CARROLS RESTAURANT GROUP, INC. We operate on a 52 or 53 week fiscal year ending on the Sunday closest toDecember 31 . Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53 week year, which contains 14 weeks. Our fiscal year endedDecember 29, 2019 contained 52 weeks and our fiscal year endingJanuary 3, 2021 will contain 53 weeks. Introduction The following Management's Discussion and Analysis of Financial Condition and Results of Operations (or "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 unaudited Condensed Consolidated Financial Statements and the accompanying financial statement notes appearing elsewhere in this report and our Annual Report on Form 10-K for the year endedDecember 29, 2019 . 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 from Operations-an analysis of our results of operations for the three and nine months endedSeptember 27, 2020 compared to the three and nine months endedSeptember 29, 2019 including a review of material items and known trends and uncertainties. Liquidity and Capital Resources-an analysis of historical information regarding our sources of cash and capital expenditures, the existence and timing of commitments and contingencies, changes in capital resources and a discussion of cash flow items affecting liquidity. Application of Critical Accounting Policies-an overview of accounting policies requiring critical judgments and estimates. Effects of New Accounting Standards-a discussion of new accounting standards and any implications related to our financial statements. Forward Looking Statements-cautionary information about forward-looking statements and a description of certain risks and projections. Company OverviewCarrols Restaurant Group, Inc. and its consolidated subsidiaries (collectively, "Carrols Restaurant Group ", the "Company", "we", "our" or "us") is one of the largest restaurant companies inthe United States and have been operating restaurants for more than 60 years. We are the largest Burger King® franchisee inthe United States , based on number of restaurants. As ofSeptember 27, 2020 we operated, as franchisee, a total of 1,088 restaurants in 23 states under the trade names of Burger King® and Popeyes®. This included 1,023 Burger King restaurants in 23 Northeastern, Midwestern and Southeastern states and 65Popeyes restaurants in seven Southeastern states as well as certain restaurants temporarily closed as a result of COVID-19. Any reference to "BKC" refers toBurger King Corporation and its indirect parent company, Restaurant Brands International Inc. ("RBI"). Any reference to "PLK" refers toPopeyes 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 consists 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, acquisitions of restaurants and closures of restaurants. Comparable 28 -------------------------------------------------------------------------------- Table of Contents 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 newly developed restaurants are included in comparable restaurant sales after they have been open for 15 months. Restaurants are excluded from comparable restaurant sales during extended periods of closure, which primarily occur due to restaurant remodeling activity. 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 and compares against the 52-week prior period. •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 straight-lined lease costs and variable rent on our restaurant leases characterized as operating leases. •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. •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 interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude impairment and other lease charges, acquisition 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 expenses, abandoned site development costs, other income and expense, certain other non-recurring expenses 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 44, 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 29 -------------------------------------------------------------------------------- Table of Contents 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 (Loss) and the reconciliation of income from operations to Adjusted Restaurant-Level EBITDA, see page 44. 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 costs) have recurred and may reoccur. •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,$75 million Term Loan B-1 borrowings, amortization of deferred financing costs, amortization of original issue discounts, interest on revolving credit borrowings and, throughApril 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 In response to the COVID-19 pandemic and the impact it has had on our business operations beginning inMarch 2020 and to the continuing uncertainty in the economy in general, we have taken several steps to adapt our business and strengthen and preserve our liquidity: •The impact of the COVID-19 pandemic on restaurant sales at our Burger King restaurants began during the week endedMarch 15, 2020 and during the week endedMarch 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 ourPopeyes restaurants, the impact of the COVID-19 pandemic on restaurant sales started during the week endedMarch 22, 2020 , and began easing mid-April. 30 -------------------------------------------------------------------------------- Table of Contents •InMarch 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 third quarter, 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 third quarter of 2020 included less than 1% of eat-in traffic at our Burger King restaurants and less than 4% of eat-in traffic at ourPopeyes restaurants. •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 third quarter of 2020, delivery comprised approximately 3% of total restaurant sales. •We temporarily closed 46 restaurants in lateMarch 2020 and earlyApril 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 the third quarter of 2020, we had reopened 40 of the temporarily closed restaurants. Two of the restaurants will not reopen. •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 in the second quarter of 2020 limited spending mainly to necessary restaurant maintenance issues. For the full year, we continue to expect operating capital expenditures to be approximately$40 million , which includes net proceeds from sale-leaseback activity and excludes the purchase of an office building for$4.1 million . •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 ofJuly 1, 2020 . •As allowed under the Coronavirus Aid, Relief and Economic Security Act, as amended (the "CARES Act"), we are deferring payment of the employer portion ofSocial Security taxes through the end of 2020. The amount of the cumulative deferral at the end of 2020 is currently estimated to be approximately$21 million , of which 50% is payable on each ofDecember 31, 2021 andDecember 31, 2022 . As ofSeptember 27, 2020 , we have deferred$14.3 million of social security taxes, which is included in other long-term liabilities in the consolidated balance sheets. •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$0.5 million related to these deferrals during the third quarter 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 have 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. Throughout the course of this evolving COVID-19 outbreak, the Company has been adapting its business in order to continue operating safely. To support the health and safety of our employees, beginning inMarch 2020 we have mandated the use of masks, and contactless procedures in our restaurants, the use of sanitizers and requiring team members' temperatures be taken at the beginning of each shift. 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 withNew York's phased re-opening. 31 -------------------------------------------------------------------------------- Table of Contents 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. In the third quarter of 2020, comparable restaurant sales were positive, with the decline in customer traffic more than offset by an increase in average check. 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 have seen the results of these efforts in the second and third quarters of 2020: •We believe our restaurant performance has stabilized and remains resilient, which is driving both sales and profitability improvement; •We are generating significant cash from operations that we believe will strengthen our balance sheet and enhance our liquidity position, and; •Our capital expenditures are manageable, which we believe should enable us to continue generating positive free cash flow for the foreseeable future. Cambridge Acquisition OnApril 30, 2019 , we completed the merger withNew CFH, LLC , a former subsidiary ofCambridge 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 of the 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 Corporation ,Carrols LLC , and BKC entered into theArea Development and Remodeling Agreement (the "ADA") which commenced onApril 30, 2019 and ends onSeptember 30, 2024 , and which superseded the Operating Agreement dated as ofMay 30, 2012 , as amended, betweenCarrols LLC and BKC. Pursuant to theADA , BKC assigned toCarrols LLC , for a cost of$3.0 million , 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").Carrols LLC agreed to open, build and operate a total of 200 new Burger King restaurants including 32 additional Burger King restaurants bySeptember 30, 2020 (which has been extended by 90 days), 41 additional Burger King restaurants bySeptember 30, 2021 , 41 additional Burger King restaurants bySeptember 30, 2022 , 40 additional Burger King restaurants bySeptember 30, 2023 and 39 additional Burger King restaurants bySeptember 30, 2024 , subject to and in accordance with the terms of theADA . In addition,Carrols LLC agreed 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 bySeptember 30, 2020 (which has been extended by 90 days), 118 additional Burger King restaurants bySeptember 30, 2021 , 131 additional Burger King restaurants bySeptember 30, 2022 , 138 additional Burger King restaurants bySeptember 30, 2023 and 141 additional Burger King restaurants bySeptember 30, 2024 , subject to and in accordance with the terms of theADA . For 2020 and future periods, we have reduced our planned spending for new restaurant development and the remodeling of restaurants below the requirements in theADA , and do not expect to meet the requirements for 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 had already been remodeled to the 20/20 image and where BKC is the landlord on the lease. We received$10.0 million from BKC in 2019 under this arrangement. TheADA requiresCarrols LLC to pay BKC pre-paid franchise fees in the following remaining amounts which will be applied to new Burger King restaurants opened and operated byCarrols LLC ; (a)$350,000 on the 32 -------------------------------------------------------------------------------- Table of Contents commencement date of the Area Development Agreement, (b)$1,600,000 onOctober 1, 2019 , (c)$2,050,000 onOctober 1, 2020 , (d)$2,050,000 onOctober 1, 2021 , (e)$2,000,000 onOctober 1, 2022 and (f)$1,950,000 onOctober 1, 2023 . The Company did not make the payment of$2,050,000 onOctober 1, 2020 due to ongoing negotiations toward a new development agreement. The continued assignment of the ADA ROFR is subject to suspension at the discretion of BKC in the event of non-compliance byCarrols LLC with the new restaurant development and restaurant remodel obligations and certain other terms in theADA . As a result of the pandemic, beginning inMarch 2020 and through the third quarter we restricted capital expenditures to the most critical maintenance needs and completion of existing projects and do not expect to meet the development and remodel obligations of theADA for 2020. In the event we do not meet our new restaurant development and/or restaurant remodel requirements in theADA , BKC may elect to suspend the ADA ROFR. In the case of a suspension of the ADA ROFR by BKC, any benefits available to us from theADA , including reduced royalty and advertising rates on new development and the assignment of the ADA ROFR, may be suspended until such time that we are in compliance with the terms of theADA . We have commenced negotiations with BKC to potentially terminate theADA and enter into a new development agreement that we anticipate will, among other items, reflect lower new development and remodeling requirements, eliminate the franchise fee prepayments previously required for 2020 through 2023, and terminate the ADA ROFR. However, there can be no assurance that we will terminate the existingADA and enter into a new development agreement on such terms or at all. 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. Capital Expenditures In light of the economic conditions resulting from the COVID-19 pandemic as discussed above, we are managing our levels of capital expenditures and delaying the start of new projects other than critical restaurant capital and maintenance needs. We estimate our capital expenditures in 2020 will be approximately$44 million , net of estimated sale-leaseback activity. We incurred$34.0 million of capital expenditures in the first nine months of 2020, inclusive of sale-leaseback proceeds, properties purchased for sale-leaseback, and insurance proceeds. We opened six Burger King restaurants in the first nine months of 2020, none of which were in the third quarter of 2020. We expect to complete remodels of seven restaurants in 2020 and to begin to selectively seek build-to-suit opportunities with attractive investment return characteristics towards the end of 2020. Restaurant Acquisitions In 2019, we acquired 234 restaurants (including the Cambridge Acquisition) from other franchisees in the following transactions (in thousands, except number of restaurants): Closing Date Number of Restaurants Purchase Price Market Location Southeastern states, primarily TN, MS, April 30, 2019 220 (1)$ 259,083 LA June 11, 2019 13 15,788 Baltimore, Maryland August 20, 2019 1 (2) 1,108 Pennsylvania 234$ 275,979 (1)Represents 165 Burger King restaurants and 55Popeyes restaurants. (2)Acquisition resulted from the exercise of our ROFR. 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 . 33 -------------------------------------------------------------------------------- Table of Contents The pro forma impact on the results of operations from the 2019 acquired restaurants for the nine months endedSeptember 29, 2019 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 operating results for the nine months endedSeptember 29, 2019 (in thousands): Nine Months Ended September 29, 2019 Total revenue $ 1,167,461 Income from operations $ 4,179 Adjusted EBITDA $ 71,631 Refinancing of Indebtedness and Amendments to our Senior Credit Facilities OnApril 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 (as amended 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 onApril 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"). Prior to the entry into the Second Amendment (as defined below), borrowings under the Term Loan B Facility and the Revolving Credit Facility initially bore interest at a rate per annum, at our option, of (i) the Alternate Base Rate (such definition and all other definitions used herein and otherwise not defined herein shall have the meanings set forth in the Senior Credit Facilities) 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 onApril 30, 2026 and the Revolving Credit Facility matures onApril 30, 2024 . OnDecember 13, 2019 , we entered into the First Amendment to our Senior Credit Facilities 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 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 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 endedDecember 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 . OnMarch 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 34 -------------------------------------------------------------------------------- Table of Contents 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 , 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 . The Second Amendment also 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 ofMarch 25, 2020 among the Company,Wells Fargo Securities, LLC ,Wells Fargo Bank, National Association andTruist Bank , we agreed to defer rent payments totaling approximately$2.4 million per month under certain real property leases for the period betweenApril 1, 2020 through and includingJune 30, 2020 . We paid these amounts in full according to these terms onJuly 1, 2020 . OnApril 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 . OnApril 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. We have decided that we will not be borrowing under the PPP. OnJune 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 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 35 -------------------------------------------------------------------------------- Table of Contents 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 onApril 30, 2026 which is the Term Loan Maturity Date (as defined in the Senior Credit Facilities). As ofSeptember 27, 2020 , 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,$136.2 million was available for revolving credit borrowings under our Senior Credit Facilities atSeptember 27, 2020 . Restaurant Closures We evaluate the performance of our restaurants on an ongoing basis including an assessment of the current and future operating results of the restaurant in relation to its cash flow and future occupancy costs, and with regard to franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on these evaluations. In 2019, excluding two restaurants relocated within their trade area, we closed eleven Burger King restaurants. In the first nine months of 2020, excluding one restaurant relocated within its trade area, we permanently closed eighteen Burger King restaurants and we currently anticipate closing an additional 16 to 18 Burger King restaurants in 2020, excluding any restaurants being relocated within their trade area. In response to restaurant sales declines resulting from the COVID-19 pandemic, we temporarily closed 42 Burger King restaurants and fourPopeyes Restaurants that were geographically close to one of our other restaurants in the last week ofMarch 2020 and first week ofApril 2020 . Due to restaurant sales improvements after the initial months of the pandemic, 36 of the Burger King restaurants that we temporarily closed were reopened and all fourPopeyes restaurants that we temporarily closed were reopened by the end of the third quarter of 2020. Two of the restaurants will not be reopened and are included in the 2020 closures above. 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 byJuly 1, 2021 .New York State does have anUrban Youth Credit through 2022 for which we have been receiving approximately$500,000 per year since 2016. We had 126 restaurants inNew York State atSeptember 27, 2020 . As of such date, we also had one restaurant inMassachusetts that has annual minimum wage increases reaching$15.00 per hour in 2023, 10 restaurants inNew Jersey that have annual minimum wage increases reaching$15.00 per hour in 2024, and 46 total restaurants inIllinois andMaryland that 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. Stock Repurchase Program OnAugust 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 effectiveAugust 2, 2019 , and expires 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 endedDecember 29, 2019 , we repurchased in open market transactions 553,112 shares at an average share price of$7.26 for a total cost of$4.0 million under the Repurchase Program. There were no 36 -------------------------------------------------------------------------------- Table of Contents repurchases in the first nine months of 2020. 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. Due to the impact of the COVID-19 pandemic we have suspended any repurchases under the Repurchase Program. Interest Rate Swap Agreement We entered into a five year interest rate swap agreement commencingMarch 3, 2020 and endingFebruary 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. 37 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months EndedSeptember 27, 2020 Compared to Three Months EndedSeptember 29, 2019 The following table highlights the key components of sales and the number of restaurants in operation for our third quarter endedSeptember 27, 2020 (inclusive of restaurants that were temporarily closed due to COVID-19 at during the period) as compared to third quarter endedSeptember 29, 2019 :
Three Months Ended
September 27, 2020 September 29, 2019
Restaurant Sales 407,036 398,414
Burger King 385,412 379,212
Popeyes 21,624 19,202
Change in Comparable Restaurant Sales % (a) 1.0 % 4.5 %
Change in Comparable Burger King Restaurant Sales (a) 0.8 % 4.5 %
Change in Comparable Popeyes Restaurant Sales (a) 5.5 %
Burger King Restaurants operating at beginning of period: 1,027 1,023 New restaurants opened, including relocations (b) - 7 Restaurants acquired - 1 Restaurants closed, including relocations (b) (4) (3) Burger King Restaurants operating at end of period 1,023 1,028 Popeyes Restaurants operating at beginning of year 65 58 New restaurants opened - 2 Restaurants acquired - - Popeyes Restaurants operating at end of period 65 60 a.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. The calculation of changes in comparable restaurant sales is based on the comparable 13-week period. b.For the three months endedSeptember 29, 2019 , new restaurants opened included one restaurant relocated within its market area. Restaurant Sales. Total restaurant sales in the third quarter of 2020 increased$8.6 million to$407.0 million from the third quarter of 2019. Our comparable restaurant sales increased 1.0% compared to the third quarter of 2019 due to an increase in average check of 15.4%, which was partially offset by a decrease in customer traffic of 12.5%. The change in average check included a 1.6% effective price increase compared to the third quarter of 2019. The decrease in traffic and increase in average check realized during the third quarter of 2020 represents changing consumer behavior as a result of the COVID-19 pandemic. Promotional sales discounts in the third quarter of 2020 were 24.0% of restaurant sales at our Burger King restaurants compared to 21.2% in the third quarter of 2019. 38
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Operating Costs and Expenses (percentages stated as a percentage of total
revenue). The following table sets forth, for the three months ended
Three Months Ended
September 27, 2020 September 29, 2019
Costs and expenses (all restaurants):
Cost of sales 29.8 % 30.1 %
Restaurant wages and related expenses 31.0 % 32.6 %
Restaurant rent expense 7.5 % 7.3 %
Other restaurant operating expenses 14.9 % 15.6 %
Advertising expense 3.9 % 4.0 %
General and administrative 5.0 % 5.3 %
Cost of sales decreased to 29.8% in the third quarter of 2020 from 30.1% in the
third quarter of 2019. This decrease reflected the positive impacts of improved
operational efficiencies at our Burger King restaurants (1.0%), menu price
increases taken since the end of the third quarter of 2019 at our Burger King
restaurants (0.6%), 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 (1.4%, including a 5.8%
increase in ground beef prices compared to the third quarter of 2019), a
decrease in rebates on purchases (0.4%) and the inclusion of delivery costs in
2020 (0.5%). Cost of sales during the quarter was also impacted by a favorable
sales mix (0.8%), which was partially offset by the impact of increased
promotions (0.7%). Cost of sales at our Popeyes restaurants improved
approximately 270 basis points over last year due to improved operations at
those restaurants (0.1%). The cost of sales impact in the prior year related to
the convenience stores we closed in the fourth quarter of 2019 was $3.6 million ,
or 0.9% of revenue in the third quarter of 2019.
Restaurant wages and related expenses decreased to 31.0% in the third quarter of
2020 from 32.6% in the third quarter of 2019 due to labor adjustments we made
during 2020 in response to the COVID-19 environment. 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
the third quarter of 2020, inclusive of minimum wage increases, was 5.2% at our
legacy restaurants when compared to the prior year period. This was more than
offset through effective labor hour management in the third quarter of 2020.
Restaurant rent expense increased $1.2 million to 7.5% of revenue in the third
quarter of 2020 from 7.3% in the third quarter of 2019 due to the sale-leaseback
of 35 restaurant locations from the fourth quarter of 2019 through 2020 which
either previously did not incur rent costs or resulted in higher rent on the
property.
Other restaurant operating expenses decreased to 14.9% in the third quarter of
2020 from 15.6% in the third quarter of 2019 as a result of efficiencies
realized from reduced dining room activity, primarily from lower repair and
maintenance spending (0.5%) and utility costs (0.3%). Reduced levels of
operating supply costs were offset by $0.9 million in expenses directly related
to COVID-19, including face masks, thermometers, sneeze guards, and sanitizers.
Advertising expense decreased to 3.9% in the third quarter of 2020 from 4.0% in
the third quarter of 2019 due to advertising incentives received for certain
newly developed Burger King restaurants, including restaurants acquired from
Cambridge in 2019.
Adjusted Restaurant-Level EBITDA. As a result of the factors discussed above,
Adjusted Restaurant-Level EBITDA increased $9.8 million , or 22.7%, to $52.8
million in the third quarter of 2020, and as a percentage of total revenue,
increased to 13.0% in the third quarter of 2020 from 10.7% in the third quarter
of 2019. For a reconciliation between Adjusted Restaurant-Level EBITDA and
income (loss) from operations see page 44.
General and Administrative Expenses. General and administrative expenses
decreased $0.9 million in the third quarter of 2020 to $20.4 million , and, as a
percentage of total revenue, decreased to 5.0% in the third quarter of
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2020 from 5.3% in the third quarter of 2019. The $0.9 million decrease was
driven by reduced overhead costs in 2020, including our reduction in regional
and corporate overhead from streamlining our regional management structure,
improvements to our training process, and reduced travel of $1.6 million . The
full impact of these administrative cost reductions were offset in the quarter
by $2.0 million higher administrative bonus accruals in 2020 as a result of
favorable restaurant-level profitability in the period and 2019 including $2.1
million more of acquisition and integration costs.
Adjusted EBITDA. As a result of the factors above, Adjusted EBITDA increased to
$34.1 million in the third quarter of 2020 from $25.7 million in the third
quarter of 2019, and as a percentage of total revenue, increased to 8.4% in the
third quarter of 2020 from 6.4% in the third quarter of 2019. For a
reconciliation between net income (loss) and EBITDA and Adjusted EBITDA see page
44.
Depreciation and Amortization Expense. Depreciation and amortization expense
decreased $1.6 million to $19.6 million in the third quarter of 2020 from $21.2
million in the third quarter of 2019. This decrease was driven by the impact in
2019 of remodeling and acquisition activity that did not recur in the third
quarter of 2020.
Impairment and Other Lease Charges. Impairment and other lease charges were $2.0
million in the third quarter of 2020, consisting of $0.7 million related to
initial impairment charges for four underperforming restaurants, capital
expenditures of $0.2 million at previously impaired restaurants, and $1.0
million of other lease charges, primarily from the closure of three restaurants
in the period.
During the third quarter of 2019, impairment and other lease charges were $0.5
million , consisting of $0.3 million for two underperforming restaurants and $0.2
million of other lease charges associated with the closure of one
underperforming restaurant in the third quarter of 2019.
Other Expense (Income), net. Other expense, net in the third quarter of 2020
included a net gain related to adjustments to insurance recoveries from previous
property damage at our restaurants of $0.2 million , loss on one sale-leaseback
transaction of $0.4 million and a loss on disposal of assets of $0.3 million
Other income, net for the three months ended September 29, 2019 included a loss
on disposal of assets of $0.1 million and a gain on one sale-leaseback
transaction of $0.1 million .
Loss on Extinguishment of Debt. We recognized a loss on extinguishment of debt
of $7.4 million during the third quarter of 2019 in connection with the
refinancing of our 8% Notes. The loss consisted of the write-off of unamortized
debt costs, unamortized bond premium and additional redemption fees.
Interest Expense. Interest expense decreased to $6.6 million in the third
quarter of 2020 from $7.6 million in the third quarter of 2019. Our weighted
average interest rate for borrowings under the Senior Credit Facilities
decreased to 4.4% in the third quarter of 2020 from 5.7% in the third quarter of
2019, as the variable rates on our borrowings decreased according to reduced
LIBOR rates.
Provision (benefit) for Income Taxes. For the three months ended September 27,
2020 the provision for income taxes was derived using an estimated effective
annual income tax rate for all of 2020 of 43.1%. The difference compared to the
statutory rate for 2020 is attributable to the net effect of approximately $3.7
million in benefits of federal employment credits and other permanent tax
adjustments which are not directly related to the amount of pre-tax loss
recorded in a period. There were no discrete tax adjustments in the third
quarter of 2020.
During the first quarter of 2020 we determined that a valuation allowance was
needed for all of our net deferred income tax assets. As a result, the deferred
tax expense that would have been incurred due to pretax income during the third
quarter of 2020 was offset by a tax benefit of $0.1 million to reduce the
valuation allowance as our net deferred tax assets decreased during the quarter.
The provision (benefit) for income taxes for the third quarter of 2019 was
derived using an estimated effective annual income tax rate for all
of 2019 of 31.5%, excluding any discrete tax adjustments. The difference
compared to the statutory rate for 2019 is attributable to the net effect of
approximately $3.0 million of non-deductible acquisition costs incurred during
the year and the benefits of federal employment credits which are not directly
related to the amount of pre-tax loss recorded in a period.
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Net Income (Loss). As a result of the above, net income for the third quarter of
2020 was $3.5 million , or $0.06 per diluted share, compared to a net loss in the
third quarter of 2019 of $6.8 million , or $0.15 per diluted share.
Nine Months Ended September 27, 2020 Compared to Nine Months Ended September 29,
2019
The following table highlights the key components of sales for the nine month
period ended September 27, 2020 as compared to the nine month period ended
September 29, 2019 :
Nine Months Ended
September 27, 2020 September 29, 2019
Restaurant Sales 1,126,972 1,054,877
Burger King 1,060,698 1,023,715
Popeyes 66,274 31,162
Change in Comparable Restaurant Sales % (a) (3.1) % 2.3 %
Change in Comparable Burger King Restaurant Sales (a) (3.5) % 2.3 %
Change in Comparable Popeyes Restaurant Sales (a) 10.1 %
Burger King Restaurants operating at beginning of period: 1,036 849 New restaurants opened, including relocations (b) 6 13 Restaurants acquired - 179 Restaurants closed, including relocations (b) (19) (13) Burger King Restaurants operating at end of period 1,023 1,028 Popeyes Restaurants operating at beginning of year 65 - New restaurants opened - 5 Restaurants acquired - 55 Popeyes Restaurants operating at end of period 65 60 a.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. The calculation of changes in comparable restaurant sales is based on the comparable 39-week period. b.For the first nine months of 2020, new restaurants opened includes one restaurant relocated within its market area and closed restaurants includes one restaurant closed as a result of relocation. For the first nine months of 2019, new restaurants opened includes two restaurants relocated within their market areas and closed restaurants includes one restaurant closed as a result of relocation. Restaurant Sales. Total restaurant sales in the first nine months of 2020 increased 6.8% to$1,127 million from$1,055 million in the first nine months of 2019. Comparable restaurant sales decreased 3.1% in the first nine months of 2020 due to a decrease in customer traffic of 15.6% which was partially offset by an increase in average check of 14.8%. The effect in the first nine months of 2020 from menu price increases taken since the beginning of 2019 was approximately 2.0%. Restaurant sales were also impacted by the inclusion of nine months of activity in 2020 for the 220 restaurants acquired in the Cambridge Acquisition, while 2019 included five months of activity. 41 -------------------------------------------------------------------------------- Table of Contents Operating Costs and Expenses (percentages stated as a percentage of total revenue unless otherwise noted). The following table sets forth, for the nine months endedSeptember 27, 2020 andSeptember 29, 2019 , selected operating results as a percentage of total revenue: Nine Months Ended September 27, 2020 September 29, 2019 Costs and expenses (all restaurants): Cost of sales 29.2 % 29.5 % Restaurant wages and related expenses 32.2 % 33.2 % Restaurant rent expense 7.9 % 7.3 % Other restaurant operating expenses 15.3 % 15.5 % Advertising expense 3.9 % 4.0 % General and administrative 5.3 % 5.8 % Cost of sales decreased to 29.2% in the first nine months of 2020 from 29.5% in the first nine months of 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 the third quarter of 2019 at our Burger King restaurants (0.6%), and the inclusion of convenience stores in the prior year which had a higher cost of sales (0.4%). These positive impacts were offset by increased commodity costs at our Burger King restaurants (1.4%, including an 8.4% increase in ground beef prices compared to the first nine months of 2019), and the inclusion of delivery costs in 2020 (0.3%). Cost of sales at ourPopeyes restaurants improved approximately 230 basis points over last year due to improved operations at those restaurants (0.1%). The cost of sales impact in the prior year related to the convenience stores we closed in the fourth quarter of 2019 of$6.0 million , or 0.6% of total revenue in the first nine months of 2019. Restaurant wages and related expenses decreased to 32.2% in the first nine months of 2020 from 33.2% in the first nine months of 2020 due to labor adjustments we made during the second quarter of 2020 in response to the COVID-19 environment. 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 over the first nine months of 2020, inclusive of minimum wage increases, was 5.5% at our legacy restaurants when compared to the prior year period. This was more than offset through effective labor hour management in the first nine months of 2019. Restaurant rent expense increased to 7.9% in the first nine months of 2020 from 7.3% in the first nine months of 2019 due to higher rent as a percentage of sales for the 220 Cambridge restaurants acquired in 2019 and the effect of lower sales volumes on fixed rental costs. Restaurant rent expense in the first nine months of 2020 was reduced for rent abatements recognized in the second quarter of$0.2 million . Other restaurant operating expenses decreased to 15.3% in the first nine months of 2020 from 15.5% in the first nine months of 2019, reflecting lower repair and maintenance costs (0.3%), offset by an increase in operating supplies (0.1%), which included$2.3 million in COVID-19 expenses, including face masks, thermometers, sneeze guards, and sanitizers. Advertising expense decreased to 3.9% in the first nine months of 2020 from 4.0% in the first nine months of 2019 due to advertising incentives received for certain remodeled Burger King restaurants, including restaurants acquired from Cambridge in 2019. Adjusted Restaurant-Level EBITDA. As a result of the factors above, Adjusted Restaurant-Level EBITDA increased$16.5 million , or 14.6%, to$129.7 million in the first nine months of 2020, and, as a percentage of total revenue, increased to 11.5% for the first nine months of 2020 from 10.7% in the prior year period. For a reconciliation between Adjusted Restaurant-Level EBITDA and income (loss) from operations see page 44. General and Administrative Expenses. General and administrative expenses decreased$1.9 million in the first nine months of 2020 to$59.8 million and, as a percentage of total revenue, decreased to 5.3% from 5.8% in the prior year period. The decrease in total general and administrative expenses in the first nine months of 2020 was due primarily to the prior year period including$6.6 million more of acquisition and integration costs, but was offset by 42 -------------------------------------------------------------------------------- Table of Contents$1.6 million more of abandoned site development costs in 2020, an increase of$1.6 million in administrative bonus accruals in 2020 as a result of favorable restaurant-level profitability in the period, and a reduction in regional and corporate overhead in 2020 from streamlining our regional management structure, improvements to our training process, and reduced travel. Adjusted EBITDA. As a result of the factors above, Adjusted EBITDA increased to$76.1 million in the first nine months of 2020 from$63.6 million in the first nine months of 2019. For a reconciliation between net income (loss) and EBITDA and Adjusted EBITDA see page 44. Depreciation and Amortization Expense. Depreciation and amortization expense increased to$60.9 million in the first nine months of 2020 from$53.6 million in the first nine months of 2019 due primarily to our ongoing remodeling initiatives and our acquisition of restaurants in 2019. Impairment and Other Lease Charges. Impairment and other lease charges were$7.8 million in the first nine months of 2020, which included$4.9 million of asset impairment charges at thirteen underperforming restaurants,$0.5 million of capital expenditures at previously impaired restaurants, and$2.4 million of other lease charges primarily due to 13 restaurants closed in the first nine months of 2020. Impairment and other lease charges were$1.8 million in the first nine months of 2019, which included$1.1 million related to impairment charges for five underperforming restaurants, capital expenditures of$0.3 million at underperforming restaurants and$0.4 million of other lease charges primarily due to restaurant closures and changes in estimates during the first nine months of 2019. Other Expense (Income), net. The first nine months of 2020 included gains related to insurance recoveries from property damage at four of its restaurants of$1.7 million , a net gain on 11 sale-leaseback transactions of$0.2 million and a loss on disposal of assets of$0.5 million . The first nine months of 2019 included 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, a gain on three sale-leaseback transactions of$0.3 million , and a gain related to an insurance recovery from property damage at one of our restaurants of$0.1 million . Loss on Extinguishment of Debt. We recognized a loss on extinguishment of debt of$7.4 million during the first nine months of 2019 in connection with the refinancing of our 8% Notes. The loss consisted of the write-off of unamortized debt costs, unamortized bond premium and additional redemption fees. Interest Expense. Interest expense decreased to$20.2 million in the first nine months of 2020 from$20.4 million in the first nine months of 2019. The weighted average interest rate on borrowings under our Senior Credit Facilities decreased to 4.5% in the first nine months of 2020 from 6.4% in the first nine months of 2019, due primarily to the refinancing in the second quarter of 2019 which included the redemption of our 8% Senior Secured Second Lien Notes in exchange for lower variable rate term loans. Provision (Benefit) for Income Taxes. The benefit for income taxes for the first nine months of 2020 was derived using an estimated effective annual income tax rate for all of 2020 of 43.1%, which excludes any discrete tax adjustments. The difference compared to the statutory rate for 2020 is attributable to the net effect of approximately$3.7 million in benefits of federal employment credits and other permanent tax adjustments which are not directly related to the amount of pre-tax loss recorded in a period. There were no discrete tax adjustments in the nine months endedSeptember 27, 2020 . During the first quarter of 2020 we determined that a valuation allowance was needed for all of our net deferred income tax assets. As a result, the deferred tax benefit that would have been incurred due to the pretax loss during the nine months of 2020 was offset by tax expense of$0.3 million for the valuation allowance on our net deferred tax assets as ofSeptember 27, 2020 . The provision (benefit) for income taxes for the first nine months of 2019 was derived using an estimated effective annual income tax rate for all of 2019 of 31.5%, excluding any discrete tax adjustments. The difference compared to the statutory rate for 2019 is attributable to the net effect of approximately$3.0 million of non- 43 -------------------------------------------------------------------------------- Table of Contents deductible acquisition costs incurred during the year and the benefits of federal employment credits which are not directly related to the amount of pre-tax loss recorded in a period. The income tax benefit for the first nine months of 2019 contains net discrete tax adjustments of$0.1 million of tax expense. Net Loss. As a result of the above, net loss for first nine months of 2020 was$10.8 million , or$0.21 per diluted share, compared to a net loss in first nine months of 2019 of$22.0 million , or$0.54 per diluted share. 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 three and nine months endedSeptember 27, 2020 andSeptember 29, 2019 are as follows (in thousands, except for per share data): Three Months Ended Nine Months Ended
Reconciliation of EBITDA and Adjusted
2020 2019 2020 2019
Net income (loss) $ 3,531 $ (6,812) $ (10,836) $ (22,013)
Provision (benefit) for income taxes 48 (1,881) (6,840) (10,035)
Interest expense 6,649 7,578 20,159 20,425
Depreciation and amortization 19,620 21,200 60,947 53,613
EBITDA 29,848 20,085 63,430 41,990
Impairment and other lease charges 1,954 500 7,776 1,777
Acquisition and integration costs (1) 18 2,754 373 7,983
Abandoned development costs (2) 189 82 1,746 193
Pre-opening costs (3) 5 478 104 1,063
Litigation costs (4) 265 144 545 416
Other expense (income), net (5) (6) 515 (20) (1,432) (1,773)
Stock-based compensation expense 1,303 1,707 3,543 4,515
Loss on extinguishment of debt - - - 7,443
Adjusted EBITDA $ 34,097 $ 25,730 $ 76,085 $ 63,607
Reconciliation of Adjusted Restaurant-Level
EBITDA:
Income (loss) from operations $ 10,228 $ (1,115) $ 2,483 $ (4,180)
Add:
General and administrative expenses 20,440 21,365 59,808 61,709
Acquisition and integration costs (1) - 596 - 1,002
Pre-opening costs (3) 5 478 104 1,063
Depreciation and amortization 19,620 21,200 60,947 53,613
Impairment and other lease charges 1,954 500 7,776 1,777
Other expense (income), net (5) (6) 515 (20) (1,432) (1,773)
Adjusted Restaurant-Level EBITDA $ 52,762 $ 43,004
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Reconciliation of Adjusted Net Income
(Loss):
Net income (loss) $ 3,531 $ (6,812) $ (10,836) $ (22,013)
Add:
Impairment and other lease charges 1,954 500 7,776 1,777
Acquisition and integration costs (1) 18 2,754 373 7,983
Abandoned development costs (2) 189 82 1,746 193
Pre-opening costs (3) 5 478 104 1,063
Litigation costs (4) 265 144 545 416
Other expense (income), net (5) (6) 515 (20) (1,432) (1,773)
Loss on extinguishment of debt - - - 7,443
Income tax effect on above adjustments (7) (737) (985) (2,279) (4,178)
Adjusted Net Income (Loss) $ 5,740 $ (3,859) $ (4,003) $ (9,089)
Adjusted diluted net income (loss) per
share (8) $ 0.09 $ (0.08) $ (0.08) $ (0.22)
Adjusted diluted weighted average common
shares outstanding (in thousands of shares) 60,543 45,947 50,887 41,015
(1)Acquisition costs for the three and nine months ended September 27, 2020 and
September 29, 2019 mostly includes legal and professional fees incurred in
connection with restaurant acquisitions. Acquisition and integration costs for
the three and nine months ended September 29, 2019 of $2.8 million and $8.0
million , respectively, include certain legal and professional fees incurred in
connection with restaurant acquisitions and corporate payroll, and other costs
related to the integration of the Cambridge Acquisition and one-time repair
costs of $0.6 million which are included in Adjusted Restaurant-Level EBITDA.
(2)Abandoned development costs for the three and nine months ended September 27,
2020 and September 29, 2019 represents the write-off of capitalized costs due to
the abandoned development of future restaurant locations.
(3)Pre-opening costs for the three and nine months ended September 27, 2020 and
September 29, 2019 include training, labor and occupancy costs incurred during
the construction of new restaurants.
(4)Litigation costs for the three and nine months ended September 27, 2020 and
September 29, 2019 includes litigation expenses pertaining to an ongoing lawsuit
with one of the Company's former vendors as well as other non-recurring
professional service expenses.
(5)The three months ended September 27, 2020 included a net gain related to
adjustments to insurance recoveries from previous property damage at restaurants
of $0.2 million , a loss on one sale-leaseback transaction of $0.4 million and a
loss on disposal of assets of $0.3 million . The nine months ended September 27,
2020 included gains related to insurance recoveries from property damage at four
of its restaurants of $1.7 million , net gain on eleven sale-leaseback
transactions of $0.2 million and a loss on disposal of assets of $0.5 million .
(6)The nine months ended September 29, 2019 included 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, a gain on three
sale-leaseback transactions of $0.3 million , a gain related to an insurance
recovery from property damage at one of our restaurants of $0.1 million , and a
loss on a disposal of restaurant equipment of $0.6 million .
(7)The income tax effect related to the adjustments to Adjusted Net Income
(Loss) during the periods presented was calculated using an incremental income
tax rate of 25% for the three and nine months ended September 27, 2020 and
September 29, 2019 .
(8)Adjusted diluted net income (loss) per share is calculated based on Adjusted
net income (loss) and the dilutive weighted average common shares outstanding
for the respective periods, where applicable.
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;
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•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 our
remodeling initiatives, payments of royalties and advertising to BKC and PLK and
payments related to our lease obligations represent significant liquidity
requirements for us, as well as any discretionary expenditures for the
acquisition or development of additional Burger King and Popeyes restaurants.
In response to the COVID-19 pandemic and the impact it is having on restaurant
sales beginning in March 2020 and to the economy in general, we took several
steps in early 2020 to adapt our business and strengthen and preserve our
liquidity during these uncertain times, as follows:
•Operationally, 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 pandemic, we
reopened 40 of the temporarily closed restaurants by the end of the third
quarter of 2020. All of our other restaurants remained open during this period
and have continued to serve all of our drive-thru and take-out customers, which
comprised over 95% of our restaurant sales in the third quarter of 2020.
•We launched delivery services in March and April at a majority of our
restaurants. We also modified our operating hours and appropriate levels of
labor in line with local ordinances and based on day-part sales trends earlier
in 2020, with most returning to normal operating hours by the end of the second
quarter of 2020.
•As discussed above, we increased revolving credit borrowing capacity under our
Revolving Credit Facility by $30.8 million to a total of $145.8 million . In the
first quarter of 2020, we borrowed on our Revolving Credit Facility to protect
against a prolonged pandemic coupled with financial market illiquidity. This was
repaid in the second quarter of 2020 upon our borrowing of $75 million in
Incremental Term B-1 Loans.
•We remain committed to keeping our expenditures in check and in the second
quarter of 2020 limited spending mainly to necessary restaurant maintenance
issues. For the full year, we continue to expect operating capital expenditures
of approximately $40 million , which includes net proceeds from sale-leaseback
activity and excludes the purchase of an office building for $4.1 million .
•We reduced regional and corporate overhead by streamlining our regional
management and support structure, improving our training process and instituting
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 CARES Act, we are deferring 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 is currently estimated to be
approximately $21 million , of which 50% is payable on each of December 31, 2021
and December 31, 2022 . As of September 27, 2020 , we have deferred $14.3 million
of social security taxes.
•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 $0.5 million related to these deferrals during the third
quarter 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. Additionally,
during the year, we experienced a number of minor and/or temporary supply chain
issues. All such issues have been resolved.
•We also have suspended any acquisition activity and share repurchases.
Based on current expectations, we believe that our projected cash flows provided
by operations, available cash and cash equivalents and borrowings under our
Revolving Credit Facility are sufficient to meet our working capital, debt
service and capital expenditure requirements for the next twelve months. If our
future financing needs increase, we may need to arrange additional debt or
equity financing. We continually evaluate and consider various financing
alternatives to enhance or supplement our existing financial resources,
including our Senior Credit Facilities.
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However, there can be no assurance that we will be able to enter into any such
arrangements on acceptable terms or at all. In addition, the recent COVID-19
pandemic, which has caused disruption in the capital markets, could make any
such financing more difficult and/or expensive.
In addition to the items outlined above, we believe our cash balances, cash
generated from our operations and availability of revolving credit borrowings
under our Senior Credit Facilities will 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 by operating activities was $80.8
million in the first nine months of 2020 compared to net cash provided by
operating activities of $35.0 million in the first nine months of 2019. The
increase was due primarily to an increase of $21.4 million in EBITDA combined
with an increase in cash provided by working capital components of $18.4
million .
Investing Activities. Net cash used for investing activities in the first nine
months of 2020 and 2019 was $34.0 million and $221.8 million , respectively. In
the first nine months of 2020, we purchased certain restaurant properties to be
sold in sale-leaseback transactions for $13.4 million and completed
sale-leaseback transactions of 11 restaurant properties for proceeds of $20.3
million . Investing activities in the first nine months of 2020 also included the
receipt of insurance proceeds of $1.8 million for recoveries on property damage
at four of our restaurants.
In the first nine months of 2019, investing activities included $131.5 million
paid in connection with the Cambridge Acquisition and the separate acquisition
of fourteen Burger King restaurants from other franchisees, net proceeds of $7.0
million from three sale-leaseback transaction and $0.1 million of proceeds from
property damage at one of our restaurants.
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 expenditures
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 and PLK's initiatives; and
(4) corporate and restaurant information systems, including expenditures for our
point-of-sale systems for restaurants that we acquire.
The following table sets forth our capital expenditures for the periods
presented (in thousands):
Nine Months Ended September 27, 2020
New restaurant development $ 15,694
Restaurant remodeling 11,615
Other restaurant capital expenditures 8,798
Corporate and restaurant information systems 6,714
Total capital expenditures $ 42,821
Nine Months Ended September 29, 2019
New restaurant development $ 37,259
Restaurant remodeling 37,826
Other restaurant capital expenditures 15,643
Corporate and restaurant information systems 6,670
Total capital expenditures $ 97,398
Financing Activities. Net cash provided by financing activities in the first
nine months of 2020 was $18.1 million and included net proceeds from issuance of
the Incremental Term B-1 Loans of $71.3 million after original issue discount,
net revolving credit facility repayments of $45.8 million , and principal
payments of $3.2 million on the Term Loan B Facility. We also incurred $2.8
million of costs associated with issuance of Incremental Term B-1 Loans and
amendments of our Senior Credit Facilities and made principal payments on
finance leases of $1.5 million .
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Net cash provided by financing activities in the nine months of 2019 was $185.7
million and included $422.9 million in borrowings from the Term B Facility, net
revolving credit borrowings of $59.5 million under the Revolving Credit
Facility, redemption of the 8.0% Notes of $280.5 million , costs associated with
the new Senior Credit Facilities of $11.5 million , principal payments on finance
leases of $1.6 million , and $2.0 million in share repurchases.
New Senior Credit Facility. On April 30, 2019 , we entered into a senior secured
credit facility 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 . 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 us 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 we 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 .
On March 25, 2020 , we entered into the Second Amendment to our Senior Credit
Facilities. The Second Amendment 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 $130.4
million .
The Second Amendment also amended the definition of Applicable Margin in the
Credit Agreement to provide that on and after the date of the Second Amendment,
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 , we shall pay to the Administrative Agent,
for the ratable benefit of the Revolving Facility Lenders, a commitment 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
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Letter Agreement, 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 . We and the
lessor under each of such leases have agreed to the deferral of rent payments
under such leases for such period and that any such deferred rent under such
leases shall be due and payable by us 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 permits us to incur and, if necessary, repay
indebtedness incurred pursuant to the PPP under the CARES Act. We have
determined that we will not be borrowing under the PPP.
On June 23, 2020 , we entered into the Fifth Amendment to our Senior Credit
Facilities. The Fifth Amendment increased the Term Loan borrowings in the
aggregate principal amount of $75 million of Incremental Term B-1 Loans. 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 Credit Agreement. The Incremental Term B-1 Loans have the
same terms as outstanding borrowings under the our existing term loan B facility
pursuant to and in accordance with the Credit Agreement, 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 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% and (ii) certain prepayments
of the Incremental Term B-1 Loans prior to the first anniversary of the Fifth
Amendment Effective Date are subject to a premium to the Administrative Agent,
for the ratable account of each applicable Term Loan Lender holding Incremental
Term B-1 Loans on the date of such prepayment equal to the Applicable Make-Whole
Amount 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.
Our obligations under the Senior Credit Facilities are guaranteed by our
subsidiaries and are secured by first priority liens on substantially all of our
assets and our subsidiaries, including a pledge of all of the capital stock and
equity interests of our subsidiaries.
Under the Senior Credit Facilities, we are required to make mandatory
prepayments of borrowings 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 our and our subsidiaries' ability to, among other
things, incur indebtedness, incur liens, sell or acquire assets or businesses,
change the character of its business in all material respects, engage in
transactions with related parties, make certain investments, make certain
restricted payments or pay dividends. In addition, the Senior Credit Facilities
require us to meet a First Lien Leverage Ratio (as defined in the Senior Credit
Facilities). As there were no borrowings under the Revolving Credit Facility at
September 27, 2020 , no First Lien Leverage Ratio calculation was required. We
were in compliance with the covenants under our Senior Credit Facilities
at September 27, 2020 .
The Senior Credit Facilities contain customary default provisions, including
that 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, bankruptcy type
defaults, cross-defaults on other indebtedness, judgments or upon the occurrence
of a change of control.
At September 27, 2020 , borrowings under the Senior Credit Facilities bore
interest as follows:
(i) Revolving Credit Facility: at a rate per annum equal to (a) the Alternate
Base Rate plus 2.50% or (b) LIBOR Rate plus 3.50%.
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(ii) Term Loan B borrowings: at a rate per annum equal to (a) the Alternate Base
Rate plus 2.25% or (b) LIBOR Rate plus 3.25%.
(iii) Term Loan B-1 borrowings: at a rate per annum, at the Company's 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 weighted average interest rate on borrowings under our Senior Credit
Facilities was 4.4% and 4.5% for the three and nine months ended September 27,
2020 , respectively, and 5.7% and 6.4% for the three and nine months ended
September 29, 2019 , respectively.
The Term Loan B and B-1 borrowings are due and payable in quarterly
installments, which began on September 30, 2019 . Amounts outstanding at
September 27, 2020 are due and payable as follows:
(i) twenty-two quarterly installments of $1.3 million ;
(ii) one final payment of $467.0 million on April 30, 2026 .
As of September 27, 2020 , 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, $136.2 million was
available for revolving credit borrowings under the Senior Credit Facilities at
September 27, 2020 .
In March 2020 , we entered into an interest rate swap agreement with our lenders
to mitigate the risk of increases in the variable interest rate related to term
loan borrowings under the Term Loan B Facility. The interest rate swap fixes the
interest rate on 50% of the outstanding term loan borrowings under the Term Loan
B Facility at 0.915% plus the applicable margin in its Senior Credit Facilities.
The agreement matures on February 28, 2025 and has a notional amount of $220.0
million at September 27, 2020 . The differences between the variable LIBOR rate
and the interest rate swap rate of 0.915% are settled monthly. We made payments
of $0.4 million to settle the interest rate swap during both the three and nine
months ended September 27, 2020 . The fair value of our interest rate swap
agreement was a liability of $7.2 million as of September 27, 2020 and is
included in long-term other liabilities in the accompanying consolidated balance
sheets. Changes in the valuation of our interest rate swap were included as a
component of other comprehensive income, and will be reclassified to earnings as
the losses are realized. We expect to reclassify net losses totaling $1.7
million into earnings in the next twelve months.
Contractual Obligations
A table of our contractual obligations as of December 29, 2019 was included in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" of our Annual Report on Form 10-K for the fiscal year
ended December 29, 2019 . There have been no significant changes to our
contractual obligations during the three months ended September 27, 2020 other
than a decrease in revolving credit borrowings under our Revolving Credit
Facility in the first nine months of 2020 of $45.8 million and an increase in
Term Loan B-1 borrowings of $75.0 million .
Inflation
The inflationary factors that have historically affected our results of
operations include increases in food and paper costs, labor and other operating
expenses, the cost of providing medical and prescription drug insurance to our
employees and energy costs. Wages paid in our restaurants are impacted by
changes in the Federal and state hourly minimum wage rates and the Fair Labor
Standards Act. Accordingly, changes in the Federal and state hourly minimum wage
rates and increases in the wage level to not be considered an hourly employee
will directly affect our labor costs. We typically attempt to offset the effect
of inflation, at least in part, through periodic menu price increases and
various cost reduction programs. However, no assurance can be given that we will
be able to offset such inflationary cost increases in the future.
Application of Critical Accounting Policies
Our unaudited condensed consolidated financial statements and accompanying notes
are prepared in accordance with accounting principles generally accepted in the
United States of America . Preparing consolidated financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. These estimates and assumptions are affected
by the application of our accounting policies. Our significant accounting
policies are described in the "Significant Accounting Policies" footnote in the
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notes to the Consolidated Financial Statements included in our Annual Report on
Form 10-K for the fiscal year ended December 29, 2019 . Critical accounting
estimates are those that require application of management's most difficult,
subjective or complex judgments, often as a result of matters that are
inherently uncertain and may change in subsequent periods. There have been no
material changes affecting our critical accounting policies previously disclosed
in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019 .
Forward Looking Statements
This Quarterly Report on Form 10-Q 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. These statements are often identified
by the words "may", "might", "will", "should", "anticipate", "believe",
"expect", "intend", "estimate", "hope", "plan" or similar expressions. In
addition, expressions of our strategies, intentions or plans are also forward
looking statements. These statements reflect management's 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. There are
important factors that could cause actual results to differ materially from
those in forward-looking statements, many of which are beyond our control.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected or implied in the
forward-looking statements. We have identified significant factors that could
cause actual results to differ materially from those stated or implied in the
forward-looking statements. 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 and in our Annual
Report on Form 10-K for the period ended December 29, 2019 :
•Negative publicity regarding food quality, illness, injury or other health
concerns (such as the current COVID-19 pandemic);
•Effectiveness of the Burger King® and Popeyes® advertising programs and the
overall success of the Burger King® and Popeyes® brands;
•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;
•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 inability 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; and
•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.
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