UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended January 3 , 2021
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ___________ to ____________
Commission File Number: 001-33174
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive office) | (Zip Code) | |||||||
Registrant’s telephone number, including area code: (315 ) 424-0513
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | x | |||||||||
| Non-accelerated filer | o | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý
As of March 3, 2021, Carrols Restaurant Group, Inc. had 53,337,104 shares of its common stock, $.01 par value, outstanding. The aggregate market value of the voting and non-voting common stock held by non-affiliates as of July 1, 2020 of Carrols Restaurant Group, Inc. was $178,742,600 .
DOCUMENTS INCORPORATED BY REFERENCE
expected to be filed pursuant to Regulation 14A no later than 120 days after the conclusion of Carrols Restaurant Group, Inc.'s fiscal year ended
January 3, 2021, are incorporated by reference into Part III of this annual report.
CARROLS RESTAURANT GROUP, INC.
FORM 10-K
YEAR ENDED JANUARY 3, 2021
| Page | ||||||||
1
PART I—FINANCIAL INFORMATION
PART I
Throughout this Annual Report on Form 10-K we refer to Carrols Restaurant Group, Inc. as “Carrols Restaurant Group” and, together with its direct and indirect consolidated subsidiaries, as “we”, “our”, “us” and the "Company" unless otherwise indicated or the context otherwise requires. Carrols Restaurant Group, Inc. is a holding company and conducts all of our operations through our wholly-owned subsidiaries Carrols Corporation (“Carrols”) and Carrols' wholly-owned subsidiary, Carrols LLC, a Delaware limited liability company, and Carrols LLC's wholly-owned subsidiary Republic Foods, Inc., a Maryland corporation ("Republic Foods"), and effective on April 30, 2019, New CFH, LLC and its wholly-owned subsidiaries. New CFH LLC's material direct and indirect wholly-owned subsidiaries include Frayser Quality, LLC and Nashville Quality, LLC (together with New CFH LLC's immaterial subsidiaries, collectively, "New CFH"). Unless the context otherwise requires, Carrols Restaurant Group and its direct and indirect wholly-owned subsidiaries are collectively referred to as the “Company.” All intercompany transactions have been eliminated in consolidation.
We use a 52 or 53 week fiscal year ending on the Sunday closest to December 31. Our fiscal years ended January 1, 2017, December 31, 2017, December 30, 2018 and December 29, 2019 each contained 52 weeks. Our fiscal year ended January 3, 2021 contained 53 weeks.
At January 3, 2021 we operated, as franchisee, 1,009 Burger King® restaurants in 23 Northeastern, Midwestern, Southcentral and Southeastern states and 65 Popeyes® restaurants in seven Southeastern states.
In this Annual Report on Form 10-K, we refer to information, forecasts and statistics regarding the restaurant industry and to information, forecasts and statistics from Nation's Restaurant News, the U.S. Census Bureau and the U.S. Department of Agriculture. We operate our Burger King® restaurants under franchise agreements with Burger King Corporation ("BKC") and our Popeyes® restaurants under franchise agreements with Popeyes Louisiana Kitchen, Inc. ("PLK"). Any reference to "BKC" in this Annual Report on Form 10-K refers to Burger King Corporation and its parent company Restaurant Brands International, Inc., which is sometimes referred to as "RBI." Any reference to PLK refers to Popeyes Louisiana Kitchen, Inc. and its indirect parent company, RBI. Unless otherwise indicated, information regarding Burger King, BKC, Popeyes and PLK in this Annual Report on Form 10-K has been made publicly available by RBI.
This 2020 Annual Report on Form 10-K contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are predictive in nature or that depend upon or refer to future events or conditions are forward-looking statements. Words such as “may”, “might”, “will”, “should”, “anticipate”, “believe”, “expect”, “intend”, “estimate”, “hope”, “plan” or similar expressions are intended to identify such forward-looking statements. In addition, expressions of our strategies, intentions; plans or guidance are also forward-looking statements. These statements reflect management's best judgment based on current views with respect to future events and are subject to risks and uncertainties, both known and unknown. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date. Actual results could differ materially from those stated or implied in these forward-looking statements as a result of a number of factors, included but not limited to, the factors discussed in Item 1A-Risk Factors. We believe important factors that could cause actual results to differ materially from our expectations include the following, in addition to other risks and uncertainties discussed herein:
•The impact of the COVID-19 pandemic;
•Effectiveness of the Burger King® and Popeyes® advertising programs and the overall success of the Burger King® brand;
•Increases in food costs and other commodity costs;
•Competitive conditions, including pricing pressures, discounting, aggressive marketing and the potential impact of competitors’ new unit openings and promotions on sales of our restaurants;
•Our ability to integrate any restaurants we acquire;
2
•Regulatory factors;
•Environmental conditions and regulations;
•General economic conditions, particularly in the retail sector;
•Weather conditions;
•Fuel prices;
•Significant disruptions in service or supply by any of our suppliers or distributors;
•Changes in consumer perception of dietary health and food safety;
•Labor and employment benefit costs, including the effects of minimum wage increases, healthcare reform and changes in the Fair Labor Standards Act;
•The outcome of pending or future legal claims or proceedings;
•Our ability to manage our growth and successfully implement our business strategy;
•Our ability to service our indebtedness;
•Our borrowing costs and credit ratings, which may be influenced by the credit ratings of our competitors;
•The availability and terms of necessary or desirable financing or refinancing and other related risks and uncertainties;
•Factors that affect the restaurant industry generally, including recalls if products become adulterated or misbranded, liability if our products cause injury, ingredient disclosure and labeling laws and regulations, reports of cases of food borne illnesses such as “mad cow” disease, and the possibility that consumers could lose confidence in the safety and quality of certain food products as well as negative publicity regarding food quality, illness, injury or other health concerns; and
•Other factors discussed under Item 1A - "Risk Factors" and elsewhere herein.
ITEM 1. BUSINESS
Overview
Our Company
We are one of the largest restaurant companies in the United States and have been operating restaurants for more than 60 years. We are the largest Burger King® franchisee in the United States, based on number of restaurants, and have operated Burger King restaurants since 1976. As of January 3, 2021, we operated 1,009 Burger King® restaurants located in 23 Northeastern, Midwestern, Southcentral and Southeastern states and 65 Popeyes® restaurants in seven Southeastern states.
For a discussion of the impact of the COVID-19 pandemic on our business, please refer to "Management’s Discussion and Analysis of Financial Condition and Results of Operations".
Burger King. Burger King restaurants feature the popular flame-broiled Whopper® sandwich, as well as a variety of hamburgers, chicken and other specialty sandwiches, french fries, salads, breakfast items, snacks, soft drinks and other offerings. We believe that our size, seasoned management team, extensive operating infrastructure, experience and proven operating disciplines differentiate us from many of our competitors as well as many other Burger King operators.
According to RBI, as of December 31, 2020 there were a total of 18,625 Burger King restaurants, of which almost all were franchised and 7,081 were located in the United States. Burger King is the second largest quick service hamburger restaurant chain in the world (as measured by number of restaurants) and we believe that the Burger King brand is one of the world's most recognized consumer brands. Burger King restaurants have a distinctive image and are generally located in high-traffic areas throughout the United States. Burger King restaurants are designed to appeal to a broad spectrum of consumers, with multiple day-part meal segments targeted to different groups of consumers. We believe that the competitive attributes of Burger King restaurants include significant brand recognition, convenience of location, quality, speed of service and price.
3
We operate our restaurants under franchise agreements with BKC. Our Burger King restaurants are typically open seven days per week and generally have operating hours ranging from 6:00 am to midnight on Sunday to Wednesday and to 1:00AM on Thursday to Saturday. In response to the COVID-19 pandemic during 2020, we reduced operating hours at many of our Burger King restaurants, primarily breakfast and late night. By the end of 2020, we had restored operating hours at our Burger King restaurants with the exception of late night, where we are closing a few hours earlier than pre-pandemic operations due to decreased local demand.
Our existing restaurants consist of one of several building types with various seating capacities. Our typical freestanding restaurant contains approximately 2,600 square feet with seating capacity for 60 to 70 guests, has drive-thru service windows and adjacent parking areas. As of January 3, 2021, almost all of our restaurants were freestanding.
Popeyes. Popeyes Restaurants are quick-service restaurants offering primarily a limited menu of lunch and dinner products, and in certain restaurants breakfast products. Popeyes distinguishes itself with a unique “Louisiana” style menu that features a fried chicken sandwich, spicy chicken, chicken tenders, biscuits, fried shrimp and other seafood, red beans and rice and other quick-service menu items. According to RBI, as of December 31, 2020, there were 3,451 Popeyes restaurants worldwide and 2,608 Popeyes restaurants in the United States.
Our Popeyes restaurants are generally freestanding locations with approximately 2,500 to 3,200 square feet with seating capacity for 50 to 60 guests and a drive-thru. Our Popeyes restaurants are typically open seven days per week with operating hours of 10:00 am to 10:00 pm Sunday through Thursday and 10:00 am to 11:00 pm on Friday and Saturday. In response to the COVID-19 pandemic during 2020, we reduced operating hours at many of our Popeyes restaurants, primarily late night. By the end of 2020, we had restored operating hours at our Popeyes restaurants with the exception of a few locations where we are still closing a few hours earlier than pre-pandemic operations due to decreased local demand.
During 2019, we acquired 234 restaurants in three separate transactions. During 2018, we acquired a total of 44 restaurants from other franchisees in four separate transactions. During 2017, we acquired a total of 64 restaurants in three separate transactions.
For the fiscal year ended January 3, 2021, our restaurants generated total restaurant sales of $1,547.5 million, which included $28.4 million from the 53rd week in 2020 and was impacted by significant sales declines we experienced in March (-16.8%) and April (-21.7%) of 2020 during the onset of the COVID-19 pandemic. In fiscal 2020, comparable restaurant sales at our Burger King restaurants decreased 2.8% and at our Popeyes restaurants decreased 0.1%. Our average annual restaurant sales for all restaurants were approximately $1.4 million per restaurant in fiscal 2020.
2019 Cambridge Acquisition. On April 30, 2019, we completed a merger with New CFH, a former subsidiary of Cambridge Franchise Holdings, LLC ("Cambridge"), and acquired 165 Burger King® restaurants, 55 Popeyes® restaurants and six convenience stores (the "Cambridge Acquisition"). Cambridge received a total of approximately 14.9 million shares of our common stock, after the automatic conversion of 10,000 shares of Series C Convertible Preferred Stock that Cambridge initially received in the Cambridge Acquisition. All shares of common stock issued to Cambridge are subject to a two year restriction on sale or transfer subject to certain limited exceptions. As part of the transaction, Cambridge designated two Cambridge executives who joined the Company's Board of Directors upon completion of the Cambridge Acquisition.
Area Development Agreements. The Company, Carrols, Carrols LLC and BKC entered into a new Area Development Agreement (the "ADA") which commenced on April 30, 2019 and was to end on September 30, 2024 and which superseded the Operating Agreement dated as of May 30, 2012, as amended, between Carrols LLC and BKC. The ADA was amended and restated by all parties on January 4, 2021 (the "Amended ADA").
Under the ADA, Carrols LLC had agreed to open, build and operate a total of 200 new Burger King restaurants including 32 additional Burger King restaurants by September 30, 2020, 41 additional Burger King restaurants by September 30, 2021, 41 additional Burger King restaurants by September 30, 2022, 40 additional Burger King restaurants by September 30, 2023 and 39 additional Burger King restaurants by September 30, 2024, subject to and in accordance with the terms of the ADA. Carrols LLC had also agreed under the ADA to remodel or upgrade a total of 748 Burger King restaurants to BKC’s Burger King of Tomorrow restaurant image, including 130 additional Burger King restaurants by September 30, 2020, 118 additional Burger King restaurants by September
4
30, 2021, 131 additional Burger King restaurants by September 30, 2022, 138 additional Burger King restaurants by September 30, 2023 and 141 additional Burger King restaurants by September 30, 2024, subject to and in accordance with the terms of the ADA.
These development commitments were substantially reduced in the Amended ADA. Pursuant to the Amended ADA, Carrols LLC agreed to open, build and operate a total of 50 new Burger King restaurants, 80% of which must be in Kentucky, Tennessee and Indiana. This includes four Burger King restaurants by September 30, 2021, 10 additional Burger King restaurants by September 30, 2022, 12 additional Burger King restaurants by September 30, 2023, 12 additional Burger King restaurants by September 30, 2024 and 12 additional Burger King restaurants by September 30, 2025.
In addition, pursuant to the Amended ADA, BKC granted Carrols LLC franchise pre-approval to build new Burger King restaurants or acquire Burger King restaurants from Burger King franchisees with respect to 500 Burger King restaurants in the aggregate in (i) Kentucky, Tennessee and Indiana (excluding certain geographic areas in Indiana) and (ii) (a) 16 states, which include Arkansas, Indiana, Kentucky, Louisiana, Maine, Maryland, Michigan, Mississippi, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont and Virginia (subject to certain exceptions for certain limited geographic areas within certain states) and (b) any other geographic locations that Carrols LLC enters after the commencement date of the Amended ADA pursuant to BKC procedures subject to certain limitations.
Pursuant to the ADA and for a cost of $3.0 million, BKC had assigned to Carrols LLC the right of first refusal on the sale of franchisee-operated restaurants in 16 states and a limited number of counties in four additional states, and granted franchise pre-approval to acquire Burger King restaurants until the date that we have acquired more than an aggregate of an additional 500 Burger King restaurants excluding those restaurants we acquired in the Cambridge Acquisition ("ADA ROFR"). The ADA ROFR was terminated in connection with the Amended ADA and an impairment charge of $2.0 million for the unamortized value remaining from the payment for the ADA ROFR was recorded in 2020.
BKC agreed to contribute $10 million to $12 million for upgrades of approximately 50 to 60 Burger King restaurants in 2019 and 2020 where BKC is the landlord on the lease for such Burger King restaurants operated by Carrols LLC or an affiliate. Most of these restaurants had already been remodeled to the 20/20 image. We received $10.0 million from BKC under this arrangement in 2019.
On October 1 of each year following the commencement date of the ADA, Carrols LLC was required to pay BKC pre-paid franchise fees in the following amounts to be applied to new Burger King restaurants opened and operated by Carrols LLC: (a) $350,000 on the commencement date of the ADA, (b) $1,600,000 on October 1, 2019, (c) $2,050,000 on October 1, 2020, (d) $2,050,000 on October 1, 2021, (e) $2,000,000 on October 1, 2022 and (f) $1,950,000 on October 1, 2023. The Amended ADA eliminated the requirement for any prepayments due and payable on and after October 1, 2020, and the $0.6 million balance of prepaid franchise fees paid under the ADA that had not yet been applied to new restaurant development was forfeited.
Through the Cambridge Acquisition, we have also assumed a development agreement for Popeyes, which includes an assignment by PLK of its right of first refusal under its franchise agreements with its franchisees for acquisitions in two southern states, as well as a development commitment to open, build and operate approximately 80 new Popeyes® restaurants over six years.
Our Competitive Strengths
We believe we have the following competitive strengths:
Largest Burger King Franchisee in the United States. We are the largest Burger King franchisee in the United States based on number of restaurants, and believe we are well positioned to leverage the scale and marketing of one of the most recognized brands in the restaurant industry. We believe the geographic dispersion of our restaurants provides us with stability and enhanced growth opportunities in many of the markets in which we operate. We also believe that our large number of restaurants increases our ability to effectively manage the awareness of the Burger King brand in certain markets through our ability to influence local advertising and promotional activities.
5
Operational Expertise. We have been operating Burger King restaurants since 1976 and have developed sophisticated information and operating systems that enable us to measure and monitor key metrics for operational performance, sales and profitability that may not be available to other restaurant operators. Our focus on leveraging our operational expertise, infrastructure and systems allows us to optimize the performance of our restaurants and restaurants that we may acquire or open. Our size and history with the Burger King brand enable us to effectively track operating metrics and leverage best practices across our organization. We believe that our experienced management team, operating culture, effective operating systems and infrastructure enable us to operate more efficiently than many other Burger King operators. We also believe we will be able to leverage our operational expertise to the Popeyes restaurants acquired in 2019.
Consistent Operating History and Financial Strength. We believe that the quality and sophistication of our restaurant operations have helped drive our strong restaurant level performance. Comparable restaurant sales for our restaurants have generally outperformed the Burger King system. Our strong restaurant level operations coupled with our financial management capabilities have resulted in consistent and stable cash flows under most economic circumstances. We have demonstrated our ability to prudently manage our capital structure and financial leverage through a variety of economic cycles. We believe that our cash flow from operations, cash balances and the availability of revolving credit borrowings under our Senior Credit Facilities are sufficient to fund our ongoing operations and capital expenditures.
Two Distinct Brands with Global Recognition, Innovative Marketing and New Product Development. As a Burger King franchisee, we benefit from, and rely on, BKC's extensive marketing, advertising and product development capabilities to drive sales and generate increased restaurant traffic. Over the years, BKC has launched innovative and creative multimedia advertising campaigns and products that highlight the relevance of the Burger King brand. BKC has also introduced promotions that leverage both value and premium menu offerings as well as providing a platform for new premium sandwich offerings. We believe these campaigns continue to positively impact the brand today as BKC focuses on offering a well-balanced value menu and premium sandwich promotional mix and remains committed to new product launches, including a new hand-breaded crispy chicken sandwich and limited time offers, both of which continue to show positive trends. BKC is also working with franchisees throughout the system to encourage the renovation and remodeling of restaurants to BKC's current image, which we believe will continue to increase customer traffic and restaurant sales. In 2020, BKC assisted with the Company’s launch of delivery options for our guests. BKC negotiated distribution and operational agreements with major delivery platform providers and introduced its own white label mobile application that allowed us to quickly provide this option to our guests. In 2021, BKC is launching a loyalty program for use by its franchisees that we believe will reduce coupon clutter and provide incentives for guests to visit our restaurants with greater frequency and during lower traffic periods.
With regard to the Popeyes brand, which is owned by PLK, a subsidiary of RBI, the successful development and launch of a new chicken sandwich in 2019 has not only driven higher sales but we believe has also attracted a new demographic of guests to the existing customer base which will enhance restaurant sales and new restaurant development opportunities.
Strategic Relationship with Burger King Corporation and RBI. We believe that the structure of the 2012 acquisition of 278 restaurants from BKC and the 2019 Cambridge Acquisition strengthened our well-established relationship with BKC and RBI and has further aligned our common interests to grow our business. In 2021, we intend to continue to expand our restaurant base over the long term by making selective acquisitions under our pre-approval rights. The consideration to BKC associated with the 2012 acquisition included a preferred stock equity interest in Carrols Restaurant Group, which is held by BKC Stockholders (as defined below) and convertible into approximately 15.0% of the outstanding shares of our common stock (after giving effect to such conversion). Since the 2012 acquisition, two of BKC's or RBI's senior executives have served on our Board of Directors. Christopher Finazzo, President of BKC, Americas and Matthew Dunnigan, Chief Financial Officer of Restaurant Brands International Inc., the indirect parent company of BKC, currently serve on our Board of Directors. Our restaurants represented approximately 14.2% of the Burger King locations in the United States as of January 3, 2021. We believe that the combination of our rights under the Amended ADA, RBI's equity interest and its board level
6
representation will continue to reinforce the alignment of our common interests with BKC and Popeyes over the long term.
Experienced Burger King Management Team with a Proven Track Record. We believe that our senior management team's extensive experience in the restaurant industry and its long and successful history of developing, acquiring, integrating and operating quick-service restaurants provide us with a competitive advantage. Our management team has a successful history of integrating acquired restaurants, and over the past 20 years, we have significantly increased the number of Burger King restaurants we own and operate, largely through acquisitions. Our operations are overseen by our Chief Executive Officer, Dan Accordino, who has over 45 years of Burger King and quick-service restaurant experience, and our new Chief Operating Officer, Carl Hauch, who joined us in February of 2021 and has over 20 years of experience in restaurant and retail operations, most recently in the Wendy's system. Additionally, we have two Burger King Divisional Vice Presidents and 13 Regional Directors that collectively have an average of 22 years of Burger King restaurant experience. Our 148 Burger King district managers, who have an average tenure of over 16 years in the Burger King system, support the Regional Directors. Our operations management is further supported by our infrastructure of financial, information systems, real estate, human resources and legal professionals.
Multiple Growth Levers. We believe our historical track record of acquiring and integrating restaurants and our long-term strategy to remodel, upgrade and open new restaurants provide multiple avenues to grow our business. With more than 60 years of restaurant operating experience, we have successfully grown our business through acquisitions and integrated the restaurants we acquired. We have experienced increases in comparable restaurant sales, increased restaurant-level profitability and improved operating metrics at the restaurants we have acquired in the last five years.
Our Business Strategies
Our primary business strategies are as follows:
Selectively Acquire and Develop Additional Burger King and Popeyes Restaurants. After enduring the challenges 2020 brought to our industry as a result of the COVID-19 pandemic, we have substantially improved our liquidity position, we have reduced our near-term capital expenditure requirements and we continue to deleverage. As a result, we believe we have the flexibility to grow our business organically and through acquisitions in a manner that will optimize our growth potential while generating consistent and enhanced free cash flow and keeping our leverage in check.
As of January 3, 2021, we operated 1,009 Burger King restaurants, making us the largest Burger King franchisee in the United States, and 65 Popeyes® restaurants. Under our Amended ADA with BKC, we are pre-approved to acquire up to 500 Burger King restaurants in territories where we currently operate and have agreed to build 50 new restaurants over the next five years. Due to the number of restaurants and franchisees in the Burger King system and our historical success in acquiring and integrating restaurants, we believe that there is considerable opportunity for future growth through acquisitions. There are more than 2,000 Burger King restaurants we do not own in states in which we have pre-approval rights. Furthermore, we believe there are additional Burger King restaurants in states beyond our territories that could be attractive acquisition candidates, subject to BKC's approval.
While we may evaluate and discuss potential acquisitions of additional restaurants from time to time, we currently have no understandings, commitments or agreements with respect to any material acquisitions. We may be required to obtain additional financing to fund future acquisitions. There can be no assurance that we will be able to obtain additional financing, if necessary, on acceptable terms or at all.
Improve Profitability of Restaurants We Acquire by Leveraging Our Existing Infrastructure and Best-Practices. For acquired restaurants, we believe we can realize benefits from economies of scale, including leveraging our existing infrastructure across a larger number of restaurants. Additionally, we believe that our skilled management team, sophisticated information technology, operating systems and training and development programs support our ability to enhance operating margins at these restaurants. We have demonstrated our ability to increase
7
the profitability of acquired restaurants and we believe that, over time, we will improve profitability and operational efficiency at the restaurants we have acquired and may acquire in the future.
Increase Restaurant Sales and Customer Traffic. BKC has identified and implemented a number of strategies to increase brand awareness, increase market share, improve overall operations and drive sales. These strategies are central to our strategic objectives to deliver profitable growth.
•Products. The strength of the BKC menu has been built on a distinct flame-grilled cooking platform to make better tasting hamburgers. We believe that BKC intends to continue to optimize the menu by focusing on core products, such as the flagship Whopper® sandwich, while maintaining a balance between value promotions and premium limited time offerings to drive sales and traffic. Recent product innovation has included the new hand-breaded Chicken Sandwich and the Impossible Whopper, a vegetable based product that has attracted new customers. The new hand-breaded Chicken Sandwich is one of the largest anticipated product introductions to our menu. In addition, BKC has implemented a multi-tier balanced marketing approach with value and premium offerings, pairing value promotions with premium sandwich offerings. Promotional initiatives in 2020 included the 2 for $6 Mix and Match, the 2 for $5 Mix and Match, and the 2 for $4 and 2 for $5 Biscuit/Croissan'wich. In 2021, we are looking forward to a new Value Menu featuring the $1.00 Bacon Cheeseburger as well as the Sourdough platform which includes the Sourdough KING and a new Sourdough Breakfast Sandwich. BKC intends to accelerate the breakfast daypart with a new French Toast Sandwich. In 2021, BKC also intends to introduce a new loyalty program entitled “Royal Perks” to entice guests to visit more often and receive personalized offers. These new platforms in addition to recent quality improvements support BKC's strategy to appeal to a broader consumer base and to increase restaurant sales.
•Image. We believe that re-imaged restaurants increase curb appeal and result in increased restaurant sales. BKC's current restaurant image features a fresh, sleek, eye-catching design which incorporates easy-to-navigate digital menu boards in the dining room, streamlined merchandising at the drive-thru and flat screen televisions in the dining area. We believe that restaurant remodeling has improved our guests' dining experience and increased customer traffic. We believe the customer experience will be further enhanced from the upgrades to the Burger King of Tomorrow image that include a double drive-thru (where applicable), certain modifications to the exterior image and the installation of exterior digital menu boards.
•Advertising and Promotion. We believe that we will benefit from BKC's advertising support of its menu items, product enhancement and re-imaging initiatives. BKC has established a data driven marketing process which has focused on driving restaurant sales and traffic, while targeting a broad consumer base with inclusive messaging. This strategy uses multiple touch points to advertise our products, including digital advertising, social media and mobile display, in addition to traditional television advertising and streaming audio. BKC has a food-centric marketing strategy which focuses consumers on the food offerings, the core asset, and balances value promotions and premium limited time offerings to drive profitable restaurant sales and traffic.
•Operations. We believe that improving restaurant operations and enhancing the customer experience are key components to increasing the profitability of our restaurants. We believe we will benefit from BKC's ongoing initiatives to improve food quality, simplify restaurant level execution, reduce restaurant labor costs and monitor operational performance, all of which are designed to improve the customer experience and increase customer traffic. In 2020, BKC implemented delivery services with major delivery providers as well as through its own mobile app. By the end of 2020, we were providing fully integrated delivery services at approximately 890 of our Burger King restaurants, based on the geographic availability of delivery services.
8
Restaurant Economics
Selected restaurant operating data for our restaurants is as follows:
Year Ended | |||||||||||||||||
| December 30, 2018 | December 29, 2019 | January 3, 2021 | |||||||||||||||
| Average annual sales per restaurant (1) | $ | 1,449,047 | $ | 1,454,654 | $ | 1,435,531 | |||||||||||
| Average sales transaction | $ | 7.37 | $ | 7.62 | $ | 8.63 | |||||||||||
| Drive-through sales as a percentage of total sales | 68.4 | % | 68.2 | % | 86.1 | % | |||||||||||
| Day-part sales percentages: | |||||||||||||||||
| Breakfast | 13.5 | % | 13.0 | % | 11.5 | % | |||||||||||
| Lunch | 31.9 | % | 31.7 | % | 32.6 | % | |||||||||||
| Dinner | 20.9 | % | 21.5 | % | 22.6 | % | |||||||||||
| Afternoon | 19.9 | % | 20.1 | % | 22.0 | % | |||||||||||
| Late night | 13.8 | % | 13.7 | % | 11.3 | % | |||||||||||
(1)Average annual sales per restaurant are derived by dividing restaurant sales by the average number of restaurants operating during the period on a 52-week basis for the years ended December 30, 2018 and December 29, 2019 or 53-week basis for the year ended January 3, 2021.
Restaurant Capital Costs
The initial cost of the franchise fee, equipment, seating, signage and other interior costs of a standard new Burger King and Popeyes restaurant currently is approximately $500,000 (which excludes the cost of land, the building and site improvements). In the markets in which we operate, the cost of land generally ranges from $500,000 to $1,200,000 for Burger King restaurants and $500,000 to $1,000,000 for Popeyes restaurants and the cost of building and site improvements generally ranges from $1,000,000 to $1,800,000 for both Burger King and Popeyes restaurants.
With respect to the development of freestanding restaurants, if we acquire land and construct the building, we typically seek to thereafter enter into an arrangement to sell and leaseback the land and building under a long-term lease. Historically, we have been able to acquire and finance many of our locations under such leasing arrangements. Where we are unable to purchase the underlying land, we enter into a long-term lease for the land followed by construction of the building using cash generated from our operations or with borrowings under our Senior Credit Facilities (as defined below).
The cost of securing real estate and developing and equipping new restaurants can vary significantly and depends on a number of factors, including local economic conditions and the characteristics of a particular site. Accordingly, the cost of opening new restaurants in the future may differ substantially from the historical cost of restaurants previously opened and the estimated costs above.
BKC's current image restaurant design draws inspiration from its signature flame-grilled cooking process and incorporates a variety of innovative elements to a backdrop that evokes the warm and welcoming look of the outdoors including corrugated metal, brick, wood and concrete. The cost of remodeling a restaurant to the BKC current image varies depending upon the age and condition of the restaurant and the amount of new equipment needed and can range from $600,000 to $1,400,000 per restaurant with an average cost of approximately $1.1 million per restaurant in 2020. The total cost of a remodel has increased over time due to construction cost increases, the addition of a second drive-thru lane at certain locations and the replacement of certain kitchen equipment at the time of the remodel which is incremental to the cost to upgrade to the BKC current image design. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent and Future Events Affecting our Results of Operations".
9
Site Selection
We believe that the location of our restaurants is a critical component of each restaurant's success. We evaluate potential new sites on many critical criteria including accessibility, visibility, costs, surrounding traffic patterns, competition and demographic characteristics. Our senior management approves the viability of all acquisition prospects and new sites, based upon analyses prepared by our real estate, financial and operations professionals and our return on investment requirements.
Seasonality
Our business is moderately seasonal due to regional weather conditions. Due to the location of our restaurants, sales are generally higher during the summer months than during the winter months.
10
Restaurant Locations
The following table details the locations of our 1,009 Burger King restaurants as of January 3, 2021:
| State | Total Restaurants | ||||
| Alabama | 6 | ||||
| Arkansas | 9 | ||||
| Georgia | 2 | ||||
| Illinois | 16 | ||||
| Indiana | 92 | ||||
| Kentucky | 41 | ||||
| Louisiana | 17 | ||||
| Maine | 15 | ||||
| Maryland | 29 | ||||
| Massachusetts | 1 | ||||
| Michigan | 51 | ||||
| Mississippi | 33 | ||||
| Missouri | 1 | ||||
| New Jersey | 10 | ||||
| New York | 125 | ||||
| North Carolina | 157 | ||||
| Ohio | 116 | ||||
| Pennsylvania | 61 | ||||
| South Carolina | 42 | ||||
| Tennessee | 109 | ||||
| Vermont | 6 | ||||
| Virginia | 66 | ||||
| West Virginia | 4 | ||||
| Total | 1,009 | ||||
The following table details the locations of our 65 Popeyes restaurants as of January 3, 2021:
| State | Total Restaurants | ||||
| Arkansas | 2 | ||||
| Indiana | 3 | ||||
| Kentucky | 3 | ||||
| Louisiana | 5 | ||||
| Mississippi | 33 | ||||
| Tennessee | 18 | ||||
| Virginia | 1 | ||||
| Total | 65 | ||||
Operations
Management Structure
We conduct substantially all of our executive management, finance, marketing and operations support functions from our corporate headquarters in Syracuse, New York. Carrols Restaurant Group is led by our Chief Executive Officer and President, Daniel T. Accordino, who has over 45 years of Burger King and quick-service restaurant experience at our company.
11
Operations for our Burger King restaurants are overseen by our new Chief Operating Officer, Carl Hauch, who joined us in February of 2021 and has over 20 years of experience in restaurant and retail operations, most recently in the Wendy's system, as well as two Division Vice Presidents and 13 Regional Directors that have an average of 22 years of Burger King restaurant experience. Our 148 district managers support the Regional Directors in the management of our Burger King restaurants. Operations for our Popeyes restaurants are overseen by two Regional Directors and nine district managers.
A district manager is responsible for the direct oversight of the day-to-day operations of an average of approximately seven to eight restaurants. Typically, district managers have previously served as restaurant managers at one of our restaurants. Regional directors, district managers and restaurant managers are compensated with a fixed salary plus an incentive bonus based upon the performance of the restaurants under their supervision, and for our regional directors and district managers, the combined performance of all of our restaurants. Most often, our restaurants are staffed with hourly employees who are supervised by a salaried general manager and one to three assistant managers.
Management Information Systems
Our management information systems provide us with the ability to efficiently and effectively manage our restaurants and to ensure the consistent application of operating controls at our restaurants. Our size affords us the ability to maintain an in-house staff of information technology and restaurant systems professionals dedicated to continuously enhancing our systems. In addition, these capabilities allow us to quickly integrate restaurants that we acquire and achieve greater economies of scale and operating efficiencies.
We typically replace the POS systems at restaurants we acquire shortly after acquisition and implement our POS, labor and inventory management systems. Our restaurants employ touch-screen POS systems that are designed to facilitate accuracy and speed of order taking. These systems are user-friendly, require limited cashier training and improve speed-of-service through the use of conversational order-taking techniques. The POS systems are integrated with PC-based applications at the restaurant and hosted systems at our corporate office that are designed to facilitate financial and management control of our restaurant operations.
Our restaurant systems provide daily tracking and reporting of traffic counts, menu item sales, labor and food data including costs and inventories, and other key operating metrics for each restaurant. We communicate electronically with our restaurants on a continuous basis via a high-speed data network, which enables us to collect this information for use in our corporate management systems in near real-time. Our corporate headquarters manages systems that support all of our accounting, operating and reporting systems. We also operate a 24-hour, seven-day help desk at our corporate headquarters that enables us to provide systems and operational support to our restaurant operations as required. Among other things, our restaurant information systems provide us with the ability to:
•monitor labor utilization and sales trends on a real-time basis at each restaurant, enabling the restaurant manager to effectively manage to our established labor standards on a timely basis;
•reduce inventory shrinkage using restaurant-level inventory management systems and daily reporting of inventory variances;
•analyze sales and product mix data to help restaurant managers forecast production levels throughout the day;
•monitor day-part drive-thru speed of service at each of our restaurants;
•allow the restaurant manager to produce day-part labor schedules based on the restaurant's historical sales patterns;
•systematically communicate human resource and payroll data to our administrative offices for efficient centralized management of labor costs and payroll processing;
•allow customers to place mobile and third-party delivery orders that integrate directly with the point-of-sale system;
•employ centralized control over pricing, menu and inventory management activities at the restaurant utilizing the remote management capabilities of our systems;
12
•take advantage of electronic commerce including the ability to place orders with suppliers and to integrate detailed invoice, receiving and product data with our inventory and accounting systems;
•provide analyses, reporting and tools to enable all levels of management to review a wide-range of financial, product mix and operational data; and
•systematically analyze and report on detailed transactional data to help detect and identify potential theft.
Critical information from our systems is available in near real-time to our restaurant managers, who are expected to react quickly to trends or situations in their restaurants. Our district managers also receive near real-time information for their respective restaurants and have access to key operating data on a remote basis using our corporate intranet-based reporting. Management personnel at all levels, from the restaurant manager through senior management, utilize and monitor key restaurant performance indicators that are also included in our restaurant-level incentive bonus plans.
Burger King and Popeyes Franchise Agreements
Each of our Burger King restaurants operates under a separate franchise agreement with BKC. Each of our Popeyes restaurants operates under a separate franchise agreement with PLK. Our franchise agreements with BKC and PLK generally require, among other things, that all restaurants comply with specified design criteria and operate in a prescribed manner, including utilization of a standard menu. In addition, our Burger King franchise agreements generally require that our restaurants conform to BKC's current image and may provide for updating our restaurants during the tenth year of the agreements to conform to such current image, which may require significant expenditures.
These franchise agreements with BKC and PLK generally provide for an initial term of 20 years and currently have an initial franchise fee of $50,000. In the event that we terminate a franchise agreement and close the related BKC restaurant prior to the expiration of its term, we generally are required to pay BKC an amount based on the net present value of the royalty stream that would have been realized by BKC had such franchise agreement not been terminated. With BKC's and PLK's respective approval, we can elect to extend franchise agreements for additional 20 year terms, provided that the restaurant meets the current restaurant image standard and we are not in default under terms of the franchise agreement. The franchise agreement fee for subsequent renewals for our Burger King and Popeyes restaurants is currently $50,000. BKC or PLK may terminate any of the franchise agreements if an act of default is committed by us under these agreements and such default is not cured. Defaults under the franchise agreements for our Burger King and Popeyes restaurants include, among other things, our failure to operate such restaurant in accordance with the operating standards and specifications established by BKC or PLK (including failure to use equipment, uniforms or decor approved by the respective franchisor), our failure to sell products approved or designated by BKC or PLK, our failure to pay royalties or advertising and sales promotion contributions as required, our unauthorized sale, transfer or assignment of such franchise agreement or the related restaurant, certain events of bankruptcy or insolvency with respect to us, conduct by us or our employees that has a harmful effect on the Burger King or Popeyes restaurant system, conviction of us or our executive officers for certain indictable offenses, our failure to maintain a responsible credit rating or our acquisition of an interest in any other hamburger restaurant business. At January 3, 2021, we were not in default under any of our franchise agreements with BKC or PLK.
In order to obtain a successor franchise agreement with BKC and PLK, a franchisee is typically required to make capital improvements to the restaurant to bring it up to BKC's or PLK's current image standards. The cost of these improvements may vary widely depending upon the magnitude of the required changes and the degree to which we have made interim improvements to the restaurant. At January 3, 2021, we had 12 Burger King franchise agreements due to expire in 2021, 14 Burger King franchise agreements due to expire in 2022 and 3 Burger King franchise agreements due to expire in 2023, as well as 32 that expired prior to the end of 2020. At January 3, 2021 we had two Popeyes franchise agreements set to expire in 2021, four Popeyes franchise agreements set to expire in 2022 and one Popeyes franchise agreement set to expire in 2023, as well as six Popeyes franchise agreements that expired prior to the end of 2020.
We believe that we will be able to satisfy BKC's and PLK's normal franchise agreement renewal criteria. Accordingly, we believe that renewal franchise agreements will be granted on a timely basis by BKC and PLK at
13
the expiration of our existing franchise agreements. Historically, BKC has granted all of our requests for successor franchise agreements. However, there can be no assurance that BKC and PLK will grant these requests in the future.
In recent years, the historical costs of improving our Burger King restaurants in connection with franchise renewals generally have ranged from $400,000 to $800,000 per restaurant. The average cost of our remodels in 2020 was approximately $1.1 million per restaurant. The cost of remodels can vary depending upon the age and condition of the restaurant and the amount of new equipment needed. The cost of capital improvements made in connection with future franchise agreement renewals may differ substantially from past franchise renewals depending on the current image requirements established from time to time by BKC or PLK.
We evaluate the performance of our Burger King and Popeyes restaurants on an ongoing basis. With respect to franchise renewals, such evaluation depends on many factors, including our assessment of the anticipated future operating results of the subject restaurants and the cost of required capital improvements that we would need to commit for such restaurants. If we determine that a Burger King or Popeyes restaurant is under-performing, or that we do not anticipate an adequate return on the capital investment required to renew the franchise agreement, we may elect to close such restaurant. We may also relocate (offset) a restaurant within its trade area and build a new Burger King or Popeyes restaurant as part of the franchise renewal process. In 2020, we closed 34 Burger King restaurants, including one offset location. We currently expect to close less than five Burger King restaurants in 2021, excluding any relocations of existing restaurants. Our determination to close these restaurants is subject to further evaluation and may change. We may also elect to close additional restaurants in the future.
In addition to the initial franchise fee, we generally pay BKC and PLK a monthly royalty. The royalty rate for new Burger King restaurants and for successor franchise agreements is 4.5% of sales. The royalty rate for new Popeyes restaurants and for successor franchise agreements is 5.0% of sales. Royalty payments for restaurants acquired from other franchisees are based on the terms of existing franchise agreements being acquired, and may be less than 4.5%. Burger King royalties, as a percentage of restaurant sales, were 4.3% in 2020, 2019 and 2018, respectively. We anticipate our Burger King and Popeyes royalties, as a percentage of restaurant sales, will be approximately 4.4% in 2021 as a result of the terms outlined above. Newly constructed Burger King restaurants developed pursuant to the ADA as well as the Amended ADA received and will receive a 1% royalty rate reduction for a four year period and certain remodeled restaurants under the ADA generally received and will receive a 0.75% royalty rate reduction for a five year period.
We also generally contribute 4% of restaurant sales from our Burger King and Popeyes restaurants to fund BKC's and PLK's national and regional advertising. Pursuant to the ADA and Amended ADA, newly constructed Burger King restaurants will receive a 3% advertising contribution reduction for four years and certain remodeled restaurants, excluding upgrades, will receive a 0.75% advertising contribution reduction for a five year period. BKC and PLK engage in substantial national and regional advertising and promotional activities and other efforts to maintain and enhance both brands. From time to time we supplement BKC's marketing with our own local advertising and promotional campaigns. See “Advertising, Products and Promotion” below.
Our franchise agreements with BKC and PLK do not give us exclusive rights to operate Burger King restaurants in any defined territory. Although we believe that BKC generally seeks to ensure that newly granted franchises do not materially adversely affect the operations of existing Burger King restaurants, we cannot assure you that franchises granted by BKC to third parties will not adversely affect any Burger King restaurants that we operate.
Advertising, Products and Promotion
BKC's marketing strategy is characterized by its HAVE IT YOUR WAY® service, TASTE IS KING® tag line, flame grilling, generous portions and competitive prices. Burger King restaurants feature flame-grilled hamburgers, the most popular of which is the Whopper® sandwich, a large, flame-grilled hamburger garnished with mayonnaise, lettuce, onions, pickles and tomatoes. The basic menu of all Burger King restaurants also includes a variety of hamburgers, chicken and other specialty sandwiches, french fries, onion rings, soft drinks, salads, breakfast items, snacks and other offerings. BKC and its franchisees have historically spent between 4% and 5% of their respective sales on marketing, advertising and promotion to sustain high brand awareness. BKC's marketing initiatives are designed to reach a diverse consumer base and BKC has continued to introduce a number of new and enhanced products to broaden menu offerings and drive customer traffic in all day parts.
14
BKC's and PLK's advertising programs consist of national campaigns supplemented by local advertising. BKC's and PLK's advertising campaigns are generally carried on television, radio and in circulated print media (national and regional newspapers and magazines). As a percentage of our restaurant sales advertising expense was 3.9% in 2020, 4.0% in 2019 and 4.1% in 2018. For 2021, we expect total advertising expense to be approximately 4.0% of total restaurant sales.
The efficiency and quality of advertising and promotional programs can significantly affect the quick-service restaurant businesses. We believe that one of the major advantages of being a Burger King franchisee is the value of the extensive national and regional advertising and promotional programs conducted by BKC. In addition to the benefits derived from BKC's advertising spending, we sometimes supplement BKC's advertising and promotional activities with our own local advertising and promotions, including the purchase of additional television, radio and print advertising. The concentration of our Burger King restaurants in many of our markets permits us to leverage advertising in those markets. We also utilize promotional programs targeted to our customers, such as combination value meals and discounted prices in order to create a flexible and directed marketing program.
Digital
BKC and PLK have invested heavily in launching a digital platform that integrates with major third-party delivery service providers and provides a seamless ordering, payment, delivery and drive thru experience for our guests. In the BKC and PLK platforms, guests can place orders through a website or mobile app and have the product ready for pickup or delivered by a third-party partner. Digital sales, including sales through the delivery platforms plus mobile order and pay, have been a strong growth driver and represented approximately 4.4% of our restaurant sales in the fourth quarter of 2020 and 3.1% of our sales for all of 2020. We are also installing outdoor digital menu boards in all drive thru locations. In 2020, we installed outdoor digital menu boards at 359 Burger King restaurants and expect to complete the remaining installation of outdoor digital menu boards at all of our Burger King and Popeyes restaurants by the first half of 2022. The menu boards integrate with the POS system and allow for artificial intelligence to help optimize the guest experience. BKC and PLK continue to invest in the digital platform and BKC intends to launch its Royal Perks loyalty program in 2021, which will be driven from its mobile app.
Suppliers
We are a member of a national purchasing cooperative, Restaurant Services, Inc., which we refer to as "RSI", created for the Burger King system. RSI is a non-profit independent purchasing cooperative that is responsible for sourcing our products and related supplies and managing relationships with approved distributors for the Burger King system. We use our purchasing power to negotiate directly with certain other vendors, to help obtain favorable pricing and terms for supplying our restaurants. For our Burger King restaurants, we are required to purchase all of our foodstuffs, paper goods and packaging materials from BKC-approved suppliers at prices negotiated by RSI. We currently primarily utilize four distributors, Lineage Foodservice Solutions, LLC, Reinhart Food Service L.L.C, McLane Company Inc., and Performance Foodservice, to supply our Burger King restaurants with the majority of our foodstuffs. As of January 3, 2021, such distributors supplied 34%, 28%, 28% and 10%, respectively, of our Burger King restaurants.
For our Popeyes restaurants we are a member of a national purchasing cooperative, Supply Management Services, Inc. ("SMS"). SMS is a non-profit independent purchasing cooperative that is responsible for sourcing certain of our products and managing relationships with approved distributors for the Popeyes system. Popeyes utilizes five distributors, two for poultry products and three for all other products. For our Popeyes restaurants, one distributor, Tyson Foods, supplies 75% of our poultry products. Another distributor, Customized Distribution Services, Inc. supplies 60 of our Popeyes restaurants with all non- poultry products.
We may purchase non-food items, such as kitchen utensils, equipment maintenance tools and other supplies, from any suitable source so long as such items meet BKC and PLK product uniformity standards. All BKC-approved and PLK-approved distributors are required to purchase foodstuffs and supplies from BKC-approved and PLK-approved manufacturers and purveyors. BKC and PLK are each responsible for monitoring quality control and supervision of the applicable manufacturers. Each conducts regular visits to observe the preparation of foodstuffs and to perform various tests to ensure that only quality foodstuffs are sold to its approved suppliers. In addition, BKC and PLK coordinate and supervise audits of approved suppliers and distributors to determine continuing
15
product specification compliance and to ensure that manufacturing plant and distribution center standards are met. Although we believe that we have alternative sources of supply available to our restaurants, the failure of a distributor or supplier for our restaurants to service us, could lead to a disruption of service or supply at our restaurants until a new distributor or supplier is engaged, which could have an adverse effect on our business.
Quality Assurance
Our operational focus is closely monitored to achieve a high level of customer satisfaction based on product quality, speed of service, order accuracy and quality of service. Our senior management and restaurant management staffs are principally responsible for ensuring compliance with BKC's and PLK's required operating procedures. We have uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the premises and employee conduct. In order to maintain compliance with these operating standards and specifications, we distribute detailed reports measuring compliance with various customer service standards and objectives to our restaurant operations management team, including feedback obtained directly from our customers through instructions given to them at the point of sale. The customer feedback is monitored by an independent agency and us and consists of evaluations of speed of service, quality of service, quality of our menu items and other operational objectives including the cleanliness of our restaurants. We also have our own staff that handle customer inquiries and complaints. The level of customer satisfaction is a key metric in our restaurant-level incentive bonus plans.
We operate in accordance with quality assurance and health standards mandated by federal, state and local governmental laws and regulations. These standards include food preparation rules regarding, among other things, minimum cooking times and temperatures, maximum time standards for holding prepared food, food handling guidelines and cleanliness. To maintain these standards, under BKC's oversight third-party firms conduct unscheduled inspections and follow-up inspections of our restaurants and report their findings to us. In addition, restaurant managers conduct internal inspections for taste, quality, cleanliness and food safety on a regular basis.
Trademarks
As a franchisee of Burger King and Popeyes, we also have contractual rights to use certain trademarks, service marks and other intellectual property relating to the Burger King and Popeyes concepts. We have no proprietary intellectual property other than the Carrols logo and trademark.
Government Regulation
Various federal, state and local laws affect our business, including various health, sanitation, fire and safety standards. Restaurants to be constructed or remodeled are subject to state and local building code and zoning requirements. In connection with the development and remodeling of our restaurants, we may incur costs to meet certain federal, state and local regulations, including regulations promulgated under the Americans with Disabilities Act.
We are subject to the federal Fair Labor Standards Act and various other federal and state laws governing such matters as the handling, preparation and sale of food and beverages; the provision of nutritional information on menu boards; minimum wage requirements; unemployment compensation; overtime; and other working conditions and citizenship requirements.
A significant number of our food service personnel are paid at rates related to the federal, and where applicable, state minimum wage. Accordingly, increases in the minimum wage have increased and in the future will increase wage rates at our restaurants.
The Patient Protection and Affordable Care Act (the “Act”) required businesses employing fifty or more full-time equivalent employees to offer health care benefits to those full-time employees or be subject to an annual penalty. Those benefits must be provided under a health care plan which provides a certain minimum scope of health care services. The Act also limits the portion of the cost of the benefits which we can require employees to pay. Based on our enrollment history to date, approximately 14% of our approximately 3,500 eligible hourly employees have opted for coverage under our medical plan.
We are also subject to various federal, state and local environmental laws, rules and regulations. We believe that we conduct our operations in substantial compliance with applicable environmental laws, rules and regulations.
16
Our costs for compliance with environmental laws, rules and regulations has not had a material adverse effect on our results of operations, cash flows or financial condition in the past.
Industry and Competition
The Restaurant Market. Restaurant sales historically have closely tracked several macroeconomic indicators and we believe that “away-from-home” food consumption will increase due to these trends in recent years. Historically, unemployment has been inversely related to restaurant sales and, as the unemployment rate decreases and disposable income increases, restaurant sales have increased. According to the U.S. Department of Agriculture, through November 2020 food away from home dollars were 44.8% of nominal food dollars, with total expenditures decreasing 18.3% from the same period in 2019. This reflects changes in the overall restaurant industry as a result of the ongoing COVID-19 pandemic, but not the quick-service segment. Our sales stabilized in May 2020 as guests have relied on our take-out and delivery service modes.
Quick-Service Restaurants. We operate in the hamburger and chicken categories of the quick-service restaurant segments of the restaurant industry. Quick-service restaurants are distinguished by high speed of service and efficiency, convenience, limited menu and service, and value pricing. According to Nation's Restaurant News, 2019 U.S. foodservice sales for the Top 200 restaurant chains increased 3.8% from 2018 to $313.5 billion. Of this amount, the hamburger category represented $88.8 billion, or 28.3%, making it the largest category of the quick-service segment.
The restaurant industry is highly competitive with respect to price, service, location and food quality. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low and medium-priced fare. We also compete with operators outside the restaurant industry such as convenience stores, delicatessens and prepared food counters in supermarkets, grocery stores, cafeterias and other purveyors offering moderately priced and quickly prepared foods. Our competitors may also employ marketing strategies such as frequent use of price discounting, frequent promotions and an emphasis on value menus.
We believe that product quality and taste, brand recognition, convenience of location, speed of service, menu variety, price, and ambiance are the most important competitive factors in the quick-service restaurant segment and that our restaurants effectively compete in each category. We believe our largest competitors for our Burger King restaurants are McDonald's and Wendy's and the largest competitors for our Popeyes restaurants are KFC and Chik-fil-A.
Human Capital Management
As of January 3, 2021, we employed approximately 26,500 persons, of which approximately 200 were administrative personnel and approximately 26,300 were restaurant operations personnel. Approximately 75% of our employees are part-time and 80% have been employed by the Company for less than one year. None of our employees are unionized or covered by collective bargaining agreements. We believe that our overall relations with our employees are good and that our efforts to manage our workforce have been effective.
Diversity
We are committed to fostering a culture that encourages diversity and inclusion, and having diverse representation in our workforce. As of January 3, 2021, 56% of our employee base was female and approximately 56% of our employee base was comprised of racial and ethnic minorities.
Training
We maintain a comprehensive training and development program for all of our personnel and provide both classroom and in-restaurant training for our salaried and hourly restaurant personnel. Our program emphasizes, among other things, system-wide operating procedures, food preparation methods, food safety and customer service
17
standards. BKC's and PLK's training and development programs are also available to us as a franchisee through web access in all of our restaurants.
COVID-19 Response
Throughout the course of the ongoing COVID-19 pandemic, we have been adapting our business in order to continue operating safely, including, among other things, by doing the following:
•To support the health and safety of our employees, beginning in March 2020 we have mandated, among other things, the use of masks, sanitizers and contactless procedures in our restaurants, and have required team members' temperatures be taken at the beginning of each shift.
•We have increased the use of low contact procedures for food delivery, including installation of plexiglass barriers at the front counter and drive thru and the implementation of delivery services.
•We have suspended all non-essential travel for our employees and implemented a work-from-home policy for all non-restaurant personnel.
•We have established a "Carrols Cares" fund to provide immediate relief to employees in need.
Availability of Information
We file annual, quarterly and current reports and other information with the Securities and Exchange Commission (the “SEC”). The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
We make available at no cost through our internet website at www.carrols.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as well as other reports relating to us that are filed or furnished to the SEC, as soon as reasonably practicable after electronically filing or furnishing such material with the SEC. The references to our website address and the SEC website address do not constitute incorporation by reference of the information contained on these websites and should not be considered part of this document.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, as well as other information and data included in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, consolidated financial condition or results of operations.
Risks Related to Our Business
We could be materially adversely affected by health concerns such as the current COVID-19 pandemic.
The United States and most other countries have experienced the widespread outbreak of the COVID-19 pandemic and in the past the Avian Flu or “SARS,” or H1N1. As we have experienced and are experiencing in the current COVID-19 environment:
•If a virus is transmitted by human contact, our employees or customers may become infected, or may choose, or be advised, to avoid gathering in public places, any of which may adversely affect our restaurant customer traffic and our ability to adequately staff our restaurants, receive deliveries on a timely basis or perform functions at the corporate level. These are all areas that have been impacted during the second quarter of 2020 and continue to be challenges in the near-term for our business. The COVID-19 pandemic has negatively impacted our customer traffic, and we have had to take immediate actions to shift focus to our drive-thru, carry-out and delivery service modes. We have also experienced significant staffing challenges, both as a result of employee exposure to COVID-19 as well as the hourly workforce being disincentivized by federal, state and local unemployment benefits and fearful of the workplace.
•We also may be adversely affected if jurisdictions in which we have restaurants impose or continue to impose mandatory closures, seek or continue to seek voluntary closures or impose or continue to impose restrictions on operations. Even if such measures are not implemented and a virus or other disease does not
18
spread significantly, the perceived risk of infection or significant health risk may adversely affect our business. During the second quarter of 2020, we did see frequent changes to our restaurants' operating hours, as a result of shifting consumer behavior as well as public safety measures mandated by local jurisdictions. In March 2020, we closed the dining rooms in all our restaurants and modified operating hours in line with local ordinances and day-part sales trends. These closures were in effect for most of the second quarter of 2020, with each restaurant operating according to their respective local governmental guidelines as well as safety procedures developed by BKC and PLK. As individual states and local governments have allowed reopenings, we have continually evaluated the opportunity to re-open dining rooms. In most cases, consumers have not been eager to return to dining rooms, and restaurant sales in the third quarter of 2020 included approximately 1% of eat-in traffic.
•Lower customer traffic as experienced in the immediate onset of the COVID-19 pandemic in our markets may not provide enough revenue to cover the fixed operating costs of our restaurants. We temporarily closed 46 restaurants in late March 2020 and early April 2020 that were geographically close to one of our other restaurants, and these closures were in effect for most of the second quarter of 2020. Due to restaurant sales improvements after the initial months of the COVID-19 pandemic, we had reopened all of the temporarily closed restaurants by the end of 2020 except for two restaurants which were permanently closed in the third quarter. While most of these closures were temporary, our business remains sensitive to operating in environments with prolonged sales declines of the magnitude we saw in the first weeks of the pandemic.
•We will incur incremental costs for an indefinite period of time to provide safety to our guests and our employees in the form of masks, sanitizers and thermometers as well as additional labor to continuously sanitize our restaurants. Throughout the course of this evolving COVID-19 outbreak, we have been adapting our business in order to continue operating safely. To support the health and safety of our employees and customers, among other things, we mandated the use of masks, sanitizers and contactless procedures in our restaurants, and have required temperature checks at the beginning of each shift for our team members. During the year ended January 3, 2021, we incurred $2.7 million in expenses directly related to COVID-19 related supplies, including face masks, thermometers, sneeze guards and sanitizers.
•The uncertain economic environment that we are operating in now has required us to enhance our liquidity and bolster our balance sheet. In the first quarter of 2020 we borrowed on our Revolving Credit Facility to protect against a prolonged pandemic coupled with financial market illiquidity. We also increased our revolving credit borrowing capacity under our Revolving Credit Facility by $30.8 million to a total of $145.8 million, and incurred Incremental Term B-1 Loans of $75 million.
•Our financial performance depends on our continuing ability to offer fresh, quality food at competitive prices. A significant disruption in service or supply by our suppliers or distributors could create disruptions in the operations of our restaurants and adversely affect our business. During the second quarter of 2020, we were subject to a limited menu in some markets due to limited product available from one of our suppliers and in some instances, deliveries were delayed due to the conditions of the COVID-19 pandemic. A more significant disruption in service or supply by our suppliers or distributors due to the impact of COVID-19 on their businesses, whether from employees at these facilities contracting the COVID-19 virus, their own business suffering due to their inability to operate in the COVID-19 economic environment, or their own financial instability could have a material adverse effect on our business.
A health pandemic such as COVID-19 is a disease outbreak that has spread rapidly and widely by infection and has affected many individuals in areas of population density. Our restaurants are places where people can gather together for human connection. Customers might avoid or be advised to not gather in public places in the event of a health pandemic, and local, regional or national governments might continue or further limit or ban public gatherings to halt or delay the spread of disease. The impact of a health pandemic on us might be disproportionately greater than on other quick-service concepts that have lower customer traffic and that depend less on the gathering of people.
In addition, we cannot guarantee that changes to our operational policies and training will be effective to keep our employees and customers safe from the COVID-19 virus. Any publicity relating to health concerns or perceived or specific outbreaks of COVID-19 attributed to one or more of our restaurants, could result in a significant
19
decrease in guest traffic in all of our restaurants and could have a material adverse effect on our results of operations. Furthermore, similar publicity or occurrences with respect to other restaurants or restaurant chains could also decrease our guest traffic and have a similar material adverse effect on our business.
Intense competition in the restaurant industry could make it more difficult to profitably expand our business and could also have a negative impact on our operating results if customers favor our competitors or we are forced to change our pricing and other marketing strategies.
The restaurant industry is highly competitive. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low and medium-priced fare. We also compete with other convenience stores, delicatessens and prepared food counters in grocery stores, supermarkets, cafeterias and other purveyors of moderately priced and quickly prepared food. We believe our largest competitors for our Burger King restaurants are McDonald’s and Wendy’s restaurants and the largest competitors for our Popeyes restaurants are KFC and Chick-fil-A.
Due to competitive conditions, we, as well as certain of the other major quick-service restaurant chains, have offered select food items and combination meals at discounted prices. These pricing and marketing strategies have had, and in the future may have, a negative impact on our earnings.
Factors applicable to the quick-service restaurant segment may have a material adverse effect on our results of operations, which may cause a decrease in earnings and revenues.
The quick-service restaurant segment can be materially adversely affected by many factors, including:
•health concerns such as the ongoing coronavirus pandemic (COVID-19);
•changes in local, regional or national economic conditions;
•changes in demographic trends;
•changes in consumer tastes;
•changes in traffic patterns;
•increases in fuel prices and utility costs;
•consumer concerns about health, diet and nutrition;
•increases in the number of, and particular locations of, competing restaurants;
•changes in discretionary consumer spending;
•inflation;
•increases in the cost of food, such as beef, chicken, produce and packaging;
•increased labor costs, including healthcare, unemployment insurance and minimum wage requirements;
•the availability of experienced management and hourly-paid employees; and
•regional weather conditions.
We are highly dependent on the Burger King and Popeyes systems and our ability to renew our franchise agreements with BKC and PLK. The failure to renew our franchise agreements or Burger King's or Popeyes' failure to compete effectively would materially adversely affect our results of operations.
Due to the nature of franchising and our agreements with BKC and PLK, our success is, to a large extent, directly related to the success of the Burger King and Popeyes system including their financial condition, advertising programs, product development, overall quality of operations and the successful and consistent operation of Burger King and Popeyes restaurants owned by other franchisees. We cannot assure you that Burger King or Popeyes restaurants will be able to compete effectively with other restaurants. As a result, any failure of the Burger King or Popeyes franchise systems to compete effectively would likely have a material adverse effect on our results of operations and financial condition.
Under each of our franchise agreements, we are required to comply with operational programs established by BKC or PLK. For example, our franchise agreements with BKC and PLK require that our restaurants comply with specified design criteria. In addition, BKC generally has the right to require us during the tenth year of a franchise agreement to remodel our restaurants to conform to the then-current image of Burger King restaurants, and PLK
20
generally has the right to require us to remodel our restaurants to conform to the then-current image of Popeyes restaurants every six years, all of which may require the expenditure of considerable funds. We also may not be able to avoid adopting menu price discount promotions or permanent menu price decreases instituted by BKC or PLK that may be unprofitable.
Our BKC franchise agreements typically have a 20 year term after which BKC’s consent is required to receive a successor franchise agreement. Our PLK franchise agreements typically also have a 20-year term after which we have the options to (a) renew for a 10 year renewal term and (b) renew for a second supplemental renewal term of 10 years provided that we meet certain conditions as set forth in the PLK franchise agreements.
We cannot assure you that BKC will grant each of our future requests for successor franchise agreements or that we will be able to exercise any of the options to renew the PLK franchise agreements. Any failure of BKC to renew our franchise agreements would materially adversely affect our results of operations and financial condition. In addition, as a condition of approval of a successor franchise agreement, BKC may require us to make capital improvements to particular restaurants to bring them up to current image standards established by Burger King, which may require us to incur substantial costs. Similarly, one of the conditions to our ability to exercise the option to renew our PLK franchise agreements is that we must make capital improvements to particular restaurants to bring them up to current image standards established by Popeyes, which may require us to incur substantial costs.
In addition, our franchise agreements with BKC and PLK do not give us exclusive rights to operate Burger King or Popeyes restaurants in any defined territory. We cannot assure you that franchises granted by BKC or PLK to third parties will not adversely affect any restaurants that we operate.
Additionally, as a franchisee, we have no control over the Burger King brand or the Popeyes brand. If BKC and PLK do not adequately protect the Burger King and Popeyes brands and other intellectual property, our competitive position and results of operations could be harmed.
We could be materially adversely affected by food-borne illnesses, as well as widespread negative publicity regarding food quality, illness, injury or other health concerns.
Negative publicity about food quality, illness, injury or other health concerns (including health implications of obesity) or similar issues stemming from one restaurant or a number of restaurants could materially adversely affect us, regardless of whether they pertain to our own restaurants, other Burger King or Popeyes restaurants, or to restaurants owned or operated by other companies. For example, health concerns about the consumption of beef, chicken or eggs or by specific events such as the outbreak of “mad cow” disease could lead to changes in consumer preferences, reduce consumption of our products and have a material adverse effect on our results of operations and financial condition. These events could also reduce available supply or significantly raise the price of beef, chicken or eggs.
In addition, we cannot guarantee that our operational controls and employee training will be effective in preventing food-borne illnesses, food tampering and other food safety issues that may affect our restaurants. Food-borne illness or food tampering incidents could be caused by customers, employees or food suppliers and transporters and, therefore, could be outside of our control. Any publicity relating to health concerns or the perceived or specific outbreaks of food-borne illnesses, food tampering or other food safety issues attributed to one or more of our restaurants, could result in a significant decrease in guest traffic in all of our restaurants and could have a material adverse effect on our results of operations. Furthermore, similar publicity or occurrences with respect to other restaurants or restaurant chains could also decrease our guest traffic and have a similar material adverse effect on our results of operations and financial condition.
Our strategy includes pursuing acquisitions of additional Burger King and Popeyes restaurants and we may not find Burger King restaurants or Popeyes restaurants that are suitable acquisition candidates or successfully operate or integrate any Burger King restaurants or Popeyes restaurants that we may acquire.
As part of our strategy, we intend to selectively pursue the acquisition of additional Burger King and Popeyes restaurants. Pursuant to the ADA and retained in the Amended ADA, BKC has granted us franchise pre-approval to acquire Burger King restaurants from Burger King franchisees until we acquire more than 500 Burger King restaurants. The right of first refusal assigned to us from BKC pursuant to the ADA was forfeited by us as a result of entering into the Amended ADA in January 2021.
21
Competition for acquisition candidates may exist or increase in the future. Consequently, there may be fewer acquisition opportunities available to us at an attractive acquisition price. There can be no assurance that we will be able to identify, acquire, manage or successfully integrate additional restaurants without substantial costs, delays or operational or financial problems. In the event we are able to acquire additional restaurants, the integration and operation of the acquired restaurants may place significant demands on our management, which could adversely affect our ability to manage our existing restaurants. We may be required to obtain additional financing to fund future acquisitions. There can be no assurance that we will be able to obtain additional financing, if necessary, on acceptable terms or at all. Our Senior Credit Facilities contain restrictive covenants that may prevent us from incurring additional debt to acquire additional Burger King or Popeyes restaurants.
We may experience difficulties in integrating restaurants acquired by us into our existing business.
The acquisition of a significant number of restaurants involves the integration of those acquired restaurants with our existing business. The difficulties of integration include:
•coordinating and consolidating geographically separated systems and facilities;
•integrating the management and personnel of the acquired restaurants, maintaining employee morale and retaining key employees;
•implementing our management information systems; and
•implementing operational procedures and disciplines to control costs and increase profitability.
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of our business and the loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with the acquisition of restaurants and integration of acquired restaurants’ operations could have a material adverse effect on our results of operations and financial condition.
Achieving the anticipated benefits of the acquisition of additional restaurants will depend in part upon whether we can integrate any acquired restaurants in an efficient and effective manner. We may not accomplish this integration process smoothly or successfully. If management is unable to successfully integrate acquired restaurants, the anticipated financial contribution of the acquisition may not be realized.
In our evaluation of our recent and potential acquisitions, assumptions are made as to our ability to increase sales as well as improve restaurant-level profitability particularly in the areas of food, labor and cash controls as well as other operating expenses. If we are not able to make such improvements in these operational areas as planned, the acquired restaurants’ targeted profitability levels will be affected which could cause an adverse effect on our overall financial results and financial condition.
22
We may incur significant liability or reputational harm if claims are brought against us or the Burger King and Popeyes brands.
We may be subject to complaints, regulatory proceedings or litigation from guests or other persons alleging food-related illness, injuries suffered in our premises or other food quality, health or operational concerns, including environmental claims. In addition, in recent years a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging, among other things, violations of federal and state law regarding workplace and employment matters, discrimination, harassment, wrongful termination and wage, rest break, meal break and overtime compensation issues and, in the case of quick-service restaurants, alleging that they have failed to disclose the health risks associated with high fat or high sodium foods and that their marketing practices have encouraged obesity. We may also be subject to litigation or other actions initiated by governmental authorities or our employees, among others, based upon these and other matters. Adverse publicity resulting from such allegations or occurrences or alleged discrimination or other operating issues stemming from one or a number of our locations could adversely affect our results of operations and financial condition, regardless of whether the allegations are true, or whether we are ultimately held liable. Any cases filed against us could materially adversely affect our results of operations and financial condition if we lose such cases and have to pay substantial damages or if we settle such cases. In addition, any such cases may materially and adversely affect our results of operations and financial condition by increasing our litigation costs and diverting our attention and resources to address such actions. Furthermore, if a claim is successful, our insurance coverage may not cover or be adequate to cover all liabilities or losses and we may not be able to continue to maintain such insurance, or to obtain comparable insurance at a reasonable cost, if at all. If we suffer losses, liabilities or loss of income in excess of our insurance coverage or if our insurance does not cover such loss, liability or loss of income, there could be a material adverse effect on our results of operations and financial condition.
Changes in consumer taste could negatively impact our business.
We obtain a significant portion of our revenues from the sale of hamburgers, fried chicken and various types of sandwiches. If consumer preferences for these types of foods change, it could have a material adverse effect on our results of operations and financial condition. The quick-service restaurant segment is characterized by the frequent introduction of new products, often supported by substantial promotional campaigns, and is subject to changing consumer preferences, tastes, and eating and purchasing habits. Our success depends on BKC’s and PLK's ability to anticipate and respond to changing consumer preferences, tastes and dining and purchasing habits, as well as other factors affecting the restaurant industry, including new market entrants and demographic changes. BKC or PLK may be forced to make changes to our menu items in order to respond to changes in consumer tastes or dining patterns, and we may lose customers who do not prefer the new menu items. In recent years, numerous companies in the quick-service restaurant segments have introduced products positioned to capitalize on the growing consumer preference for food products that are, or are perceived to be, promoting good health, nutritious, low in calories, low in fat content or plant-based. If BKC or PLK does not continually develop and successfully introduce new menu offerings that appeal to changing consumer preferences or if the Burger King and Popeyes franchise systems do not timely develop new products, our results of operations and financial condition could suffer. In addition, any significant event that adversely affects consumption of our products, such as cost, changing tastes or health concerns, could adversely affect our results of operations and financial condition.
We could be adversely affected by our failure to acknowledge and sufficiently respond to the fast-moving influence of social media.
The widespread use of social media platforms can provide individuals with access to a broad audience at any time of day. The content shared by users on these platforms may be published without consideration of accuracy or its potential impact. Such content may be factually inaccurate, but nonetheless negatively impact our customer engagement, business operations, brand reputation or financial performance. This damage could be fast-moving and not allow us or our franchisors a chance to address the situation.
23
If a significant disruption in service or supply by any of our suppliers or distributors were to occur, it could create disruptions in the operations of our restaurants, which could have a material adverse effect on our results of operations and financial condition.
Our financial performance depends on our continuing ability to offer fresh, quality food at competitive prices. If a significant disruption in service or supply by our suppliers or distributors were to occur, it could create disruptions in the operations of our restaurants, which could have a material adverse effect on our results of operations and financial condition.
We are a member of a national purchasing cooperative, Restaurant Services, Inc., which we refer to as "RSI", created for the Burger King system. RSI is a non-profit independent purchasing cooperative that is responsible for sourcing our products and related supplies and managing relationships with approved distributors for the Burger King system. We use our purchasing power to negotiate directly with certain other vendors, to obtain favorable pricing and terms for supplying our restaurants. For our Burger King restaurants, we are required to purchase all of our foodstuffs, paper goods and packaging materials from BKC-approved suppliers at prices negotiated by RSI. We currently primarily utilize four distributors, Lineage Foodservice Solutions, LLC, Reinhart Food Service L.L.C, McLane Company Inc. and Performance Foodservice, to supply our Burger King restaurants with the majority of our foodstuffs. As of January 3, 2021, such distributors supplied 34%, 28%, 28% and 10%, respectively, of our Burger King restaurants.
For our Popeyes restaurants we are a member of a national purchasing cooperative, Supply Management Services, Inc. ("SMS"). SMS is a non-profit independent purchasing cooperative that is responsible for sourcing certain of our products and managing relationships with approved distributors for the Popeyes system. Popeyes utilizes five distributors, two for poultry products and three for all other products. For our Popeyes restaurants, one distributor, Tyson Foods, supplies 75% of our poultry products. Another distributor, Customized Distribution Services, Inc. supplies 60 of our Popeyes restaurants with all non-poultry products.
In the event that any of our distributors or suppliers are unable to service us and we are unable to timely secure alternative sources for product, we could suffer a disruption of service until a new distributor or supplier is engaged, which could have a material adverse effect on our results of operations and financial condition.
If labor costs increase, we may not be able to make a corresponding increase in our prices and our results of operations and financial condition may be materially adversely affected.
Wage rates for a number of our employees are either at or slightly above the federal and or state minimum wage rates. As federal and/or state minimum wage rates increase, we may need to increase not only the wage rates of our minimum wage employees but also the wages paid to the employees at wage rates which are above the minimum wage, which will increase our costs. The extent to which we are not able to raise our prices to compensate for increases in wage rates, including increases in state unemployment insurance costs or other costs including mandated health insurance, could have a material adverse effect on our results of operations and financial condition. In addition, even if minimum wage rates do not increase, we may still be required to raise wage rates in order to compete for an adequate supply of labor for our restaurants.
Higher labor costs due to statutory and regulatory changes could have a material adverse effect on our results of operations and financial condition.
We are subject to the federal labor laws, including the Fair Labor Standards Act, as well as various state and local laws governing such matters as minimum wages, labor relations, workplace safety, citizenship requirements and other working conditions for employees. Federal, state and local laws may also require us to provide paid and unpaid leave, healthcare, sick time or other benefits to our employees. Changes in the law, or penalties associated with any failure on our part to comply with legal requirements, could increase our labor costs or result in additional expense.
Beginning in 2018, certain workers were able to take up to eight weeks (increasing in New York and other areas to twelve weeks in 2021) of employer-provided paid leave for childbirth, care for a seriously ill family member or needs related to a family member’s military deployment. We have considered these labor costs in our price changes, and additional labor costs may require us to raise our prices in the future. In certain geographic areas which cannot absorb such increases, this could have a material adverse effect on our results of operations and financial condition. We provide unpaid leave for employees for covered family and medical reasons, including
24
childbirth, to the extent required by the Family and Medical Leave Act of 1993, as amended, and applicable state laws. To the extent we need to hire additional employees or pay overtime to replace such employees on leave, this would be an added expense which could have a material adverse affect on our results of operations and financial condition.
Increases in income tax rates or changes in income tax laws could adversely affect our results of operations and financial condition.
Increases in income tax rates in the United States or other changes in income tax laws in any particular jurisdiction could reduce our after-tax income from such jurisdiction and could adversely affect our business, financial condition or results of operations. The United States recently made changes to existing tax laws in the Tax Cuts and Jobs Act (the "Tax Act"), which was signed into law on December 22, 2017. Among its many provisions, the Tax Act reduced the U.S. Federal corporate income tax rate from 35% to 21% and imposed limitations on the deductibility of interest and certain other corporate deductions. Additional changes in the U.S. tax regime, including changes in how existing tax laws are interpreted or enforced, could adversely affect our results of operations and financial condition.
The efficiency and quality of our competitors’ advertising and promotional programs and the extent and cost of our advertising could have a material adverse effect on our results of operations and financial condition.
The success of our restaurants depends in part upon the effectiveness of the advertising campaigns and promotions by BKC or PLK. If our competitors increase spending on advertising and promotion, or the cost of television or radio advertising increases, or BKC’s, PLK's or our advertising and promotions are less effective than our competitors’, there could be a material adverse effect on our results of operations and financial condition.
Our business is regional and we therefore face risks related to reliance on certain markets as well as risks for other unforeseen events.
At January 3, 2021, 15% of our restaurants were located in North Carolina, 12% were located in New York, 12% were located in Tennessee, and 24% were located in Indiana, Ohio and Michigan. Therefore, the economic conditions, state and local government regulations, weather or other conditions affecting New York, Tennessee, Indiana, Ohio, Michigan and North Carolina, and other unforeseen events, including terrorism and other regional issues, may have a material impact on the success of our restaurants in those locations.
Many of our restaurants are located in regions that may be susceptible to severe weather conditions such as harsh winter weather and hurricanes. As a result, adverse weather conditions in any of these areas could damage these restaurants, result in fewer guest visits to these restaurants and otherwise have a material adverse impact on our results of operations and financial condition.
We could be materially adversely affected by external events such as extreme weather, natural disasters, terrorist actions, pandemics and civil unrest, among others.
External events such as extreme weather, natural disasters, terrorist actions, pandemics and civil unrest, and anticipation of such events, can adversely affect consumer spending, supply availability and costs, and our ability to operate our business in any impacted market.
We cannot assure you that the current locations of our restaurants will continue to be economically viable or that additional locations can be acquired at reasonable costs.
The location of our restaurants has significant influence on their success. We cannot assure you that current locations will continue to be economically viable or that additional locations can be acquired at reasonable costs. In addition, the economic environment where restaurants are located could decline in the future, which could result in reduced sales for those locations. We cannot assure you that new sites will be profitable or as profitable as existing sites.
Economic downturns may adversely impact consumer spending patterns.
The U.S. economy is experiencing and has in the past experienced significant slowdown and volatility due to uncertainties related to availability of credit, difficulties in the banking and financial services sectors, softness in the housing market, diminished market liquidity, falling consumer confidence and high unemployment rates including
25
as a result of the COVID-19 pandemic. Our business is dependent to a significant extent on national, regional and local economic conditions, particularly those that affect our guests that frequently patronize our restaurants and the health of surrounding businesses who employ a significant amount of workers. In particular, where our customers’ disposable income is reduced (such as by job losses, credit constraints and higher housing, tax, energy, interest or other costs) or where our customer's actual or perceived wealth has decreased (because of circumstances such as lower residential real estate values, increased foreclosure rates, increased tax rates or other economic disruptions), our restaurants have in the past experienced, and may in the future experience, lower sales and customer traffic as customers choose lower-cost alternatives or other alternatives to dining out. The resulting decrease in our customer traffic or average sales per transaction has had an adverse effect in the past, and could in the future have a material adverse effect, on our results of operations and financial condition.
The loss of the services of our senior management could have a material adverse effect on our results of operations and financial condition.
Our success depends to a large extent upon the continued services of our senior management who have substantial experience in the restaurant industry. We believe that it could be difficult to replace our senior management with individuals having comparable experience. Consequently, the loss of the services of members of our senior management could have a material adverse effect on our results of operations and financial condition.
Government regulation could adversely affect our results of operations and financial condition.
We are subject to extensive laws and regulations relating to the development and operation of restaurants, including regulations relating to the following:
•zoning;
•labeling of caloric and other nutritional information on menu boards, advertising and food packaging;
•the preparation and sale of food;
•employer/employee relationships, including minimum wage requirements, overtime, mandatory paid and unpaid leave, working and safety conditions, and citizenship requirements;
•health care; and
•federal and state laws that prohibit discrimination and laws regulating the design and operation of, and access to, facilities, such as the Americans With Disabilities Act of 1990.
In the event that legislation having a negative impact on our business is adopted, it could have a material adverse impact on our results of operations and financial condition. For example, substantial increases in the minimum wage or state or Federal unemployment taxes could adversely affect our financial condition and results of operations. Local zoning or building codes or regulations can cause substantial delays in our ability to build and open new restaurants. Any failure to obtain and maintain required licenses, permits and approvals could also adversely affect our results of operations and financial condition.
Federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials could expose us to liabilities which could have a material adverse effect on our results of operations and financial condition.
We are subject to a variety of federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous substances or other regulated materials, release of pollutants into the air, soil and water, and the remediation of contaminated sites.
Failure to comply with environmental laws could result in the imposition of fines or penalties, restrictions on operations by governmental agencies or courts of law, as well as investigatory or remedial liabilities and claims for alleged personal injury or damages to property or natural resources. Some environmental laws impose strict, and under some circumstances joint and several, liability for costs of investigation and remediation of contaminated sites on current and prior owners or operators of the sites, as well as those entities that send regulated materials to the sites. We cannot assure you that we have been or will be at all times in complete compliance with such laws, regulations and permits. Therefore, our costs of complying with current and future environmental, health and safety laws could have a material adverse effect our results of operations and financial condition.
26
We are subject to all of the risks associated with leasing property subject to long-term, non-cancelable leases.
The leases for our restaurant locations (except for certain acquired restaurants which have an underlying lease term of less than 20 years) generally have initial terms of 20 years, and typically provide for renewal options in five year increments as well as for rent escalations. Generally, our leases are “net” leases, which require us to pay all of the costs of insurance, taxes, maintenance and utilities. Additional sites that we lease are likely to be subject to similar long-term, non-cancelable leases. We generally cannot cancel our leases. If an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be obligated to perform our monetary obligations under the applicable lease including, among other things, paying all amounts due for the balance of the lease term. In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or any terms at all, which could cause us to close restaurants in desirable locations.
An increase in food costs could have a material adverse effect on our results of operations and financial condition.
Our profitability and operating margins are dependent in part on our ability to anticipate and react to changes in food costs. Changes in the price or availability of certain food products, including as a result of the COVID-19 pandemic, could affect our ability to offer broad menu and price offerings to guests and could materially adversely affect our profitability and reputation. The type, variety, quality, source and price of beef, chicken, produce and cheese can be subject to change due to factors beyond our control, including weather, governmental regulation, availability and seasonality, each of which may affect our food costs or cause a disruption in our supply. Our food distributors or suppliers may also be affected by higher costs to produce and transport commodities used in our restaurants, higher minimum wage and benefit costs and other expenses that they pass through to their customers, which could result in higher costs for goods and services supplied to us. Although RSI is able to contract for certain food commodities for periods up to one year, the pricing and availability of some commodities used in our operations are not locked in for periods of longer than one week or at all. We do not currently use financial instruments to hedge our risk of market fluctuations in the price of beef, produce and other food products. We may not be able to anticipate and react to changing food costs through menu price adjustments in the future, which could negatively impact our results of operations and financial condition.
Security breaches of confidential credit card, consumer, employee and other material information as well as other threats to our technical systems may have a material adverse effect on our results of operations and financial condition.
Approximately half of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which confidential or material information has been compromised. The Company devotes significant resources to data encryption, network security and other measures to protect its systems and data, but these security measures cannot provide absolute security. We may become subject to lawsuits, fines or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our guests’ credit or debit card or any other material information. Any such claim or proceeding, or any adverse publicity resulting from these allegations, may have a material adverse effect on our results of operations and financial condition.
The Company’s results of operations, financial condition and reputation may be impacted by information technology system failures or network disruptions.
We rely on information systems across our operations for point-of-sale processing in our restaurants, collection of cash, procurement and payment to suppliers, payment of payroll, financial reporting and other processes and procedures. Our ability to efficiently manage our business depends significantly on the reliability and capacity of these systems. The Company may be subject to information technology system failures and network disruptions caused by natural disasters, accidents, pandemics, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, ransomware or other events or disruptions. System redundancy may be ineffective or inadequate, and the Company’s disaster recovery planning may not be sufficient for all eventualities which may have a material adverse effect on our results of operations and financial condition. While the Company maintains dedicated insurance coverage that, subject to policy terms and conditions and subject to a deductible, is designed to address certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise in the continually evolving area of cyber risk.
27
Carrols is currently a guarantor under 18 Fiesta Restaurant Group, Inc. ("Fiesta") restaurant property leases and any default under such property leases by Fiesta may result in substantial liabilities to us.
Fiesta, a former wholly-owned subsidiary of the Company, was spun-off in 2012 to the Company's stockholders. Carrols currently is a guarantor under 18 Fiesta restaurant property leases, of which all except for two are still operating as of January 3, 2021. The Separation and Distribution Agreement entered into in connection with the spin-off among Carrols, Fiesta and us provides that the parties will cooperate and use their commercially reasonable efforts to obtain the release of such guarantees. Unless and until any such guarantees are released, Fiesta agrees to indemnify Carrols for any losses or liabilities or expenses that it may incur arising from or in connection with any such lease guarantees.
Risks Related to Our Common Stock
The market price of our common stock may be highly volatile or may decline regardless of our operating performance.
The trading price of our common stock may fluctuate substantially. The price of our common stock that will prevail in the market may be higher or lower than the price when you acquired our stock, depending on many factors, some of which are beyond our control. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. The fluctuations could cause a loss of all or part of an investment in our common stock. Factors that could cause fluctuation in the trading price of our common stock may include, but are not limited to the following:
•price and volume fluctuations in the overall stock market from time to time;
•significant volatility in the market price and trading volume of companies generally or restaurant companies specifically;
•actual or anticipated variations in the earnings or operating results of our company or our competitors;
•actual or anticipated changes in financial estimates by us or by any securities analysts who might cover our stock or the stock of other companies in our industry;
•market conditions or trends in our industry and the economy as a whole;
•announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures and our ability to complete any such transaction;
•announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;
•capital commitments;
•changes in accounting principles;
•additions or departures of key personnel;
•sales of our common stock, including sales of large blocks of our common stock or sales by our directors and officers; and
•events that affect BKC, PLK or any of our significant suppliers discussed above.
In addition, if the market for restaurant company stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry or related industries even if these events do not directly affect us.
In the past, following periods of volatility in the market price of a company's securities, class action securities litigation has often been brought against that company. Due to the potential volatility of our stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources from our business, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
28
The concentrated ownership of our capital stock by insiders may limit our stockholders' ability to influence corporate matters.
At January 3, 2021, our executive officers, directors, BKC and Blue Holdco 1, LLC (collectively the "BKC Stockholders"), and Cambridge together beneficially owned approximately 45.1% of our common stock, giving effect to the conversion of the Series B Convertible Preferred Stock issued to the BKC Stockholders. As a result, our executive officers, directors, affiliates of the BKC Stockholders and Cambridge, if they act as a group, will be able to significantly influence matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions such as mergers and acquisitions. The BKC Stockholders and Cambridge each has two representatives on our Board of Directors, which has the authority to make decisions affecting our company and its capital structure, including the issuance of additional debt and the declaration of dividends. Each of the BKC Stockholders and Cambridge may have interests that differ from those of other stockholders and may vote in a way with which other stockholders disagree and which may be adverse to their interests. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of the Company that other stockholders may view as beneficial, which could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately depress the market price of our common stock.
We currently do not expect to pay any cash dividends for the foreseeable future, and our Senior Credit Facilities limit our ability to pay dividends to our stockholders.
We currently do not expect to pay any cash dividends to holders of our common stock in the foreseeable future. The absence of a dividend on our common stock may increase the volatility of the market price of our common stock or make it more likely that the market price of our common stock will decrease in the event of adverse economic conditions or adverse developments affecting our company. Additionally, our Senior Credit Facilities limit, and the debt instruments that we may enter into in the future may limit, our ability to pay dividends to our stockholders.
If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.
The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We cannot assure you that these analysts will publish research or reports about us or that any analysts that do so will not discontinue publishing research or reports about us in the future. If one or more analysts who cover us downgrade our stock, our stock price could decline rapidly. If analysts do not publish reports about us or if one or more analysts cease coverage of our stock, we could lose visibility in the market, which in turn could cause our stock price to decline.
Provisions in our restated certificate of incorporation and amended and restated bylaws, as amended, or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Delaware corporate law and our restated certificate of incorporation and amended and restated bylaws, as amended, contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
•require that special meetings of our stockholders be called only by our Board of Directors or certain of our officers, thus prohibiting our stockholders from calling special meetings;
•deny holders of our common stock cumulative voting rights in the election of directors, meaning that stockholders owning a majority of our outstanding shares of common stock will be able to elect all of our directors;
•authorize the issuance of “blank check” preferred stock that our board could issue to dilute the voting and economic rights of our common stock and to discourage a takeover attempt;
•provide that approval of our Board of Directors or a supermajority of stockholders is necessary to make, alter or repeal our amended and restated bylaws and that approval of a supermajority of stockholders is necessary to amend, alter or change certain provisions of our restated certificate of incorporation;
29
•establish advance notice requirements for stockholder nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings;
•divide our board into three classes of directors, with each class serving a staggered 3-year term, which generally increases the difficulty of replacing a majority of the directors;
•provide that directors only may be removed for cause by a supermajority of our stockholders; and
•require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing.
Risks Related to Our Indebtedness
Our substantial indebtedness could have a material adverse effect on our financial condition.
As of January 3, 2021 we had $494.2 million of total indebtedness outstanding consisting of $419.4 million Term Loan B borrowings and $73.9 million Term Loan B-1 borrowings under our Senior Credit Facilities and $0.9 million of finance lease liabilities. As of January 3, 2021 we had $136.1 million of revolving borrowing availability under our Senior Credit Facilities (after reserving $9.7 million for letters of credit issued under the Senior Credit Facilities, which included amounts for anticipated claims from our renewals of workers' compensation and other insurance policies).
As a result of our substantial indebtedness, a significant portion of our operating cash flow will be required to make payments of interest and principal on our outstanding indebtedness, and we may not generate sufficient cash flow from operations, or have future borrowings available under our Senior Credit Facilities, to enable us to repay our indebtedness, including the Term Loan B and B-1 borrowings, or to fund other liquidity needs.
Our substantial indebtedness could have important consequences to our stockholders. For example, it could:
•make it more difficult for us to satisfy our obligations with respect to the Senior Credit Facilities and our other debt;
•increase our vulnerability to general adverse economic and industry conditions;
•require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness and related interest, including indebtedness we may incur in the future, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
•restrict our ability to acquire additional restaurants;
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•increase our cost of borrowing;
•place us at a competitive disadvantage compared to our competitors that may have less debt; and
•limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or general corporate purposes.
We expect to use cash flow from operations, our cash balances and revolving credit borrowings under our Senior Credit Facilities to meet our current and future financial obligations, including funding our operations, debt service, possible future acquisitions and capital expenditures (including restaurant remodeling and new restaurant development). Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future, which could result in our being unable to repay indebtedness, or to fund other liquidity needs. If we do not have sufficient liquidity, we may be forced to reduce or delay capital expenditures and restaurant acquisitions, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, including our Senior Credit Facilities, on or before maturity. We cannot make any assurances that we will be able to accomplish any of these alternatives on terms acceptable to us, or at all. In addition, the terms of existing or future indebtedness, including the agreements for our Senior Credit Facilities, may limit our ability to pursue any of these alternatives.
30
Despite current indebtedness levels and restrictive covenants, we may still be able to incur more debt or make certain restricted payments, which could further exacerbate the risks described above.
Although our Senior Credit Facilities contain restrictions on our ability to incur indebtedness, those restrictions are subject to a number of exceptions. We could also consider investments in joint ventures or acquisitions, which may increase our indebtedness. Moreover, although our Senior Credit Facilities contain restrictions on our ability to make restricted payments, including the declaration and payment of dividends, we are able to make such restricted payments under certain circumstances. Adding new debt to current debt levels or making restricted payments could intensify the related risks that we and our subsidiaries now face.
Our Senior Credit Facilities restrict our ability to engage in some business and financial transactions and contain certain other restrictive terms.
Our Senior Credit Facilities restrict our ability in certain circumstances to, among other things:
•incur additional debt;
•pay dividends and make other distributions on, redeem or repurchase, capital stock;
•make investments or other restricted payments;
•enter into transactions with affiliates;
•engage in sale and leaseback transactions;
•sell all, or substantially all, of our assets;
•create liens on assets to secure debt; or
•effect a consolidation or merger.
These covenants limit our operational flexibility and could prevent us from taking advantage of business opportunities as they arise, growing our business or competing effectively. In addition, our Senior Credit Facilities may require us to maintain a First Lien Net Ratio (as defined in the Senior Credit Facilities) and satisfy other financial tests. Our ability to meet this financial ratio and other tests can be affected by events beyond our control, and we cannot assure you that we will meet these tests. At January 3, 2021, we were in compliance with such covenants.
A breach of any of these covenants or other provisions in our debt agreements could result in an event of default, which if not cured or waived, could result in such debt becoming immediately due and payable. This, in turn, could cause our other debt to become due and payable as a result of cross-acceleration provisions contained in the agreements governing such other debt. In the event that some or all of our debt is accelerated and becomes immediately due and payable, we may not have the funds to repay, or the ability to refinance, such debt.
We may not have the funds necessary to satisfy all of our obligations under our Senior Credit Facilities or other indebtedness in connection with certain change of control events.
Our Senior Credit Facilities provide that certain change of control events constitute an event of default. Such an event of default entitles the lenders thereunder to, among other things, cause all outstanding debt obligations under the Senior Credit Facilities to become due and payable and to proceed against the collateral securing such Senior Credit Facilities. Any event of default or acceleration of the Senior Credit Facilities will likely also cause a default under the terms of our other indebtedness.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
31
ITEM 2. PROPERTIES
As of January 3, 2021, we owned nine and leased 1,065 restaurant properties including 28 co-branded locations. In addition, we owned five and leased 19 non-operating properties as of January 3, 2021, not including two properties under construction that are expected to open as new restaurants in 2021.
We typically enter into leases (including renewal options) ranging from 20 to 40 years. The average remaining term for all leases, including options, was approximately 25.8 years at January 3, 2021. Generally, we have been able to renew leases, upon or prior to their expiration, at the prevailing market rates, although there can be no assurance that this will continue to occur.
Most of our Burger King® restaurant leases are coterminous with the related franchise agreements. We believe that we generally will be able to renew at commercially reasonable rates the leases whose terms expire prior to the expiration of that location's Burger King® franchise agreement, although there can be no assurance that this will occur.
Most leases require us to pay utility and water charges and real estate taxes. Certain leases also require contingent rentals based upon a percentage of gross sales of the particular restaurant that exceed specified minimums. In some of our shopping center locations, we are also required to pay certain other charges such as a pro rata share of the shopping center's common area maintenance costs, insurance and security costs.
In addition to the restaurant locations set forth under Item 1. “Business-Restaurant Locations”, we own a building with approximately 25,300 square feet at 968 James Street, Syracuse, New York, which houses our executive offices, most of our administrative operations for our Burger King® restaurants and one of our regional support offices. We also lease eight small regional offices that support the management of our Burger King® restaurants, two offices in Tennessee acquired in the Cambridge Acquisition, and two smaller administrative offices in Syracuse, NY that support administrative operations.
ITEM 3. LEGAL PROCEEDINGS
Litigation. We are involved in various litigation matters and claims that arise in the ordinary course of business. Based on our currently available information, we do not believe that the ultimate resolution of any of these matters will have a material adverse effect on our consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The NASDAQ Global Market under the symbol “TAST”. On March 3, 2021, there were 53,337,104 shares of our common stock outstanding held by 482 holders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.
We did not pay any cash dividends during the fiscal years 2020 or 2019. We currently do not expect to pay any cash dividends on our common stock in the foreseeable future. We are a holding company and conduct all of our operations through our direct and indirect subsidiaries. As a result, for us to pay dividends, we need to rely on dividends or distributions to us from our direct and indirect subsidiaries. Our Senior Credit Facilities limit, and debt instruments that we and our subsidiaries may enter into in the future may limit, our ability to pay dividends to our stockholders.
32
Stock Performance Graph
The following graph compares from December 31, 2015 the cumulative total stockholder return on our common stock relative to the cumulative total returns of The NASDAQ Composite Index and a peer group, the S&P SmallCap 600 Restaurants Index. We have elected to use the S&P SmallCap 600 Restaurant Index in compiling our stock performance graph because we believe the S&P SmallCap 600 Restaurant Index represents a comparison to competitors with similar market capitalization as us. The graph assumes an investment of $100 in our common stock and each index on December 31, 2015.
* $100 invested on 12/31/2015 in stock or index, including reinvestment of dividends.
| 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | |||||||||||||||
| Carrols Restaurant Group, Inc. | $ | 100.00 | $ | 129.90 | $ | 103.49 | $ | 83.82 | $ | 60.05 | $ | 53.49 | ||||||||
| NASDAQ Composite | $ | 100.00 | $ | 108.87 | $ | 141.13 | $ | 137.12 | $ | 187.44 | $ | 271.64 | ||||||||
| S&P SmallCap 600 Restaurants | $ | 100.00 | $ | 108.78 | $ | 100.34 | $ | 98.61 | $ | 103.52 | $ | 106.19 | ||||||||
Purchases of Equity Securities by the Issuer
On August 2, 2019, our Board of Directors approved a repurchase program under which we may repurchase up to $25 million of our outstanding common stock (the "Repurchase Program"). The authorization became effective on August 2, 2019, and will expire 24 months thereafter, unless terminated earlier by our Board of Directors. Purchases under the Repurchase Program may be made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions (including, without limitation, the use of Rule 10b5-1 plans) in compliance with applicable federal securities laws, including Rule 10b-18 under the Exchange Act. We have no obligation to repurchase stock under the Repurchase Program, and the timing, actual number and value of shares purchased will depend on our stock price, trading volume, general market and economic conditions, and other factors.
33
The table below reflects shares of common stock we repurchased in the fourth quarter of 2020:
| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Approximate Dollar Value of Shares that May Yet to Be Purchased Under the Plans or Programs | |||||||||||||||||||||||
| September | Purchased 9/28 through 9/30 | — | $ | — | — | $ | — | |||||||||||||||||||
| October | Purchased 10/1 through 10/31 | — | $ | — | — | $ | — | |||||||||||||||||||
| November | Purchased 11/1 through 11/30 | 762,512 | $ | 6.11 | 762,512 | $ | 16,326,820 | |||||||||||||||||||
| December | Purchased 12/1 through 12/31 | 771,792 | $ | 6.92 | 771,792 | $ | 10,983,543 | |||||||||||||||||||
| January | Purchased 1/1 through 1/3 | — | $ | — | — | $ | — | |||||||||||||||||||
(1) Shares were repurchased in open market transactions pursuant to the Repurchase Program.
34
ITEM 6. SELECTED FINANCIAL DATA
Our fiscal years ended January 1, 2017, December 31, 2017, December 30, 2018 and December 29, 2019 presented below each include 52 weeks. The fiscal year ended January 3, 2021 presented below includes 53 weeks.
The information in the following tables should be read together with our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. Our consolidated financial information may not be indicative of our future performance.
| Year Ended | |||||||||||||||||||||||||||||
| Acquisition Activity: | January 1, 2017 | December 31, 2017 | December 30, 2018 | December 29, 2019 | January 3, 2021 | ||||||||||||||||||||||||
| Restaurants acquired | 56 | 64 | 44 | 234 | — | ||||||||||||||||||||||||
| Transactions | 7 | 3 | 4 | 3 | — | ||||||||||||||||||||||||
| Year Ended | |||||||||||||||||||||||||||||
| January 1, 2017 | December 31, 2017 | December 30, 2018 | December 29, 2019 | January 3, 2021 | |||||||||||||||||||||||||
| (In thousands, except share and per share data) | |||||||||||||||||||||||||||||
| Statements of operations data: | |||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||
| Restaurant sales | 943,583 | 1,088,532 | 1,179,307 | 1,452,516 | 1,547,502 | ||||||||||||||||||||||||
| Other revenue | — | — | — | 10,249 | — | ||||||||||||||||||||||||
| Total revenue | 943,583 | 1,088,532 | 1,179,307 | 1,462,765 | 1,547,502 | ||||||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||||||||
| Cost of sales | 250,112 | 304,593 | 326,308 | 431,969 | 452,738 | ||||||||||||||||||||||||
| Restaurant wages and related expenses | 297,766 | 350,054 | 382,829 | 485,278 | 498,127 | ||||||||||||||||||||||||
| Restaurant rent expense | 64,814 | 75,948 | 81,409 | 107,147 | 118,444 | ||||||||||||||||||||||||
| Other restaurant operating expenses | 148,946 | 166,786 | 178,750 | 227,364 | 236,059 | ||||||||||||||||||||||||
| Advertising expense | 41,299 | 44,677 | 48,340 | 58,689 | 60,735 | ||||||||||||||||||||||||
| General and administrative (1)(2) | 54,956 | 60,348 | 66,587 | 84,734 | 84,051 | ||||||||||||||||||||||||
| Depreciation and amortization | 47,295 | 54,159 | 58,468 | 74,674 | 81,727 | ||||||||||||||||||||||||
| Impairment and other lease charges | 2,355 | 2,827 | 3,685 | 3,564 | 12,778 | ||||||||||||||||||||||||
| Other expense (income) (3) | 338 | (333) | (424) | (1,911) | (1,271) | ||||||||||||||||||||||||
| Total operating expenses | 907,881 | 1,059,059 | 1,145,952 | 1,471,508 | 1,543,388 | ||||||||||||||||||||||||
| Income (loss) from operations | 35,702 | 29,473 | 33,355 | (8,743) | 4,114 | ||||||||||||||||||||||||
| Interest expense | 18,315 | 21,710 | 23,638 | 27,856 | 27,283 | ||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | 7,443 | — | ||||||||||||||||||||||||
| Gain on bargain purchase | — | — | (230) | — | — | ||||||||||||||||||||||||
| Income (loss) before income taxes | 17,387 | 7,763 | 9,947 | (44,042) | (23,169) | ||||||||||||||||||||||||
| Provision (benefit) for income taxes | (28,085) | 604 | (157) | (12,123) | 6,294 | ||||||||||||||||||||||||
| Net income (loss) | $ | 45,472 | $ | 7,159 | $ | 10,104 | $ | (31,919) | $ | (29,463) | |||||||||||||||||||
| Per share data: | |||||||||||||||||||||||||||||
| Basic and diluted net income (loss) per share: | $ | 1.01 | $ | 0.16 | $ | 0.22 | $ | (0.74) | $ | (0.58) | |||||||||||||||||||
| Weighted average shares used in computing net income (loss) per share: | |||||||||||||||||||||||||||||
| Basic | 35,178,329 | 35,416,531 | 35,715,372 | 43,421,715 | 50,751,185 | ||||||||||||||||||||||||
| Diluted | 44,851,345 | 44,976,514 | 45,319,971 | 43,421,715 | 50,751,185 | ||||||||||||||||||||||||
35
| Year Ended | |||||||||||||||||||||||||||||
| January 1, 2017 | December 31, 2017 | December 30, 2018 | December 29, 2019 | January 3, 2021 | |||||||||||||||||||||||||
| (In thousands, except restaurant weekly sales data) | |||||||||||||||||||||||||||||
| Other financial data: | |||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 62,288 | $ | 72,783 | $ | 80,769 | $ | 48,708 | $ | 103,945 | |||||||||||||||||||
| Total capital expenditures | 94,099 | 73,516 | 75,735 | 134,879 | 56,890 | ||||||||||||||||||||||||
| Net cash used for investing activities | 96,221 | 108,105 | 106,894 | 218,045 | 47,857 | ||||||||||||||||||||||||
| Net cash provided by financing activities | 13,661 | 62,372 | 727 | 168,297 | 5,902 | ||||||||||||||||||||||||
| Operating Data: | |||||||||||||||||||||||||||||
| Restaurants (at end of period) | 753 | 807 | 849 | 1,101 | 1,074 | ||||||||||||||||||||||||
| Average number of restaurants | 719.5 | 784.3 | 813.9 | 998.5 | 1,078.0 | ||||||||||||||||||||||||
| Average annual sales per restaurant (4) | 1,311 | 1,388 | 1,449 | 1,455 | 1,436 | ||||||||||||||||||||||||
| Adjusted EBITDA (5) | 89,505 | 91,771 | 102,990 | 86,371 | 107,855 | ||||||||||||||||||||||||
| Adjusted net income (loss) (5) | 17,860 | 9,262 | 14,091 | (15,323) | (3,733) | ||||||||||||||||||||||||
| Adjusted Restaurant-Level EBITDA (5) | 140,646 | 146,837 | 162,133 | 156,131 | 181,562 | ||||||||||||||||||||||||
| Change in comparable restaurant sales (6) | 2.3 | % | 5.2 | % | 3.8 | % | 2.2 | % | (2.7) | % | |||||||||||||||||||
| Balance sheet data (at end of period): | |||||||||||||||||||||||||||||
| Total assets | $ | 490,115 | $ | 581,514 | $ | 600,251 | $ | 1,751,460 | $ | 1,757,085 | |||||||||||||||||||
| Working capital | (39,231) | (19,514) | (47,461) | (109,540) | (44,396) | ||||||||||||||||||||||||
| Debt: | |||||||||||||||||||||||||||||
| Senior and senior subordinated debt | 213,500 | 275,000 | 275,000 | 468,625 | 493,250 | ||||||||||||||||||||||||
| Finance leases | 7,039 | 5,681 | 3,941 | 2,524 | 908 | ||||||||||||||||||||||||
| Lease financing obligations | 3,020 | 1,203 | 1,201 | 1,198 | 1,189 | ||||||||||||||||||||||||
| Total debt | $ | 223,559 | $ | 281,884 | $ | 280,142 | $ | 472,347 | $ | 495,347 | |||||||||||||||||||
| Stockholders’ equity | $ | 154,656 | $ | 169,060 | $ | 185,540 | $ | 309,462 | $ | 271,532 | |||||||||||||||||||
| Year Ended | |||||||||||||||||||||||||||||
| January 1, 2017 | December 31, 2017 | December 30, 2018 | December 29, 2019 | January 3, 2021 | |||||||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||||||||
| Reconciliation of EBITDA and Adjusted EBITDA (5): | |||||||||||||||||||||||||||||
| Net income (loss) | $ | 45,742 | $ | 7,159 | $ | 10,104 | $ | (31,919) | $ | (29,463) | |||||||||||||||||||
| Provision (benefit) for income taxes | (28,085) | 604 | (157) | (12,123) | 6,294 | ||||||||||||||||||||||||
| Interest expense | 18,315 | 21,710 | 23,638 | 27,856 | 27,283 | ||||||||||||||||||||||||
| Depreciation and amortization | 47,295 | 54,159 | 58,468 | 74,674 | 81,727 | ||||||||||||||||||||||||
| EBITDA | 82,997 | 83,632 | 92,053 | 58,488 | 85,841 | ||||||||||||||||||||||||
| Impairment and other lease charges | 2,355 | 2,827 | 3,685 | 3,564 | 12,778 | ||||||||||||||||||||||||
| Acquisition and integration costs (7) | 1,853 | 1,793 | 1,445 | 10,827 | 273 | ||||||||||||||||||||||||
| Abandoned development costs | — | — | — | 256 | 3,464 | ||||||||||||||||||||||||
| Pre-opening costs | — | 363 | 462 | 1,449 | 163 | ||||||||||||||||||||||||
| Other income, net (3) | (1,603) | (362) | (424) | (1,911) | (1,271) | ||||||||||||||||||||||||
| Litigation and other professional expenses (8) | 1,850 | — | 187 | 502 | 1,384 | ||||||||||||||||||||||||
| Stock compensation expense | 2,053 | 3,518 | 5,812 | 5,753 | 5,223 | ||||||||||||||||||||||||
| Gain on bargain purchase | — | — | (230) | — | — | ||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | 7,443 | — | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 89,505 | $ | 91,771 | $ | 102,990 | $ | 86,371 | $ | 107,855 | |||||||||||||||||||
36
| Year Ended | |||||||||||||||||||||||||||||
| January 1, 2017 | December 31, 2017 | December 30, 2018 | December 29, 2019 | January 3, 2021 | |||||||||||||||||||||||||
| Reconciliation of Adjusted Restaurant-Level EBITDA (5): | |||||||||||||||||||||||||||||
| Income (loss) from operations | $ | 35,702 | $ | 29,473 | $ | 33,355 | $ | (8,743) | $ | 4,114 | |||||||||||||||||||
| Add: | |||||||||||||||||||||||||||||
| General and administrative expenses | 54,956 | 60,348 | 66,587 | 84,734 | 84,051 | ||||||||||||||||||||||||
| Restaurant integration costs | — | — | — | 2,364 | — | ||||||||||||||||||||||||
| Pre-opening costs | — | 363 | 462 | 1,449 | 163 | ||||||||||||||||||||||||
| Depreciation and amortization | 47,295 | 54,159 | 58,468 | 74,674 | 81,727 | ||||||||||||||||||||||||
| Impairment and other lease charges | 2,355 | 2,827 | 3,685 | 3,564 | 12,778 | ||||||||||||||||||||||||
| Other expense (income), net (3) | 338 | (333) | (424) | (1,911) | (1,271) | ||||||||||||||||||||||||
Adjusted Restaurant-Level EBITDA | $ | 140,646 | $ | 146,837 | $ | 162,133 | $ | 156,131 | $ | 181,562 | |||||||||||||||||||
| Year Ended | |||||||||||||||||||||||||||||
| January 1, 2017 | December 31, 2017 | December 30, 2018 | December 29, 2019 | January 3, 2021 | |||||||||||||||||||||||||
| Reconciliation of Adjusted net income (loss) (5): | |||||||||||||||||||||||||||||
| Net income (loss) | $ | 45,472 | $ | 7,159 | $ | 10,104 | $ | (31,919) | $ | (29,463) | |||||||||||||||||||
| Add: | |||||||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | 7,443 | — | ||||||||||||||||||||||||
| Impairment and other lease charges | 2,355 | 2,827 | 3,685 | 3,564 | 12,778 | ||||||||||||||||||||||||
| Acquisition and integration costs (7) | 1,853 | 1,793 | 1,445 | 10,827 | 273 | ||||||||||||||||||||||||
| Abandoned development costs | — | — | — | 256 | 3,464 | ||||||||||||||||||||||||
| Pre-opening costs | — | 363 | 462 | 1,449 | 163 | ||||||||||||||||||||||||
| Other income, net (3) | (1,603) | (362) | (424) | (1,911) | (1,271) | ||||||||||||||||||||||||
| Gain on bargain purchase | — | — | (230) | — | — | ||||||||||||||||||||||||
| Litigation and other professional expenses (8) | 1,850 | — | 187 | 502 | 1,384 | ||||||||||||||||||||||||
| Income tax effect of above adjustments (9) | (1,693) | (1,756) | (1,138) | (5,534) | (4,199) | ||||||||||||||||||||||||
| Adjustments to income tax benefit (10) | (30,374) | (762) | — | — | 13,138 | ||||||||||||||||||||||||
| Adjusted net income (loss) | $ | 17,860 | $ | 9,262 | $ | 14,091 | $ | (15,323) | $ | (3,733) | |||||||||||||||||||
| Adjusted diluted net income (loss) per share (11) | $ | 0.40 | $ | 0.21 | $ | 0.31 | $ | (0.35) | $ | (0.07) | |||||||||||||||||||
(1) Acquisition costs of $1.9 million, $1.8 million, $1.4 million, $8.5 million and $0.3 million were included in general and administrative expense for the years ended January 1, 2017, December 31, 2017, December 30, 2018, December 29, 2019 and January 3, 2021, respectively.
(2)General and administrative expenses include stock-based compensation expense for the years ended January 1, 2017, December 31, 2017, December 30, 2018, December 29, 2019 and January 3, 2021 of $2.1 million, $3.5 million, $5.8 million, $5.8 million and $5.2 million, respectively.
(3)In 2020, we recorded gains related to insurance recoveries from property damage at four of the Company's restaurants of $2.1 million, a net gain on twelve sale-leaseback transactions of $0.2 million and a loss on disposal of assets of $1.0 million. In fiscal 2019, we recorded, among other things, a $1.9 million gain related to a settlement with BKC for the approval of new restaurant development by other franchisees which unfavorably impacted our restaurants. In fiscal 2018 and 2017, we recorded net gains of $0.4 million and $0.3 million, respectively, primarily related to insurance recoveries from fires at two restaurants. In fiscal 2016, we recorded gains of $1.2 million related to property insurance recoveries from fires at two restaurants, a gain of $0.5 million related to a settlement for a partial condemnation on one of its operating restaurant properties and expense of $1.85 million related to a settlement of litigation.
(4)Average annual sales per restaurant are derived by dividing restaurant sales by the average number of restaurants operating during the period.
(5)EBITDA, Adjusted EBITDA, Restaurant-Level EBITDA and Adjusted net income (loss) are financial measures not in accordance with accounting principles generally accepted in the United States of America ("GAAP"). EBITDA represents net income or loss before income taxes, interest expense and depreciation and amortization. Adjusted EBITDA represents EBITDA as adjusted to exclude impairment and other lease charges, acquisition and integration costs, stock compensation expense, pre-opening costs, gain on bargain purchase, loss on extinguishment of debt and other income or expense. Adjusted Restaurant-Level EBITDA represents income or loss from operations adjusted to exclude general and administrative expenses, restaurant integration costs, pre-opening costs, depreciation and amortization, impairment and
37
other lease charges, and other income or expense. Adjusted net income (loss) represents net income or loss as adjusted to exclude loss on extinguishment of debt, impairment and other lease charges, acquisition and integration costs, pre-opening expense gain on bargain purchase, litigation costs, legal settlement gains and other income or expense, the related income tax effect of these adjustments and the establishment or reversal of a valuation allowance on our net deferred income tax assets.
We are presenting Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted net income (loss) because we believe that they provide a more meaningful comparison than EBITDA and net income or loss of our core business operating results, as well as with those of other similar companies. Additionally, we present Adjusted Restaurant-Level EBITDA because it excludes the impact of general and administrative expenses and other income or expense, which are not directly related to restaurant-level operations. Management believes that Adjusted EBITDA and Adjusted Restaurant-Level EBITDA, when viewed with our results of operations in accordance with GAAP and the accompanying reconciliations, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA and Adjusted Restaurant-Level EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.
However, EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted net income (loss) are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or loss, income or loss from operations or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies.
EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted net income (loss) have important limitations as analytical tools. These limitations include the following:
•EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;
•EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect the interest expense or the cash requirements necessary to service principal or interest payments on our debt;
•Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect the cash required to fund such replacements; and
•EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted net income (loss) do not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges (such as impairment and other lease charges and acquisition and integration costs) have recurred and may reoccur.
(6)Restaurants we acquire are included in comparable restaurant sales after they have been operated by us for 12 months. Sales from restaurants we develop are included in comparable sales after they have been open for 15 months. Comparable restaurant sales are on a 53-week basis for the year ended January 3, 2021.
38
(7)Acquisition and integration costs for the periods presented include certain legal and professional fees, corporate payroll, and other costs related to the integration of acquisitions and one-time repair and other operating costs which are included in Adjusted Restaurant-Level EBITDA.
(8)Litigation and other professional expenses in fiscal 2020 include legal costs pertaining to an ongoing lawsuit with one of our vendors, costs to settle a class action claim and other non-recurring professional service expenses. In fiscal 2019 and 2018, this included legal costs pertaining to an ongoing lawsuit with one of our vendors and for fiscal 2016, represents costs for settlement of certain litigation.
(9)The income tax effect related to all adjustments, other than the deferred income tax valuation allowance provision (benefit), was calculated using an incremental income tax rate of 25% in fiscal 2020 and fiscal 2019, 22.2% in fiscal 2018 and 38% in all other years presented.
(10)Fiscal 2020 includes tax expense of $13.1 million to record an incremental tax valuation allowance for certain income tax credits as they may expire prior to their utilization. The benefit for income taxes in fiscal 2019 contains discrete tax adjustments of $0.5 million of income tax expense. The benefit for income taxes in fiscal 2018 contains net discrete tax adjustments of $0.1 million of income tax expense. The provision for income taxes in fiscal 2017 contains a $0.8 million discrete tax benefit recorded in the fourth quarter to remeasure our net deferred taxes due to the lowering of the Federal income tax rate to 21% under the Tax Cuts and Jobs Act signed into law in the fourth quarter of 2017. The benefit for income taxes in fiscal 2016 reflects a $30.4 million income tax benefit recorded in the fourth quarter of 2016 to reverse a previously recorded valuation allowance on net deferred income tax assets.
(11)Adjusted diluted net income (loss) per share is calculated based on Adjusted net income (loss) and the dilutive weighted average common shares outstanding for each respective period.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our fiscal years consist of 52 or 53 weeks ending on the Sunday closest to December 31. The fiscal year ended January 3, 2021 contained 53 weeks and the fiscal year ended December 29, 2019 contained 52 weeks.
Introduction
We are a holding company and conduct all of our operations through our direct and indirect subsidiaries, Carrols, Carrols LLC, New CFH, LLC and its direct and indirect subsidiaries, and Republic Foods, Inc., and have no assets other than the shares of capital stock of Carrols and New CFH, LLC, our direct wholly-owned subsidiaries. The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K. The overview provides our perspective on the individual sections of MD&A, which include the following:
Company Overview—a general description of our business and our key financial measures.
Recent and Future Events Affecting Our Results of Operations—a description of recent events that affect, and future events that may affect, our results of operations.
Results of Operations—an analysis of our consolidated results of operations for the years ended January 3, 2021, and December 29, 2019, including a review of the material items and known trends and uncertainties. See Item 7 of our 2019 Annual Report on Form 10-K for an analysis of our consolidated results of operations for the years ended December 29, 2019 and December 30, 2018.
Liquidity and Capital Resources—an analysis of our cash flows, including capital expenditures, changes in capital resources and known trends that may impact liquidity.
Application of Critical Accounting Policies—an overview of accounting policies requiring critical judgments and estimates.
New accounting pronouncements—a discussion of new accounting pronouncements, dates of implementation, and the impact on our consolidated financial position or results of operations, if any.
39
Company Overview
Carrols Restaurant Group, Inc. and its consolidated subsidiaries (collectively, "Carrols Restaurant Group", the "Company", "we", "our" or "us") is one of the largest restaurant companies in the United States and has been operating restaurants for more than 60 years. We are the largest Burger King® franchisee in the United States, based on number of restaurants, and have operated Burger King® restaurants since 1976. As of January 3, 2021 we operated, as a franchisee, a total of 1,074 restaurants in 23 states under the trade names of Burger King® and Popeyes®. This included 1,009 Burger King® restaurants in 23 Northeastern, Midwestern, Southcentral and Southeastern states and 65 Popeyes® restaurants in seven Southeastern states.
During the year ended December 29, 2019, we acquired 179 Burger King® restaurants and 55 Popeyes restaurants in three separate transactions which we refer to as the "2019 acquired restaurants". During the year ended December 30, 2018, we acquired 44 Burger King® restaurants in four separate transactions, which we refer to as the "2018 acquired restaurants".
Any reference to "BKC" refers to Burger King Corporation and its indirect parent company, Restaurant Brands International Inc. ("RBI"). Any reference to "PLK" refers to Popeyes Louisiana Kitchen, Inc. and its indirect parent company, RBI.
The following is an overview of the key financial measures discussed in our results of operations:
•Restaurant sales consist of food and beverage sales at our restaurants, net of sales discounts and excluding sales tax collected. Restaurant sales are influenced by changes in comparable restaurant sales, menu price increases, new restaurant development, acquisition of restaurants and the closures of restaurants. Comparable restaurant sales reflect the change in year-over-year sales for a comparable restaurant base. Restaurants we acquire are included in comparable restaurant sales after they have been owned for 12 months and immediately after they re-open following a remodel. Newly developed restaurants are included in comparable restaurant sales after they have been open for 15 months. For comparative purposes, where applicable, the calculation of the changes in comparable restaurant sales is based either on a 53-week or 52-week year.
•Other revenue consists of fuel sales, food sales and sales of other convenience merchandise and services from the six convenience stores acquired as part of the Cambridge Acquisition (as defined in this MD&A). The six convenience stores were closed in the fourth quarter of 2019.
•Cost of sales consists of food, paper and beverage costs (including packaging costs) and delivery charges, less purchase discounts and vendor rebates. Cost of sales is generally influenced by changes in commodity costs, the mix of items sold, the level of promotional discounting, the effectiveness of our restaurant-level controls to manage food and paper costs and the relative contribution of delivery sales. In 2019, cost of sales also included fuel costs for the six convenience stores acquired as part of the Cambridge Acquisition, which contributed lower margins relative to our restaurant cost of sales.
•Restaurant wages and related expenses include all restaurant management and hourly productive labor costs and related benefits, employer payroll taxes and restaurant-level bonuses. Payroll and related benefits are subject to inflation, including minimum wage increases and increased costs for health insurance, workers’ compensation insurance and federal and state unemployment insurance.
•Restaurant rent expense includes base rent and variable rent on our leases characterized as operating leases. In 2018, restaurant rent expense also included the amortization of favorable and unfavorable leases and was reduced by the amortization of deferred gains on sale-leaseback transactions.
•Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are royalty expenses paid to BKC and PLK, utilities, repairs and maintenance, real estate taxes and credit card fees.
•Advertising expense includes advertising payments to BKC and PLK based on a percentage of sales as required under our franchise and operating agreements and additional marketing and promotional expenses in certain of our markets.
40
•General and administrative expenses are comprised primarily of salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants, legal, auditing and other professional fees, acquisition costs and stock-based compensation expense.
•EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Income (Loss). EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Income (Loss) are non-GAAP financial measures. EBITDA represents net income (loss) before income taxes, interest expense and depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude impairment and other lease charges, acquisition and integration costs, loss on extinguishment of debt, stock compensation expense, other income or expense, abandoned site development costs, pre-opening expenses and certain other non-recurring expenses. Adjusted Restaurant-Level EBITDA represents income (loss) from operations adjusted to exclude general and administrative expenses, depreciation and amortization, impairment and other lease charges and other income or expense. Adjusted net income (loss) represents net income (loss) adjusted to exclude loss on extinguishment of debt, impairment and other lease charges, acquisition costs, pre-opening and litigation costs, legal settlement gains and other income and expense and the related income tax effect of these adjustments.
•We are presenting Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Income (loss) because we believe that they provide a more meaningful comparison than EBITDA and net income of our core business operating results, as well as with those of other similar companies. Additionally, we present Adjusted Restaurant-Level EBITDA because it excludes the impact of general and administrative expenses and other income or expense, which are not directly related to restaurant-level operations. Management believes that Adjusted EBITDA and Adjusted Restaurant-Level EBITDA, when viewed with our results of operations in accordance with GAAP and the accompanying reconciliations on page 54, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA and Adjusted Restaurant-Level EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.
However, EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Income (Loss) are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income, income from operations or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies. For the reconciliation between net income to EBITDA, Adjusted EBITDA and Adjusted net income and the reconciliation of income from operations to Adjusted Restaurant-Level EBITDA, see page 54.
EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Income (Loss) have important limitations as analytical tools. These limitations include the following:
•EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;
•EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect the interest expense or the cash requirements necessary to service principal or interest payments on our debt;
•Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect the cash required to fund such replacements; and
•EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Income (Loss) do not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges (such as impairment, other lease charges, acquisition costs and litigation costs) have recurred and may reoccur.
41
•Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants, the amortization of franchise rights from our acquisitions of restaurants and the amortization of franchise fees paid to BKC and PLK.
•Impairment and other lease charges are determined through our assessment of the recoverability of property and equipment and intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. A potential impairment charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries.
•Interest expense consists of interest expense associated with our $425.0 million Term Loan B borrowings and $75.0 million Term Loan B-1 borrowings, amortization of deferred financing costs, amortization of original issue discount, interest on revolving credit borrowings, ticking fees, payments required under our interest rate swap arrangement, and, through April 30, 2019, interest on the $275.0 million of 8% Senior Secured Second Lien Notes due 2022 (the "8% Notes") and unamortized bond premium.
Recent and Future Events Affecting our Results of Operations
Impact of the COVID-19 Pandemic
The impact of the COVID-19 pandemic on restaurant sales at our Burger King restaurants began during the week ended March 15, 2020. During the week ended March 29, 2020, comparable restaurant sales decreased 33.8% compared to the prior year week. Comparable restaurant sales declines at our Burger King restaurants began easing mid-April, and for the month of June the change in comparable restaurant sales was positive. For our Popeyes restaurants, the impact of the COVID-19 pandemic on restaurant sales started during the week ended March 22, 2020, and began easing mid-April.
In response to the impact that the COVID-19 pandemic has had on our business operations and the continuing uncertainty in the economy in general, we have taken steps to adapt our business and strengthen and preserve our liquidity, including the following:
•In March 2020, we closed the dining rooms in all our restaurants and modified operating hours in line with local ordinances and day-part sales trends. These closures were in effect for most of the second quarter of 2020, with each restaurant operating according to their respective local governmental guidelines as well as safety procedures developed by BKC and PLK. As individual states and local governments have allowed reopenings, we have continually evaluated the opportunity to re-open dining rooms. By the end of the year, approximately 35% of dining rooms have reopened, however, in most cases, guests have continued to rely on our drive-thru, carry-out and delivery service modes. Restaurant sales in the fourth quarter of 2020 included approximately 1% of eat-in traffic at our Burger King restaurants and 7% of eat-in traffic at our Popeyes restaurants, which are the highest we've seen since the onset of the pandemic.
•We launched delivery services in March of 2020 at approximately 800 of our restaurants and have added additional third-party delivery partners as well as restaurant coverage over the course of the year. For the fourth quarter of 2020, delivery comprised approximately 3.5% of total restaurant sales and for all of 2020 delivery was approximately 2.4% of all sales.
•We temporarily closed 46 restaurants in late March 2020 and early April 2020 that were geographically close to one of our other restaurants, and these closures were in effect for most of the second quarter of 2020. By the end of 2020, we had reopened all of these restaurants with the exception of two Burger King restaurants we permanently closed in the third quarter.
•As discussed below, we increased revolving credit borrowing capacity under our Revolving Credit Facility (as defined below) by $30.8 million to a total of $145.8 million and borrowed Incremental Term B-1 Loans (as defined below) for net proceeds of $71.3 million after original issue discount to increase our liquidity and protect against the uncertainty of a prolonged pandemic.
•We remain committed to active management of our expenditures and for the second quarter of 2020 limited spending mainly to necessary restaurant maintenance issues. For the full year, we reduced operating capital expenditures to $56.9 million from $134.9 million in 2019.
42
•We reduced regional and corporate overhead by streamlining our regional management and support structure, improving our training process and instituted a 10% temporary reduction in all non-restaurant wages for the second quarter of 2020. Given our improved business trajectory, this reduction in wages was restored as of July 1, 2020.
•As allowed under the Coronavirus Aid, Relief and Economic Security Act, as amended (the "CARES Act"), we deferred payment of the employer portion of Social Security taxes through the end of 2020. The amount of the cumulative deferral at the end of 2020 was approximately $21.6 million, of which 50% is payable on each of December 31, 2021 and December 31, 2022.
•We negotiated with our landlords other than BKC to secure $5.8 million in deferral or abatement of 2020 cash rent obligations, of which $4.8 million was or is expected to be repaid over various periods beginning in the third quarter of 2020. We repaid $1.6 million related to these deferrals by the end of 2020.
•During the second quarter of 2020, we optimized payment terms with our key vendors and suppliers and utilized deferral opportunities with our utility vendors. These reverted to normal payment terms in July of 2020. During the year, we experienced a number of minor and/or temporary supply chain issues. All such issues have been resolved.
•We suspended any acquisition activity and share repurchases during the first quarter, which we subsequently reinstated during the fourth quarter.
Throughout the course of this evolving COVID-19 outbreak, we have been adapting our business in order to continue operating safely. To support the health and safety of our employees, beginning in March 2020 we mandated, among other things, the use of masks, sanitizers and temperature checks at the beginning of each shift for our team members as well as instituted contactless procedures in our restaurants. We also suspended all non-essential travel for our employees and implemented a work-from-home policy for all non-restaurant personnel effective through the second quarter of 2020. During the third quarter of 2020, administrative employees returned to the office on a voluntary basis in compliance with New York's phased re-opening.
Although the COVID-19 pandemic has negatively impacted the Company's customer traffic, the immediate actions taken to continue drive-thru and carry-out business operations and secure additional liquidity have minimized the financial impact on the Company's results of operations, financial condition and cash flows. We believe our business model and world-class brands are ideally positioned to serve value and convenience-seeking customers through our drive-thru, at-the-counter for take-out, and delivery channels.
43
While significant uncertainty remains as to when or the manner in which the circumstances surrounding the COVID-19 pandemic will change, including but not limited to stock price volatility, lower customer traffic, governmental restrictions on restaurant businesses and the unpredictable economic environment, we have been nimble in adapting our operations to the realities of the marketplace and saw the results of these efforts in 2020. In 2020, we were able to increase our full year Adjusted Restaurant-Level EBITDA and Adjusted EBITDA by $25.4 million and $21.5 million, respectively, by managing food costs, optimizing labor hours despite higher wage rates, and controlling other restaurant-level and corporate overhead expenses.
Cambridge Acquisition
On April 30, 2019, we completed a merger with New CFH, LLC, a former subsidiary of Cambridge Franchise Holdings, LLC ("Cambridge") and acquired 165 Burger King® restaurants, 55 Popeyes® restaurants and six convenience stores (the "Cambridge Acquisition"). Cambridge received a total of approximately 14.9 million shares of our common stock after conversion of all preferred stock initially issued to Cambridge in the Cambridge Acquisition. All shares of common stock issued to Cambridge are subject to a two year restriction on sale or transfer, subject to certain limited exceptions.
Area Development and Remodeling Agreement
The Company, Carrols, Carrols LLC, and BKC entered into a new Area Development Agreement (the "ADA") which commenced on April 30, 2019 and was set to end on September 30, 2024 and which superseded the Operating Agreement dated as of May 30, 2012, as amended, between Carrols LLC and BKC. The ADA was amended and restated by all parties on January 4, 2021 (the "Amended ADA").
Under the ADA, Carrols LLC had agreed to open, build and operate a total of 200 new Burger King restaurants including 32 additional Burger King restaurants by September 30, 2020, 41 additional Burger King restaurants by September 30, 2021, 41 additional Burger King restaurants by September 30, 2022, 40 additional Burger King restaurants by September 30, 2023 and 39 additional Burger King restaurants by September 30, 2024, subject to and in accordance with the terms of the ADA. Carrols LLC also had agreed under the ADA to remodel or upgrade a total of 748 Burger King restaurants to BKC’s Burger King of Tomorrow restaurant image, including 130 additional Burger King restaurants by September 30, 2020, 118 additional Burger King restaurants by September 30, 2021, 131 additional Burger King restaurants by September 30, 2022, 138 additional Burger King restaurants by September 30, 2023 and 141 additional Burger King restaurants by September 30, 2024, subject to and in accordance with the terms of the ADA.
These development commitments were substantially reduced in the Amended ADA. Pursuant to the Amended ADA, Carrols LLC agreed to open, build and operate a total of 50 new Burger King restaurants, 80% of which must be in Kentucky, Tennessee and Indiana. This includes four Burger King restaurants by September 30, 2021, 10 additional Burger King restaurants by September 30, 2022, 12 additional Burger King restaurants by September 30, 2023, 12 additional Burger King restaurants by September 30, 2024 and 12 additional Burger King restaurants by September 30, 2025.
In addition, pursuant to the Amended ADA, BKC granted Carrols LLC franchise pre-approval to build new Burger King restaurants or acquire Burger King restaurants from Burger King franchisees with respect to 500 Burger King restaurants in the aggregate in (i) Kentucky, Tennessee and Indiana (excluding certain geographic areas in Indiana) and (ii) (a) 16 states, which include Arkansas, Indiana, Kentucky, Louisiana, Maine, Maryland, Michigan, Mississippi, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont and Virginia (subject to certain exceptions for certain limited geographic areas within certain states) and (b) any other geographic locations that Carrols LLC enters after the commencement date of the Amended ADA pursuant to BKC procedures subject to certain limitations.
Pursuant to the ADA and for a cost of $3.0 million, BKC had assigned to Carrols LLC the right of first refusal on the sale of franchisee-operated restaurants in 16 states and a limited number of counties in four additional states, and granted franchise pre-approval to acquire Burger King restaurants until the date that we have acquired more than an aggregate of an additional 500 Burger King restaurants excluding those restaurants we acquired in the
44
Cambridge Acquisition ("ADA ROFR"). The ADA ROFR was terminated in connection with the Amended ADA and an impairment charge of $2.0 million for the unamortized value remaining from the payment for the ADA ROFR was recorded in 2020.
BKC agreed to contribute $10 million to $12 million for upgrades of approximately 50 to 60 Burger King restaurants in 2019 and 2020, most of which have already been remodeled to the 20/20 image and where BKC is the landlord on the lease for such Burger King restaurants operated by Carrols LLC or an affiliate. In 2019, we received $10.0 million from BKC under this arrangement.
On October 1 of each year following the commencement date of the ADA, Carrols LLC was required to pay BKC pre-paid franchise fees in the following amounts to be applied to new Burger King restaurants opened and operated by Carrols LLC: (a) $350,000 on the commencement date of the ADA, (b) $1,600,000 on October 1, 2019, (c) $2,050,000 on October 1, 2020, (d) $2,050,000 on October 1, 2021, (e) $2,000,000 on October 1, 2022 and (f) $1,950,000 on October 1, 2023. The Amended ADA eliminated the requirement for any prepayments due and payable on and after October 1, 2020, and the $0.6 million balance of prepaid franchise fees paid under the ADA that had not yet been applied to new restaurant development was forfeited.
Through the Cambridge Acquisition, we have also assumed a development agreement for Popeyes®, which includes an assignment by PLK of its right of first refusal under its franchise agreements with its franchisees for acquisitions in two southern states, as well as a development commitment to open, build and operate approximately 80 new Popeyes® restaurants over six years.
Restaurant Acquisitions
From the beginning of 2018 through January 3, 2021, we acquired 278 restaurants from other Burger King and Popeyes franchisees in the following transactions ($ in thousands):
| Closing Date | Number of Restaurants | Purchase Price | Number of Fee-Owned Restaurants | Market Location | |||||||||||||||||||
| 2018 Acquisitions: | |||||||||||||||||||||||
| February 13, 2018 | (1) | 1 | $ | — | New York | ||||||||||||||||||
| August 21, 2018 | (2) | 2 | 1,666 | Detroit, Michigan | |||||||||||||||||||
| September 5, 2018 | (2) | 31 | 25,930 | Western Virginia | |||||||||||||||||||
| October 2, 2018 | 10 | 10,506 | South Carolina and Georgia | ||||||||||||||||||||
| 44 | 38,102 | — | |||||||||||||||||||||
| 2019 Acquisitions: | |||||||||||||||||||||||
| April 30, 2019 | (3) | 220 | 259,083 | 14 | Southeastern states, primarily TN, MS, LA | ||||||||||||||||||
| June 11, 2019 | 13 | 15,788 | Baltimore, Maryland | ||||||||||||||||||||
| August 20, 2019 | (2) | 1 | 1,108 | Pennsylvania | |||||||||||||||||||
| 234 | 275,979 | 14 | |||||||||||||||||||||
| Total | 278 | $ | 314,081 | 14 | |||||||||||||||||||
(1)We recorded a bargain purchase gain because the fair value of assets acquired, largely representing a franchise right asset of $0.3 million, exceeded the total fair value of consideration paid by $0.2 million.
(2)Acquisitions resulting from the exercise of our right of first refusal on acquisitions in certain markets.
(3)The Cambridge Acquisition included 165 Burger King restaurants and 55 Popeyes restaurants.
The 2019 acquired restaurants included 14 fee-owned properties, of which six were subsequently sold in sale-leaseback transactions in 2019 for net proceeds of $8.3 million and two were subsequently sold in sale leaseback transactions in 2020 for net proceeds of $3.4 million. All of the 2018 acquired restaurants were leased properties.
45
The pro forma impact on the results of operations for the 2019 acquired restaurants is included below. The pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. This pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings or any transaction costs related to the 2019 acquired restaurants. The following table summarizes certain pro forma financial information related to our 2019 operating results (in thousands):
| Year Ended | |||||
| December 29, 2019 | |||||
| Restaurant sales | $ | 1,568,533 | |||
| Loss from operations | $ | (299) | |||
| Pro Forma Adjusted EBITDA | $ | 94,139 | |||
Capital Expenditures
We expect that our capital expenditures in 2021 will be approximately $65 million to $75 million, which includes approximately 35% for remodeling existing restaurants, 25% for the construction of eight new restaurants, and 20% for required ongoing capital maintenance expenditures.
In 2021, proceeds from sale/leaseback transactions related to new restaurant development are expected to be approximately $8 million to $13 million. We will review on an ongoing basis our future development and remodel plans in relation to our available capital resources.
Refinancing of Indebtedness and our Senior Credit Facilities
On April 30, 2019, we entered into a new senior secured credit facility which provides for senior secured credit facilities in an aggregate principal amount of $550.0 million (the "Senior Credit Facilities"), consisting of (i) a term loan B facility in an aggregate principal amount of $425.0 million (the “Term Loan B Facility”), the entire amount of which was borrowed by us on April 30, 2019 and (ii) a revolving credit facility (including a sub-facility of $35.0 million for standby letters of credit) in an aggregate principal amount of $125.0 million (the "Revolving Credit Facility"). Borrowings under the Term Loan B Facility and the Revolving Credit Facility bear interest at a rate per annum, at our option, of (i) the Alternate Base Rate plus the applicable margin of 2.25% or (ii) the LIBOR Rate plus a margin of 3.25% (as defined in the Senior Credit Facilities). The Term Loan B Facility matures on April 30, 2026 and the Revolving Credit Facility matures on April 30, 2024.
On December 13, 2019, the Company entered into the First Amendment to Credit Agreement which amended a financial covenant under the Senior Credit Facilities applicable solely with respect to the Revolving Credit Facility that previously required the Company to maintain quarterly a Total Net Leverage Ratio (as defined in the Senior Credit Facilities) of not greater than 4.75 to 1.00 (measured on a most recent four quarter basis), to now require that the Company maintain only a First Lien Leverage Ratio (as defined in the Senior Credit Facilities) of not greater than 5.75 to 1.00 (as measured on a most recent four quarter basis) if, and only if, on the last day of any fiscal quarter (beginning with the fiscal quarter ended December 29, 2019), the sum of the aggregate principal amount of outstanding revolving credit borrowings under the Revolving Credit Facility and the aggregate face amount of letters of credit issued under the Revolving Credit Facility (excluding undrawn letters of credit in an aggregate face amount up to $12.0 million) exceeds 35% of the aggregate amount of the maximum revolving credit borrowings under the Revolving Credit Facility. The First Amendment also reduced the aggregate maximum revolving credit borrowings under the Revolving Credit Facility by $10.0 million to a total of $115.0 million.
As of December 29, 2019, there were $45.8 million of revolving credit borrowings outstanding and $11.6 million of letters of credit were issued under the Revolving Credit Facility. After reserving for issued letters of credit and outstanding revolving credit borrowings, $57.6 million was available for revolving credit borrowings under the Senior Credit Facilities at December 29, 2019.
46
On March 25, 2020, we entered into the Second Amendment to our Senior Credit Facilities (the "Second Amendment"). The Second Amendment increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the revolving credit facility (the "Revolving Committed Amount") by $15.4 million to a total of $130.4 million.
The Second Amendment also amended the definition of Applicable Margin (such definition and all other definitions used herein and otherwise not defined herein shall be the meanings set forth in the Senior Credit Facilities) in the Credit Agreement to provide that on and after the date of the Second Amendment (the "Second Amendment Effective Date"), the Applicable Margin for borrowings under the Revolving Credit Facility (including Letter of Credit Fees) shall be at a rate per annum equal to (a) for so long as the Revolving Committed Amount is greater than $115.0 million, (i) for the period commencing on the Second Amendment Effective Date and including the date that is 179 days after the Second Amendment Effective Date, 3.5% for LIBOR Rate Loans and 2.5% for Alternate Base Rate Loans, (ii) for the period commencing on the date that is 180 days after the Second Amendment Effective Date, through and including the date that is 269 days after the Second Amendment Effective Date, 4.25% for LIBOR Rate Loans and 3.25% for Alternate Base Rate Loans, (iii) for the period commencing on the date that is 270 days after the Second Amendment Effective Date, through and including the date that is 364 days after the Second Amendment Effective Date, 4.5% for LIBOR Rate Loans and 3.5% for Alternate Base Rate Loans and (iv) for the period commencing on the date that is 365 days after the Second Amendment Effective Date and thereafter, 4.75% for LIBOR Rate Loans and 3.75% for Alternate Base Rate Loans and (b) for so long as the Revolving Committed Amount is equal to or less than $115.0 million, 3.5% for LIBOR Rate Loans and 2.5% for Alternate Base Rate Loans.
The Second Amendment provides that beginning on the 180th day after the Second Amendment Effective Date and for so long as the Revolving Committed Amount is greater than $115.0 million, we shall pay to the Administrative Agent, for the ratable benefit of the Revolving Facility Lenders, a commitment fee (the "Ticking Fee") on the average daily amount of the Revolving Committed Amount at a rate per annum equal to (a) 0.125% for the 180th day after the Second Amendment Effective Date through and including the 269th day after the Second Amendment Effective Date, (b) 0.25% for the 270th day after the Second Amendment Effective Date through and including the 364th day after the Second Amendment Effective Date and (c) 1.00% for the 365th day after the Second Amendment Effective Date and thereafter. The Second Amendment provides that the Ticking Fee will be due and payable quarterly in arrears (calculated on a 360-day basis) on the last Business Day of each calendar quarter and will accrue from the 180th day after the Second Amendment Effective Date for so long as the Revolving Committed Amount is greater than $115.0 million. We recorded expense of $0.1 million related to these ticking fees in the year ended January 3, 2021.
The Second Amendment further provides that we shall use the proceeds of an Extension of Credit which results in the sum of the aggregate principal amount of outstanding Revolving Loans plus the aggregate amount of LOC Obligations equaling an amount in excess of $115.0 million, solely for our ongoing operations and our subsidiaries and shall not be held as cash on the balance sheet. Pursuant to the Letter Agreement, (the "Letter Agreement") dated as of March 25, 2020 among the Company, Wells Fargo Securities, LLC, Wells Fargo Bank, National Association and Truist Bank, we agreed to defer rent payments totaling approximately $2.4 million per month under certain real property leases for the period between April 1, 2020 through and including June 30, 2020. We paid these amounts in full according to these terms on July 1, 2020.
On April 8, 2020, we entered into the Third Amendment to our Senior Credit Facilities which increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility by $15.4 million to a total of $145.8 million.
On April 16, 2020, we entered into the Fourth Amendment to our Senior Credit Facilities (the "Fourth Amendment"). The Fourth Amendment permits us to incur and, if necessary, repay indebtedness incurred pursuant to the Paycheck Protection Program (the "PPP") under the CARES Act. Subsequent to this amendment, we withdrew our application for relief under the PPP and returned the funds upon receipt.
On June 23, 2020 (the "Fifth Amendment Effective Date"), we entered into the Fifth Amendment to our Senior Credit Facilities (the "Fifth Amendment"). The Fifth Amendment increased the Term Loan (as defined in the
47
Senior Credit Facilities) borrowings in the aggregate principal amount of $75 million of Incremental Term B-1 Loans (as defined in the Senior Credit Facilities). The Incremental Term B-1 Loans constitute a new tranche of Term Loans ranking pari passu in right of payment and security with the Initial Term Loans (as defined in the Senior Credit Facilities) for all purposes under the Senior Credit Facilities. The Incremental Term B-1 Loans have the same terms as outstanding borrowings under the Company's existing term loan B facility pursuant to and in accordance with the Senior Credit Facilities, provided that (i) borrowings under the Incremental Term B-1 Loans will bear interest at a rate per annum, at our option, of (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus the applicable margin of 5.25% or (b) the LIBOR Rate (as defined in the Senior Credit Facilities) (which shall not be less than 1% for Incremental Term B-1 Loans) plus the applicable margin of 6.25% and (ii) certain prepayments of the Incremental Term B-1 Loans by us prior to the first anniversary of the Fifth Amendment Effective Date are subject to a premium to the Administrative Agent (as defined in the Senior Credit Facilities), for the ratable account of each applicable Term Loan Lender (as defined in the Senior Credit Facilities) holding Incremental Term B-1 Loans on the date of such prepayment equal to the Applicable Make-Whole Amount (as defined in the Senior Credit Facilities) with respect to the principal amount of the Incremental Term B-1 Loans so prepaid. The principal amount of the Incremental Term B-1 Loans will amortize in an aggregate annual amount equal to 1% of the original principal amount of the Incremental Term B-1 Loans and shall be repayable in consecutive quarterly installments on the last day of our fiscal quarters beginning on the third fiscal quarter of 2020 with the remaining outstanding principal amount of the Incremental Term B-1 Loan and all accrued but unpaid interest and other amounts payable with respect to the Incremental Term B-1 Loan due on April 30, 2026 which is the Term Loan Maturity Date (as defined in the Senior Credit Facilities).
As of January 3, 2021, there were no revolving credit borrowings outstanding and $9.7 million of letters of credit were issued under our Revolving Credit Facility. After reserving for issued letters of credit, $136.1 million was available for revolving credit borrowings under our Senior Credit Facilities at January 3, 2021.
Interest Rate Swap Agreement
We entered into a five year interest rate swap agreement commencing March 3, 2020 and ending February 28, 2025 with a notional amount of $220.0 million to swap variable rate interest payments (one-month LIBOR plus the applicable margin) under our Senior Credit Facilities for fixed interest payments bearing an interest rate of 0.915% plus the applicable margin in our Senior Credit Facilities.
Stock Repurchase Program
On August 2, 2019, our Board of Directors approved a stock repurchase plan (the "Repurchase Program") under which we may repurchase up to $25 million of our outstanding common stock. The authorization became effective August 2, 2019, and will expire 24 months thereafter, unless terminated earlier by the Board of Directors. Purchases under the Repurchase Program may be made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions (including, without limitation, the use of Rule 10b5-1 plans) in compliance with applicable federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended.
During the year ended January 3, 2021, we repurchased 1,534,304 shares in open market transactions of our common stock at an average share price of $6.52 for a total cost of $10.0 million under the Repurchase Program. During the year ended December 29, 2019, we repurchased 553,112 shares in open market transactions at an average share price of $7.26 for a total cost of $4.0 million under the Repurchase Program.
We have no obligation to repurchase additional shares of stock under the Repurchase Program, and the timing, actual number and value of shares purchased will depend on our stock price, trading volume, general market and economic conditions and other factors.
Future Restaurant Closures
We evaluate the performance of our restaurants on an ongoing basis including an assessment of the current and future operating results of each restaurant in relation to its cash flow and future occupancy costs and, with
48
regard to franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on these evaluations.
In 2020, excluding one restaurant relocated within its trade area, we closed 33 restaurants. We currently anticipate less than five restaurant closures in 2021 outside of any restaurants being relocated within their trade area at the end of their respective lease term.
Our determination of whether to close restaurants in the future is subject to further evaluation and may change. We may incur lease charges in the future from closures of underperforming restaurants prior to the expiration of their contractual lease term. We do not believe that the future impact on our results of operations due to restaurant closures will be material, although there can be no assurance in this regard.
Effect of Minimum Wage Increases
Certain of the states and municipalities in which we operate have increased their minimum wage rates for 2020 and in many cases have also approved additional increases for future periods. Most notably, New York State has increased the minimum wage applicable to our business to $13.75 an hour in 2020 from $12.75 per hour in 2019 and $11.75 per hour in 2018, with subsequent annual increases reaching $15.00 per hour by July 1, 2021. New York State has an Urban Youth Credit through 2022 from which we have been receiving approximately $500,000 per year since 2016. We had 125 restaurants in New York State as of January 3, 2021. We also have one restaurant in Massachusetts that has annual minimum wage increases reaching $15.00 per hour in 2023, 10 restaurants in New Jersey that have annual minimum wage increases reaching $15.00 per hour in 2024, and 45 total restaurants in Illinois and Maryland that also have annual minimum wage increases reaching $15.00 per hour in 2025. We typically attempt to offset the effects of wage inflation, at least in part, through periodic menu price increases. However, no assurance can be given that we will be able to offset these wage increases in the future.
49
Results of Operations
Fiscal 2020 compared to Fiscal 2019
The following table highlights the key components of sales and the number of restaurants in operation for the years ended January 3, 2021 and December 29, 2019 (dollars in thousands):
| Year ended | ||||||||||||||
| January 3, 2021 | December 29, 2019 | |||||||||||||
| (in thousands of dollars) | ||||||||||||||
| Burger King restaurant sales | $ | 1,459,016 | $ | 1,398,660 | ||||||||||
| Popeyes restaurant sales | 88,486 | 53,856 | ||||||||||||
| Total restaurant sales | $ | 1,547,502 | $ | 1,452,516 | ||||||||||
| Change in comparable Burger King restaurant sales % | (2.8) | % | 2.2 | % | ||||||||||
| Change in comparable Popeyes restaurant sales % | (0.1) | % | ||||||||||||
| Burger King restaurants operating at beginning of year | 1,036 | 849 | ||||||||||||
| New restaurants opened, including relocations | (1) | 7 | 21 | |||||||||||
| Restaurants acquired | — | 179 | ||||||||||||
| Restaurants closed, including relocations | (1) | (34) | (13) | |||||||||||
| Restaurants operating at end of year | 1,009 | 1,036 | ||||||||||||
| Popeyes restaurants operating at beginning of year | 65 | — | ||||||||||||
| New restaurants opened, including relocations | — | 10 | ||||||||||||
| Restaurants acquired | — | 55 | ||||||||||||
| Restaurants operating at end of year | 65 | 65 | ||||||||||||
(1) New restaurants opened in 2020 and 2019 included one and two restaurants, respectively, that were closed and relocated within their market areas.
Restaurant Sales and Other Revenue. Total restaurant sales in 2020 increased 6.5% to $1,547.5 million from $1,452.5 million in 2019. Comparable restaurant sales decreased 2.7% due to an increase in average check of 13.1% which was more than offset by a decrease in customer traffic of 13.9%. The comparable restaurant sales decline includes the significant sales declines we experienced in March (-16.8%) and April (-21.7%) of 2020 during the onset of the COVID-19 pandemic. The effect of menu price increases in 2020 was approximately 1.6%.
Restaurant sales overall increased $95.0 million, which included $28.4 million from the impact of a 53rd week in fiscal 2020 and $95.7 million from including a full year of operations for the 200 restaurants acquired in 2019 as compared with eight months of operations in fiscal 2019. In fiscal 2019, we had other revenue of $10.2 million from six convenience stores acquired in the Cambridge Acquisition that are not included in restaurant sales above. These stores were closed at the end of 2019.
50
Operating Costs and Expenses (percentages stated as a percentage of total restaurant sales unless otherwise noted).
The following table sets forth selected operating results for the years ended January 3, 2021 and December 29, 2019:
| Year Ended | |||||||||||
| January 3, 2021 | December 29, 2019 | ||||||||||
| Costs and expenses (all restaurants): | |||||||||||
| Cost of sales | 29.3 | % | 29.7 | % | |||||||
| Restaurant wages and related expenses | 32.2 | % | 33.4 | % | |||||||
| Restaurant rent expense | 7.7 | % | 7.4 | % | |||||||
| Other restaurant operating expenses | 15.3 | % | 15.7 | % | |||||||
| Advertising expense | 3.9 | % | 4.0 | % | |||||||
| General and administrative expenses | 5.4 | % | 5.8 | % | |||||||
Cost of sales decreased as a percentage of restaurant sales to 29.3% in 2020 from 29.7% in 2019. This decrease reflected the positive impacts of improved operational efficiencies at our Burger King restaurants (0.8%), menu price increases taken since the end of 2019 at our Burger King restaurants (0.5%), and the inclusion of convenience stores in the prior year which had a higher cost of sales (0.6%). These positive impacts were offset by increased commodity costs at our Burger King restaurants (1.1%, including a 3.2% increase in ground beef prices compared to 2019) and the inclusion of delivery costs in 2020 (0.4%). The impact of higher promotional discounting during 2020 was offset by a favorable sales mix.
Cost of sales at our Popeyes restaurants improved approximately 160 basis points over last year due to improved operations at those restaurants (0.1%). Cost of sales in the prior year related to the convenience stores we closed in the fourth quarter of 2019 was $9.2 million, or 0.6% of revenue in 2020.
Restaurant wages and related expenses decreased to 32.2% in 2020 from 33.4% in 2019 due to labor adjustments we made during 2020 in response to the COVID-19 pandemic. We were able to adjust our labor requirements and hours based on operating day part sales trends and in response to dining room closures. The impact of hourly labor rate increases in 2020, inclusive of minimum wage increases, was 5.6% at our legacy restaurants when compared to the prior year period. This was more than offset through effective labor hour management in 2020.
Restaurant rent expense increased to 7.7% in 2020 from 7.4% in 2019 due to the sale-leaseback of 36 restaurant locations from the fourth quarter of 2019 through the end of 2020 which either previously did not incur rent costs or resulted in higher rent on the property.
Other restaurant operating expenses decreased to 15.3% in 2020 from 15.7% in 2019 due primarily to lower repair and maintenance costs (0.2%) and lower utility costs (0.2%).
Advertising expense decreased to 3.9% in 2020 from 4.0% in 2019 due to advertising incentives received for certain remodeled Burger King restaurants.
Adjusted Restaurant-Level EBITDA. As a result of the factors above, as well as the impact of the 53rd week in fiscal 2020 of $6.3 million, Adjusted Restaurant-Level EBITDA increased $25.4 million to $181.6 million in 2020 from $156.1 million in 2019. For a reconciliation between Adjusted Restaurant-Level EBITDA and income from operations see page 54.
General and Administrative Expenses. General and administrative expenses decreased to $84.1 million in 2020 from $84.7 million in 2019. We reduced regional and corporate overhead in 2020 by streamlining our regional management structure and making improvements to our training process, which offset the impact of increased overhead from the Cambridge Acquisition, as well as reducing travel by $1.4 million in 2020 compared to 2019. We instituted a 10% temporary reduction in non-restaurant wages for the second quarter of 2020, which reduced general
51
and administrative expenses by $1.0 million. This 10% temporary reduction in non-restaurant wages was restored as of July 1, 2020. The full impact of these administrative cost reductions was offset by $3.4 million higher administrative bonus accruals in 2020 as a result of favorable profitability in the period.
We incurred $1.4 million and $0.5 million in 2020 and 2019, respectively, in administrative costs pertaining to non-recurring litigation and professional fees. In connection with our pause on new development in 2020, we recorded $3.5 million in expense for abandoned site development costs, including $0.6 million related to forfeiting prepaid franchise fees in connection with the Amended ADA. Administrative expenses in 2019 included $8.2 million more of acquisition and integration costs. General and administrative expenses excluding the non-recurring costs described above decreased as a percentage of total revenues to 5.1% in 2020 from 5.2% in 2019.
Adjusted EBITDA. As a result of the factors above, as well as an impact from the 53rd week in fiscal 2020 of $5.3 million, Adjusted EBITDA increased $21.5 million to $107.9 million in 2020 from $86.4 million in 2019.
For a reconciliation between net income and EBITDA and Adjusted EBITDA see page 54.
Depreciation and Amortization. The increase in depreciation and amortization expense to $81.7 million in 2020 from $74.7 million in 2019 was primarily due to our acquisitions of restaurants in 2019 being included for a full year in 2020.
Impairment and Other Lease Charges. We recorded impairment and other lease charges of $12.8 million in 2020 consisting of $2.0 million related to the impairment of the remaining unamortized value of our right of first refusal under our ADA with BKC, $5.0 million related to initial impairment charges for fifteen underperforming restaurants, $1.2 million of capital expenditures at previously impaired restaurants, and other lease charges of $4.6 million primarily related to the closure of 23 of our underperforming restaurant locations during 2020.
We recorded impairment and other lease charges of $3.6 million in 2019 and included $0.3 million of capital expenditures at previously impaired restaurants, $1.3 million related to initial impairment charges for seven underperforming restaurants, and other lease charges of $1.9 million mostly related to the closing of the six convenience stores acquired in 2019 from Cambridge.
Other Income, Net. In 2020, we recorded other income, net, of $1.3 million which consisted of gains related to insurance recoveries from property damage at four of our restaurants of $2.1 million, a net gain on 12 sale-leaseback transactions of $0.2 million and a loss on disposal of assets of $1.0 million.
In 2019, we recorded other income, net, of $1.9 million, which consisted of a $1.9 million gain from a settlement with BKC for their approval of new restaurant development by other franchisees which unfavorably impacted our restaurants, a $0.6 million net gain on sale-leaseback transactions, a $0.2 million gain related to insurance recoveries from fire at two of our restaurants and a loss on a disposal of restaurant equipment of $0.8 million.
Interest Expense. Interest expense decreased to $27.3 million in 2020 from $27.9 million in 2019. The weighted average interest rate on our long-term debt, excluding lease financing obligations, was 4.6% in 2020 and 6.1% in 2019.
Loss on Extinguishment of Debt. We recognized a loss on extinguishment of debt of $7.4 million in 2019 in connection with the refinancing of the 8% Notes. The loss consisted of the write-off of unamortized debt costs, unamortized bond premium and additional redemption fees.
Provision (Benefit) for Income Taxes. In 2020, we recorded income tax expense of $6.3 million and our effective income tax rate was 27.2%. The difference to the Federal statutory rate for 2020 of 21% is primarily due to a charge in the period of $13.1 million to establish an incremental tax valuation allowance for certain income tax credits as they may expire prior to utilization, the tax benefit of state income taxes, and other discrete tax items.
The benefit for income taxes in 2019 of $12.1 million was at an effective tax rate of 27.5%, including discrete tax expense items of $0.5 million. The difference compared to the Federal statutory rate for 2019 of 21% is
52
primarily due to the tax benefit of employment tax credits which are not directly related to the amount of pre-tax loss and the tax benefit of state income taxes.
Net Income (Loss). As a result of the above, our net loss was $29.5 million in 2020, or $0.58 per diluted share, compared to net loss of $31.9 million in 2019, or $0.74 per diluted share.
53
Reconciliations of net income (loss) to EBITDA, Adjusted EBITDA and Adjusted net income (loss) and income (loss) from operations to Adjusted Restaurant-Level EBITDA for the years ended January 3, 2021 and December 29, 2019 are as follows (in thousands):
| Year Ended | |||||||||||
| January 3, 2021 | December 29, 2019 | ||||||||||
| Reconciliation of EBITDA and Adjusted EBITDA: | |||||||||||
| Net income (loss) | $ | (29,463) | $ | (31,919) | |||||||
| Provision (benefit) for income taxes | 6,294 | (12,123) | |||||||||
| Interest expense | 27,283 | 27,856 | |||||||||
| Depreciation and amortization | 81,727 | 74,674 | |||||||||
| EBITDA | 85,841 | 58,488 | |||||||||
| Impairment and other lease charges | 12,778 | 3,564 | |||||||||
| Acquisition and integration costs (1) | 273 | 10,827 | |||||||||
| Abandoned development costs (2) | 3,464 | 256 | |||||||||
| Pre-opening costs (3) | 163 | 1,449 | |||||||||
| Litigation costs and other professional expenses (4) | 1,384 | 502 | |||||||||
| Other income, net (5)(6) | (1,271) | (1,911) | |||||||||
| Stock compensation expense | 5,223 | 5,753 | |||||||||
| Loss on extinguishment of debt | — | 7,443 | |||||||||
| Adjusted EBITDA | $ | 107,855 | $ | 86,371 | |||||||
| Year Ended | |||||||||||
| January 3, 2021 | December 29, 2019 | ||||||||||
| Reconciliation of Adjusted Restaurant-Level EBITDA: | |||||||||||
| Income (loss) from operations | $ | 4,114 | $ | (8,743) | |||||||
| Add: | |||||||||||
| General and administrative expenses | 84,051 | 84,734 | |||||||||
| Acquisition and integration costs (1) | — | 2,364 | |||||||||
| Pre-opening costs (3) | 163 | 1,449 | |||||||||
| Depreciation and amortization | 81,727 | 74,674 | |||||||||
| Impairment and other lease charges | 12,778 | 3,564 | |||||||||
| Other income, net (5)(6) | (1,271) | (1,911) | |||||||||
Adjusted Restaurant-Level EBITDA | $ | 181,562 | $ | 156,131 | |||||||
54
| Year Ended | |||||||||||
| January 3, 2021 | December 29, 2019 | ||||||||||
| Reconciliation of Adjusted net loss: | |||||||||||
| Net loss | $ | (29,463) | $ | (31,919) | |||||||
| Add: | |||||||||||
| Impairment and other lease charges | 12,778 | 3,564 | |||||||||
| Acquisition and integration costs (1) | 273 | 10,827 | |||||||||
| Abandoned development costs (2) | 3,464 | 256 | |||||||||
| Pre-opening costs (3) | 163 | 1,449 | |||||||||
| Litigation and other professional expenses (4) | 1,384 | 502 | |||||||||
| Other income, net (5)(6) | (1,271) | (1,911) | |||||||||
| Loss on extinguishment of debt | — | 7,443 | |||||||||
| Income tax effect on above adjustments (7) | (4,199) | (5,534) | |||||||||
| Valuation allowance for deferred taxes (8) | 13,138 | — | |||||||||
| Adjusted net loss | $ | (3,733) | $ | (15,323) | |||||||
| Adjusted diluted net loss per share (9) | $ | (0.07) | $ | (0.35) | |||||||
| Diluted weighted average common shares outstanding | 50,751 | 43,422 | |||||||||
(1)Acquisition and integration costs for twelve months ended January 3, 2021 primarily include legal and professional fees incurred in connection with the acquisition of 165 Burger King and 55 Popeyes restaurants from Cambridge Franchise Holdings, LLC in 2019, which were included in general and administrative expense. Acquisition and integration costs for the twelve months ended December 29, 2019 of $10.8 million include certain legal and professional fees; corporate payroll, and other costs related to the integration of the Cambridge merger and one-time repair costs which are included in Adjusted Restaurant-Level EBITDA.
(2)Abandoned development costs for the twelve months ended January 3, 2021 and December 29, 2019 represent the write-off of capitalized costs due to the abandoned development of future restaurant locations.
(3)Pre-opening costs for the twelve months ended January 3, 2021 and December 29, 2019 include training, labor and occupancy costs incurred during the construction of new restaurants.
(4)Litigation and other professional expenses for the twelve months ended January 3, 2021 and December 29, 2019 include costs pertaining to an ongoing lawsuit with one of the Company's former vendors, costs to settle a class action claim and other non-recurring professional service expenses.
(5)Other income, net for the twelve months ended January 3, 2021 included gains related to insurance recoveries from property damage at four of the Company's restaurants of $2.1 million, a net gain on 12 sale-leaseback transactions of $0.2 million and a loss on disposal of assets of $1.0 million.
(6)Other income, net for the twelve months ended December 29, 2019 included a $1.9 million gain related to a settlement with Burger King Corporation for the approval of new restaurant development by other franchisees which unfavorably impacted the Company's restaurants, net gains on sale-leaseback transactions of $0.6 million, a gain related to an insurance recovery from property damage at two of the Company's restaurants of $0.2 million and a loss on a disposal of restaurant equipment of $0.8 million.
(7)The income tax effect related to the adjustments to Adjusted Net Loss during the periods presented was calculated using an incremental income tax rate of 25.0% for the three and twelve months ended January 3, 2021 and December 29, 2019, respectively.
(8)Reflects the removal of the income tax provision recorded during the year ended January 3, 2021 for the establishment of a valuation allowance on certain federal income tax credits as they may expire prior to their utilization by the Company.
(9)Adjusted diluted net loss per share is calculated based on Adjusted net loss and the diluted weighted average common shares outstanding for the respective periods, where applicable.
55
Liquidity and Capital Resources
As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories and receive trade credit based upon negotiated terms for purchasing food products and other supplies. As a result, we may at times maintain current liabilities in excess of current assets, which results in a working capital deficit. We are able to operate with a substantial working capital deficit because:
•restaurant operations are primarily conducted on a cash basis;
•rapid turnover results in a limited investment in inventories; and
•cash from sales is usually received before related liabilities for food, supplies and payroll become due.
Interest payments under our debt obligations, capital expenditures including for our remodeling initiatives, payments of royalties and advertising to BKC and Popeyes and payments related to our lease obligations represent significant liquidity requirements for us, not including any discretionary expenditures for the acquisition or development of additional Burger King and Popeyes restaurants. We believe our cash balances, cash generated from our operations and availability of revolving credit borrowings under our Senior Credit Facilities provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months.
Operating activities. Net cash provided from operating activities for the years ended January 3, 2021 and December 29, 2019 was $103.9 million and $48.7 million, respectively. Net cash provided by operating activities in 2020 increased by $55.2 million compared to 2019 due primarily to an increase of Adjusted EBITDA of $21.5 million and a change in working capital of $19.0 million, primarily related to our deferral of the employer portion of social security taxes through the end of 2020 of $21.6 million.
Net cash provided from operating activities in 2019 decreased by $32.1 million compared to 2018 due primarily to a reduction of Adjusted EBITDA of $16.6 million, an increase in deferred income tax liabilities of $11.5 million and a change in operating right-of use assets and operating lease liabilities of $4.0 million.
Investing activities. Net cash used for investing activities from continuing operations for the years ended January 3, 2021 and December 29, 2019 was $47.9 million and $218.0 million, respectively. In 2020, in addition to our capital expenditures of $56.9 million, we received net proceeds of $7.0 million from sale-leaseback transactions, including properties purchased for sale-leaseback, and received $2.1 million from property insurance recoveries.
In 2019, in addition to our capital expenditures of $134.9 million, we completed the Cambridge Acquisition which included approximately $113.8 million for retirement of the Cambridge indebtedness net of cash, acquired fourteen Burger King restaurants from other franchisees for $16.9 million, and received net proceeds of $47.2 million from sale-leaseback transactions, including properties purchased for sale-leaseback.
Capital expenditures are a large component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants including expenses associated with our franchise agreement renewals and certain restaurants that we acquire; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants, and from time to time, to support BKC’s initiatives; and (4) corporate and restaurant information systems, including expenditures for our point-of-sale software for restaurants that we acquire.
56
The following table sets forth our capital expenditures for the periods presented (dollar amounts in thousands):
| Year Ended January 3, 2021: | ||||||||
| New restaurant development | $ | 17,824 | ||||||
| Restaurant remodeling | 15,317 | |||||||
| Other restaurant capital expenditures | 13,064 | |||||||
| Corporate and restaurant information systems | 10,685 | |||||||
| Total capital expenditures | $ | 56,890 | ||||||
| Number of new restaurant openings including relocations | 7 | |||||||
| Year Ended December 29, 2019: | ||||||||
| New restaurant development | $ | 53,596 | ||||||
| Restaurant remodeling | 50,383 | |||||||
| Other restaurant capital expenditures | 18,922 | |||||||
| Corporate and restaurant information systems | 11,978 | |||||||
| Total capital expenditures | $ | 134,879 | ||||||
| Number of new restaurant openings including relocations | 31 | |||||||
Financing activities. Net cash provided by financing activities in 2020 was $5.9 million and included $71.3 million in net proceeds from issuance of the Incremental Term B-1 Loans, net repayments of our revolving credit borrowings of $45.8 million, and purchases of treasury shares of $10.1 million. We also incurred $3.3 million of costs associated with the financing long-term debt, made principal payments on term loan facilities of $4.6 million, made principal payments on finance leases of $1.6 million, and repurchased shares of our common stock for $10.0 million.
Net cash provided by financing activities in 2019 was $168.3 million, due primarily to proceeds from the Term Loan B Facility of $422.9 million combined with net revolving credit borrowings of $45.8 million under the Revolving Credit Facility and the redemption of the 8.0% Notes including premium and fees of $280.5 million. We also incurred $11.5 million of costs associated with the Senior Credit Facilities, made principal payments on finance leases of $2.2 million, and repurchased shares of our common stock for $4.0 million.
Senior Credit Facilities. On April 30, 2019, we entered into the Senior Credit Facilities in an aggregate principal amount of $550.0 million, consisting of (i) a Term Loan B Facility in an aggregate principal amount of $425.0 million maturing on April 30, 2026 and (ii) a Revolving Credit Facility (including a sub-facility of $35.0 million for standby letters of credit) in an aggregate principal amount of $125.0 million maturing on April 30, 2024.
The net proceeds from borrowings under the Term Loan B Facility were $422.9 million after original issue discount and were used to (i) refinance the indebtedness of Carrols Restaurant Group, including redemption of $275.0 million of 8.0% Notes and accrued interest thereon at a redemption price of 102%, (ii) the retirement of outstanding Cambridge indebtedness and (iii) the payment of fees and expenses in connection with the Cambridge Acquisition and the Senior Credit Facilities. The proceeds of the Revolving Credit Facility will finance ongoing working capital and other general corporate purposes, including permitted acquisitions and required expenditures under development agreements. In connection with these transactions, we recognized a loss of $7.4 million on the extinguishment of debt.
On December 13, 2019, we entered into the First Amendment to Credit Agreement which amended a financial covenant under the Senior Credit Facilities applicable solely with respect to the Revolving Credit Facility that previously required the Company to maintain quarterly a Total Net Leverage Ratio (as defined in the Senior Credit Facilities) of not greater than 4.75 to 1.00 (measured on a most recent four quarter basis), to now require that the Company maintain only a First Lien Leverage Ratio (as defined in the Senior Credit Facilities) of not greater than 5.75 to 1.00 (as measured on a most recent four quarter basis) if, and only if, on the last day of any fiscal quarter (beginning with the fiscal quarter ended December 29, 2019), the sum of the aggregate principal amount of outstanding revolving credit borrowings under the Revolving Credit Facility and the aggregate face amount of letters of credit issued under the Revolving Credit Facility (excluding undrawn letters of credit in an aggregate face amount up to $12.0 million) exceeds 35% of the aggregate amount of the maximum revolving credit borrowings
57
under the Revolving Credit Facility. The First Amendment also reduced the aggregate maximum revolving credit borrowings under the Revolving Credit Facility by $10.0 million to a total of $115.0 million.
On March 25, 2020, the Company entered into the Second Amendment to its Senior Credit Facilities (the "Second Amendment"). The Second Amendment increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility (the "Revolving Committed Amount") by $15.4 million to a total of $130.4 million.
The Second Amendment also amended the definition of Applicable Margin (such definition and all other definitions used herein and otherwise not defined herein shall have the meanings set forth in the Senior Credit Facilities) to provide that on and after the date of the Second Amendment (the "Second Amendment Effective Date"), the Applicable Margin for borrowings under the Revolving Credit Facility (including Letter of Credit Fees) shall be at a rate per annum equal to (a) for so long as the Revolving Committed Amount is greater than $115.0 million, (i) for the period commencing on the Second Amendment Effective Date and including the date that is 179 days after the Second Amendment Effective Date, 3.5% for LIBOR Rate Loans and 2.5% for Alternate Base Rate Loans, (ii) for the period commencing on the date that is 180 days after the Second Amendment Effective Date, through and including the date that is 269 days after the Second Amendment Effective Date, 4.25% for LIBOR Rate Loans and 3.25% for Alternate Base Rate Loans, (iii) for the period commencing on the date that is 270 days after the Second Amendment Effective Date, through and including the date that is 364 days after the Second Amendment Effective Date, 4.5% for LIBOR Rate Loans and 3.5% for Alternate Base Rate Loans and (iv) for the period commencing on the date that is 365 days after the Second Amendment Effective Date and thereafter, 4.75% for LIBOR Rate Loans and 3.75% for Alternate Base Rate Loans and (b) for so long as the Revolving Committed Amount is equal to or less than $115.0 million, 3.5% for LIBOR Rate Loans and 2.5% for Alternate Base Rate Loans.
The Second Amendment also provides that beginning on the 180th day after the Second Amendment Effective Date and for so long as the Revolving Committed Amount is greater than $115.0 million, the Company shall pay to the Administrative Agent, for the ratable benefit of the Revolving Facility Lenders, a commitment fee (the "Ticking Fee") on the average daily amount of the Revolving Committed Amount at a rate per annum equal to (a) 0.125% for the 180th day after the Second Amendment Effective Date through and including the 269th day after the Second Amendment Effective Date, (b) 0.25% for the 270th day after the Second Amendment Effective Date through and including the 364th day after the Second Amendment Effective Date and (c) 1.00% for the 365th day after the Second Amendment Effective Date and thereafter. The Second Amendment provides that the Ticking Fee will be due and payable quarterly in arrears (calculated on a 360-day basis) on the last Business Day of each calendar quarter and will accrue from the 180th day after the Second Amendment Effective Date for so long as the Revolving Committed Amount is greater than $115.0 million. The Second Amendment also provides that the Company shall use the proceeds of an Extension of Credit which results in the sum of the aggregate principal amount of outstanding Revolving Loans plus the aggregate amount of LOC Obligations equaling an amount in excess of $115.0 million, solely for ongoing operations of the Company and its subsidiaries and shall not be held as cash on the balance sheet. Pursuant to the Letter Agreement dated as of March 25, 2020 among the Company, Wells Fargo Securities, LLC, Wells Fargo Bank, National Association and Truist Bank, the Company agreed to defer rent payments totaling approximately $2.4 million per month under certain real property leases for the period between April 1, 2020 through and including June 30, 2020. The Company paid these amounts in full according to these terms on July 1, 2020.
On April 8, 2020, the Company entered into the Third Amendment to its Senior Credit Facilities which increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility by $15.4 million to a total of $145.8 million.
On April 16, 2020, the Company entered into the Fourth Amendment to its Senior Credit Facilities (the "Fourth Amendment"). The Fourth Amendment permits the Company to incur and, if necessary, repay indebtedness incurred pursuant to the Paycheck Protection Program (the "PPP") under the Coronavirus Aid, Relief and Economic Security Act, as amended (the "CARES Act"). Subsequent to this amendment, the Company withdrew its application for relief under the PPP and returned the funds upon receipt.
On June 23, 2020 (the "Fifth Amendment Effective Date"), the Company entered into the Fifth Amendment to its Senior Credit Facilities (the "Fifth Amendment"). The Fifth Amendment increased the Term Loan (as defined in
58
the Senior Credit Facilities) borrowings in the aggregate principal amount of $75 million of Incremental Term B-1 Loans (as defined in the Senior Credit Facilities). The Incremental Term B-1 Loans constitute a new tranche of Term Loans ranking pari passu in right of payment and security with the Initial Term Loans for all purposes under the Senior Credit Facilities. The Incremental Term B-1 Loans have the same terms as outstanding borrowings under the Company's existing term loan B facility pursuant to and in accordance with the Senior Credit Facilities, provided that (i) borrowings under the Incremental Term B-1 Loans will bear interest at a rate per annum, at the Company’s option, of (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus the applicable margin of 5.25% or (b) the LIBOR Rate (as defined in the Senior Credit Facilities) (which shall not be less than 1% for Incremental Term B-1 Loans) plus the applicable margin of 6.25% and (ii) certain prepayments of the Incremental Term B-1 Loans by the Company prior to the first anniversary of the Fifth Amendment Effective Date are subject to a premium to the Administrative Agent (as defined in the Senior Credit Facilities), for the ratable account of each applicable Term Loan Lender (as defined in the Senior Credit Facilities) holding Incremental Term B-1 Loans on the date of such prepayment equal to the Applicable Make-Whole Amount (as defined in the Senior Credit Facilities) with respect to the principal amount of the Incremental Term B-1 Loans so prepaid. The principal amount of the Incremental Term B-1 Loans will amortize in an aggregate annual amount equal to 1% of the original principal amount of the Incremental Term B-1 Loans and shall be repayable in consecutive quarterly installments on the last day of the Company's fiscal quarters beginning on the third fiscal quarter of 2020 with the remaining outstanding principal amount of the Incremental Term B-1 Loan and all accrued but unpaid interest and other amounts payable with respect to the Incremental Term B-1 Loan due on April 30, 2026 which is the Term Loan Maturity Date (as defined in the Senior Credit Facilities).
The net proceeds of the Incremental Term B-1 Loans were $71.3 million after original issue discount and were used for general corporate purposes, including repayment of the outstanding balance of the Revolving Credit Facility.
At January 3, 2021, borrowings under our Senior Credit Facilities bore interest as follows:
(i) Revolving Credit Facility: at a rate per annum equal to (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus 2.50% or (b) LIBOR Rate (as defined in the Senior Credit Facilities) plus 3.50%.
(ii) Term Loan B borrowings: at a rate per annum equal to (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus 2.25% or (b) LIBOR Rate (as defined in the Senior Credit Facilities) plus 3.25%.
(iii) Term Loan B-1 borrowings: at a rate per annum, at our option, of (a) the Alternate Base Rate plus the applicable margin of 5.25% or (b) the LIBOR Rate (which shall not be less than 1% for Incremental Term B-1 Loans) plus the applicable margin of 6.25%.
The Term Loan B and B-1 borrowings are due and payable in quarterly installments, which began on September 30, 2019. Amounts outstanding at January 3, 2021 are due and payable as follows:
(i) twenty-one quarterly installments of $1.3 million;
(ii) one final payment of $467.0 million on April 30, 2026.
Our obligations under the Senior Credit Facilities are secured by first priority liens on substantially all of the assets of the Company and subsidiary guarantors (including a pledge of all of the capital stock and equity interests of certain subsidiary guarantors).
Under the Senior Credit Facilities, we will be required to make mandatory prepayments of borrowings with excess cash flow (as defined in the Senior Credit Facilities) and in the event of dispositions of assets, debt issuances and insurance and condemnation proceeds (all subject to certain exceptions).
The Senior Credit Facilities contain certain covenants, including, without limitation, those limiting the Company's and the subsidiary guarantors’ ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in any material respects, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends.
Under the Senior Credit Facilities, the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which include, without limitation, payment default, covenant defaults,
59
bankruptcy type defaults, defaults on other indebtedness, judgments or upon the occurrence of a change of control (as specified therein).
As of January 3, 2021, there were no revolving credit borrowings outstanding and $9.7 million of letters of credit issued under the Revolving Credit Facility. After reserving for issued letters of credit and outstanding revolving credit borrowings, $136.1 million was available for revolving credit borrowings at January 3, 2021 under the Revolving Credit Facility. We were in compliance with the financial covenants under our Senior Credit Facilities at January 3, 2021.
Prior Senior Credit Facility. On May 30, 2012, we entered into a senior credit facility (the "prior senior credit facility"), which was most recently amended on June 20, 2017 to increase the permitted indebtedness of our 8% Notes to a principal amount not to exceed $300.0 million in order to provide for the additional $75 million principal amount of the 8% Notes issued on June 23, 2017. Previously, on January 13, 2017, we entered into an amendment to our prior senior credit facility to, among other things, increase maximum revolving credit borrowings to $125.0 million (including $20.0 million available for letters of credit). The prior senior credit facility also provided for potential incremental borrowing increases of up to $25.0 million, in the aggregate.
Borrowings under the prior senior credit facility bore interest at a rate per annum, at our option, of:
(i) the Alternate Base Rate plus the applicable margin of 1.75% to 2.75% based on our Adjusted Leverage Ratio, or
(ii) the LIBOR Rate plus the applicable margin of 2.75% to 3.75% based on our Adjusted Leverage Ratio (all terms as defined under the prior senior credit facility).
Contractual Obligations