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PLKI > SEC Filings for PLKI > Form 10-K/A on 6-Jun-2014All Recent SEC Filings

Show all filings for POPEYES LOUISIANA KITCHEN, INC.

Form 10-K/A for POPEYES LOUISIANA KITCHEN, INC.


6-Jun-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our Selected Financial Data, our Consolidated Financial Statements and our Risk Factors that are included elsewhere in this filing.
Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements, as a result of a number of factors including those factors set forth in Item 1A. of this Annual Report and other factors presented throughout this filing.
Nature of Business
Popeyes develops, operates, and franchises quick-service restaurants under the trade names Popeyesฎ Chicken & Biscuits and Popeyesฎ Louisiana Kitchen (collectively "Popeyes") in 47 states, the District of Columbia, Puerto Rico, Guam, the Cayman Islands, and 28 foreign countries. Popeyes has two reportable business segments: franchise operations and company-operated restaurants. Financial information concerning these business segments can be found at Note 20 to our Consolidated Financial Statements. 2013 Overview
We accomplished the following results in 2013 as a result of disciplined execution against our strategic plan:
• Reported net income was $34.1 million, or $1.41 per diluted share, compared to $30.4 million, or $1.24 per diluted share, in 2012. Adjusted earnings per diluted share were $1.43 compared to $1.24 in 2012, an increase of approximately 15%. Adjusted earnings per diluted share is a supplemental non-GAAP measure of performance. See the heading entitled "Management's Use of Non-GAAP Financial Measures."

• Global same-store sales increased 3.7%, compared to a 6.9% increase last year, for a two-year growth of 10.6%.

• Global system-wide sales increased approximately 9.9%, for a two-year growth rate of over 21%, after adjusting for the 53rd week of operations in fiscal 2012.

• The Popeyes system opened 194 restaurants, compared to 141 last year, and permanently closed 68 restaurants, resulting in 126 net openings, compared to 66 in 2012. The Popeyes system opened more new restaurants in fiscal 2013 than in any single year in the last 15 years.

• Popeyes expanded its strategic investment in company-operated restaurants by adding six new restaurants in our two new markets, Indianapolis and Charlotte, and three in our heritage markets, New Orleans and Memphis. We expect that this strategy will allow the Company to demonstrate its dominant real estate approach and our investment in our employee and guest experiences. In addition, the profitability of our restaurants represents a good long-term investment of capital and fuels our investment in our franchise system as a whole.

• Approximately 550 domestic restaurants were remodeled bringing the total to over 1,100 restaurants, or 60% of the domestic system, in the new Popeyes Louisiana Kitchen image.

• General and administrative expenses were $73.4 million, at 3.0% of system-wide sales compared to $67.6 million at 3.0% of system-wide sales in 2012.

• Operating EBITDA of $65.2 million was 31.7% of total revenues, compared to $55.9 million, at 31.3% of total revenues last year. Operating EBITDA is a supplemental non-GAAP measure of performance. See the heading entitled "Management's Use of Non-GAAP Financial Measures."

• Free cash flow was $42.0 million, compared to $36.7 million in 2012. Free cash flow is a supplemental non-GAAP measure of performance. See the heading entitled "Management's Use of Non-GAAP Financial Measures."

• The Company recorded $5.5 million in non-recurring franchise revenues related to the conversions of restaurants acquired in Minnesota and California. These revenues, net of occupancy and other expenses, contributed approximately $0.12 to adjusted earnings per share in 2013.

• The Company repurchased approximately 504,000 shares of its common stock for approximately $19.9 million.


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2013 Same-Store Sales
Global same-store sales increased 3.7%, compared to a 6.9% increase in 2012.

Total domestic same-store sales increased 3.6%, compared to a 7.5% increase last year. For five consecutive years, our domestic same-store sales have outpaced the chicken-QSR and the entire QSR category, according to independent data. This positive sales growth reflects Popeyes continued menu innovation, supported by expanded relevant advertising and strengthened restaurant execution which has led to an increase in Popeyes market share of the chicken-QSR category to 20.8% for 2013.

Company-operated restaurant same-store sales increased 2.3%, compared to 5.3% in 2012. Same-store sales in 2013 were comprised of 3.4% in our heritage markets, New Orleans and Memphis, offset by negative same-store sales for the single Indianapolis restaurant included in the computation of same-store sales. The Company expects that in the near-term, same-store sales in its new company-operated markets of both Indianapolis and Charlotte will be impacted as new restaurants are developed in those emerging markets and rollover high first year sales volumes.

International same-store sales increased 4.7%, compared to a 2.6% increase last year, the seventh consecutive year of positive same-store sales.

2014 Operating and Financial Outlook

Globally, in 2014, the Company expects:

• Same-store sales growth in the range of 2.0% to 3.0%.

• New restaurant openings in the range of 180 to 200 and net restaurant openings in the range of 100 to 130, for a net unit growth rate of approximately 5%. During 2014, the Company expects to open 10 to 15 new company-operated restaurants.

• General and administrative expenses are expected to be approximately 3% of system-wide sales maintaining the investment rate for sustainable long term growth.

• Capital expenditures for the year are expected to be $30 to $35 million, including approximately $25 million for company-operated restaurant development.

• Adjusted earnings per diluted share in the range of $1.57 to $1.62. This guidance reflects a two year average growth of approximately 13% to 14%.

• In 2014, the Company plans to repurchase $20 to $30 million in outstanding shares, compared to $19.9 million in 2013.

• The Company's effective income tax rate in 2014 is expected to be approximately 38%, compared to 37.4% in 2013.

Long-Term Guidance

Consistent with previous guidance, over the course of the upcoming five years, the Company believes the execution of its Strategic Plan will deliver on an average annualized basis the following results: same-store sales growth of 1% to 3%; net unit growth of 4% to 6%; and earnings per diluted share growth of 13% to 15%.
Factors Affecting Comparability of Consolidated Results of Operations: 2013, 2012 and 2011
For 2013, 2012, and 2011, the following items and events affect comparability of reported operating results:
• The Company's fiscal year ends on the last Sunday in December. The 2012 fiscal year consisted of 53 weeks. All other fiscal years presented consisted of 52 weeks each. The 53rd week in 2012 increased sales by company-operated restaurants by approximately $1.2 million and increased franchise revenues by approximately $1.7 million. The net impact of the 53rd week earnings per share was approximately $0.01 per diluted share.

• During 2013, 2012 and 2011, the Company opened nine, five, and two Company-operated restaurants, respectively.

• In 2012, the Company completed an acquisition of twenty-seven restaurants in Minnesota and California. The restaurants were in the trade image of another quick service restaurant concept. Twenty-six of the acquired restaurants were converted into the Popeyes Louisiana Kitchen image and leased to Popeyes franchisees to operate under our standard franchise agreement. The remaining restaurant property was sold in 2013. Non-recurring franchise fees associated with twenty-four conversions completed in 2013 were $5.5 million compared to $0.5 million for two conversions completed in 2012. These franchise revenues, net of non-recurring occupancy and other expenses, contributed approximately $0.12 to adjusted earnings per share in 2013.


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Comparisons of Fiscal Years 2013 and 2012 Sales by Company-Operated Restaurants
Sales by company-operated restaurants were $78.7 million in 2013, a $14.7 million increase from 2012. The increase was primarily due to new restaurant openings in 2013 and 2012 and an increase in same-store sales of 2.3% partially offset by the $1.2 million sales impact of the 53rd week in 2012. Franchise Royalties and Fees
Franchise royalties and fees have three basic components: (1) ongoing royalty payments that are determined based on a percentage of franchisee sales;
(2) franchise fees associated with new restaurant openings; and (3) development fees associated with the opening of new franchised restaurants in a given market. Royalty revenues are the largest component of franchise revenues, constituting more than 90%. Franchise revenues were $121.9 million in 2013, a $11.4 million increase from 2012. The increase was primarily due to a $7.8 million increase in royalties, resulting from an increase in franchise same-store sales of 3.8% during 2013 and new franchised restaurants, and a $5.0 million increase in one-time franchise fees associated with the conversion and franchising of California and Minnesota restaurant properties acquired in 2012 partially offset by a $1.4 million decrease in transfer fees and other franchise revenues, net. Rent from Franchised Restaurants
Rent from franchised restaurants was $5.4 million in 2013, a $1.1 million increase from 2012. The increase was primarily due to $1.9 million in rents from twenty-six restaurant properties converted and leased to franchisees in Minnesota and California under percentage rent arrangements partially offset by lower rents from properties sold or leases assigned to franchisee operators. Company Operated Restaurant Profit
Company-operated restaurant operating profit was $14.7 million in 2013 compared to $11.1 million last year. The $3.6 million increase in Company-operated restaurant operating profit was primarily due to an increase in same-store sales of 2.3% and new restaurant openings in 2013 and 2012. Company-operated restaurant operating profit margin was 18.7% of sales in 2013 compared to 17.3% of sales last year. The higher restaurant operating profit margin was primarily due to overall lower food and commodity prices, higher beverage rebates, labor efficiencies and increased leverage on occupancy and other expenses. Company-operated restaurant operating profit margin is a supplemental non-GAAP measure of performance. See the heading entitled "Management's Use of Non-GAAP Financial Measures."
Occupancy Expenses - Franchised Restaurants Occupancy expenses - franchised restaurants was $3.4 million in 2013, a $0.5 million increase from 2012. The increase was primarily due to $1.2 million occupancy expenses associated with the twenty-six restaurant properties converted and leased to franchisees in Minnesota and California under percentage rent arrangements. The increase in occupancy expenses for the converted properties were partially offset by lower occupancy expenses from properties sold or leases assigned to franchisee operators. General and Administrative Expenses
General and administrative expenses were $73.4 million in 2013, a $5.8 million increase from 2012. This increase was primarily attributable to:

• $2.3 million increase in international franchise development and marketing support expenses,

• $1.0 million increase in domestic new restaurant development expenses,

• $0.7 million increase in marketing and menu development expenses,

• $0.5 million increase in multi-unit management expenses in new Company-operated restaurant markets in Indianapolis and Charlotte,

• $0.5 million increase in stock-based compensation expense, and

• $0.8 million increase in leadership development, global supply chain, domestic franchisee restaurant support and other expenses, net.

General and administrative expenses remain among the most efficient in the industry at approximately 3.0% of system wide sales during 2013 and 2012, respectively.


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Depreciation and Amortization
Depreciation and amortization was $6.7 million compared to $4.6 million last year. The increase in depreciation and amortization is primarily attributable to depreciation associated with new Company-operated restaurants, restaurant reimages, acquired restaurant properties converted and leased to franchisees in Minnesota and California, information technology assets and our corporate support center facility.
Other Expenses (Income), Net
Other expense was $0.3 million in expense in 2013 compared to other income of $0.5 million last year. In 2013, other expense included $0.4 million in loss on disposals of property and equipment offset by $0.1 million in net gain on sales of assets, net. In 2012, other income includes a $0.3 million gain on the sale of real estate to a franchisee and the recognition of $0.5 million in deferred gains related to seven properties formerly leased to a franchisee, partially offset by $0.4 million loss on disposal of property and equipment and other expenses, net.
See Note 16 to our Consolidated Financial Statements for a description of Other expenses (income), net for 2013 and 2012. Operating Profit
Operating profit in 2013 was $58.2 million, a $6.9 million increase compared to 2012. Fluctuations in the components of revenue and expense giving rise to this change are discussed above. The following is an analysis of the fluctuations in operating profit by business segment. Operating profit for each reportable segment includes operating results directly attributable to each segment.

                                                                                     As a
(Dollars in millions)                         2013       2012      Fluctuation      Percent
Franchise operations                         $ 54.7    $ 47.8     $         6.9      14.4  %
Company-operated restaurants                   10.5       7.6               2.9      38.2  %
Operating profit before unallocated expenses   65.2      55.4               9.8      17.7  %
Less unallocated expenses:
Depreciation and amortization                   6.7       4.6               2.1      45.7  %
Other expenses (income), net                    0.3      (0.5 )             0.8    (160.0 )%
Total                                        $ 58.2    $ 51.3     $         6.9      13.5  %

The $6.9 million growth in franchise operations was primarily due to the $11.4 million increase in franchise revenue partially offset by increases in general and administrative expenses related to international franchise development and marketing support expenses, domestic new restaurant development expenses, marketing and menu development expenses, stock-based compensation expense, leadership development, global supply chain, domestic franchisee restaurant support and other expenses, net.
Company-operated restaurants segment operating profit was $10.5 million, a $2.9 million or 38.2% increase from 2012. The increase is segment operating profit was primarily due to a $3.6 million, or 32.4%, increase in company-operated restaurant operating profit partially offset by increases in general and administrative expenses primarily related to the multi-unit management expenses in the new Indianapolis and Charlotte company-operated restaurant markets. Income Tax Expense
Income tax expense was $20.4 million, yielding an effective tax rate of 37.4%, compared to an effective tax rate of 36.3% in 2012. The higher effective tax rate in 2013 is primarily due to higher state income taxes and favorable adjustments to estimated foreign income tax credit reserves in 2012 partially offset by higher worker opportunity and research and development tax credits in 2013. The effective rates differ from statutory rates due to adjustments in estimated tax reserves, tax credits and permanent differences between reported income and taxable income for tax purposes. See Note 18 to our Consolidated Financial Statements included in this Form 10-K for the reconciliation of the statutory rates to the Company's effective tax rates.


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Comparisons of Fiscal Years 2012 and 2011 Sales by Company-Operated Restaurants
Sales by company-operated restaurants were $64.0 million in 2012, a $9.4 million increase from 2011. The increase was primarily due to new restaurants opened and a 5.3% increase in same-store sales.
Franchise Royalties and Fees
Franchise revenues were $110.5 million in 2012, a $15.5 million increase from 2011. The increase was primarily due to an increase in royalties, resulting primarily from an increase in franchise same-store sales of 7.5% during 2012 and new franchised restaurants.
Company Operated Restaurant Profit
Company-operated restaurant operating profit of $11.1 million was 17.3% of sales, compared to $10.2 million and 18.7% of sales in 2011. The $0.9 million increase in Company-operated restaurant operating profit was primarily due to same-store sales of 5.3% and two new restaurant openings in 2011. The 2012 operating profit includes approximately $0.3 million in pre-opening costs associated with opening 5 new restaurants. The 2011 restaurant operating profit includes a $0.5 million favorable adjustment to insurance reserves. Excluding the effects of pre-opening costs in 2012 and the change in estimated insurance reserves in 2011, Company-operated restaurant operating profit margin would have been 17.8% in both 2012 and 2011. Company-operated restaurant operating profit margin is a supplemental non-GAAP measure of performance. See the heading entitled "Management's Use of Non-GAAP Financial Measures." General and Administrative Expenses
General and administrative expenses were $67.6 million, a $6.3 million increase from 2011. This increase was primarily attributable to:

• $3.1 million increase in short-term and long-term employee incentive costs,

• $1.0 million increase in restaurant support and pre-opening costs in new company-operated markets,

• $0.9 million increase in domestic new restaurant development and reimage expenses,

• $0.5 million in legal fees related to licensing arrangements,

• $0.6 million increase in franchisee restaurant support services and new restaurant opening support costs, and

• $0.2 million increase in global support center and other general administrative expenses, net.

General and administrative expenses remain among the most efficient in the industry at approximately 3.0% and 3.1% of system wide sales during 2012 and 2011, respectively.
Other Expenses (Income), Net
Other income was $0.5 million in income in 2012 compared to other expenses of $0.5 million in 2011. Fiscal 2012 results include $0.9 million in gains on sale of real estate assets to franchisees, partially offset by $0.4 million loss on disposal of property and equipment and other expenses, net. In 2011, the Company recognized $0.8 million in expenses for the global support center relocation, offset by a $0.8 net gain on the sale of assets and $0.5 million in disposals of property and equipment and other expenses, net.
See Note 16 to our Consolidated Financial Statements for a description of Other expenses (income), net for 2012 and 2011.


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Operating Profit
Operating profit in 2012 was $51.3 million, a $10.6 million increase compared to
2011. Fluctuations in the components of revenue and expense giving rise to these
changes are discussed above. The following is an analysis of the fluctuations in
operating profit by business segment. Operating profit for each reportable
segment includes operating results directly attributable to each segment.

                                                                                    As a
(Dollars in millions)                          2012      2011      Fluctuation     Percent
Franchise operations                         $ 47.8     $ 37.4    $      10.4       27.8  %
Company-operated restaurants                    7.6        8.0           (0.4 )     (5.0 )%
Operating profit before unallocated expenses   55.4       45.4           10.0       22.0  %
Less unallocated expenses:
Depreciation and amortization                   4.6        4.2            0.4        9.5  %
Other expenses (income), net                   (0.5 )      0.5           (1.0 )   (200.0 )%
Total                                        $ 51.3     $ 40.7    $      10.6       26.0  %

The $10.4 million growth in franchise operations was primarily due to the $15.5 million increase in franchise revenue partially offset by increases in general and administrative expenses related to short-term and long-term employee incentive costs, domestic new restaurant development and reimage expenses, legal fees related to licensing agreements, franchise restaurant support services and new restaurant opening support costs.
Company-operated restaurants segment operating profit was $7.6 million, a $0.4 million or 5.0%, decrease from 2011. For 2012, company-operated restaurant operating profit was $11.1 million, a $0.9 million increase compared to 2011. Company-operated restaurant operating profit was offset by a $0.9 million planned increase in restaurant support and pre-opening costs in new company-operated markets Indianapolis and Charlotte, a $0.4 million increase in training, assessments and support costs in the New Orleans and Memphis company-operated restaurants.
Income Tax Expense
Income tax expense was $17.3 million, yielding an effective tax rate of 36.3%, compared to an effective tax rate of 34.6% in 2011. In 2011, income tax expense included a tax benefit of $0.8 million, or 2.2%, for work opportunity tax credits related to prior years. Excluding the impact of these tax credits, the 2012 effective rate was lower than 2011 due to favorable adjustments to foreign income tax credit reserves partially offset by higher state income taxes. The effective rates differ from statutory rates due to adjustments in estimated tax reserves, tax credits and permanent differences between reported income and taxable income for tax purposes. See Note 18 to our Consolidated Financial Statements included in this Form 10-K for the reconciliation of the statutory rates to the Company's effective tax rates.

Liquidity and Capital Resources
On December 18, 2013, the Company entered into a five year $125.0 million secured revolving credit facility ("2013 Credit Facility") that replaced its former credit facility that consisted of a five year $60 million revolving credit facility and a five year $40 million term loan ("2010 Credit Facility"). Key terms in the 2013 Credit Facility include the following:
• The Company must maintain a Consolidated Total Leverage Ratio of < 3.50 to 1.0.

• The Company must maintain a Consolidated Minimum Fixed Charge Coverage Ratio of > 1.25 to 1.0.

• The Company may repurchase and retire its common shares at any time the Total Leverage Ratio is less than 3.00 to 1.0.

• The Company may obtain other short-term borrowings of up to $10.0 million and letters of credit up to $20.0 million. Collectively, these other borrowings and letters of credit may not exceed the amount of unused borrowings under the facility.

• The Company can request incremental revolving credit commitments up to an additional $125 million.

• No principal payments will be due until the maturity date December 18, 2018.


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See Note 9 to our Consolidated Financial Statements included in this Form 10-K for a description of the 2013 Credit Facility.
Consolidated Total Leverage Ratio, as defined in the 2013 Credit Facility, is the ratio of the Company's Consolidated Total Indebtedness to Consolidated EBITDA for the four immediately preceding fiscal quarters. Consolidated Total Indebtedness means, as at any date of determination, the aggregate principal amount of indebtedness of the Company.
Consolidated Minimum Fixed Charge Coverage Ratio, as defined in the 2013 Credit Facility, is the ratio of the company's Consolidated EBITDAR less provisions for current taxes less Consolidated Maintenance Capital Expenditures to Consolidated Fixed Charges. Consolidated Fixed Charges is defined as the sum of aggregate amounts of scheduled principal payments made during such period on Indebtedness, including Capital Lease Obligations, Consolidated Cash Interest, and Consolidated Rental Expense.
At December 29, 2013 the Company was compliant with all debt covenant requirements. The Company's Total Leverage Ratio was 0.97 to 1.0 compared to a covenant requirement of less than 3.50 to 1.0 and the Minimum Fixed Charge Coverage Ratio was 3.80 to 1.0 compared to a covenant requirement of greater than 1.25 to 1.0.
Outstanding balances accrue interest at a margin of 125 to 250 basis points over the London Interbank Offered Rate ("LIBOR") or other alternative indices plus an applicable margin as specified in the facility. The commitment fee on the unused balance under the facility ranges from 15 to 40 basis points. The increment over LIBOR and the commitment fee are determined quarterly based upon the Consolidated Total Leverage Ratio. As of December 29, 2013 and December 30, 2012, the Company's weighted average interest rates for all outstanding indebtedness under its credit facilities were 1.5% and 3.7% respectively. The Company had $61.1 million available for short-term borrowings and letter of credit under its 2013 Credit Facility as of December 29, 2013.
We finance our business activities primarily with cash flows generated from our operating activities and borrowings under our 2013 Credit Facility. Based primarily upon our generation of cash flows from operations, coupled with its existing cash reserves of $9.6 million and $61.1 million available borrowings under its 2013 Credit Facility as of December 29, 2013, the Company believes that it will have adequate cash flow (primarily from operating cash flows) to meet its anticipated future requirements for working capital, various contractual obligations and expected capital expenditures for 2014. Our franchise model provides strong, diverse and reliable cash flows. Net cash provided by operating activities of the Company was $44.8 million and $40.2 million for 2013 and 2012, respectively. The increase in cash provided by operating activities was primarily attributable higher segment operating profit in franchise operations and Company-operated restaurants. See our Company's Consolidated Statements of Cash Flows in our Consolidated Financial Statements included in this Form 10-K.
Our cash flows and available borrowings allow us to pursue our growth strategies. Our priorities in the use of available cash are:
• reinvestment in core business activities that promote the Company's strategic initiatives,

• repurchase of shares of our common stock, and

• reduction of long-term debt.

Our investment in core business activities includes our obligation to maintain and re-image our Company-operated restaurants, construct Company-operated . . .

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