UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 25, 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 333-180524-04
NPC RESTAURANT HOLDINGS, LLC
(Exact name of registrant as specified in its charter)
DELAWARE | 20-4509045 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification number) | |
7300 W. 129th Street Overland Park, KS |
66213 | |
(Address of principal executive offices) | (Zip Code) |
Telephone: (913) 327-5555
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There is no market for the Registrants equity. As of November 5, 2012, there were 1,000 units of membership interests outstanding.
Page | ||||||
Part I |
FINANCIAL INFORMATION | |||||
Item 1. |
Condensed Consolidated Financial Statements (unaudited) | 4 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 23 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 35 | ||||
Item 4. |
Controls and Procedures | 35 | ||||
Part II |
OTHER INFORMATION | |||||
Item 1. |
Legal Proceedings | 36 | ||||
Item 1A. |
Risk Factors | 36 | ||||
Item 6. |
Exhibits | 37 | ||||
38 | ||||||
39 |
2
EXPLANATORY NOTE
On April 3, 2012, NPC International, Inc., NPC Operating Company A, Inc., NPC Operating Company B, Inc. and NPC Acquisition Holdings, LLC (n/k/a NPC Restaurant Holdings, LLC) (collectively, the Registrants) filed a Registration Statement on Form S-4 (File No. 333-180524) (the Initial Form S-4) in connection with an offer by the Registrants to exchange $190.0 million aggregate principal amount of Senior Notes issued on December 28, 2011 for an equal principal amount of Senior Notes registered under the Securities Act of 1933. The Initial Form S-4 was declared effective by the Securities and Exchange Commission on April 17, 2012 and the exchange offer commenced on April 17, 2012 (the Initial Exchange Offer).
On May 4, 2012, the Registrants terminated the Initial Exchange Offer. The reason for the termination was that the consolidated financial statements of NPC International, Inc. were contained in the prospectus relating to the Initial Exchange Offer (the Initial Prospectus) rather than the consolidated financial statements of its parent, NPC Acquisition Holdings, LLC. On May 7, 2012, the Registrants filed a post-effective amendment (the Amendment) to the Initial Form S-4, to replace the consolidated financial statements of NPC International, Inc. with the consolidated financial statements of NPC Acquisition Holdings, LLC and to make related changes. The Amendment was declared effective on May 9, 2012, and a new exchange offer commenced on May 10, 2012. The new exchange offer was completed in June 2012.
The Securities and Exchange Commission EDGAR system (the EDGAR System) filing codes for NPC Acquisition Holdings, LLC were inadvertently not used when the Initial Form S-4 and the Initial Prospectus were filed, and as a result NPC Acquisition Holdings, LLC does not show up as having filed the Initial Form S-4 and the Initial Prospectus on the EDGAR System. In addition, the EDGAR System was unable to accept the filing codes for NPC Acquisition Holdings, LLC in connection with the filing of a post-effective amendment to a registration statement such as the Amendment. As a result, NPC Acquisition Holdings, LLC does not show up as having filed the Amendment on the EDGAR System. However, each of the Initial Form S-4, the Initial Prospectus and the Amendment will show up as having been filed on the EDGAR System by the other Registrants. Also, NPC Acquisition Holdings, LLC is included as a registrant on the cover of each of the Initial Form S-4, the Initial Prospectus and the Amendment. In addition, the EDGAR System filing codes for NPC International Holdings, Inc., the parent of NPC Acquisition Holdings, LLC, were inadvertently used when the Initial Form S-4 and the Initial Prospectus were filed. NPC International Holdings, Inc. is not a registrant and does not appear as a registrant in any of the filings.
NPC Acquisition Holdings, LLC changed its name to NPC Restaurant Holdings, LLC on September 12, 2012.
3
PART I
Item 1. | Condensed Consolidated Financial Statements |
NPC RESTAURANT HOLDINGS, LLC
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
Successor | Predecessor | |||||||||
September 25, 2012 |
December 27, 2011 |
|||||||||
Assets |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 32,358 | $ | 78,394 | ||||||
Accounts and other receivables |
5,201 | 8,041 | ||||||||
Inventories |
7,540 | 7,296 | ||||||||
Prepaid expenses and other current assets |
4,970 | 3,399 | ||||||||
Deferred income taxes |
7,292 | 16,369 | ||||||||
Income taxes receivable |
1,801 | | ||||||||
|
|
|
|
|||||||
Total current assets |
59,162 | 113,499 | ||||||||
Facilities and equipment, less accumulated depreciation of $28,912 and $143,793, respectively |
142,672 | 131,744 | ||||||||
Franchise rights, less accumulated amortization of $11,643 and $50,527, respectively |
626,371 | 390,110 | ||||||||
Goodwill |
290,508 | 191,701 | ||||||||
Other assets, net |
49,761 | 21,674 | ||||||||
|
|
|
|
|||||||
Total assets |
$ | 1,168,474 | $ | 848,728 | ||||||
|
|
|
|
|||||||
Liabilities and members equity |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 29,395 | $ | 24,631 | ||||||
Accrued liabilities |
49,040 | 62,893 | ||||||||
Accrued interest |
8,491 | 3,122 | ||||||||
Income taxes payable |
| 2,516 | ||||||||
Current portion of insurance reserves |
9,876 | 9,690 | ||||||||
Current portion of debt |
3,750 | 13,540 | ||||||||
|
|
|
|
|||||||
Total current liabilities |
100,552 | 116,392 | ||||||||
|
|
|
|
|||||||
Long-term debt |
560,313 | 359,160 | ||||||||
Other deferred items |
49,950 | 34,013 | ||||||||
Insurance reserves |
15,756 | 13,969 | ||||||||
Deferred income taxes |
207,278 | 123,734 | ||||||||
Members equity subject to redemption |
| 3,250 | ||||||||
|
|
|
|
|||||||
Total long-term liabilities |
833,297 | 534,126 | ||||||||
|
|
|
|
|||||||
Commitments and contingencies |
||||||||||
Members equity: |
||||||||||
Membership interests (1,000 units authorized and 1,000 units issued and outstanding as of September 25, 2012 and December 27, 2011) |
| | ||||||||
Members capital |
234,625 | 198,210 | ||||||||
|
|
|
|
|||||||
Total members equity |
234,625 | 198,210 | ||||||||
|
|
|
|
|||||||
Total liabilities and members equity |
$ | 1,168,474 | $ | 848,728 | ||||||
|
|
|
|
See accompanying notes to the condensed consolidated financial statements.
4
NPC RESTAURANT HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands)
Successor | Predecessor | |||||||||
13 Weeks Ended | ||||||||||
Sept. 25, 2012 | Sept. 27, 2011 | |||||||||
Sales: |
||||||||||
Net product sales |
$ | 243,533 | $ | 228,021 | ||||||
Fees and other income |
12,700 | 9,830 | ||||||||
|
|
|
|
|||||||
Total sales |
256,233 | 237,851 | ||||||||
Costs and expenses: |
||||||||||
Cost of sales |
70,408 | 70,695 | ||||||||
Direct labor |
73,244 | 66,841 | ||||||||
Other restaurant operating expenses |
81,099 | 74,113 | ||||||||
General and administrative expenses |
14,320 | 13,102 | ||||||||
Corporate depreciation and amortization of intangibles |
4,488 | 3,078 | ||||||||
Other |
6 | 902 | ||||||||
|
|
|
|
|||||||
Total costs and expenses |
243,565 | 228,731 | ||||||||
|
|
|
|
|||||||
Operating income |
12,668 | 9,120 | ||||||||
Interest expense |
11,416 | 6,131 | ||||||||
|
|
|
|
|||||||
Income before income taxes |
1,252 | 2,989 | ||||||||
Income tax benefit |
(1,126 | ) | (480 | ) | ||||||
|
|
|
|
|||||||
Net income |
$ | 2,378 | $ | 3,469 | ||||||
|
|
|
|
See accompanying notes to the condensed consolidated financial statements.
5
NPC RESTAURANT HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands)
Successor | Predecessor | |||||||||
39 Weeks Ended | ||||||||||
Sept. 25, 2012 | Sept. 27, 2011 | |||||||||
Sales: |
||||||||||
Net product sales |
$ | 753,148 | $ | 695,727 | ||||||
Fees and other income |
37,060 | 31,875 | ||||||||
|
|
|
|
|||||||
Total sales |
790,208 | 727,602 | ||||||||
Costs and expenses: |
||||||||||
Cost of sales |
216,660 | 209,248 | ||||||||
Direct labor |
220,459 | 204,298 | ||||||||
Other restaurant operating expenses |
238,033 | 222,090 | ||||||||
General and administrative expenses |
43,158 | 39,420 | ||||||||
Corporate depreciation and amortization of intangibles |
13,123 | 8,978 | ||||||||
Other |
509 | 1,530 | ||||||||
|
|
|
|
|||||||
Total costs and expenses |
731,942 | 685,564 | ||||||||
|
|
|
|
|||||||
Operating income |
58,266 | 42,038 | ||||||||
Other expense: |
||||||||||
Interest expense |
35,797 | 19,075 | ||||||||
Loss on debt extinguishment |
5,144 | | ||||||||
|
|
|
|
|||||||
Income before income taxes |
17,325 | 22,963 | ||||||||
Income tax expense |
2,953 | 4,838 | ||||||||
|
|
|
|
|||||||
Net income |
$ | 14,372 | $ | 18,125 | ||||||
|
|
|
|
See accompanying notes to the condensed consolidated financial statements.
6
NPC RESTAURANT HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
Successor | Predecessor | Successor | Predecessor | |||||||||||||||||
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||||||
Sept. 25, 2012 | Sept. 27, 2011 | Sept. 25, 2012 | Sept. 27, 2011 | |||||||||||||||||
Net income |
$ | 2,378 | $ | 3,469 | $ | 14,372 | $ | 18,125 | ||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||
Derivative financial instruments: |
||||||||||||||||||||
Change in fair value |
| (75 | ) | | 27 | |||||||||||||||
Reclassification into earnings |
| 192 | | 1,053 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income |
$ | 2,378 | $ | 3,586 | $ | 14,372 | $ | 19,205 | ||||||||||||
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated financial statements.
7
NPC RESTAURANT HOLDINGS, LLC
CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
(in thousands)
Members equity |
||||
Predecessor Balance at December 27, 2011 |
$ | 198,210 | ||
|
|
|||
Successor Company |
||||
Purchase accounting adjustments |
(198,210 | ) | ||
Issuance of membership interests, net of Sponsor transaction fee |
227,820 | |||
Acquirer costs, net of tax |
(7,567 | ) | ||
|
|
|||
Successor Balance December 28, 2011 |
220,253 | |||
Net income |
14,372 | |||
|
|
|||
Balance at September 25, 2012 |
$ | 234,625 | ||
|
|
See accompanying notes to the condensed consolidated financial statements.
8
NPC RESTAURANT HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Successor | Predecessor | |||||||||
39 Weeks Ended | ||||||||||
Sept. 25, 2012 | Sept. 27, 2011 | |||||||||
Operating activities |
||||||||||
Net income |
$ | 14,372 | $ | 18,125 | ||||||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||||
Depreciation and amortization |
41,654 | 33,991 | ||||||||
Amortization of debt issuance costs |
3,072 | 1,905 | ||||||||
Deferred income taxes |
2,545 | 2,897 | ||||||||
Loss on debt extinguishment |
5,144 | | ||||||||
Debt extinguishment penalty |
(1,702 | ) | | |||||||
Other |
25 | 828 | ||||||||
Changes in assets and liabilities, excluding the effect of acquisitions: |
||||||||||
Accounts receivable |
2,840 | 261 | ||||||||
Inventories |
(37 | ) | 634 | |||||||
Prepaid expenses and other current assets |
(1,415 | ) | (874 | ) | ||||||
Accounts payable |
4,764 | 3,552 | ||||||||
Income taxes |
(1,104 | ) | (770 | ) | ||||||
Accrued interest |
5,369 | 2,991 | ||||||||
Accrued liabilities |
(19,902 | ) | 1,943 | |||||||
Insurance reserves |
1,973 | 282 | ||||||||
Other deferred items |
(858 | ) | 1,610 | |||||||
Other assets |
94 | 1,054 | ||||||||
|
|
|
|
|||||||
Net cash provided by operating activities |
56,834 | 68,429 | ||||||||
|
|
|
|
|||||||
Investing activities |
||||||||||
Capital expenditures |
(28,504 | ) | (17,763 | ) | ||||||
Purchase of the stock of the Company |
(431,540 | ) | | |||||||
Purchase of business assets, net of cash acquired |
(19,371 | ) | | |||||||
Proceeds from sale or disposition of assets |
189 | 647 | ||||||||
|
|
|
|
|||||||
Net cash used in investing activities |
(479,226 | ) | (17,116 | ) | ||||||
|
|
|
|
|||||||
Financing activities |
||||||||||
Borrowings under revolving credit facility |
14,900 | | ||||||||
Payments under revolving credit facility |
(14,900 | ) | | |||||||
Payments on term bank facilities |
(937 | ) | (29,670 | ) | ||||||
Retirement of predecessor entity debt |
(372,700 | ) | | |||||||
Proceeds from equity contributions, net of costs of $18,735 |
216,635 | | ||||||||
Issuance of debt |
565,000 | | ||||||||
Debt issue costs |
(32,012 | ) | | |||||||
Interest rate derivative |
(636 | ) | | |||||||
Proceeds from sale-leaseback transactions |
1,006 | 486 | ||||||||
|
|
|
|
|||||||
Net cash provided by (used in) financing activities |
376,356 | (29,184 | ) | |||||||
|
|
|
|
|||||||
Net change in cash and cash equivalents |
(46,036 | ) | 22,129 | |||||||
Beginning cash and cash equivalents |
78,394 | 44,159 | ||||||||
|
|
|
|
|||||||
Ending cash and cash equivalents |
$ | 32,358 | $ | 66,288 | ||||||
|
|
|
|
|||||||
Supplemental disclosures of cash flow information: |
||||||||||
Net cash paid for interest |
$ | 27,357 | $ | 14,180 | ||||||
Net cash paid for income taxes |
$ | 2,243 | $ | 2,323 |
See accompanying notes to the condensed consolidated financial statements.
.
9
NPC RESTAURANT HOLDINGS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Presentation
On September 12, 2012, NPC Acquisition Holdings, LLC changed its name to NPC Restaurant Holdings, LLC and is referred to herein as Holdings. Holdings and its subsidiaries are referred to herein as the Company. Holdings wholly-owned subsidiary, NPC International, Inc., is referred to herein as NPC. On December 28, 2011, all of the outstanding membership interests of Holdings were acquired by NPC International Holdings, Inc. (NPC Holdings or Parent), an entity controlled by Olympus Growth Fund V, L.P. and certain of its affiliates (Olympus or Sponsor).
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements are not included herein.
The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys Post-Effective Amendment No. 1 to Form S-4 Registration Statement (File No. 333-180524) filed with the SEC on May 7, 2012 and declared effective on May 9, 2012.
The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. The Company believes the accompanying unaudited interim condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments and accruals) necessary to fairly present the Companys condensed consolidated results of operations, financial position and cash flows as of the dates and for the periods presented.
Note 2 Acquisitions and Purchase Accounting
The Transactions
On November 6, 2011, NPC Holdings (Purchaser), entered into a Purchase and Sale Agreement (the Purchase Agreement), pursuant to which Purchaser acquired all of the outstanding membership interests of Holdings, which owns all of the outstanding capital stock of NPC, for approximately $755.0 million, plus post-closing purchase price adjustments as outlined in the Purchase Agreement, (the Acquisition). The closing of the Acquisition occurred on December 28, 2011.
In connection with the Acquisition, Purchaser repaid or caused to be repaid, on behalf of NPC, all of the outstanding borrowings of NPC under its then-existing senior secured credit facilities which consisted of a term loan (the Old Term Loan) and a $75.0 million revolving credit facility (the Old Revolving Facility and together with the Old Term Loan, the Old Senior Secured Credit Facilities). In addition, NPC completed, at Purchasers request pursuant to the Purchase Agreement, a cash tender offer (the Tender Offer) for NPCs then-outstanding 9 1/2% Senior Subordinated Notes due 2014 (the Old Senior Subordinated Notes) and redeemed the remaining Old Senior Subordinated Notes not tendered in the Tender Offer.
To consummate the Acquisition, the Company entered into new debt financing consisting of (i) a $375.0 million term loan (the Term Loan), (ii) a five-year senior secured revolving credit facility that provides for aggregate borrowings of up to $100.0 million (the Revolving Facility and together with the Term Loan, the Senior Secured Credit Facilities) and (iii) $190.0 million of Senior Notes (the Senior Notes) (collectively, all of the transactions described in this paragraph, the Financing Transactions). As further described in the Explanatory Note in the forepart of this Form 10-Q, in June 2012 the Company completed an exchange offer which allowed the holders of Senior Notes to exchange those notes for an equal principal amount of Senior Notes that are registered under the Securities Act of 1933.
For ease of reference, the Company refers to the following collectively as the Transactions in this filing: (i) the Acquisition; (ii) the related repayment of then-existing indebtedness, including the consummation of the Tender Offer and related consent solicitation and the repayment of the Old Senior Secured Credit Facilities; (iii) the Financing Transactions; (iv) the establishment of the Senior Secured Credit Facilities; and (v) the payment of fees and expenses related thereto.
Transaction Expenses
The Purchaser incurred approximately $12.4 million of expenses, net of tax, in connection with the Transactions, consisting of financing commitment fees, other Transactions related legal, accounting and professional fees and a transaction
10
fee paid to the Sponsor on the closing date pursuant to the management advisory agreement. These costs were funded by NPC and recorded in the Successor period (as defined below) as a reduction to the members capital at closing of $235.3 million. Additionally, the bond consent and pre-payment penalty for the Tender Offer were paid at closing by NPC on behalf of the sellers and such costs were recorded, net of tax, at NPC Holdings.
During fiscal 2011, NPC recorded $26.6 million for costs incurred by the sellers in connection with the Transactions. These costs consisted largely of stock and other compensation expense, broker fees and legal and professional fees and were expensed in the Predecessor period (as defined below).
Purchase Accounting
As a result of the Transactions, purchase accounting adjustments were made to underlying assets and liabilities based on a third party valuation. The purchase accounting adjustments did not impact net cash flow. The primary changes to the income statement as a result of the application of purchase accounting includes an increase in the amortization and depreciation expense associated with the adjustments to franchise rights, leasehold interests and facilities and equipment based upon the estimates of fair value and managements estimate of the remaining useful lives of the subject assets. The Transactions resulted in higher debt levels and higher interest rates which resulted in higher interest accruals and increased capitalized debt issue costs which resulted in higher interest expense during the post-transaction period. Due to the impact of the change of control that occurred in conjunction with the Transactions and the changes resulting from the purchase accounting adjustments described above, the income statement and statement of cash flows presentation separates the operating results of the Company into two accounting periods; (1) the period prior to December 27, 2011, the day preceding consummation of the Transactions (Predecessor), and (2) the period beginning December 28, 2011 and after utilizing the new basis of accounting (Successor). The results are further separated by a heavy black line to indicate the effective date of the new basis of accounting.
As a result of the consummation of the Transactions, the consolidated financial statements for the period after December 27, 2011, are presented on a different basis than that for the periods before December 28, 2011, as a result of the application of purchase accounting as of December 28, 2011, and therefore are not comparable.
At September 25, 2012, total consideration includes approximately $14.0 million for accrued purchase price representing amounts due to the sellers for future tax refunds which the Company expects to receive over the next three years. Such amounts were included in accrued liabilities and other deferred liabilities in the Consolidated Balance Sheet at September 25, 2012. The purchase price allocation recorded in connection with the Transactions is presented below (in thousands):
Cash and cash equivalents |
$ | 11,962 | ||
Accounts receivable |
8,041 | |||
Inventories |
7,296 | |||
Prepaid expenses and other current assets |
3,399 | |||
Income taxes receivable |
698 | |||
Deferred income tax asset |
7,292 | |||
Facilities and equipment |
138,952 | |||
Franchise rights |
627,000 | |||
Goodwill |
289,144 | |||
Other assets |
24,686 | |||
Accounts payable |
(24,631 | ) | ||
Other accrued liabilities |
(59,941 | ) | ||
Other deferred items |
(41,402 | ) | ||
Insurance reserves |
(13,969 | ) | ||
Deferred income tax liability |
(210,791 | ) | ||
|
|
|||
Total consideration |
$ | 767,736 |
The weighted average amortization period for all intangible assets is as follows:
Years | ||||
Franchise rights |
41 | |||
Favorable leasehold interests |
15 | |||
Unfavorable leasehold interests |
9 |
11
Additionally, on February 20, 2012 the Company closed on an Asset Purchase Agreement with Pizza Hut, Inc. (PHI) pursuant to which the Company agreed to purchase from PHI 36 units in and around Jacksonville, Florida for $18.8 million in cash plus an additional $0.5 million for inventory, prepaid expenses and store cash. The purchase price, net of cash acquired, was allocated as follows (in thousands):
Franchise rights |
$ | 10,164 | ||
Fixed assets |
7,186 | |||
Goodwill |
1,364 | |||
Other |
657 | |||
|
|
|||
Total purchase price |
$ | 19,371 |
The goodwill recorded reflects the Companys ability to synergize acquired units with its existing operations. All of the goodwill recognized for this acquisition will be deductible for income tax purposes. The weighted average amortization period assigned to the franchise rights acquired during 2012 was approximately 41 years. This acquisition was funded from available cash on hand and borrowings on the Companys $100.0 million Revolving Facility.
The pro forma impact of the Transactions and the asset acquisition on the results of operations is included in the below table for periods prior to the acquisition dates in which the acquisitions were not previously consolidated. The pro forma results of operations are not necessarily indicative of the results that would have occurred had these acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of future operating results.
Pro forma (unaudited) (in thousands) |
||||||||||||
13 Weeks Ended | 39 Weeks Ended | |||||||||||
Sept. 27, 2011 | Sept. 25, 2012 | Sept. 27, 2011 | ||||||||||
Total sales |
$ | 245,711 | $ | 795,045 | $ | 751,181 | ||||||
Net (loss) income |
(362 | ) | 14,641 | 13,209 |
The unaudited Consolidated Statements of Income for the 13 and 39 weeks ended September 25, 2012 included $8.4 million and $20.4 million, respectively, of total sales related to the units acquired in the asset acquisition. It is impracticable to disclose earnings for the post-acquisition period for these acquired units as earnings of such units are not tracked on an individual basis.
Note 3 Goodwill and Other Intangible Assets
Changes in goodwill for the year-to-date period of 2012 are summarized below (in thousands):
Balance at December 27, 2011 |
$ | 191,701 | ||
Purchase accounting adjustment |
(191,701 | ) | ||
Allocation of purchase price, net of taxes |
197,054 | |||
Purchase accounting adjustment for impact of deferred income taxes |
92,090 | |||
Acquisition of business assets |
1,364 | |||
|
|
|||
Balance September 25, 2012 |
$ | 290,508 | ||
|
|
Amortizable other intangible assets consist of franchise rights and leasehold interests. These intangible assets are amortized on a straight-line basis over the lesser of their economic lives or the remaining life of the applicable agreement. Intangible assets subject to amortization are summarized below (in thousands):
September 25, 2012 | ||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value |
||||||||||
Amortizable intangible assets: |
||||||||||||
Franchise rights |
$ | 638,014 | $ | (11,643 | ) | $ | 626,371 | |||||
Unfavorable leasehold interests, net |
(4,640 | ) | 1,123 | (3,517 | ) | |||||||
|
|
|
|
|
|
|||||||
$ | 633,374 | $ | (10,520 | ) | $ | 622,854 | ||||||
|
|
|
|
|
|
12
December 27, 2011 | ||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value |
||||||||||
Amortizable intangible assets: |
||||||||||||
Franchise rights |
$ | 440,637 | $ | (50,527 | ) | $ | 390,110 | |||||
Favorable leasehold interests, net |
6,013 | (1,842 | ) | 4,171 | ||||||||
|
|
|
|
|
|
|||||||
$ | 446,650 | $ | (52,369 | ) | $ | 394,281 | ||||||
|
|
|
|
|
|
Amortization expense on intangible assets was $3.5 million and $2.5 million for the 13 weeks ended September 25, 2012 and September 27, 2011, respectively, and $10.5 million and $7.6 million for the 39 weeks ended September 25, 2012 and September 27, 2011, respectively.
Annual amortization during the next five fiscal years is expected to be as follows: $14.4 million for fiscal 2013; $14.6 million in each of the years for fiscal 2014 through 2016; and $14.9 million for fiscal 2017.
Note 4 Debt
The Companys debt consisted of the following (in thousands):
September 25, 2012 |
December 27, 2011 |
|||||||
Term Loan |
$ | 374,063 | $ | | ||||
Senior Notes |
190,000 | | ||||||
Revolving Facility ($100 million) (1) |
| | ||||||
Old Term Loan |
| 197,700 | ||||||
Old Senior Subordinated Notes |
| 175,000 | ||||||
Old Revolving Facility ($75 million) (1) |
| | ||||||
|
|
|
|
|||||
564,063 | 372,700 | |||||||
Less current portion |
3,750 | 13,540 | ||||||
|
|
|
|
|||||
$ | 560,313 | $ | 359,160 | |||||
|
|
|
|
(1) | At September 25, 2012, the Company had $82.3 million of borrowing capacity available under its Revolving Facility, net of $17.7 million of outstanding letters of credit and at December 27, 2011, the Company had $57.3 million of borrowing capacity available under its Old Revolving Facility, net of $17.7 million of outstanding letters of credit. |
The Companys Senior Secured Credit Facilities were entered into as part of the Financing Transactions on December 28, 2011 and consist of a $100.0 million Revolving Facility and a $375.0 million Term Loan. Outstanding borrowings under the Revolving Facility bear interest at the London Interbank Offered Rate (LIBOR), the money market rate, or the base rate (as defined), plus in each case an applicable margin based upon a leverage ratio as defined in the credit agreement for the Senior Secured Credit Facilities. At September 25, 2012, the rate would have been the prevailing LIBOR rate plus the margin of 5.0% in the case of a LIBOR loan or the base rate (as defined) plus the margin of 4.0% in the case of a base rate loan. Availability under the Revolving Facility is reduced by letters of credit, of which $17.7 million were issued at September 25, 2012. Commitment fees are paid based upon the unused balance of the Revolving Facility and the fees are paid at 0.5%. Commitment fees and letter of credit fees are reflected as interest expense. The Revolving Facility is secured by substantially all of the Companys assets and is due December 28, 2016.
On March 28, 2012, the Company refinanced the Term Loan. The refinancing lowered the spread over LIBOR to 4.0% from 5.25% on the Term Loan borrowings, and lowered the Term Loan LIBOR floor to 1.25% from 1.5%. The combined weighted average interest rate was 5.25% per annum at September 25, 2012,. The principal amount of the Term Loan amortizes in equal quarterly installments of $937,500 in an aggregate annual amount equal to 1% of the original principal amount of the Term Loan, with the balance payable at maturity. These quarterly installments may be reduced as a result of any voluntary or required prepayments made by the Company, which any such reductions will be applied on a prorated basis in accordance with the terms of the Credit Agreement. The term loan note is secured by substantially all of the Companys assets and is due December 28, 2018.
The Company paid a soft call premium of $3.8 million in accordance with the terms of the Senior Secured Credit Facilities plus transaction related expenses of approximately $1.1 million to effectuate the refinancing. Based on the terms of this transaction, $3.2 million of these costs were capitalized as debt issuance costs and will be amortized over the term of the related debt. The remaining $1.7 million was recorded as debt extinguishment expense during the second quarter of 2012. No other changes were made to the Senior Secured Credit Facilities in the refinancing. Additionally, related debt issuance costs of approximately $3.4 million were written off to debt extinguishment expense during the second quarter of fiscal 2012.
13
The Senior Notes bear interest at the rate of 10.5% payable semi-annually in arrears on January 15 and July 15 until maturity of the Senior Notes on December 28, 2020. These Senior Notes are unsecured. The Senior Notes may be redeemed at any time prior to January 15, 2016 at a redemption price equal to 100% of the principal amount of Senior Notes redeemed plus a premium equal to the greater of (i) 1.0% of such amount or (ii) the excess of the present value of the redemption price payable for redemption as of January 15, 2016 and the interest payments through such date over the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest as of the date of redemption. Effective January 15, 2016, these Notes may be redeemed at a redemption price of 105.250% of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest until January 15, 2017, when the redemption price becomes 102.625% plus accrued and unpaid interest and remains such until January 15, 2018, when these Senior Notes can be redeemed at the face amount, plus accrued and unpaid interest. In June 2012 the Company completed an exchange offer which allowed the holders of Senior Notes to exchange the notes for an equal principal amount of Senior Notes that are registered under the Securities Act of 1933.
The Companys debt facilities contain restrictions on additional borrowings, certain asset sales, capital expenditures, dividend payments, certain investments and related-party transactions, as well as requirements to maintain various financial ratios. At September 25, 2012, the Company was in compliance with all of its debt covenants.
Based upon the amount of excess cash flow generated during fiscal 2012 and the Companys leverage at fiscal 2012 year end, each of which is defined in the credit agreement governing the Term Loan, the Company is required to make an excess cash flow mandatory prepayment. The excess cash flow mandatory prepayment is an annual requirement under the credit agreement and is due 95 days after the end of each fiscal year. The Company currently expects that it will be required to make a payment in 2013 of between $4.0 million and $6.0 million depending upon the amount of excess cash flow generated during the fiscal 2012 year and the Companys leverage at fiscal 2012 year-end. As this is a preliminary estimate, the final excess cash flow mandatory prepayment could ultimately differ materially from the amounts reflected above and as such we have not reflected any of this estimate as a current liability.
The estimated fair value of the Companys outstanding borrowings was as follows (in thousands):
September 25, 2012 |
December 27, 2011 |
|||||||
Term Loan |
$ | 376,868 | $ | | ||||
Senior Notes |
216,600 | | ||||||
Old Term Loan |
| 197,700 | ||||||
Senior Subordinated Notes |
| 179,156 | ||||||
|
|
|
|
|||||
$ | 593,468 | $ | 376,856 | |||||
|
|
|
|
|||||
Carrying value |
$ | 564,063 | $ | 372,700 |
The Company measures the fair value of its debt facilities under a Level 2 observable input. However, the fair value estimates presented herein are not necessarily indicative of the amount that the Companys debtholders could realize in a current market exchange.
Note 5 Income Taxes
For the 39 weeks ended September 25, 2012, the Company recorded income tax expense of $3.0 million which resulted in an effective income tax rate of 17.0% compared to income tax expense of $4.8 million or an effective tax rate of 21.1% during the prior year. Fiscal 2012 included a favorable adjustment of $0.5 million related to the release of liabilities for uncertain tax positions. The lower than statutory rate for both periods was primarily attributable to various federal employment-related tax credits. Several, but not all, of these federal tax credit programs historically utilized by the Company have not been extended for 2012 and are therefore excluded from the 2012 tax rate calculation.
The Company files a consolidated US federal tax return with the parent company, NPC Holdings. The Company allocates taxes between it and the Parent utilizing the separate return method.
14
The liability for uncertain tax positions was $4.6 million as of September 25, 2012, was considered long term and was included in other deferred items in the Consolidated Balance Sheets. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows, (in thousands):
Balance at December 27, 2011 |
$ | 9,527 | ||
Purchase accounting adjustments |
(6,682 | ) | ||
Additions based on tax positions related to the current year |
2,439 | |||
Lapse of applicable statute of limitations |
(895 | ) | ||
Additional interest / penalties accrued |
164 | |||
|
|
|||
Balance at September 25, 2012 |
$ | 4,553 | ||
|
|
Note 6 Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
September 25, 2012 | December 27, 2011 | |||||||
Payroll and vacation |
$ | 15,972 | $ | 18,383 | ||||
Due to sellers |
5,122 | | ||||||
Accrued transaction costs |
| 12,995 | ||||||
Accrued litigation expenses |
| 8,000 | ||||||
Other |
27,946 | 23,515 | ||||||
|
|
|
|
|||||
$ | 49,040 | $ | 62,893 | |||||
|
|
|
|
Note 7 Commitments and Contingencies
Concurrently with the closing of the Acquisition, certain members of management purchased common stock of NPC Holdings for $4.1 million. Under the terms of the Stockholders Agreement of NPC Holdings, the common stock is required to be repurchased by NPC Holdings upon the termination of the employment of the employee. However, the amount of this liability is determined based upon the circumstances of the termination of employment. The Company does not have a contractual obligation to fund the purchase of the mandatorily redeemable stock; however, the Company could be required to provide a distribution to NPC Holdings to fund the repurchase in the event of an employees termination of employment from the Company.
Note 8 Derivative Financial Instruments
In January 2012, the Company entered into an interest rate cap agreement for an aggregate notional amount of $150.0 million in order to hedge the variability of cash flows related to a portion of the Companys floating rate indebtedness. The cap agreement hedges a portion of contractual floating rate interest commitments through the expiration of the agreement in January 2016. Pursuant to the agreement, the Company has capped LIBOR at 2.5% with respect to the aggregate notional amount of $150.0 million. In the event LIBOR exceeds 2.5% the Company will pay interest at the capped rate. In the event LIBOR is less than 2.5%, the Company will pay interest at the prevailing LIBOR rate. The Company paid $0.6 million to effectuate this cash flow hedge which is being amortized over the life of the agreement as interest expense.
During the third quarter of 2012, there was no ineffectiveness related to the cash flow hedge.
Note 9 Stock-based Compensation
In connection with the Acquisition, the Purchaser established a new stock option plan (the 2011 Stock Option Plan or Plan) which governs, among other things, the grant of options with respect to the common stock of the Purchaser. The purposes of this Plan are to: (i) attract and retain highly qualified employees for the Company; (ii) motivate the participants to exercise their best efforts on behalf of the Company and the Purchaser; (iii) allow participants in the Plan to participate in equity value creation; and (iv) align the incentives between the participants and the Purchaser as well as the Company.
15
The following table summarized stock option activity under the Plan during the 39 weeks ended September 25, 2012:
Number of Options |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (in years) |
||||||||||
Outstanding at December 27, 2011 |
| $ | | |||||||||
Granted |
245,914 | 130 | ||||||||||
Exercised |
| | ||||||||||
Forfeited or expired |
| | ||||||||||
|
|
|
|
|||||||||
Outstanding at September 25, 2012 |
245,914 | $ | 130 | 9.3 | ||||||||
|
|
|
|
|
|
|||||||
Exercisable at September 25, 2012 |
| $ | | |
Under the Purchasers 2011 Stock Option Plan, options may be granted with respect to a maximum of 261,469 shares of common stock of the Purchaser (which represents 10% of the outstanding shares of common stock of the Purchaser as of the date of the acquisition on a fully diluted basis), subject to adjustment under certain circumstances. Each grant of options under the 2011 Stock Option Plan will specify the applicable option exercise period, option exercise price, vesting conditions and such other terms and conditions as deemed appropriate by the Board of Directors of the Purchaser. Currently 80% of the options granted under the 2011 Stock Option Plan will vest ratably over four years subject to the achievement of certain performance targets (Series 1). Currently 20% of the options issued under the 2011 Stock Option Plan will vest only upon a change of control of the Company (Series 2). In each case, vesting will be subject to the option holders continued employment through the vesting date. All options granted under the Plan will expire ten years from the date of grant, subject to earlier expiration in the event the option holder ceases to be employed. At September 25, 2012, there were 15,555 shares of common stock available for future grant under the Plan.
Under their respective employment agreements, the following options have been granted to certain members of management:
As
of September 25, 2012 |
||||
Series 1 Options |
196,731 | |||
Series 2 Options |
49,183 | |||
|
|
|||
Total options granted |
245,914 | |||
|
|
|||
Total options exercisable |
|
The exercise price of the Series 1 and Series 2 options was established based on the per share price of the common stock investment in the Purchaser at the time of closing of the Transactions, or $100.00 per share. For the Series 1 options, the exercise price accretes at a rate equal to 9% per annum, compounded annually. The exercise price of the Series 2 options was established as $250.00 per share. The exercise price of options granted following the Transactions will be determined at the discretion of the Compensation Committee of the Purchaser. The exercise price for all options granted was equal to or greater than the fair market value of the shares subject to the option on the date of grant.
Option grants will be made at the discretion and through approval of the Board of Directors of the Purchaser to ensure that compensation to the Companys executive officers remains competitive and in-line with its peer companies.
The Company considers these options to be liability awards. The compensation cost for the portion of awards that are outstanding for which the requisite service has not been rendered, or the performance condition has not been achieved, will be recognized as the requisite service is rendered (subject to the occurrence of a triggering event becoming probable as described below) and/or performance condition achieved. Further, under the award agreements under the 2011 Stock Option Plan, any portion of an option that was vested on the date of the termination of the option holders employment or engagement with the Company for any reason is forfeited without payment of any kind 30 days after the date of such separation; provided that in the event the separation is a result of a termination by the Company for cause or the resignation of the option holder (other than for good reason in certain situations), any portion of the option that was vested shall also expire and be forfeited without payment of any kind on the separation date. Under the Stockholders Agreement among the stockholders of Purchaser, upon the termination of an employee stockholders employment or engagement with the Company for any reason, the Purchaser is required to purchase and the employee is required to sell all of the shares held at a price per share equal to the greater of (i) the original cost of such repurchased shares or (ii) the fair market value of such repurchased shares; provided that, if the separation is the result of a termination by the Company with cause or the resignation of the
16
employee stockholder (other than for good reason in certain situations), then the purchase price for such repurchase shares equals the lesser of (i) the original cost or (ii) fair market value. The Company does not have a contractual obligation to fund the repurchase of these shares; however, the Company may be called upon to provide a distribution to the Purchaser upon such time a triggering event should occur that would require a repurchase of outstanding shares.
As of September 25, 2012, no options had been exercised by management. Based on the provisions of the 2011 Stock Option Plan and the award agreements thereunder, all options granted have clearly defined and limited scenarios in which the option has value to the option holder. Specifically, the Purchaser is not publicly traded so there is no market for shares acquired upon exercise of options. In addition, the Stockholders Agreement prohibits the transfer of shares to third parties without consent which may be withheld in the sole discretion of the Purchaser and its majority owners. Further, there are no provisions in place under which an employee may sell the shares back to the Company absent the occurrence of a triggering event (termination of employment or a Purchaser sale transaction). Therefore, the holder of options or shares acquired upon exercise of such options can generally only cash-out the options and/or sell the underlying shares upon occurrence of such an event, and upon the occurrence of such an event the options granted have the potential to yield value to each option holder only if the holders employment is terminated by the Company without cause or by the holder with good reason in certain situations (Good Leaver Scenario) or upon a Purchaser sale transaction. Additionally, due to the fact that an option holder would have no value for termination of employment for any other reason, and currently the Good Leaver scenario and Purchaser sale transaction are not deemed probable, the Company has concluded a 100% forfeiture rate is appropriate as there is no assurance that these options will achieve any value under these conditions prior to forfeiture or expiration. As no triggering events have been deemed probable as of September 25, 2012, the Company has recorded no compensation expense for options granted during 2012.
Note 10 Transactions with Sponsor
Olympus Advisory Agreement. In connection with the Transactions, the Company entered into a management advisory agreement with the Sponsor pursuant to which the Sponsor received on the closing date a transaction fee of $7.6 million in cash in connection with the Transactions which was recorded as a reduction of the $235.3 million of proceeds received from the issuance of common shares in the successor period. Under the agreement Olympus or its affiliates will continue to provide financial, investment banking, management advisory and other services on the Companys behalf for an annual fee of $1.0 million, paid in quarterly installments in arrears on the last day of each calendar quarter. The Company accrues the fee ratably to general and administrative expense. The Sponsor will also receive reimbursement for out-of-pocket expenses incurred in connection with services provided pursuant to the agreement.
Note 11 Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity and requires reporting of all non-owner changes in stockholders equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the reclassification requirement within the new standard was indefinitely deferred. ASU 2011-05 was effective for the Company in its first quarter of fiscal 2012 and applied retrospectively. All necessary disclosures have been complied with in this Form 10-Q and the provisions of ASU 2011-05 did not have an effect on the financial position, results of operations or cash flows of the Company.
In September 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other (Topic 350), Testing Goodwill for Impairment (ASU 2011-08), which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting units fair value is less than its carrying value before applying the two-step quantitative goodwill impairment test that is currently in place. If it is determined through the qualitative assessment that a reporting units fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. This update was effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. All necessary disclosures have been complied with in this Form 10-Q and the provisions of ASU 2011-08 did not have an effect on the financial position, results of operations or cash flows of the Company.
In December 2011, the FASB issued guidance enhancing disclosures related to offsetting of certain assets and liabilities. This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. We do not expect the adoption will have a significant impact on our condensed consolidated financial statements.
17
Note 12 Condensed Consolidating Financial Statements
NPCs obligations under the Senior Notes and Senior Secured Credit Facilities are fully guaranteed by Holdings. As of the date hereof, Holdings only material asset is 100% of the stock of NPC. The remaining co-issuers with NPC, NPC Operating Company A, Inc. (NPC Op Co A) and NPC Operating Company B, Inc. (NPC Op Co B) do not have any assets, operations or cash flows and are 100% owned by NPC. The subsidiary guarantees are joint and several, full and unconditional. The following summarizes the Companys condensed consolidating information as of September 25, 2012 and December 27, 2011, and for each of the 13-week and 39-week periods ended September 25, 2012 and September 27, 2011 (in thousands):
Condensed Consolidating Statements of Income
Successor | ||||||||||||||||||||||||
13 Weeks Ended September 25, 2012 | ||||||||||||||||||||||||
Parent | Subsidiary | Subsidiary | Subsidiary | |||||||||||||||||||||
Guarantor: Holdings |
Issuer: NPC | Co-Issuer: NPC Op Co A |
Co-Issuer: NPC Op Co B |
Eliminations | Consolidated | |||||||||||||||||||
Total sales |
$ | | $ | 256,233 | $ | | $ | | $ | | $ | 256,233 | ||||||||||||
Total costs and expenses |
| 243,565 | | | | 243,565 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
| 12,668 | | | | 12,668 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Interest expense |
| 11,416 | | | | 11,416 | ||||||||||||||||||
Equity in net income of subsidiary |
2,378 | | | | (2,378 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income taxes |
2,378 | 1,252 | | | (2,378 | ) | 1,252 | |||||||||||||||||
Income tax benefit |
| (1,126 | ) | | | | (1,126 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
$ | 2,378 | $ | 2,378 | $ | | $ | | $ | (2,378 | ) | $ | 2,378 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | ||||||||||||||||||||||||
13 Weeks Ended September 27, 2011 | ||||||||||||||||||||||||
Parent | Subsidiary | Subsidiary | Subsidiary | |||||||||||||||||||||
Guarantor: Holdings |
Issuer: NPC | Co-Issuer: NPC Op Co A |
Co-Issuer: NPC Op Co B |
Eliminations | Consolidated | |||||||||||||||||||
Total sales |
$ | | $ | 237,851 | $ | | $ | | $ | | $ | 237,851 | ||||||||||||
Total costs and expenses |
| 228,731 | | | | 228,731 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
| 9,120 | | | | 9,120 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Interest expense |
| 6,131 | | | | 6,131 | ||||||||||||||||||
Equity in net income of subsidiary |
3,469 | | | | (3,469 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income taxes |
3,469 | 2,989 | | | (3,469 | ) | 2,989 | |||||||||||||||||
Income tax benefit |
| (480 | ) | | | | (480 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
$ | 3,469 | 3,469 | $ | | $ | | $ | (3,469 | ) | 3,469 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
18
Successor | ||||||||||||||||||||||||
39 Weeks Ended September 25, 2012 | ||||||||||||||||||||||||
Parent | Subsidiary | Subsidiary | Subsidiary | |||||||||||||||||||||
Guarantor: Holdings |
Issuer: NPC | Co-Issuer: NPC Op Co A |
Co-Issuer: NPC Op Co B |
Eliminations | Consolidated | |||||||||||||||||||
Total sales |
$ | | $ | 790,208 | $ | | $ | | $ | | $ | 790,208 | ||||||||||||
Total costs and expenses |
| 731,942 | | | | 731,942 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
| 58,266 | | | | 58,266 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Interest expense |
| 35,797 | | | | 35,797 | ||||||||||||||||||
Loss on debt extinguishment |
| 5,144 | | 5,144 | ||||||||||||||||||||
Equity in net income of subsidiary |
14,372 | | | | (14,372 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income taxes |
14,372 | 17,325 | | | (14,372 | ) | 17,325 | |||||||||||||||||
Income tax expense |
| 2,953 | | | | 2,953 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
$ | 14,372 | $ | 14,372 | $ | | $ | | $ | (14,372 | ) | $ | 14,372 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | ||||||||||||||||||||||||
39 Weeks Ended September 27, 2011 | ||||||||||||||||||||||||
Parent | Subsidiary | Subsidiary | Subsidiary | |||||||||||||||||||||
Guarantor: Holdings |
Issuer: NPC | Co-Issuer: NPC Op Co A |
Co-Issuer: NPC Op Co B |
Eliminations | Consolidated | |||||||||||||||||||
Total sales |
$ | | $ | 727,602 | $ | | $ | | $ | | $ | 727,602 | ||||||||||||
Total costs and expenses |
| 685,564 | | | | 685,564 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
| 42,038 | | | | 42,038 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Interest expense |
| 19,075 | | | | 19,075 | ||||||||||||||||||
Equity in net income of subsidiary |
18,125 | | | | (18,125 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income taxes |
18,125 | 22,963 | | | (18,125 | ) | 22,963 | |||||||||||||||||
Income tax expense |
| 4,838 | | | | 4,838 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
18,125 | 18,125 | $ | | $ | | (18,125 | ) | 18,125 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
19
Condensed Consolidating Balance Sheet
Successor | ||||||||||||||||||||||||
September 25, 2012 | ||||||||||||||||||||||||
Parent | Subsidiary | Subsidiary | Subsidiary | |||||||||||||||||||||
Guarantor: Holdings |
Issuer: NPC | Co-Issuer: NPC Op Co A |
Co-Issuer: NPC Op Co B |
Eliminations | Consolidated | |||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Current assets |
$ | | $ | 59,162 | $ | | $ | | $ | | $ | 59,162 | ||||||||||||
Facilities and equipment, net |
| 142,672 | | | | 142,672 | ||||||||||||||||||
Franchise rights, net |
| 626,371 | | | | 626,371 | ||||||||||||||||||
Goodwill |
| 290,508 | | | | 290,508 | ||||||||||||||||||
Investment in subsidiary |
234,625 | | | | (234,625 | ) | | |||||||||||||||||
Other assets, net |
| 49,761 | | | | 49,761 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 234,625 | $ | 1,168,474 | $ | | $ | | $ | (234,625 | ) | $ | 1,168,474 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Liabilities and members equity: |
||||||||||||||||||||||||
Current liabilities, excluding debt |
$ | | $ | 96,802 | $ | | $ | | $ | | $ | 96,802 | ||||||||||||
Current portion of long-term debt |
| 3,750 | | | | 3,750 | ||||||||||||||||||
Long-term debt |
| 560,313 | | | | 560,313 | ||||||||||||||||||
Other liabilities and deferred items |
| 65,706 | | | | 65,706 | ||||||||||||||||||
Deferred income taxes |
| 207,278 | | | | 207,278 | ||||||||||||||||||
Members equity |
234,625 | 234,625 | | | (234,625 | ) | 234,625 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and members equity |
$ | 234,625 | $ | 1,168,474 | $ | | $ | | $ | (234,625 | ) | $ | 1,168,474 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | ||||||||||||||||||||||||
December 27, 2011 | ||||||||||||||||||||||||
Parent | Subsidiary | Subsidiary | Subsidiary | |||||||||||||||||||||
Guarantor: Holdings |
Issuer: NPC | Co-Issuer: NPC Op Co A |
Co-Issuer: NPC Op Co B |
Eliminations | Consolidated | |||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Current assets |
$ | | $ | 113,499 | $ | | $ | | $ | | $ | 113,499 | ||||||||||||
Facilities and equipment, net |
| 131,744 | | | | 131,744 | ||||||||||||||||||
Franchise rights, net |
| 390,110 | | | | 390,110 | ||||||||||||||||||
Goodwill |
| 191,701 | | | | 191,701 | ||||||||||||||||||
Investment in subsidiary |
201,460 | | | | (201,460 | ) | | |||||||||||||||||
Other assets, net |
| 21,674 | | | | 21,674 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 201,460 | $ | 848,728 | $ | | $ | | $ | (201,460 | ) | $ | 848,728 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Liabilities and members equity: |
||||||||||||||||||||||||
Current liabilities, excluding debt |
$ | | $ | 102,852 | $ | | $ | | $ | | $ | 102,852 | ||||||||||||
Current portion of long-term debt |
| 13,540 | | | | 13,540 | ||||||||||||||||||
Long-term debt |
| 359,160 | | | | 359,160 | ||||||||||||||||||
Other liabilities and deferred items |
| 47,982 | | | | 47,982 | ||||||||||||||||||
Members equity subject to redemption |
3,250 | | | | | 3,250 | ||||||||||||||||||
Deferred income taxes |
| 123,734 | | | | 123,734 | ||||||||||||||||||
Members equity |
198,210 | 201,460 | | | (201,460 | ) | 198,210 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and members equity |
$ | 201,460 | $ | 848,728 | $ | | $ | | $ | (201,460 | ) | $ | 848,728 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
20
Condensed Consolidating Statements of Cash Flows
Successor | ||||||||||||||||||||||||
39 Weeks Ended September 25, 2012 | ||||||||||||||||||||||||
Parent | Subsidiary | Subsidiary | Subsidiary | |||||||||||||||||||||
Guarantor: Holdings |
Issuer: NPC | Co-Issuer: NPC Op Co A |
Co-Issuer: NPC Op Co B |
Eliminations | Consolidated | |||||||||||||||||||
Operating activities: |
||||||||||||||||||||||||
Net cash flows provided by operating activities |
$ | | $ | 56,834 | $ | | $ | | $ | | $ | 56,834 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Investing activities: |
||||||||||||||||||||||||
Capital expenditures |
| (28,504 | ) | | | | (28,504 | ) | ||||||||||||||||
Purchase of the stock of the Company |
(216,635 | ) | (431,540 | ) | | | 216,635 | (431,540 | ) | |||||||||||||||
Purchase of business assets, net of cash acquired |
| (19,371 | ) | | | | (19,371 | ) | ||||||||||||||||
Proceeds from sale or disposition of assets |
| 189 | | | | 189 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash flows used in investing activities |
(216,635 | ) | (479,226 | ) | | | 216,635 | (479,226 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Financing activities: |
||||||||||||||||||||||||
Retirement of predecessor entity debt and other obligations |
| (372,700 | ) | | | | (372,700 | ) | ||||||||||||||||
Proceeds from equity contributions, net |
216,635 | 216,635 | | | (216,635 | ) | 216,635 | |||||||||||||||||
Issuance of debt |
| 565,000 | | | | 565,000 | ||||||||||||||||||
Payments on term bank facilities |
| (937 | ) | (937 | ) | |||||||||||||||||||
Debt issue costs |
| (32,012 | ) | | | | (32,012 | ) | ||||||||||||||||
Proceeds from sale-leaseback transactions |
| 1,006 | 1,006 | |||||||||||||||||||||
Interest rate derivative |
| (636 | ) | | | | (636 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by financing activities |
216,635 | 376,356 | | | (216,635 | ) | 376,356 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net change in cash and cash equivalents |
| (46,036 | ) | | | | (46,036 | ) | ||||||||||||||||
Beginning cash and cash equivalents |
| 78,394 | | | | 78,394 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending cash and cash equivalents |
$ | | $ | 32,358 | $ | | $ | | $ | | $ | 32,358 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
21
Predecessor | ||||||||||||||||||||||||
39 Weeks Ended September 27, 2011 | ||||||||||||||||||||||||
Parent | Subsidiary | Subsidiary | Subsidiary | |||||||||||||||||||||
Guarantor: Holdings |
Issuer: NPC | Co-Issuer: NPC Op Co A |
Co-Issuer: NPC Op Co B |
Eliminations | Consolidated | |||||||||||||||||||
Operating activities: |
||||||||||||||||||||||||
Net cash flows provided by operating activities |
$ | | $ | 68,429 | $ | | $ | | $ | | $ | 68,429 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Investing activities: |
||||||||||||||||||||||||
Capital expenditures |
| (17,763 | ) | | | | (17,763 | ) | ||||||||||||||||
Proceeds from sale or disposition of assets |
| 647 | | | | 647 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash flows used in investing activities |
| (17,116 | ) | | | | (17,116 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Financing activities: |
||||||||||||||||||||||||
Payments on term bank facilities |
| (29,670 | ) | | | | (29,670 | ) | ||||||||||||||||
Proceeds from sale-leaseback transactions |
| 486 | | | | 486 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash flows used in financing activities |
| (29,184 | ) | | | | (29,184 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net change in cash and cash equivalents |
| 22,129 | | | | 22,129 | ||||||||||||||||||
Beginning cash and cash equivalents |
| 44,159 | | | | 44,159 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending cash and cash equivalents |
$ | | $ | 66,288 | $ | | $ | | $ | | $ | 66,288 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
22
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
As used in this report, NPC Restaurant Holdings, LLC (f/k/a NPC Acquisition Holdings, LLC) is referred to herein as Holdings. Holdings and its subsidiaries are referred to as the Company, we us, and our. Holdings wholly-owned subsidiary, NPC International, Inc. is referred to as NPC.
Cautionary Statement Regarding Forward Looking Information
This report includes forward-looking statements regarding, among other things, our plans, strategies, and prospects, both business and financial. All statements contained in this document other than historical information are forward-looking statements. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and may contain words and phrases such as may, expect, should, anticipate, intend, or similar expressions. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, there can be no assurance we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Important factors that could cause actual results to differ materially from our forward-looking statements, expectations and historical trends include, but are not limited to, the following:
| competitive conditions; |
| general economic and market conditions; |
| effectiveness of franchisor advertising programs and the overall success of the franchisor; |
| the ability of the Pizza Hut systems cost savings initiative (described below) to reduce our cost of sales; |
| increases in commodity, labor, fuel and other costs; |
| effectiveness of the hedging program for cheese prices directed by the Unified Foodservice Purchasing Co-op (UFPC); |
| significant disruptions in service or supply by any of our suppliers or distributors; |
| changes in consumer tastes, geographic concentration and demographic patterns; |
| consumer concerns about health and nutrition; |
| our ability to manage our growth and successfully implement our business strategy; |
| the effect of disruptions to our computer and information systems; |
| the effect of local conditions, events and natural disasters; |
| general risks associated with the restaurant industry; |
| the outcome of pending or yet-to-be instituted legal proceedings; |
| regulatory factors, including changing laws related to healthcare coverage and menu labeling, which may adversely affect our business operations; |
| the loss of our executive officers and certain key personnel; |
| our ability to service our substantial indebtedness, including the substantial increase in our indebtedness relating to the Transactions (as described in Notes 2 and 4 of the unaudited Condensed Consolidated Financial Statements); |
| restrictions contained in our debt agreements, including those related to the Transactions; |
| availability, terms and deployment of capital; |
| our ability to obtain debt or equity financing on reasonable terms or at costs similar to that of our current credit facility; and |
| various other factors beyond our control. |
Any forward-looking statements made in this report speak only as of the date of this report. Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs. We do not intend, and do not undertake, any obligation to update any forward looking statements to reflect future events or circumstances after the date of such statements. For a more detailed discussion of the principal factors that could cause actual results to be materially different, you should read our risk factors in our Post-Effective Amendment No. 1 to Form S-4 Registration
23
Statement (File No. 333-180524) filed with the Securities and Exchange Commission (SEC) on May 7, 2012 as well as our unaudited condensed consolidated financial statements, related notes, and other financial information appearing elsewhere in this report and our other filings with the SEC.
Overview
Who We Are. We are the largest Pizza Hut franchisee and the largest franchisee of any restaurant concept in the United States according to the 2012 Top 200 Restaurant Franchisees by Franchise Times. We are also the eighth largest restaurant unit operator in the U.S. according to the 2012 Chain Restaurant Industry Review by GE Capital Franchise Finance. NPC was founded in 1962 and, as of September 25, 2012 we operated 1,211 Pizza Hut units in 28 states with significant presence in the Midwest, South and Southeast. As of the third quarter of 2012, our operations represented approximately 20% of the domestic Pizza Hut restaurant system and 21% of the domestic Pizza Hut franchised restaurant system as measured by number of units, excluding licensed units which operate with a limited menu and no delivery in certain of our markets.
Our Fiscal Year. We operate on a 52- or 53-week fiscal year ending on the last Tuesday in December. Fiscal years 2012 and 2011 each contain 52 weeks.
The Transactions. On November 6, 2011, NPC International Holdings, Inc. (Purchaser), an entity formed by an investment group consisting of entities affiliated with Olympus Growth Fund V, L.P. and OGP V, LLC, its general partner (Olympus or the Sponsor), entered into a Purchase and Sale Agreement (the Purchase Agreement), pursuant to which the Purchaser acquired all of the outstanding membership interests of the Company (the Acquisition). The closing of the Acquisition occurred on December 28, 2011.
In connection with the Acquisition, the Purchaser repaid or caused to be repaid, on behalf of NPC, all of the outstanding borrowings of NPC under its then-existing senior secured credit facilities (Old Senior Secured Credit Facilities). In addition, NPC completed, at the Purchasers request pursuant to the Purchase Agreement, a cash tender offer (the Tender Offer) for NPCs then-outstanding 9 1/2% Senior Subordinated Notes due 2014 (the Old Senior Subordinated Notes) and redeemed the remaining Old Senior Subordinated Notes not tendered in the Tender Offer.
To consummate the Acquisition, NPC and its subsidiaries entered into, and Holdings guaranteed new debt financing consisting of (i) a $375.0 million term loan (the Term Loan), (ii) a five-year senior secured revolving credit facility that provides for aggregate borrowings of up to $100.0 million (the Revolving Facility and together with the Term Loan, the Senior Secured Credit Facilities) and (iii) $190.0 million of Senior Notes (the Senior Notes) (collectively, all of the transactions described in this paragraph, the Financing Transactions).
New Basis of Accounting. As a result of the Transactions (as described in Note 2 of the unaudited Condensed Consolidated Financial Statements), purchase accounting adjustments were made to underlying assets and liabilities based on a third party valuation. The purchase accounting adjustments did not impact net cash flow. The primary changes to the income statement as a result of the application of purchase accounting includes an increase in the amortization and depreciation expense associated with the adjustments to franchise rights and facilities and equipment based upon the estimates of fair value and managements estimate of the remaining useful lives of the subject assets. The Transactions resulted in higher debt levels and higher interest rates which resulted in higher interest accruals and increased capitalized debt issue costs which resulted in higher interest expense during the post-transaction period.
Due to the impact of the changes resulting from the purchase accounting adjustments described above, the income statement and statement of cash flows presentation separates the operating results of the Company into two accounting periods; (1) the period prior to December 27, 2011, the day preceding consummation of the Transactions (predecessor), and (2) the period beginning December 28, 2011 and after utilizing the new basis of accounting (successor). The results are further separated by a heavy black line to indicate the effective date of the new basis of accounting. Items discussed below were not impacted by purchase accounting unless otherwise noted.
Our Sales
Net Product Sales. Net product sales are comprised of sales of food and beverages from our restaurants, net of discounts. For the 39 weeks ended September 25, 2012, pizza sales accounted for approximately 78% of net product sales. Various factors influence sales at a given unit, including customer recognition of the Pizza Hut brand, our level of service and operational effectiveness, pricing, marketing and promotional efforts and local competition. Several factors affect our sales in any period, including the number of units in operation, comparable store sales and seasonality. Comparable store sales refer to period-over-period net product sales comparisons for units under our operation for at least 12 months.
24
Fees and Other Income. Fees and other income are comprised primarily of delivery fees charged to customers, vending receipts and other fee income and are not included in our comparable store sales metric.
Seasonality. Our business is seasonal in nature with net product sales typically being higher in the first half of the fiscal year. Sales are largely driven by product innovation, advertising and promotional activities and can be adversely impacted by holidays and economic times that generally negatively impact consumer discretionary spending, such as the back to school season. As a result of these seasonal fluctuations, our operating results may vary substantially between fiscal quarters. Further, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Restaurant formats. We operate our Pizza Hut restaurants through three different formats to cater to the needs of our customers in each respective market. Delivery units, or Delcos, are typically located in strip centers and provide delivery and carryout, with a greater proportion being located in more densely populated areas. Red Roof units, or RRs, are traditional free-standing, dine-in restaurants which offer on-location dining room service as well as carryout service. Restaurant-Based Delivery units, or RBDs, conduct delivery, dine-in, and carryout operations from the same free-standing location. Approximately 49% of our units include the WingStreet product line at September 25, 2012. The WingStreet menu includes bone-in and bone-out fried chicken wings which are tossed in one of eight sauces and appetizers which are available for dine-in, carryout and delivery.
The following table sets forth certain information with respect to each year-to-date fiscal period:
39 Weeks Ended | ||||||||
Sept. 25, 2012 | Sept. 27, 2011 | |||||||
Sales by occasion: |
||||||||
Delivery |
37 | % | 37 | % | ||||
Carryout |
48 | % | 45 | % | ||||
Dine-in |
15 | % | 18 | % | ||||
Number of restaurants open at the end of the period: |
||||||||
Delco |
503 | 445 | ||||||
RR |
179 | 180 | ||||||
RBD |
529 | 528 | ||||||
|
|
|
|
|||||
1,211 | (1) | 1,153 | (1) |
(1) | Includes 593 units and 531 units offering the WingStreet product line, at September 25, 2012 and September 27, 2011, respectively. |
Our Costs
Our operating costs and expenses are comprised of cost of sales, direct labor, other restaurant expenses and general and administrative expenses. Our cost structure is highly variable with approximately 70% of operating costs variable to sales and volume of transactions.
Cost of sales. Cost of sales includes the cost of food and beverage products sold, less rebates from suppliers, as well as paper and packaging, and is primarily influenced by fluctuations in commodity prices. Historically, our cost of sales has primarily been comprised of the following: cheese: 30-35%; dough: 16-20%; meat: 16-20%; and packaging: 8-10%. These costs can fluctuate from year-to-year given the commodity nature of the cost category and promotional activity, but are constant across regions. We are a member of the UFPC, a cooperative set up to act as a central procurement service for the operators of Yum! Brands, Inc. restaurants, and participate in various cheese hedging and procurement programs that are directed by the UFPC for cheese, meat and certain other commodities to help reduce the price volatility of those commodities from period-to-period. Based on information provided by the UFPC, the UFPC expects to hedge approximately 30% to 50% of the Pizza Hut systems anticipated cheese purchases through a combination of derivatives taken under the direction of the UFPC.
Direct Labor. Direct labor includes the salary, payroll taxes, fringe benefit costs and workers compensation expense associated with restaurant based personnel. Direct labor is highly dependent on federal and state minimum wage rate legislation given that the vast majority of our workers are hourly employees. To control labor costs, we are focused on proper scheduling and adequate training of our store employees, as well as retention of existing employees.
25
Other restaurant operating expenses. Other restaurant operating expenses include all other costs directly associated with operating a restaurant facility, which primarily represents royalties, advertising, rent and depreciation (facilities and equipment), utilities, delivery expenses, supplies, repairs, insurance, and other restaurant-related costs.
Included within other restaurant operating expenses are royalties paid to Pizza Hut, Inc. (PHI). Beginning in fiscal 2012, Pizza Hut has offered development incentives totaling $80,000 per new unit developed in fiscal 2012 (the Development Incentive), subject to certain threshold criteria, which was partially recorded as a reduction to royalty fees. The program has been extended to cover new units developed in 2013 as well. Incentive rebates earned under the program for fiscal 2012 development will largely be received in 2013. Currently, we expect to develop 40 Delco units during each of the fiscal years 2012 and 2013. Our blended average royalty rate (excluding development incentives) for the year-to-date periods of 2012 and 2011 was 4.8% of total sales.
General and administrative expenses. General and administrative expenses include field supervision and personnel costs and the corporate and administrative functions that support our restaurants, including employee wages and benefits, travel, information systems, recruiting and training costs, credit card transaction fees, professional fees, supplies and insurance.
Trends and Uncertainties Affecting Our Business
We believe that as a franchisee of such a large number of Pizza Hut restaurants, our financial success is driven less by variable factors that affect regional restaurants and their markets, and more by trends affecting the food purchase industry specifically the Quick Service Restaurants or QSR industry. The following discussion describes certain key factors that may affect our future performance.
General Economic Conditions and Consumer Spending
Higher gas prices, continued high unemployment rates, lower home values and sales, the negative impact of changes in the credit markets, and low consumer confidence as a result of the changes within the economic environment have caused the consumer to experience a real and perceived reduction in disposable income which has negatively impacted consumer spending in most segments of the restaurant industry over the last several years, including the segment in which we compete. Specifically, we believe pressures on low and lower-middle income customers continue to be significant, and we believe that these customers are particularly interested in receiving value at a reasonable price in the current environment.
Competition
The restaurant business is highly competitive. The QSR industry is a fragmented market, with competition from national and regional chains, as well as independent operators, which affects pricing strategies and margins. Additionally, the frozen pizza and take-and-bake alternatives are becoming an increasingly intrusive competitive threat in the pizza segment. Limited product variability within our segment can make differentiation among competitors difficult. Thus, companies in the industry continuously promote and market new product introductions, price discounts and bundled deals, and rely heavily on effective marketing and advertising to drive sales.
Commodity Prices
Commodity prices of packaging products (liner board) and ingredients such as cheese, dough (wheat), and meat, can vary. The prices of these commodities can fluctuate throughout the year due to changes in supply and demand. Our costs can also fluctuate as a result of changes in ingredients or packaging instituted by PHI. The block cheese price for the third quarter of fiscal 2012 averaged $1.78 per pound, a decrease of $0.20 or 10% versus the average price for the third quarter of fiscal year 2011.
The Pizza Hut system has undertaken a significant cost savings initiative with the assistance of a third party consultant focused upon reducing the brands ingredient and operating costs (the Margin Management Initiative). This initiative is expected to reduce costs through a combination of sourcing and ingredient specification changes without negatively impacting the quality of our ingredients or the abundance of our toppings. Through the end of fiscal 2011 the initial stages of this initiative secured over $5.0 million in annual savings primarily through changes in the brands packaging platform which benefited our cost of sales beginning in the second half of fiscal 2011. During the year-to-date period of 2012, we have implemented an additional $16.0 million to $18.0 million in annual savings which partially benefited 2012 year-to-date cost of sales and will benefit future quarters to a greater extent. Additional program savings from this initiative are currently expected to be realized over the next 9 to 15 months and could further benefit our cost of sales.
26
Based upon current market conditions, we currently expect overall commodity inflation for fiscal 2013 to be between 5% and 7% without giving effect to the UFPC directed hedging programs and before our cost saving initiatives, which we currently anticipate could offset a significant portion of the increase.
Labor Cost
The restaurant industry is labor intensive and known for having a high level of employee turnover given low hourly wages and the part-time composition of the workforce. To the extent that our delivery sales mix increases due to acquisition of units or customer preference, our labor costs would be expected to increase due to the more labor intensive nature of the delivery transaction. Direct labor is highly dependent on federal and state minimum wage rate legislation given the vast majority of workers are hourly employees whose compensation is either determined or influenced by the minimum wage rate. Recently, there has been legislation passed to increase certain states minimum wage rates effective for 2012. We currently expect the increases in state minimum wage rates to increase direct labor expense by approximately $1.2 million in fiscal 2012. We implemented certain labor optimization strategies and a change in pay practices for certain team members that benefited fiscal 2011 cost of labor by approximately $6.0 million and is currently expected to benefit fiscal 2012 cost of labor by approximately $1.0 to $2.0 million. Total savings for these initiatives are currently expected to increase over the next 9 to 15 months due to the normal course attrition of certain employees.
The federal government and several state governments have proposed or enacted legislation regarding health care, including legislation that in some cases requires employers to either provide health care coverage to their full-time employees, pay a penalty or pay into a fund that would provide coverage for them. We are currently evaluating the effects on our business of the Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010, and the related Health Care and Education Reconciliation Act of 2010, which was signed into law on March 30, 2010 (collectively, the Federal Health Care Acts). The provisions of the Federal Health Care Acts having the greatest potential financial impact on us are scheduled to become effective in 2014. Based upon our current evaluation, without taking mitigating steps we expect that the Federal Health Care Acts will likely increase our future costs and could have a material adverse effect on our business, results of operations and financial condition, but we are currently unable to quantify the amount of the impact with any degree of certainty.
Additionally, potential changes in federal labor laws and regulations relating to union organizing rights and activities could result in portions of our workforce being subjected to greater organized labor influence, thereby potentially increasing our labor costs, and could have a material adverse effect on our business, results of operations and financial condition.
Inflation and Deflation
Inflationary factors, such as increases in food and labor costs, directly affect our operations. Because most of our employees are paid on an hourly basis, changes in rates related to federal and state minimum wage and tip credit laws will affect our labor costs.
Significant increases in average gasoline prices in the regions in which we operate could increase our delivery driver reimbursement costs. We estimate that every $0.29 per gallon change in average gas prices in our markets impacts our annual operating results by approximately $0.8 million. However, as gas prices increase, the impact upon our operations is somewhat mitigated by a transfer of sales from the delivery occasion to the carryout access mode, which is perceived as a higher value by consumers and benefits us with lower labor costs for the carryout transaction.
If the economy experiences deflation, which is a persistent decline in the general price level of goods and services, we may suffer a decline in revenues as a result of the falling prices. In that event, given our fixed costs and minimum wage requirements, it is unlikely that we would be able to reduce our costs at the same pace as any declines in revenues. Consequently, a period of prolonged or significant deflation would likely have a material adverse effect on our business, results of operations and financial condition. Similarly, if we reduce the prices we charge for our products as a result of declines in comparable store sales or competitive pressures, we may suffer decreased revenues, margins, income and cash flow from operations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited Condensed Consolidated Financial Statements. The preparation of these financial statements requires estimation and judgment that affect the reported amounts of revenues, expenses, assets, and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ materially from actual results, the impact on the unaudited Condensed Consolidated
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Financial Statements may be material. Our critical accounting policies are available under Critical Accounting Policies and Estimates in Managements Discussion and Analysis of Financial Condition and Results of Operations in our Post-Effective Amendment No. 1 to Form S-4 Registration Statement (File No. 333-180524) filed with the SEC on May 7, 2012. There have been no significant changes with respect to these policies during the 39 weeks ended September 25, 2012.
Recently Issued Accounting Statements and Pronouncements
See Note 11 of the unaudited Condensed Consolidated Financial Statements for new accounting standards, including the expected dates of adoption and estimated effects on our unaudited Condensed Consolidated Financial Statements.
Results of Operations
The table below presents (i) comparable store sales indices and (ii) selected restaurant operating results as a percentage of net product sales for the 13-week and 39-week periods ended September 25, 2012 and September 27, 2011, respectively:
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||
Sept. 25, 2012 | Sept. 27, 2011 | Sept. 25, 2012 | Sept. 27, 2011 | |||||||||||||
Comparable store sales |
1.3 | % | 0.4 | % | 3.9 | % | (2.5 | %) | ||||||||
Net product sales |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Direct restaurant costs and expenses: |
||||||||||||||||
Cost of sales |
28.9 | % | 31.0 | % | 28.8 | % | 30.1 | % | ||||||||
Direct labor |
30.1 | % | 29.3 | % | 29.3 | % | 29.4 | % | ||||||||
Other restaurant operating expenses |
33.3 | % | 32.5 | % | 31.6 | % | 31.9 | % |
Activity with respect to unit count is set forth in the table below:
39 Weeks Ended | ||||||||
Sept. 25, 2012 | Sept. 27, 2011 | |||||||
Beginning of period |
1,151 | 1,136 | ||||||
Acquired |
36 | | ||||||
Developed(1) |
27 | 19 | ||||||
Closed(1) |
(3 | ) | (2 | ) | ||||
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|
|
|
|||||
End of period |
1,211 | 1,153 | ||||||
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|
|
|
|||||
Equivalent units(2) |
1,184 | 1,136 |
(1) | For the 39 weeks ended September 25, 2012 and September 27, 2011, one unit and two units, respectively, were relocated or rebuilt and are included in both the developed and closed totals above. |
(2) | Equivalent units represent the number of units open at the beginning of a given period, adjusted for units opened, closed, temporarily closed, acquired or sold during the period on a weighted average basis. |
We added the WingStreet product line to two units, developed 27 new units and acquired 34 units which included the product line during the 39 weeks ended September 25, 2012, for a total of 593 units or 49% offering the WingStreet product line at September 25, 2012.
13 Weeks Ended September 25, 2012 Compared to the 13 Weeks Ended September 27, 2011
Net Product Sales. Net product sales for the third quarter of 2012 were $243.5 million compared to $228.0 million for the third quarter of 2011, an increase of $15.5 million, or 6.8%, resulting primarily from (i) a comparable store sales increase of 1.3% rolling over last years third quarter comparable store sales increase of 0.4%, and (ii) a 5.3% increase in equivalent units for the third quarter as compared to the prior year.
Fees and Other Income. Fees and other income for the third quarter of 2012 as compared to the same period of 2011, were $12.7 million and $9.8 million, respectively, an increase of $2.9 million or 29.2%. The increase was due to higher customer delivery charge income largely due to increased delivery transactions, customer delivery charge increases and an increase in equivalent units.
Cost of Sales. Cost of sales for the third quarter of 2012 as compared to 2011, was $70.4 million and $70.7 million, respectively, a decrease of $0.3 million or 0.4%. Cost of sales decreased 2.1%, as a percentage of net product sales, to 28.9%,
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compared to 31.0% in the prior year. This decrease was largely due to lower ingredient and packaging costs associated with the Margin Management Initiative as well as lower commodity costs. These decreases more than offset the unfavorable impact to cost of sales as a result of pricing and product mix changes associated with the $10 Any Pizza promotion.
Direct Labor. Direct labor costs for the third quarter of 2012 as compared to 2011, were $73.2 million and $66.8 million, respectively, an increase of $6.4 million, or 9.6%. Direct labor costs were 30.1% of net product sales for the third quarter of 2012, a 0.8% increase compared to the prior year. This increase was primarily due to increased delivery transactions, which are more labor intensive, and to a lesser extent, a lower average selling price, as compared to the prior year.
Other Restaurant Operating Expenses. Other restaurant operating expenses for the third quarter of 2012 were $81.1 million compared to $74.1 million for the prior year, an increase of $7.0 million, or 9.4%. Other restaurant operating expenses were 33.3% of net product sales for the third quarter of 2012 compared to 32.5% of net product sales for the prior year, an increase of 0.8%.
The changes in the other restaurant operating expenses as a percentage of net product sales are explained as follows:
Other restaurant operating expenses as a percentage of net product sales for the 13 weeks ended September 27, 2011 |
32.5 | % | ||
Depreciation |
0.7 | |||
Delivery driver reimbursement expense |
0.7 | |||
Restaurant manager bonuses |
0.2 | |||
Leveraging of rent and occupancy costs |
(0.5 | ) | ||
Development Incentives |
(0.4 | ) | ||
Advertising |
(0.3 | ) | ||
Other |
0.4 | |||
|
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Other restaurant operating expenses as a percentage of net product sales for the 13 weeks ended September 25, 2012 |
33.3 | % | ||
|
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The unfavorable variance as a percentage of net product sales was largely due to higher depreciation expense as a result of purchase accounting adjustments, increased delivery driver reimbursement expense and higher restaurant manager bonuses partially offset by the leveraging of fixed and semi-fixed costs as a result of higher comparable store sales, primarily rent and occupancy costs, the benefit of the Development Incentives and lower advertising costs.
Depreciation expense for store operations was $10.0 million or 4.1% of net product sales for the third quarter of 2012 successor period compared to $7.8 million or 3.4% of net product sales for the prior year predecessor period largely due to higher depreciation resulting from higher carrying values of fixed assets due to the purchase accounting adjustments.
General and Administrative Expenses. General and administrative expenses for the third quarter of 2012 were $14.3 million compared to $13.1 million for the third quarter of 2011, an increase of $1.2 million or 9.3%. This increase was largely due to higher incentive compensation and salaries expense.
Corporate Depreciation and Amortization. Corporate depreciation and amortization costs were $4.5 million for the third quarter of 2012 and $3.1 million for the third quarter of 2011, respectively. The increase during 2012 is largely due to increased franchise rights and other intangibles amortization expense associated with the Transactions-related purchase accounting adjustments.
Other. During the third quarter of 2012, we recorded minimal other expense compared to $0.9 million of expense during the third quarter of 2011, consisting of $0.8 million for expenses incurred in connection with strategic alternatives considered by the Company, which ultimately led to the Transactions, and $0.1 million for casualty losses.
Interest Expense. Interest expense was $11.4 million for the third quarter of 2012 (successor period) compared to $6.1 million for the prior year (predecessor period), an increase of $5.3 million due to higher average debt levels and higher interest rates resulting from the Transactions and increased amortization of deferred debt issuance costs related to the Transactions. Our average outstanding debt balance increased $191.4 million to $564.1 million for the third quarter of 2012 as compared to the same period last year and our cash borrowing rate increased 1.4% to 7.3% for the third quarter of 2012 as compared to the prior year. Interest expense included $1.1 million and $0.6 million for amortization of deferred debt issuance costs in the third quarter of 2012 and 2011, respectively.
Income Taxes. For the third quarter of 2012, we recorded an income tax benefit of $1.1 million compared to $0.5 million for the third quarter of 2011. The third quarter 2012 income tax benefit included a favorable adjustment of $0.5 million related to the release of liabilities for uncertain tax positions. The lower than statutory rate for both periods was primarily attributable to various federal employment-related tax credits.
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Net Income. Net income for the third quarter of 2012 (successor period) was $2.4 million compared to $3.5 million for the prior year quarter (predecessor period), a decrease of $1.1 million. Operating income benefited from a 6.8% increase in net product sales and increased customer delivery income partially offset by increased direct labor costs, other restaurant operating expenses and general and administrative expenses. However, the increase in operating income was more than offset by higher interest expense as a result of the Transactions.
39 Weeks Ended September 25, 2012 Compared to 39 Weeks Ended September 27, 2011
Net Product Sales. Net product sales for the 39 weeks ended September 25, 2012 were $753.1 million compared to $695.7 million for the same period of 2011, an increase of $57.4 million, or 8.3%, resulting largely from a comparable store sales increase of 3.9% for the 39 weeks ended September 25, 2012, rolling over last years comparable store sales decline of 2.5% and a 4.2% increase in equivalent units for the 39 weeks ended September 25, 2012 as compared to the prior year.
Fees and Other Income. Fees and other income were $37.1 million for the 39 weeks ended September 25, 2012, compared to $31.9 million for the prior year, for an increase of $5.2 million or 16.3%. The increase was due to higher customer delivery charge income largely due to increased delivery transactions, an increase in equivalent units and customer delivery charge increases.
Cost of Sales. Cost of sales was $216.7 million for the 39 weeks ended September 25, 2012, compared to $209.2 million for the prior year for an increase of $7.5 million or 3.5%. Cost of sales decreased 1.3%, as a percentage of net product sales, to 28.8%, compared to 30.1% in the prior year. This decrease was largely due to lower ingredient and packaging costs associated with the Margin Management Initiative as well as lower commodity costs. These decreases more than offset the unfavorable impact to cost of sales as a result of pricing and product mix changes associated with the $10 Any Pizza promotions and value bundling.
Direct Labor. Direct labor costs for the 39 weeks ended September 25, 2012 as compared to the prior year were $220.5 million and $204.3 million, respectively, an increase of $16.2 million, or 7.9%. Direct labor costs were 29.3% of net product sales for the 39 weeks ended September 25, 2012, a 0.1% decrease compared to the prior year largely due to the benefit of sales leveraging on fixed labor costs which was partially offset by an increase in delivery transactions which are more labor intensive.
Other Restaurant Operating Expenses. Other restaurant operating expenses for the 39 weeks ended September 25, 2012 as compared to the prior year were $238.0 million and $222.1 million, respectively, an increase of $15.9 million, or 7.2%. Other operating expenses were 31.6% of net product sales for the 39 weeks ended September 25, 2012 compared to 31.9% of net product sales for the prior year, a decrease of 0.3%.
The changes in the other restaurant operating expenses as a percentage of net product sales are explained as follows:
Other restaurant operating expenses as a percentage of net product sales for the 39 weeks ended September 27, 2011 |
31.9 | % | ||
Leveraging of rent and occupancy costs |
(0.7 | ) | ||
Development Incentives |
(0.3 | ) | ||
Advertising |
(0.2 | ) | ||
Depreciation |
0.4 | |||
Restaurant manager bonuses |
0.3 | |||
Delivery driver reimbursement expense |
0.2 | |||
|
|
|||
Other restaurant operating expenses as a percentage of net product sales for the 39 weeks ended September 25, 2012 |
31.6 | % | ||
|
|
The favorable variance as a percentage of net product sales was largely due to leveraging of fixed and semi-fixed costs as a result of higher comparable store sales, primarily rent and occupancy costs, the benefit of the Development Incentives and lower advertising expenses which were partially offset by higher depreciation expense as a result of purchase accounting adjustments, higher restaurant manager bonus expense and increased delivery driver reimbursement expense.
Depreciation expense for store operations was $28.6 million or 3.8% of net product sales for the 39 weeks ended September 25, 2012 compared to $23.4 million or 3.4% of net product sales for the prior year predecessor period largely due to higher depreciation resulting from higher carrying values of fixed assets due to the purchase accounting adjustments.
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General and Administrative Expenses. General and administrative expenses for the 39 weeks ended September 25, 2012 were $43.2 million compared to $39.4 million for the prior year, an increase of $3.8 million or 9.5%. This increase was largely due to higher incentive compensation and salaries expense, increased credit card transaction fees and costs associated with our enterprise resource planning (ERP) system implementation for 2012.
Corporate Depreciation and Amortization. Corporate depreciation and amortization costs were $13.1 million and $9.0 million for the 39 weeks ended September 25, 2012 and September 27, 2011, respectively. The increase during 2012 is largely due to increased franchise rights and other intangibles amortization expense associated with the Transactions-related purchase accounting adjustments.
Other. During the 39 weeks ended September 25, 2012, we recorded $0.5 million for costs incurred in connection with the Acquisition of the Company by Olympus on December 28, 2011 and the 36-unit acquisition in February 2012 compared to $1.5 million in the prior year-to-date period consisting of $0.8 million for expenses incurred in connection with strategic alternatives considered by the Company and $0.7 million for facility impairment charges.
Interest Expense. Interest expense was $35.8 million for the 39 weeks ended September 25, 2012 (successor period) compared to $19.1 million for the prior year (predecessor period), an increase of $16.7 million due to higher average debt levels and higher interest rates resulting from the Transactions and increased amortization of deferred debt issuance costs related to the Transactions. Our average outstanding debt balance increased $185.9 million to $564.8 million for the 39 weeks ended September 25, 2012 as compared to the same period last year and our cash borrowing rate increased 1.6% to 7.6% for the 39 weeks ended September 25, 2012 as compared to the prior year. Interest expense included $3.1 million and $1.9 million for amortization of deferred debt issuance costs in the year-to-date period of 2012 and 2011, respectively.
Loss on debt extinguishment. During the second quarter of 2012 we recorded $5.1 million for the loss on debt extinguishment related to the refinancing of the Term Loan at lower prevailing interest rates on March 28, 2012. The expense consisted of $3.4 million for the write off of debt issuance costs and $1.7 million for a portion of the soft call premium and transaction fees.
Income Taxes. For the 39 weeks ended September 25, 2012, we recorded income tax expense of $3.0 million which resulted in an effective income tax rate of 17.0% compared to an effective tax rate of 21.1%, or $4.8 million, for the prior year. The current year included a favorable adjustment of $0.5 million related to the release of liabilities for uncertain tax positions. The lower than statutory rate for both periods was primarily attributable to various federal employment-related tax credits.
Net Income. Net income for the 39 weeks ended September 25, 2012 was $14.4 million compared to $18.1 million for the prior year. Operating income benefited from an 8.3% increase in net product sales and increased customer delivery charge income partially offset by increased cost of sales, direct labor costs, other restaurant operating expenses and general and administrative expenses. However, the increase in operating income was more than offset by higher interest expense as a result of the Transactions and the loss on debt extinguishment related to the refinancing of the Term Loan.
Liquidity and Sources of Capital
Our short-term and long-term liquidity needs will arise primarily from: (1) interest and principal payments related to our existing credit facility and the Senior Notes; (2) capital expenditures, including new unit development, asset development including asset upgrade requirements and maintenance capital expenditures; (3) opportunistic acquisitions of Pizza Hut restaurants or other acquisition opportunities; and (4) working capital requirements as may be needed to support our business. We intend to fund our operations, interest expense, capital expenditures, acquisitions and working capital requirements principally from cash from operations, cash reserves and borrowings on our Revolving Facility. Future acquisitions, depending on the size, may require borrowings beyond those available on our existing Revolving Facility and therefore may require further utilization of the additional remaining Term Loan borrowing capacity under our credit facility described below as well as other sources of debt or additional equity capital.
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Our working capital was a deficit of $41.4 million at September 25, 2012. Like many other restaurant companies, we are able to operate and generally do operate with a working capital deficit. We are able to operate with a working capital deficit because (i) restaurant revenues are received primarily in cash or by credit card with a low level of accounts receivable; (ii) rapid turnover results in a limited investment in inventories; and (iii) cash from sales is usually received before related liabilities for food, supplies and payroll become due. Because we are able to operate with minimal working capital or a deficit, we have historically utilized excess cash flow from operations and our Revolving Facility for debt reduction, capital expenditures and acquisitions, and to provide liquidity for our working capital needs. At September 25, 2012, we had $82.3 million of borrowing capacity available under our Revolving Facility, net of $17.7 million of outstanding letters of credit.
Cash flows from operating activities
Cash from operations is our primary source of funds. Changes in earnings and working capital levels are the two key factors that generally have the greatest impact on cash from operations. Cash provided by operating activities for the 39 weeks ended September 25, 2012 was $56.8 million and was reduced by $16.0 million of predecessor Transactions-related liabilities paid at closing for accrued transaction expenses and accrued interest with proceeds from the sale of the Company. Cash flow from operating activities of $56.8 million consisted of (i) net income of $14.4 million, (ii) non-cash adjustments to net income of $50.7 million, and (iii) negative changes in operating assets and liabilities of $8.3 million due primarily to a reduction of $16.0 million for the payment of Transactions-related accrued expenses and interest, the payment of a litigation settlement during the third quarter and the timing of accrued payroll partially offset by increased accrued interest and accounts payable and lower accounts receivable.
Cash provided by operating activities for the 39 weeks ended September 27, 2011 was $68.4 million and consisted of (i) net income of $18.1 million, (ii) non-cash adjustments to net income of $39.6 million, and (iii) positive changes in operating assets and liabilities of $10.7 million due largely due to increased accrued liabilities, accounts payable and accrued interest, partially offset by a decrease due to the timing of accrued payroll.
Cash flows from investing activities
Cash flows used in investing activities were $479.2 million during the 39 weeks ended September 25, 2012 compared to $17.1 million for the same period of the prior year. During the year-to-date period of 2012, net cash outflows were primarily impacted by costs relating to the Transactions totaling $431.5 million. In addition, we invested $28.5 million in capital expenditures (including approximately $0.8 million for IT equipment for the 36-unit acquisition) and completed the Jacksonville, Florida acquisition of 36 units for $19.4 million (including amounts paid for working capital settlement items and development fees) and received proceeds from the sale of assets of $0.2 million. For the 39 weeks ended September 27, 2011, we invested $17.8 million in capital expenditures and received proceeds from the sale of assets of $0.6 million.
Beginning in fiscal 2012 and extended to 2013, Pizza Hut offered development incentives totaling $80,000 per new unit developed in fiscal 2012 and 2013, subject to certain threshold criteria. The Development Incentive is partially recorded as a reduction to royalty fees. Additionally, beginning in May 2012, Pizza Hut is offering development incentives totaling $10,000 per unit converted to the WingStreet platform between May 2012 and September 30, 2014. We plan to avail ourselves of these development incentives, and as such, we currently expect to develop 40 Delco units during fiscal 2013 for approximately $12.0 million and add the WingStreet product line to 290 units for approximately $7.8 million in both fiscal 2013 and 2014. We currently expect our capital expenditure investment to be approximately $46.0 million to $50.0 million in fiscal 2013, excluding the aforementioned development incentives.
Cash flows from financing activities
Net financing cash inflows were $376.4 million for the 39 weeks ended September 25, 2012 and net outflows were $29.2 million for the same period of the prior year. Year-to-date 2012 cash inflows consisted primarily of $800.4 million of debt and equity proceeds obtained to finance the Transactions, which were reduced by repayment of predecessor entity debt of $372.7 million, debt issuance costs of $32.0 million and $18.7 million of expenses related to the Transactions. Also during 2012 we completed a sale-leaseback transaction for one property for proceeds of $1.0 million. During the 39 weeks ended September 27, 2011, we paid our mandatory excess cash flow prepayment of $29.7 million on our Old Senior Secured Credit Facilities utilizing cash reserves. Also during 2011 we completed a sale-leaseback transaction for one property for proceeds of $0.5 million.
As part of the Transaction, our debt structure consists of the following sources of financing:
| Senior Secured Credit Facilities. Our Senior Secured Credit Facilities were entered into as part of the Financing Transactions on December 28, 2011 and consist of a $100.0 million Revolving Facility and a $375.0 million Term Loan. Outstanding borrowings under the Senior Secured Credit Facilities bear interest at the London Interbank |
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Offered Rate (LIBOR), the money market rate, or the base rate (as defined), plus in each case an applicable margin based upon a leverage ratio as defined in the credit agreement for the Senior Secured Credit Facilities. At September 25, 2012, the rate would have been the prevailing LIBOR rate plus the margin of 5.0% in the case of a LIBOR loan or the base rate (as defined) plus the margin of 4.0% in the case of a base rate loan. Availability under the Revolving Facility is reduced by letters of credit, of which $17.7 million were issued at September 25, 2012. Commitment fees are paid based upon the unused balance of the Revolving Facility and the fees are paid at 0.5%. Commitment fees and letter of credit fees are reflected as interest expense. The Revolving Facility is secured by substantially all of the Companys assets and is due December 28, 2016. |
Under our $375.0 million Term Loan, interest was paid at LIBOR plus 5.25%, or the base rate (as defined) plus 4.25%, with a LIBOR floor of 1.5%. On March 28, 2012, the Company refinanced the Term Loan. The refinancing lowered the spread over LIBOR to 4.00% on the Term Loan borrowings, and lowered the Term Loan LIBOR floor to 1.25%. The combined weighted average interest rate was 5.25% per annum at September 25, 2012. The principal amount of the Term Loan amortizes in equal quarterly installments of $937,500 in an aggregate annual amount equal to 1% of the original principal amount of the Term Loan, with the balance payable at maturity. The term loan note is secured by substantially all of our assets and is due December 28, 2018.
| Senior Notes. The Senior Notes bear interest at the rate of 10.5% payable semi-annually in arrears on January 15 and July 15 until maturity of the Notes on December 28, 2020. These Senior Notes are unsecured. The Senior Notes may be redeemed at any time prior to January 15, 2016 at a redemption price equal to 100% of the principal amount of Senior Notes redeemed plus a premium equal to the greater of (i) 1.0% of such amount or (ii) the excess of the present value of the redemption price payable for redemption as of January 15, 2016 and the interest payments through such date over the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest as of the date of redemption. Effective January 15, 2016, these Notes may be redeemed at a redemption price of 105.250% of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest until January 15, 2017, when the redemption price becomes 102.625% plus accrued and unpaid interest and remains such until January 15, 2018, when these Senior Notes can be redeemed at the face amount, plus accrued and unpaid interest. In June 2012 the Company completed an exchange offer which allowed the holders of Senior Notes to exchange the notes for an equal principal amount of Senior Notes that are registered under the Securities Act of 1933. |
Based upon the amount of excess cash flow generated during fiscal 2012 and the Companys leverage at fiscal 2012 year end, each of which is defined in the credit agreement governing the Term Loan, the Company is required to make an excess cash flow mandatory prepayment. The excess cash flow mandatory prepayment is an annual requirement under the credit agreement and is due 95 days after the end of each fiscal year. We currently expect that we will be required to make a payment in 2013 of between $4.0 million and $6.0 million depending upon the amount of excess cash flow generated during the 2012 fiscal year and our leverage at 2012 fiscal year-end. As this is a preliminary estimate, the final excess cash flow mandatory prepayment could ultimately differ materially from the amounts reflected above and as such we have not reflected any of this estimate as a current liability.
As of September 25, 2012, we were in compliance with all of the financial covenants under our Senior Secured Credit Facilities. Our ratios under the foregoing financial covenants in our credit agreement for our Senior Secured Credit Facilities as of September 25, 2012 were as follows:
Actual | Covenant Requirement | |||||
Maximum leverage ratio |
3.74x | Not more than 6.25x | ||||
Minimum interest coverage ratio |
2.07x | Not less than 1.25x |
The credit agreement defines Leverage Ratio as the ratio of Consolidated Debt for Borrowed Money to Consolidated EBITDA; Consolidated Interest Coverage Ratio is defined as the ratio of (x) Consolidated EBITDA plus Rent Expense to (y) Consolidated Interest Expense plus Rent Expense. All of the foregoing capitalized terms are defined in the Credit Agreement, which was filed with the SEC on April 3, 2012 as Exhibit 10.11 to the Companys Registration Statement on Form S-4 (File No 333-180524). The Credit Agreement provides that each of the above defined terms include the pro forma effect of acquisitions and divestitures on a full year basis among other pro forma adjustments. This pro forma effect used in connection with the financial debt covenant ratio calculations is not the same calculation we use to determine Adjusted EBITDA, which we disclose to investors in our earnings releases and which is discussed below.
Based upon current operations, we believe that our cash flows from operations, together with borrowings that are available under the Revolving Facility, will be adequate to meet our anticipated requirements for working capital, capital expenditures, and scheduled principal and interest payments through the next 12 months. Furthermore, after the refinancing of the Term Loan on March 28, 2012, we potentially have additional liquidity due to reduced interest payments at the then prevailing interest rates through the maturity period of the Term Loan.
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At September 25, 2012, we had $82.3 million of borrowing capacity available under our Revolving Facility net of $17.7 million of outstanding letters of credit. We will consider additional sources of financing to fund our long-term growth if necessary, including the $125.0 million of incremental term loan capacity available under our Senior Secured Credit Facilities.
Non-GAAP measures
Adjusted EBITDA is a supplemental measure of our performance that is not required by or presented in accordance with generally accepted accounting principles (GAAP). We have included Adjusted EBITDA as a supplemental disclosure because we believe that Adjusted EBITDA provides investors a helpful measure for comparing our operating performance with the performance of other companies that have different financing and capital structures or tax rates. We incurred substantial transaction costs in 2011 in connection with the sale of the Company to Olympus on the first day of fiscal 2012 and had substantial interest expense relating to the financing of the acquisition of the Company in 2011 and substantial depreciation and amortization expense relating to the acquisition of the Company in 2011 and to the Companys acquisition of units in recent years. We believe the elimination of these items, as well as income taxes, pre-opening and facility impairment charges, Development Incentives, the loss on debt extinguishment relating to the refinancing of the Companys indebtedness and unusual litigation expenses (before indemnification offset) give management and investors useful information to compare the performance of our core operations over different periods. The following is a reconciliation of net income to Adjusted EBITDA(1) (in thousands).
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||
Sept. 25, 2012 | Sept. 27, 2011 | Sept. 25, 2012 | Sept. 27, 2011 | |||||||||||||
Net income |
$ | 2,378 | $ | 3,469 | $ | 14,372 | $ | 18,125 | ||||||||
Adjustments: |
||||||||||||||||
Interest expense |
11,416 | 6,131 | 35,797 | 19,075 | ||||||||||||
Income tax (benefit) expense |
(1,126 | ) | (480 | ) | 2,953 | 4,838 | ||||||||||
Depreciation and amortization |
14,455 | 11,124 | 41,654 | 33,991 | ||||||||||||
Net facility impairment charges |
30 | | 85 | 710 | ||||||||||||
Pre-opening expenses and other |
423 | 499 | 1,171 | 1,055 | ||||||||||||
Loss on debt extinguishment |
| | 5,144 | | ||||||||||||
Transaction costs |
112 | 791 | 590 | 791 | ||||||||||||
Development Incentives |
(1,040 | ) | | (2,080 | ) | | ||||||||||
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Adjusted EBITDA |
$ | 26,648 | $ | 21,534 | $ | 99,686 | $ | 78,585 | ||||||||
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(1) | The Company defines Adjusted EBITDA as consolidated net income plus interest, income taxes, depreciation and amortization, facility impairment charges, and pre-opening expenses, further adjusted to exclude unusual litigation expenses (before indemnification offset), Development Incentives, the loss on debt extinguishment relating to the refinancing of the Companys indebtedness, and expenses related to the acquisition of the Company by Olympus. Adjusted EBITDA is not a measure of financial performance under GAAP. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation from, or as a substitute for analysis of, the Companys financial information reported under GAAP. Adjusted EBITDA as defined above may not be similar to EBITDA measures of other companies. |
Letters of Credit
As of September 25, 2012, we had letters of credit of $17.7 million issued under our Senior Secured Credit Facilities in support of self-insured risks.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to various market risks. Market risk is the potential loss arising from adverse changes in market prices and rates. We do not enter into derivative or other financial instruments for trading or speculative purposes.
Interest Rate Risk. Our primary market risk exposure is interest rate risk. All of our borrowings under our Senior Secured Credit Facilities bear interest at a floating rate. As of September 25, 2012, we had $374.1 million in funded floating rate debt outstanding under our Senior Secured Credit Facilities. A 100 basis point increase in the floating rate would increase annual interest expense by approximately $3.7 million. However, under our Senior Secured Credit Facilities, we have a LIBOR floor of 1.25% as of September 25, 2012 on our LIBOR Term Loan borrowings. Therefore, current market rates would have to exceed 1.25% before we would realize variability on our interest expense. Further, we entered into an interest rate cap in January 2012, which limits LIBOR at 2.5% on a notional amount of $150.0 million outstanding under our Term Loan borrowings.
Commodity Prices. Commodity prices such as cheese can vary. The price of this commodity can change throughout the year due to changes in supply and demand. Cheese has historically represented approximately 30-35% of our cost of sales. We are a member of the UFPC, and participate in cheese hedging programs that are directed by the UFPC to help reduce the volatility of this commodity from period-to-period. Based on information provided by the UFPC, the UFPC expects to hedge approximately 30% to 50% of the Pizza Hut systems anticipated cheese purchases through a combination of derivatives taken under the direction of the UFPC.
The estimated increase in our food costs from a hypothetical 10% adverse change in the average cheese block price per pound (approximately $0.16 per pound and $0.18 per pound for the 39 weeks ended September 25, 2012 and September 27, 2011, respectively) would have been approximately $5.6 million and $6.3 million for the 39 weeks ended September 25, 2012 and September 27, 2011, respectively, without giving effect to the UFPC directed hedging programs.
Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There has been no change in our internal control over financial reporting that occurred during our third fiscal quarter of 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
35
Item 1. | Legal Proceedings. |
As previously disclosed, the Company was a defendant in a lawsuit entitled Jeffrey Wass and Mark Smith, et al. v. NPC International, Inc., Case No. 2:09-CV-2254-JWL-KGS, in the United States District Court for the District of Kansas. On March 7, 2012, the parties orally agreed to settle the lawsuit on terms that are not material to the Company. On June 27, 2012 the court granted approval of the settlement agreement and terminated the action. Per the settlement agreement, NPC funded the settlement on July 27, 2012. The full amount of the settlement paid under the settlement agreement was recorded as an expense and accrued as a liability on the Companys consolidated financial statements as of and for the fiscal year ended December 27, 2011. A receivable for approximately 55% of the settlement amount from an indemnification escrow account was recorded with an offsetting amount recorded as a reduction in the purchase price paid by Olympus.
Item 1A. | Risk Factors. |
There have been no material changes to the risk factors set forth in Post-Effective Amendment No. 1 to our Form S-4 filed with the SEC on May 7, 2012. In addition to the other information set forth in this report, readers should carefully consider the factors discussed in Risk Factors in the Post-Effective Amendment which could materially affect our business, financial condition or future results.
36
Item 6. | Exhibits, Financial Statement Schedules |
Pursuant to the rules and regulations of the SEC, we have filed, furnished or incorporated by reference the documents referenced below as exhibits to this Form 10-Q. The documents include certain agreements to which the Company is a party or has a beneficial interest. The agreements have been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other factual information about the Company or its business or operations. In particular, the assertions embodied in any representations, warranties and covenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in confidential disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties and covenants in the agreements may have been used for the purpose of allocating risk between the parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fully reflected in the Companys public disclosures. Accordingly, investors should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about the Company or its business or operations on the date hereof.
The exhibits that are required to be filed, furnished or incorporated by reference herein are listed in the Exhibit Index below (following the signatures page of this report).
37
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on November 5, 2012.
NPC RESTAURANT HOLDINGS, LLC | ||
By: | /s/ Troy D. Cook | |
Name: | Troy D. Cook | |
Title: | Executive Vice PresidentFinance, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) |
38
Exhibit |
Description | |
2.01* | Purchase and Sale Agreement, dated as of November 6, 2011, by and between NPC Acquisition Holdings, LLC (n/k/a NPC Restaurant Holdings, LLC), NPC International Holdings, Inc., and Merrill Lynch Global Private Equity, Inc. and the other sellers listed therein.. | |
2.02* | Certificate of Formation, as amended, of NPC Restaurant Holdings, LLC (incorporated herein by reference to Exhibit 3.1 to Holdings Current Report on Form 8-K filed on September 12, 2012). | |
3.01* | Certificate of Formation of NPC Acquisition Holdings, LLC. | |
3.22 | Restated Limited Liability Company Agreement of NPC Restaurant Holdings, LLC (incorporated herein by reference to Exhibit 3.2 to Holdings Current Report on Form 8-K filed on September 12, 2012). | |
4.01* | Indenture, dated as of December 28, 2011, by and between NPC International, Inc., NPC Operating Company A, Inc. and NPC Operating Company B, Inc., as issuers, NPC Acquisition Holdings, LLC (n/k/a NPC Restaurant Holdings, LLC), as guarantor, and Wells Fargo Bank, National Association, as trustee. | |
4.02* | Form of 10 1/2% Senior Note due 2020 (included in Exhibit 4.01). | |
4.03* | Registration Rights Agreement, dated as of December 28, 2011, by and between NPC International, Inc., NPC Operating Company A, Inc. and NPC Operating Company B, Inc., as issuers, NPC Acquisition Holdings, LLC (n/k/a NPC Restaurant Holdings, LLC), as guarantor, and Goldman, Sachs & Co. and Barclays Capital Inc., as initial purchasers. | |
10.01 | NPC International, Inc. Deferred Compensation and Retirement Plan* (incorporated herein by reference to Exhibit 10.7 to NPCs Registration Statement on Form S-4 (File No. 333-138338) filed on October 31, 2006). | |
10.02 | NPC International, Inc. POWR Plan for Key Employees* (incorporated herein by reference to Exhibit 10.8 to NPCs Registration Statement on Form S-4 (File No. 333-138338) filed on October 31, 2006). | |
10.03 | Form of Location Franchise Agreement, dated as of January 1, 2003, by and between Pizza Hut, Inc. and NPC Management, Inc. (incorporated herein by reference to Exhibit 10.9 to NPCs Registration Statement on Form S-4 (File No. 333-138338) filed on October 31, 2006). | |
10.04 | Form of Territory Franchise Agreement, dated as of January 1, 2003, by and between Pizza Hut, Inc. and NPC Management, Inc. (incorporated herein by reference to Exhibit 10.10 to NPCs Registration Statement on Form S-4 (File No. 333-138338) filed on October 31, 2006). | |
10.05 | Pizza Hut National Purchasing Coop, Inc. Membership Subscription and Commitment Agreement, dated as of February 9, 1999, by and between NPC Management, Inc. and Pizza Hut National Purchasing Coop (incorporated herein by reference to Exhibit 10.32 to NPCs Annual Report on Form 10-K (File No. 0-13007) filed with the SEC on May 28, 1999). | |
10.06 | Amendment to Franchise Agreement dated as of December 25, 2007, by and between Pizza Hut, Inc. and NPC International, Inc. (incorporated by reference to Exhibit 10.16 to NPCs Annual Report on Form 10-K (File No. 333-138338) filed March 14, 2008). | |
10.07 | Master Distribution Agreement between Unified Foodservice Purchasing Co-op, LLC, for and on behalf of itself as well as the Participants, as defined therein (including certain subsidiaries of Yum! Brands, Inc.) and McLane Foodservice, Inc., effective as of January 1, 2011 and Participant Distribution Joinder Agreement with McLane Foodservice, Inc. dated August 11, 2010** (incorporated herein by reference to Exhibit 10.23 to NPCs Quarterly Report on Form 10-Q (File No. 333-138338) filed with the SEC on November 8, 2010). | |
10.08* | Amended and Restated Employment Agreement, dated as of November 4, 2011, by and between NPC International, Inc., NPC Acquisition Holdings, LLC (n/k/a NPC Restaurant Holdings, LLC) and James K. Schwartz*. | |
10.09* | Amended and Restated Employment Agreement, dated as of November 4, 2011, by and between NPC International, Inc., NPC Acquisition Holdings, LLC (n/k/a NPC Restaurant Holdings, LLC) and Troy D. Cook*. | |
10.10* | Stockholders Agreement, dated as of November 6, 2011, by and between NPC International Holdings, Inc., Olympus Growth Fund V, L.P., Olympus Executive Fund II, L.P., Olympus-1133 West Co-Investment Fund, L.P., and the other persons party thereto. |
39
10.11* | Amended and Restated Credit Agreement, dated as of March 28, 2012, by and between NPC International, Inc., NPC Operating Company A, Inc., NPC Operating Company B, Inc., NPC Acquisition Holdings, LLC (n/k/a NPC Restaurant Holdings, LLC), Barclays Bank plc and the other lenders party thereto. | |
10.12* | Amendment No. 1 to Credit Agreement, dated as of March 28, 2012, by and between NPC International, Inc., NPC Operating Company A, Inc., NPC Operating Company B, Inc., NPC Acquisition Holdings, LLC (n/k/a NPC Restaurant Holdings, LLC) and Barclays Bank plc. | |
10.13* | Security Agreement, dated as of December 28, 2011, by and between NPC International, Inc., the other pledgors party thereto and Barclays Bank plc. | |
10.14* | Investment Agreement, dated as of December 28, 2011, by and between NPC International Holdings, Inc., Olympus Growth Fund V, L.P., Olympus Executive Fund II, L.P., Olympus-1133 West Co-Investment Fund, L.P., and the other persons party thereto. | |
10.15* | Advisory Services Agreement, dated as of December 28, 2011, by and between NPC International Holdings, Inc., NPC International, Inc. and Olympus Advisors V, LLC. | |
10.16* | Escrow Agreement, dated as of December 28, 2011, by and between NPC International Holdings, Inc., Merrill Lynch Global Private Equity, Inc. and Wells Fargo Bank, N.A. | |
10.17* | NPC International Holdings, Inc. 2011 Stock Option Plan. | |
10.18* | Form of NPC International Holdings, Inc. Stock Option Agreement. | |
10.19* | ISDA Master Agreement, dated as of February 23, 2012, between Coöperative Centrale Raiffeisen-Boerenleenbank B.A. and NPC International, Inc. | |
21.01* | Subsidiaries of the registrants. | |
31.1*** | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2*** | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1*** | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2*** | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | Financial statements from the quarterly report on Form 10-Q of NPC Restaurant Holdings, LLC for the quarter ended September 25, 2012, filed on November 5, 2012, formatted in XBRL: (i) the Consolidated Statements of Income (unaudited) for the 13 and 39 weeks ended September 25, 2012 and September 27, 2011, (ii) the Consolidated Balance Sheets (unaudited) at September 25, 2012 and December 27, 2011, (iii) the Consolidated Statements of Comprehensive Income (unaudited) for the 39 weeks ended September 25, 2012 and September 27, 2011, (iv) the Consolidated Statement of Equity (unaudited) for the 39 weeks ended September 25, 2012, (v) the Consolidated Statements of Cash Flows (unaudited) for the 39 weeks ended September 25, 2012 and September 27, 2011 and (vi) the Notes to Condensed Consolidated Financial Statements (unaudited) tagged as blocks of text and in detail. |
* | Filed as an exhibit with corresponding number to the registrants registration statement on Form S-4 (File No 333-180524) and incorporated herein by reference |
** | Portions of these documents have been omitted pursuant to a Request for Confidential Treatment filed with the SEC pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Omitted portions of these documents are indicated with an asterisk. |
*** | Filed or furnished herewith |
40
Exhibit 31.1
CERTIFICATIONS
I, James K. Schwartz, certify that:
1. I have reviewed the quarterly report on Form 10-Q of NPC Restaurant Holdings, LLC (the registrant) for the period ended September 25, 2012;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; |
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants Board of Directors (or persons performing the equivalent functions):
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 5, 2012
/s/ James K. Schwartz |
James K. Schwartz |
President, Chief Executive Officer and Chief Operating Officer |
Exhibit 31.2
CERTIFICATIONS
I, Troy D. Cook, certify that:
1. I have reviewed the quarterly report on Form 10-Q of NPC Restaurant Holdings, LLC (the registrant) for the period ended September 25, 2012;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; |
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants Board of Directors (or persons performing the equivalent functions):
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 5, 2012
/s/ Troy D. Cook |
Troy D. Cook |
Executive Vice PresidentFinance, Chief Financial Officer and Secretary |
Exhibit 32.1
Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of NPC Restaurant Holdings, LLC (the Company) on Form 10-Q for the period ended September 25, 2012 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, James K. Schwartz, President, Chief Executive Officer and Chief Operating Officer of NPC Restaurant Holdings, LLC, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 5, 2012
/s/ James K. Schwartz |
James K. Schwartz |
President, Chief Executive Officer and Chief Operating Officer |
Exhibit 32.2
Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of NPC Restaurant Holdings, LLC (the Company) on Form 10-Q for the period ended September 25, 2012 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Troy D. Cook, Executive Vice-President - Finance, Chief Financial Officer and Secretary of NPC Restaurant Holdings, LLC, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 5, 2012
/s/ Troy D. Cook |
Troy D. Cook |
Executive Vice PresidentFinance, Chief Financial Officer and Secretary |
Debt (Details 1) (USD $)
In Thousands, unless otherwise specified |
Sep. 25, 2012
|
Dec. 27, 2011
|
---|---|---|
Summary of estimated fair value of debt facilities | ||
Fair value | $ 593,468 | $ 376,856 |
Carrying value | 564,063 | 372,700 |
Term Loan [Member]
|
||
Summary of estimated fair value of debt facilities | ||
Fair value | 376,868 | |
Carrying value | 374,063 | |
Senior Notes [Member]
|
||
Summary of estimated fair value of debt facilities | ||
Fair value | 216,600 | |
Carrying value | 190,000 | |
Old Term Loan [Member]
|
||
Summary of estimated fair value of debt facilities | ||
Fair value | 197,700 | |
Carrying value | 197,700 | |
Senior Subordinated Notes [Member]
|
||
Summary of estimated fair value of debt facilities | ||
Fair value | $ 179,156 |
Acquisitions and Purchase Accounting (Details 3) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 25, 2012
|
Sep. 27, 2011
|
Sep. 25, 2012
|
Sep. 27, 2011
|
|
Summary of pro forma net income | ||||
Total sales | $ 8,400 | $ 245,711 | $ 795,045 | $ 751,181 |
Net (loss) Income | $ (362) | $ 14,641 | $ 13,209 |
Income Taxes (Tables)
|
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 25, 2012
|
||||||||||||||||||||||||||||||||||||||||||||||
Income Taxes [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
Reconciliation unrecognized tax benefits |
|
Condensed Consolidating Financial Statements (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 25, 2012
Successor [Member]
|
Sep. 25, 2012
Successor [Member]
|
Sep. 27, 2011
Predecessor [Member]
|
Sep. 27, 2011
Predecessor [Member]
|
Sep. 25, 2012
Parent Guarantor: Holdings [Member]
Successor [Member]
|
Sep. 25, 2012
Parent Guarantor: Holdings [Member]
Successor [Member]
|
Sep. 27, 2011
Parent Guarantor: Holdings [Member]
Predecessor [Member]
|
Sep. 27, 2011
Parent Guarantor: Holdings [Member]
Predecessor [Member]
|
Sep. 25, 2012
Subsidiary Issuer: NPC [Member]
Successor [Member]
|
Sep. 25, 2012
Subsidiary Issuer: NPC [Member]
Successor [Member]
|
Sep. 27, 2011
Subsidiary Issuer: NPC [Member]
Predecessor [Member]
|
Sep. 27, 2011
Subsidiary Issuer: NPC [Member]
Predecessor [Member]
|
Sep. 25, 2012
Subsidiary Co-Issuer: NPC Op Co A [Member]
Successor [Member]
|
Sep. 25, 2012
Subsidiary Co-Issuer: NPC Op Co A [Member]
Successor [Member]
|
Sep. 27, 2011
Subsidiary Co-Issuer: NPC Op Co A [Member]
Predecessor [Member]
|
Sep. 27, 2011
Subsidiary Co-Issuer: NPC Op Co A [Member]
Predecessor [Member]
|
Sep. 25, 2012
Subsidiary Co-Issuer: NPC Op Co B [Member]
Successor [Member]
|
Sep. 25, 2012
Subsidiary Co-Issuer: NPC Op Co B [Member]
Successor [Member]
|
Sep. 27, 2011
Subsidiary Co-Issuer: NPC Op Co B [Member]
Predecessor [Member]
|
Sep. 27, 2011
Subsidiary Co-Issuer: NPC Op Co B [Member]
Predecessor [Member]
|
Sep. 25, 2012
Eliminations [Member]
Successor [Member]
|
Sep. 25, 2012
Eliminations [Member]
Successor [Member]
|
Sep. 27, 2011
Eliminations [Member]
Predecessor [Member]
|
Sep. 27, 2011
Eliminations [Member]
Predecessor [Member]
|
|
Condensed Consolidating Statements of Income | ||||||||||||||||||||||||
Total sales | $ 256,233 | $ 790,208 | $ 237,851 | $ 727,602 | $ 256,233 | $ 790,208 | $ 237,851 | $ 727,602 | ||||||||||||||||
Total costs and expenses | 243,565 | 731,942 | 228,731 | 685,564 | 243,565 | 731,942 | 228,731 | 685,564 | ||||||||||||||||
Operating income | 12,668 | 58,266 | 9,120 | 42,038 | 12,668 | 58,266 | 9,120 | 42,038 | ||||||||||||||||
Interest expense | 11,416 | 35,797 | 6,131 | 19,075 | 11,416 | 35,797 | 6,131 | 19,075 | ||||||||||||||||
Loss on debt extinguishment | 5,144 | 5,144 | ||||||||||||||||||||||
Equity in net income of subsidiary | 2,378 | 14,372 | 3,469 | 18,125 | 22,963 | (2,378) | (14,372) | (3,469) | (18,125) | |||||||||||||||
Income before income taxes | 1,252 | 17,325 | 2,989 | 22,963 | 2,378 | 14,372 | 3,469 | 18,125 | 1,252 | 17,325 | 2,989 | 19,075 | (2,378) | (14,372) | (3,469) | (18,125) | ||||||||
Income tax expense | (1,126) | 2,953 | (480) | 4,838 | (1,126) | 2,953 | (480) | 4,838 | ||||||||||||||||
Net income | $ 2,378 | $ 14,372 | $ 3,469 | $ 18,125 | $ 2,378 | $ 14,372 | $ 3,469 | $ 18,125 | $ 2,378 | $ 14,372 | $ 3,469 | $ 18,125 | $ (2,378) | $ (14,372) | $ (3,469) | $ (18,125) |
Income Taxes (Details Textual) (USD $)
|
9 Months Ended | ||
---|---|---|---|
Sep. 25, 2012
|
Sep. 25, 2011
|
Dec. 27, 2011
|
|
Income Taxes (Textual) [Abstract] | |||
Income tax expense | $ 3,000,000 | $ 4,800,000 | |
Effective tax rate | 17.00% | 21.10% | |
Liability for uncertain tax positions | 4,553,000 | 9,527,000 | |
Liabilities for uncertain tax positions | $ 500,000 |
Goodwill and Other Intangible Assets (Details Textual) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 25, 2012
|
Sep. 27, 2011
|
Sep. 25, 2012
|
Sep. 27, 2011
|
|
Goodwill and Other Intangible Assets (Textual) [Abstract] | ||||
Amortization expense | $ 3.5 | $ 2.5 | $ 10.5 | $ 7.6 |
2013 | 14.4 | 14.4 | ||
2014 | 14.6 | 14.6 | ||
2015 | 14.6 | 14.6 | ||
2016 | 14.6 | 14.6 | ||
2017 | $ 14.9 | $ 14.9 |
Condensed Consolidating Financial Statements (Details 2) (USD $)
In Thousands, unless otherwise specified |
9 Months Ended | 9 Months Ended | 9 Months Ended | 9 Months Ended | 9 Months Ended | 9 Months Ended | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 25, 2012
Successor [Member]
|
Sep. 25, 2012
Successor [Member]
Parent Guarantor: Holdings [Member]
|
Sep. 25, 2012
Successor [Member]
Subsidiary Issuer: NPC [Member]
|
Sep. 25, 2012
Successor [Member]
Subsidiary Co-Issuer: NPC Op Co A [Member]
|
Sep. 25, 2012
Successor [Member]
Subsidiary Co-Issuer: NPC Op Co B [Member]
|
Sep. 25, 2012
Successor [Member]
Eliminations [Member]
|
Sep. 27, 2011
Predecessor [Member]
|
Dec. 27, 2011
Predecessor [Member]
|
Dec. 29, 2010
Predecessor [Member]
|
Sep. 27, 2011
Predecessor [Member]
Parent Guarantor: Holdings [Member]
|
Dec. 29, 2010
Predecessor [Member]
Parent Guarantor: Holdings [Member]
|
Sep. 27, 2011
Predecessor [Member]
Subsidiary Issuer: NPC [Member]
|
Dec. 29, 2010
Predecessor [Member]
Subsidiary Issuer: NPC [Member]
|
Sep. 27, 2011
Predecessor [Member]
Subsidiary Co-Issuer: NPC Op Co A [Member]
|
Dec. 29, 2010
Predecessor [Member]
Subsidiary Co-Issuer: NPC Op Co A [Member]
|
Sep. 27, 2011
Predecessor [Member]
Subsidiary Co-Issuer: NPC Op Co B [Member]
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Dec. 29, 2010
Predecessor [Member]
Subsidiary Co-Issuer: NPC Op Co B [Member]
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Sep. 27, 2011
Predecessor [Member]
Eliminations [Member]
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Dec. 29, 2010
Predecessor [Member]
Eliminations [Member]
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Operating activities | |||||||||||||||||||
Net cash flows provided by operating activities | $ 56,834 | $ 56,834 | $ 68,429 | $ 68,429 | |||||||||||||||
Investing activities | |||||||||||||||||||
Capital expenditures | (28,504) | (28,504) | (17,763) | (17,763) | |||||||||||||||
Purchase of the stock of the Company | (431,540) | (216,635) | (431,540) | 216,635 | |||||||||||||||
Purchase of business assets, net of cash acquired | (19,371) | (19,371) | |||||||||||||||||
Proceeds from sale or disposition of assets | 189 | 189 | 647 | 647 | |||||||||||||||
Net cash flows used in investing activities | (479,226) | (216,635) | (479,226) | 216,635 | (17,116) | (17,116) | |||||||||||||
Financing activities | |||||||||||||||||||
Retirement of predecessor entity debt and other obligations | (372,700) | (372,700) | |||||||||||||||||
Proceeds from equity contributions, net | 216,635 | 216,635 | 216,635 | (216,635) | |||||||||||||||
Issuance of debt | 565,000 | 565,000 | |||||||||||||||||
Payments on term bank facilities | (937) | (937) | (29,670) | (29,670) | |||||||||||||||
Debt issue costs | (32,012) | (32,012) | |||||||||||||||||
Proceeds from sale-leaseback transactions | 1,006 | 1,006 | 486 | 486 | |||||||||||||||
Interest rate derivative | (636) | (636) | |||||||||||||||||
Net cash provided by financing activities | 376,356 | 216,635 | 376,356 | (216,635) | (29,184) | 29,184 | |||||||||||||
Net change in cash and cash equivalents | (46,036) | (46,036) | 22,129 | 22,129 | |||||||||||||||
Beginning cash and cash equivalents | 78,394 | 78,394 | 78,394 | 44,159 | 44,159 | ||||||||||||||
Ending cash and cash equivalents | $ 32,358 | $ 32,358 | $ 66,288 | $ 78,394 | $ 44,159 | $ 66,288 | $ 44,159 |
Stock-based Compensation (Details 1)
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9 Months Ended |
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Sep. 25, 2012
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Options granted to certain members of management | |
Total options granted | 245,914 |
Total options exercisable | |
Series 1 Options [Member]
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Options granted to certain members of management | |
Total options granted | 196,731 |
Series 2 Options [Member]
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Options granted to certain members of management | |
Total options granted | 49,183 |
Basis of Presentation
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9 Months Ended |
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Sep. 25, 2012
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Basis of Presentation [Abstract] | |
Basis of Presentation |
Note 1 – Basis of Presentation On September 12, 2012, NPC Acquisition Holdings, LLC changed its name to NPC Restaurant Holdings, LLC and is referred to herein as “Holdings.” Holdings and its subsidiaries are referred to herein as the “Company.” Holdings’ wholly-owned subsidiary, NPC International, Inc., is referred to herein as “NPC”. On December 28, 2011, all of the outstanding membership interests of Holdings were acquired by NPC International Holdings, Inc. (“NPC Holdings” or “Parent”), an entity controlled by Olympus Growth Fund V, L.P. and certain of its affiliates (“Olympus” or “Sponsor”). The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements are not included herein. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Post-Effective Amendment No. 1 to Form S-4 Registration Statement (File No. 333-180524) filed with the SEC on May 7, 2012 and declared effective on May 9, 2012. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. The Company believes the accompanying unaudited interim condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments and accruals) necessary to fairly present the Company’s condensed consolidated results of operations, financial position and cash flows as of the dates and for the periods presented. |
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