1     34.4

Other operating (income) expenses, net

     53.3        11.3        (8.7         (3.6     (5.8     (371.7 )%      162.4
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

Total operating costs and expenses

     1,548.6        1,973.2        552.6            616.2        1,058.2        21.5     11.4
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

Income (loss) from operations

     417.7        362.5        (85.8         101.5        161.7        15.2     104.3

Interest expense, net

     223.8        226.7        58.1            14.6        23.9        1.3     (134.7 )% 

Loss on early extinguishment of debt

     34.2        21.1                                 (62.1 )%      NM   
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

Income (loss) before income taxes

     159.7        114.7        (143.9         86.9        137.8        39.2     42.0

Income tax expense (benefit)

     42.0        26.6        (28.2         15.8        47.8        (57.9 )%      24.9
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

Net income (loss)

   $ 117.7      $ 88.1      $ (115.7       $ 71.1      $ 90.0        33.6     94.1
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

FX Impact Favorable/(Unfavorable)

                

Consolidated revenues

   $ (41.3   $ 35.6      $ (5.8       $ (11.5   $ 13.4       

Consolidated CRM

     (3.1     2.6        (0.3         (1.0     1.1       

Consolidated SG&A

     6.5        (8.2     3.6            3.1        (1.3    

Consolidated income (loss) from operations

     (10.9     5.3        1.0            (2.9     (2.0    

Consolidated net income (loss)

     (10.6     5.7                   (3.0     (3.0    

Consolidated Adjusted EBITDA

     (12.8     4.5        0.2            (2.7     0.2       
Key Business Metrics                 
     2012     2011     2010                              

System sales growth

     5.9     1.7     1.5          

Franchise sales

   $ 14,672.5      $ 13,653.4      $ 13,086.8             

Comparable sales growth

                

Company

     3.6     0.1     (3.3 )%           

Franchise

     3.2     (0.6 )%      (2.3 )%           

System

     3.2     (0.5 )%      (2.4 )%           

Average restaurant sales (in thousands)

   $ 1,267.9      $ 1,248.0      $ 1,225.1             

Net Restaurant Growth (NRG)

                

Company

     (6     (4     4             

Franchise

     491        265        169             

System

     485        261        173             

Net Refranchisings

     871        45        82             

Restaurant counts at period end

                

Company

     418        1,295        1,344             

Franchise

     12,579        11,217        10,907             

System

     12,997        12,512        12,251             

 

NM — Not Meaningful

 

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Comparable Sales Growth

Worldwide system comparable sales growth of 3.2% for 2012 was driven by comparable sales growth in the U.S. and Canada, EMEA and LAC segments, partially offset by negative comparable sales growth in APAC.

Negative worldwide system comparable sales growth of 0.5% for 2011 was driven by negative comparable sales growth in the U.S. and Canada and APAC segments, partially offset by comparable sales growth in EMEA and LAC.

Company restaurants

During 2012, Company restaurant revenues decreased primarily due to the net refranchising of 871 Company restaurants during 2012 and unfavorable FX impact, partially offset by Company comparable sales growth across all segments.

During 2011, 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.

During 2012, CRM% decreased to 11.3% from 11.7% in 2011 due to decreases in CRM% in the U.S. and Canada and LAC, partially offset by increases in CRM% in EMEA and APAC. The effects of promotional activity, increased food, paper and product costs, higher wage rates in Germany and Mexico and increased repair and maintenance expenses in the U.S. and Canada were partially offset by favorable adjustments to self insurance reserves in the U.S. and Canada and the leveraging effect of Company comparable sales growth on fixed occupancy and other operating costs.

During 2011, CRM% decreased to 11.7% from 11.9% in 2010 due to the effects of acquisition accounting, including a $14.6 million increase in Company restaurant depreciation and amortization expense, 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. During 2012, franchise and property revenues increased primarily due to franchise comparable sales growth, the net refranchising of 871 Company restaurants and franchise NRG of 491 restaurants, which resulted in increased royalties and rents. Additionally, initial franchise fees increased as a result of the increase in franchise NRG during 2012 and renewal and other related franchise fees increased primarily due to the timing of renewals. These factors were partially offset by unfavorable FX impact.

During 2011, franchise and property revenues increased primarily due to new leases and subleases associated with the net refranchising of 45 Company restaurants, royalties derived from franchise NRG of 265 restaurants, favorable FX impact and the impact of acquisition accounting, including a $6.6 million net increase in revenue resulting from the amortization of unfavorable and favorable income leases. These factors were partially offset by a decrease 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.

During 2012, 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 refranchisings, partially offset by a decrease in bad debt expense and favorable FX impact.

 

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During 2011, 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         Predecessor     Variance  
                Transition Period                    
               

October 19,
2010 to
December 31,
2010

        July 1,
2010 to
October 18,
2010
    January 1,
2010 to
June 30,
2010
    2012
Compared to
2011
    2011
Compared to
2010
 
    2012     2011               Favorable / (Unfavorable)  

Selling expenses

  $ 48.3      $ 78.2      $ 16.7          $ 25.3      $ 44.2        38.2%        9.3%   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

Management general and administrative expenses

    212.7        248.5        65.6            116.6        173.5        14.4%        30.1%   

Share-based compensation and non-cash incentive compensation expense

    10.2        6.4                   5.8        8.3        (59.4)%        54.6%   

Depreciation and amortization

    17.6        15.9        2.8            5.4        9.8        (10.7)%        11.7%   

2010 Transaction costs

           3.7        94.9                          100.0%        96.1%   

Global restructuring and related professional fees

           46.5        67.2                          100.0%        30.8%   

Field optimization project costs

           10.6                                 100.0%        NA      

Global portfolio realignment project costs

    30.2        7.6                                 (297.4)%        NA      

Business combination agreement expenses

    27.0                                        NA           NA      
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

Total general and administrative expenses

    297.7        339.2        230.5            127.8        191.6        12.2%        38.3%   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

Selling, general and administrative expenses

  $ 346.0      $ 417.4      $ 247.2          $ 153.1      $ 235.8        17.1%        34.4%   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

 

NA — Not Applicable

Selling expenses consist primarily of Company restaurant advertising fund contributions. During 2012, selling expenses decreased primarily as a result of the refranchisings, favorable FX impact and a temporary reduction in advertising fund contributions associated with incentives to accelerate implementation of restaurant equipment initiatives. During 2011, 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 share-based compensation, depreciation and amortization as well as separately managed expenses associated with unusual or non-recurring events, such as costs associated with the 2010 Transactions, global restructuring, field optimization project, global portfolio realignment project and business combination agreement expenses. The decrease in Management G&A in 2012 was driven primarily by a decrease in salary

 

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and fringe benefits, professional services and favorable FX impact. 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 in 2012 was driven primarily by a decrease in Management G&A and the completion of our global restructuring and field optimization projects in 2011 partially offset by business combination agreement expenses and increases in global portfolio realignment project costs and share-based compensation and non-cash incentive compensation expense.

The decrease in our total general and administrative expenses in 2011 was driven primarily by the decreases in Management G&A, 2010 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.

Other operating income (expense), net

 

     Successor          Predecessor  
                 Transition Period        
                 October 19,
2010 to
December 31,
2010
         July 1,
2010 to
October 18,
2010
    January 1,
2010 to
June 30,
2010
 
     2012     2011           

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

   $ 30.8      $ 6.2      $ 5.8           $ (3.2   $ (3.4

Litigation settlements and reserves, net

     1.7        1.3        3.5             1.5        (0.9

Foreign exchange net gains

     (4.2     (4.6     (21.4          (1.4     (4.4

Loss on termination of interest rate cap

     8.7                                    

Equity in net loss from unconsolidated affiliates

     4.1        1.2        0.3             0.5        0.1   

Other, net

     12.2        7.2        3.1             (1.0     2.8   
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Other operating (income) expense, net

   $ 53.3      $ 11.3      $ (8.7        $ (3.6   $ (5.8
  

 

 

   

 

 

   

 

 

        

 

 

   

 

 

 

Interest expense, net

During 2012, interest expense, net decreased compared to 2011 primarily due to reduced borrowings as a result of principal payments and prepayments of our Term Loan and repurchases of our Senior Notes and Discount Notes, partially offset by incremental interest expense on our Discount Notes due to the timing of their issuance in the prior year and compounded interest.

During 2011, interest expense, net increased compared to 2010, reflecting an increase in borrowings and higher interest rates due to the 2010 Transactions, and interest expense on our Discount Notes.

The weighted average interest rate on our long-term debt was 7.29% for 2012, 7.50% for 2011 and 6.01% for 2010.

Loss on early extinguishment of debt

We recorded a $34.2 million loss on early extinguishment of debt in 2012 related to our 2012 debt refinancing as well as prepayments of our Term Loan and repurchases of our Discount Notes and Senior Notes. We recorded a $21.1 million loss on early extinguishment of debt in 2011 related to our 2011 debt refinancing as well as prepayments of our Term Loan and repurchases of our Senior Notes and Discount Notes.

 

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Income tax expense

Our effective tax rate was 26.3% in 2012, primarily as a result of the current mix of income from multiple tax jurisdictions, the release of valuation allowance and the impact of costs on refranchisings primarily in foreign jurisdictions.

Our effective tax rate was 23.2% in 2011 compared to 45.5% in 2010 as a result of the current mix of income from multiple tax jurisdictions and the 2010 Transactions.

Profitability Measures and Non-GAAP Reconciliations

The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. EBITDA is defined as net income (loss) before depreciation and amortization, interest expense, net, loss on early extinguishment of debt and income tax expense. Adjusted EBITDA is defined as EBITDA excluding the impact of share-based compensation and non-cash incentive compensation expense, other operating (income) expenses, net, and all other specifically identified costs associated with non-recurring projects, including 2010 Transaction costs, global restructuring and related professional fees, field optimization project costs, global portfolio realignment project costs and business combination agreement expenses. Adjusted EBITDA is used by management to measure operating performance of the business, excluding specifically identified items that management believes do not directly reflect our core operations, and represents our measure of segment income.

 

    Successor     Predecessor     Variance  
                Transition Period                    
    2012     2011     October 19,
2010 to
December 31,
2010
    July 1,
2010 to
October 18,
2010
    January 1,
2010 to
June 30,
2010
    2012
Compared
to 2011
    2011
Compared
to 2010
 
                                  Favorable/(Unfavorable)  

Segment income:

               

U.S. and Canada

  $ 471.0      $ 459.9      $ 77.2      $ 145.0      $ 219.7        2.4%        4.1%   

EMEA

    166.1        146.0        20.1        30.8        36.9        13.8%        66.3%   

Latin America

    73.2        63.9        9.5        12.3        22.3        14.6%        44.9%   

APAC

    41.1        26.7        4.9        7.1        9.5        53.9%        24.2%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

    751.4        696.5        111.7        195.2        288.4        7.9%        17.0%   

Unallocated Management G&A

    (99.3     (111.5     (16.5     (60.3     (64.9     10.9%        21.3%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Adjusted EBITDA

    652.1        585.0        95.2        134.9        223.5        11.5%        29.0%   

Share-based compensation and non-cash incentive compensation expense

    10.2        6.4               5.8        8.3        (59.4)%        54.6%   

2010 Transaction costs

           3.7        94.9                      100.0%        96.1%   

Global restructuring and related professional fees

           46.5        67.2                      100.0%        30.8%   

Field optimization project costs

           10.6                             100.0%        NM     

Global portfolio realignment project costs

    30.2        7.6                             (297.4)%        NM     

Business combination agreement expenses

    27.0                                    NM          NM     

Other operating (income) expenses, net

    53.3        11.3        (8.7     (3.6     (5.8     (371.7)%        162.4%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

EBITDA

    531.4        498.9        (58.2     132.7        221.0        6.5%        68.8%   

Depreciation and amortization

    113.7        136.4        27.6        31.2        59.3        16.6%        (15.5)%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Income (loss) from operations

    417.7        362.5        (85.8     101.5        161.7        15.2%        104.3%   

Interest expense, net

    223.8        226.7        58.1        14.6        23.9        1.3%        (134.7)%   

Loss on early extinguishment of debt

    34.2        21.1                             (62.1)%        NM     

Income tax expense (benefit)

    42.0        26.6        (28.2     15.8        47.8        (57.9)%        24.9%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Net income (loss)

  $ 117.7      $ 88.1      $ (115.7   $ 71.1      $ 90.0        33.6%        94.1%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

NM — Not Meaningful

 

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Table of Contents

The increases in Adjusted EBITDA in 2012 and 2011 were primarily driven by increases in segment income in all of our operating segments and reductions in Unallocated Management G&A.

The increase in income from operations in 2012 was driven by the increase in consolidated Adjusted EBITDA, the non-recurrence of costs related to the 2010 Transactions, global restructuring project and field optimization project. These factors were partially offset by increases in global portfolio realignment project costs, share-based compensation and non-cash incentive compensation expense and other operating (income) expense, net and business combination agreement expenses. Income from operations was also favorably impacted by reductions in depreciation and amortization expense.

The increase in income from operations in 2011 was driven by the increase in consolidated Adjusted EBITDA and reductions in share-based compensation and non-cash incentive compensation expense, 2010 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 operating income, net.

Our net income increased in 2012 primarily as a result of an increase in income from operations and a decrease in interest expense, net, partially offset by an increase in the loss on early extinguishment of debt and an increase in income tax expense.

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

 

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U.S. and Canada

 

    Successor         Predecessor     Variance  
                Transition Period                    
    2012     2011     October 19,
2010 to
December 31,
2010
        July 1,
2010 to
October 18,
2010
    January 1,
2010 to
June 30,
2010
    2012
Compared to
2011
    2011
Compared to
2010
 
                                      Favorable/(Unfavorable)  

Company:

               

Company restaurant revenues

  $ 792.9      $ 1,172.0      $ 237.0          $ 362.1      $ 632.5        (32.3 )%      (4.8 )% 

CRM

    90.1        142.2        31.4            50.7        78.0        (36.6 )%      (11.2 )% 

CRM %

    11.4     12.1     13.2         14.0     12.3     (0.8 )%      (1.0 )% 

Company restaurant expenses as a % of Company restaurant revenues:

                 

Food and paper

    33.0     32.3     30.9         32.2     32.7     (0.7 )%      (0.1 )% 

Payroll and benefits

    30.5     30.4     30.7         30.9     31.2     (0.1 )%      0.6

Depreciation and amortization

    5.5     5.7     5.3         4.7     5.3     0.2     (0.6 )% 

Other occupancy and operating

    19.6     19.5     19.9         18.1     18.5     (0.1 )%      (0.9 )% 

Franchise:

                 

Franchise and property revenues

  $ 468.2      $ 397.1      $ 78.5          $ 121.1      $ 201.5        17.9     (1.0 )% 

Franchise and property expenses

    79.8        69.9        14.6            13.5        22.3        (14.2 )%      (38.7 )% 

Segment SG&A

    76.3        95.7        34.9            33.5        91.4        20.3     40.1

Segment depreciation and amortization

    68.8        86.2        16.8            20.2        53.9        20.2     5.2

Segment income

    471.0        459.9        77.2            145.0        219.7        2.4     4.1

Segment margin

    37.3     29.3     24.5         30.0     26.3     8.0     2.2

FX Impact Favorable/(Unfavorable)

  

           

Segment revenues

  $ (1.6   $ 6.4      $ 1.3          $ 2.3      $ 10.2       

Segment CRM

    (0.2     0.6        0.1            0.2        0.8       

Segment income

    0.3        (1.3                0.2        0.6       

Key Business Metrics

               
    2012     2011     2010                              

System-wide sales growth

    3.0     (3.3 )%      (3.7 )%           

Franchise sales

  $ 8,143.9      $ 7,510.5      $ 7,727.2             

Comparable sales growth

               

Company

    3.7     (1.9 )%      (3.8 )%           

Franchise

    3.4     (3.6 )%      (4.5 )%           

System

    3.5     (3.4 )%      (4.4 )%           

NRG

               

Company

    (4     (7     (1          

Franchise

    (20     (43     6             

System

    (24     (50     5             

Net Refranchisings

    752        38        44             

Restaurant counts at period end

               

Company

    183        939        984             

Franchise

    7,293        6,561        6,566             

System

    7,476        7,500        7,550             

 

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Comparable Sales Growth

During 2012, system comparable sales growth of 3.5% in the U.S. and Canada was driven primarily by the implementation of our Four Pillars strategy. During 2012, we enhanced our menu by launching four new menu platforms (salads, wraps, smoothies and desserts), expanded our chicken, coffee and ancillary platforms and made compelling limited time offer promotions. We also implemented a marketing strategy that targets a broader consumer base with more inclusive messaging and food centric advertising designed to balance value promotions and premium limited-time offerings.

During 2011, negative system comparable sales growth of 3.4% in the U.S. and Canada was primarily attributed to value promotions in 2010 compared to 2011.

Company restaurants

During 2012, Company restaurant revenues decreased primarily due to the net refranchising of 752 Company restaurants, partially offset by Company comparable sales growth. FX impact was not significant.

During 2011, 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.

During 2012, the decrease in CRM% reflects an increase in promotional activity to drive traffic and trial of limited time offer menu items, increases in food, paper and product costs and an increase in repair and maintenance expenses associated with restaurants prepared for refranchisings, partially offset by favorable adjustments to our self insurance reserve.

During 2011, 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

During 2012, franchise and property revenues increased primarily due to the net refranchising of 752 Company restaurants and franchise comparable sales growth, which resulted in increased royalties and rents. Additionally, renewal franchise fees increased due to the timing of renewals as a result of incentives provided to franchisees to accelerate restaurant remodels. FX impact was not significant.

During 2011, 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.

During 2012, franchise and property expenses increased primarily due to additional restaurants leased or subleased to franchisees as a result of refranchisings, partially offset by a decrease in bad debt expense. FX impact was not significant.

During 2011, 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 and an increase in bad debt expense.

 

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Segment income and segment margin

During 2012 and 2011, segment income increased due to an increase in net franchise and property income and a decrease in segment selling, general and administrative expenses (“SG&A”), partially offset by a decrease in CRM.

During 2012 and 2011, segment margin increased primarily as a result of the higher contribution of franchise and property revenues in the segment, which yield higher margins than Company restaurant revenues, after completion of the refranchisings, partially offset by a decrease in CRM%.

EMEA

 

    Successor         Predecessor     Variance  
                Transition Period              
    2012     2011     October 19,
2010 to
December 31,
2010
        July 1, 2010 to
October 18,
2010
    January 1,
2010 to
June 30,
2010
    2012
Compared to
2011
    2011
Compared to
2010
 
                                      Favorable/(Unfavorable)  

Company:

                 

Company restaurant revenues

  $ 264.6      $ 330.7      $ 68.1          $ 113.8      $ 208.7        (20.0 )%      (15.3 )% 

CRM

    30.7        35.5        6.9            14.6        15.1        (13.5 )%      (3.0 )% 

CRM %

    11.6     10.7     10.1         12.8     7.2     0.9     1.4

Company restaurant expenses as a % of Company restaurant revenues:

                 

Food and paper

    30.1     29.4     28.9         28.1     28.2     (0.7 )%      (1.1 )% 

Payroll and benefits

    32.5     31.4     31.7         32.3     34.8     (1.1 )%      2.1

Depreciation and amortization

    3.1     3.5     3.6         2.6     3.3     0.4     (0.3 )% 

Other occupancy and operating

    22.7     25.0     25.7         24.1     26.4     2.3     0.7

Franchise:

                 

Franchise and property revenues

  $ 208.3      $ 194.9      $ 36.6          $ 55.3      $ 82.8        6.9     11.6

Franchise and property expenses

    29.7        25.9        6.5            7.0        10.7        (14.7 )%      (7.0 )% 

Segment SG&A

    61.1        81.1        21.3            35.6        58.1        24.7     29.5

Segment depreciation and amortization

    17.9        22.6        4.4            3.5        7.8        20.8     (43.9 )% 

Segment income

    166.1        146.0        20.1            30.8        36.9        13.8     66.3

Segment margin

    35.1     27.8     19.2         18.2     12.7     7.3     12.3

FX Impact Favorable/(Unfavorable)

               
 

Segment revenues

  $ (35.9   $ 23.4      $ (8.5       $ (15.3   $ (0.1    

Segment CRM

    (2.2     1.7        (0.5         (1.3     (0.1    

Segment income

    (12.7     6.4        0.4            (2.9     (0.7    

Key Business Metrics

               
    2012     2011     2010                              

System-wide sales growth

    11.2     6.5     6.2          

Franchise sales

  $ 3,822.9      $ 3,649.0      $ 3,163.1             

Comparable sales growth

               

Company

    4.3     5.8     (2.5 )%           

Franchise

    3.1     4.1     (0.1 )%           

System

    3.2     4.3     (0.3 )%           

NRG

               

Company

    (1     (4     (1          

Franchise

    240        158        65             

System

    239        154        64             

Net Refranchisings

    59        7        73             

Restaurant counts at period end

               

Company

    132        192        203             

Franchise

    2,989        2,690        2,525             

System

    3,121        2,882        2,728             

 

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Comparable Sales Growth

During 2012, system comparable sales growth of 3.2% in EMEA was driven by comparable sales growth in Germany, the United Kingdom, Russia and Turkey, partially offset by negative system comparable sales growth in Spain. EMEA’s successful balance of value promotions and strong premium product promotions contributed to incremental sales primarily in Germany and the United Kingdom.

During 2011, system comparable sales growth of 4.3% in EMEA was driven by comparable sales growth in Germany, Turkey and Italy.

Company restaurants

During 2012, Company restaurant revenues decreased primarily due to the net refranchising of 59 Company restaurants during 2012 and unfavorable FX impact. These factors were partially offset by Company comparable sales growth.

During 2011, Company restaurant revenues decreased due to the net refranchising of 7 Company restaurants during 2011 as well as the impact of 34 Company restaurants refranchised in September 2010, partially offset by Company comparable sales growth and favorable FX impact.

During 2012, CRM % increased primarily as a result of the leveraging effect of Company comparable sales growth on our fixed occupancy and other operating costs and the net refranchising of 59 Company restaurants with lower than average CRM% during 2012. These factors were partially offset by increased food, paper and product costs, promotions of lower margin menu items and wage rate increases in Germany.

During 2011, CRM % increased primarily as a result of the leveraging effect of 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 United Kingdom, wage rate increases in Germany and Spain and the impact of acquisition accounting.

Franchise and Property

During 2012, franchise and property revenues increased due to franchise comparable sales growth, franchise NRG of 240 restaurants and the net refranchising of 59 Company restaurants which resulted in increased royalties and rental income. Additionally, initial franchise fees increased as a result of the increase in franchise NRG during 2012 and renewal and other related franchise fees increased primarily due to the early renewal of franchise agreements. These factors were partially offset by unfavorable FX impact.

During 2011, 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.

During 2012, franchise and property expenses increased due to rent expense associated with additional properties leased or subleased to franchisees as a result of refranchisings and an increase in bad debt expense, partially offset by favorable FX impact.

During 2011, franchise and property expenses increased due to an increase in 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

During 2012 and 2011, segment income increased due to a decrease in segment SG&A and an increase in net franchise and property income, partially offset by a decrease in CRM.

 

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During 2012 and 2011, segment margin increased primarily as a result of the higher contribution of franchise and property revenues in the segment, which yield higher margins than Company restaurant revenues, following the refranchisings in 2012 and franchise NRG in both periods and an increase in CRM%.

LAC

 

    Successor         Predecessor     Variance  
                Transition Period                    
    2012     2011     October 19,
2010 to
December 31,
2010
        July 1,
2010 to
October 18,
2010
    January 1,
2010 to
June 30,
2010
    2012
Compared to
2011
    2011
Compared to
2010
 
                                      Favorable/(Unfavorable)  

Company:

                 

Company restaurant revenues

  $ 62.5      $ 66.2      $ 13.1          $ 18.3      $ 30.2        (5.6 )%      7.5

CRM

    9.9        12.5        1.5            3.4        5.6        (20.8 )%      19.0

CRM %

    15.8     18.9     11.5         18.6     18.5     (3.0 )%      1.8

Company restaurant expenses as a % of Company restaurant revenues:

                 

Food and paper

    38.8     38.2     38.6         39.3     38.7     (0.6 )%      0.7

Payroll and benefits

    12.9     12.0     12.2         11.9     11.9     (0.9 )%      (0.1 )% 

Depreciation and amortization

    9.3     9.7     13.1         8.0     8.5     0.4     (0.4 )% 

Other occupancy and operating

    23.2     21.2     24.7         22.3     22.3     (2.0 )%      1.6

Franchise:

                 

Franchise and property revenues

  $ 71.9      $ 61.9      $ 11.7          $ 15.7      $ 24.9        16.2     18.4

Franchise and property expenses

           (1.1                1.3               100.0     184.6

Segment SG&A

    14.6        18.3        5.5            7.0        10.9        20.2     21.8

Segment depreciation and amortization

    6.0        6.7        1.8            1.5        2.7        10.4     (11.7 )% 

Segment income

    73.2        63.9        9.5            12.3        22.3        14.6     44.9

Segment margin

    54.5     49.9     38.3         36.2     40.5     4.6     11.2

FX Impact Favorable/(Unfavorable)

               

Segment revenues

  $ (3.7   $ 1.1      $ 0.6          $ 0.7      $ 2.4       

Segment CRM

    (0.6     0.2        0.1            0.1        0.4       

Segment income

    (0.4            (0.1         0.1        0.4       

Key Business Metrics

               
    2012     2011     2010                              

System-wide sales growth

    9.9     13.5     13.9          

Franchise sales

  $ 1,334.1      $ 1,208.7      $ 1,060.6             

Comparable sales growth

               

Company

    0.6     4.3     (2.9 )%           

Franchise

    5.9     8.1     4.2          

System

    5.7     7.9     3.8          

NRG

               

Company

    3        1        2             

Franchise

    165        81        33             

System

    168        82        35             

Net Refranchisings

                              

Restaurant counts at period end

               

Company

    100        97        96             

Franchise

    1,290        1,125        1,044             

System

    1,390        1,222        1,140             

 

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Table of Contents

Comparable Sales Growth

During 2012, system comparable sales growth of 5.7% in LAC was driven by comparable sales growth in Brazil and Mexico, partially offset by negative system comparable sales growth in Puerto Rico.

During 2011, system comparable sales growth of 7.9% in LAC was driven by comparable sales growth in Brazil and Argentina, partially offset by negative comparable sales growth in Puerto Rico.

Company restaurants

During 2012, Company restaurant revenues decreased primarily due to unfavorable FX impact, partially offset by Company comparable sales growth.

During 2011, Company restaurant revenues increased primarily due to positive Company comparable sales growth and slightly favorable FX impact.

During 2012, CRM% decreased primarily as a result of increased food, paper and product costs associated with price increases in certain commodities, higher labor costs associated with wage rate increases, higher labor costs related to food delivery and kiosks and higher rent expense on certain lease renewals.

During 2011, 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, acquisition accounting and higher labor costs associated with food delivery and kiosks.

Franchise and Property

During 2012, franchise and property revenues increased due to franchise comparable sales growth and franchise NRG of 165 restaurants during 2012, which resulted in increased royalties. Additionally, initial franchise fees increased as a result of the increase in franchise NRG and renewal and other related franchise fees increased primarily due to the early renewal of franchise agreements. These factors were partially offset by the prior year collection and recognition of cumulative royalties previously deferred.

During 2011, franchise and property revenues increased due to franchise NRG, franchise comparable sales growth, the collection and recognition of cumulative royalties previously deferred and an increase in initial franchise fees driven by an increase in franchise NRG. These factors were partially offset by the recovery of previously reserved receivables. FX impact was not significant.

Segment income and segment margin

During 2012 and 2011, segment income increased due to an increase in net franchise and property income and decreases in segment SG&A as well as an increase in CRM in 2011. The increase in segment income during 2012 was partially offset by a decrease in CRM.

During 2012 and 2011, segment margin increased primarily as a result of the higher contribution of franchise and property revenues in the segment, which yield higher margins than Company restaurant revenues, as well as an increase in CRM% in 2011. The increase in segment margin during 2012 was partially offset by a decrease in CRM%.

 

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APAC

 

    Successor         Predecessor     Variance  
                Transition Period                    
    2012     2011     October 19,
2010 to
December 31,

2010
        July 1,
2010 to
October 18,

2010
    January 1,
2010 to
June 30,
2010
    2012
Compared to
2011
    2011
Compared to
2010
 
                                      Favorable/(Unfavorable)  

Company:

                 

Company restaurant revenues

  $ 49.0      $ 69.8      $ 13.5          $ 20.3      $ 21.9