UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 1, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-32843
TIM HORTONS INC.
(Exact name of Registrant as specified in its charter)
Canada | 98-0641955 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification Number) |
|
874 Sinclair Road, Oakville, ON, Canada | L6K 2Y1 | |
(Address of principal executive offices) | (Zip code) |
905-845-6511
(Registrants phone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
Outstanding at August 6, 2012 |
|
Common shares | 154,933,251 shares |
Exhibit Index on page 44.
TIM HORTONS INC. AND SUBSIDIARIES
On August 3, 2012, the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York was US$1.0014 for Cdn$1.00.
Availability of Information
Tim Hortons Inc., (the Company), a corporation incorporated under the Canada Business Corporations Act (the CBCA), qualifies as a foreign private issuer in the U.S. for purposes of the Securities Exchange Act of 1934, as amended (the Exchange Act). Although, as a foreign private issuer, the Company is no longer required to do so, the Company currently continues to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the U.S. Securities and Exchange Commission (SEC) instead of filing the reporting forms available to foreign private issuers.
We make available, through our internet website for investors ( www.timhortons-invest.com ), our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after electronically filing such material with the SEC and with the Canadian Securities Administrators (CSA). The reference to our website address does not constitute incorporation by reference of the information contained on the website into, and should not be considered part of, this document.
Reporting Currency
The majority of the Companys operations, restaurants and cash flows are based in Canada, and the Company is primarily managed in Canadian dollars. As a result, the Companys reporting currency is the Canadian dollar. All amounts are expressed in Canadian dollars unless otherwise noted.
2
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands of Canadian dollars, except per share data)
Second quarter ended | Year-to-date period ended | |||||||||||||||
July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | |||||||||||||
Revenues |
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Sales (note 13) |
$ | 563,772 | $ | 498,058 | $ | 1,087,074 | $ | 952,535 | ||||||||
Franchise revenues |
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Rents and royalties |
198,973 | 185,389 | 379,159 | 353,219 | ||||||||||||
Franchise fees |
22,836 | 19,313 | 40,632 | 40,493 | ||||||||||||
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221,809 | 204,702 | 419,791 | 393,712 | |||||||||||||
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Total revenues |
785,581 | 702,760 | 1,506,865 | 1,346,247 | ||||||||||||
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Costs and expenses |
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Cost of sales (note 13) |
493,300 | 434,051 | 958,725 | 836,383 | ||||||||||||
Operating expenses |
73,068 | 65,102 | 139,784 | 127,256 | ||||||||||||
Franchise fee costs |
24,794 | 20,419 | 45,076 | 41,736 | ||||||||||||
General and administrative expenses |
40,395 | 43,969 | 80,522 | 83,965 | ||||||||||||
Equity (income) |
(3,859 | ) | (3,820 | ) | (7,105 | ) | (6,933 | ) | ||||||||
Other (income) expense, net |
(956 | ) | (179 | ) | (599 | ) | 19 | |||||||||
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Total costs and expenses, net |
626,742 | 559,542 | 1,216,403 | 1,082,426 | ||||||||||||
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Operating income |
158,839 | 143,218 | 290,462 | 263,821 | ||||||||||||
Interest (expense) |
(8,650 | ) | (7,427 | ) | (16,548 | ) | (14,803 | ) | ||||||||
Interest income |
723 | 851 | 1,434 | 2,527 | ||||||||||||
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Income before income taxes |
150,912 | 136,642 | 275,348 | 251,545 | ||||||||||||
Income taxes (note 2) |
41,675 | 40,202 | 76,132 | 73,691 | ||||||||||||
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Net income |
109,237 | 96,440 | 199,216 | 177,854 | ||||||||||||
Net income attributable to noncontrolling interests (note 12) |
1,170 | 891 | 2,370 | 1,626 | ||||||||||||
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Net income attributable to Tim Hortons Inc. |
$ | 108,067 | $ | 95,549 | $ | 196,846 | $ | 176,228 | ||||||||
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Basic earnings per common share attributable to Tim Hortons Inc. (note 3) |
$ | 0.70 | $ | 0.58 | $ | 1.27 | $ | 1.06 | ||||||||
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Diluted earnings per common share attributable to Tim Hortons Inc. (note 3) |
$ | 0.69 | $ | 0.58 | $ | 1.26 | $ | 1.06 | ||||||||
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Weighted average number of common shares outstanding (in thousands) Basic (note 3) |
155,351 | 163,448 | 155,589 | 165,555 | ||||||||||||
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Weighted average number of common shares outstanding (in thousands) Diluted (note 3) |
155,995 | 163,961 | 156,207 | 166,014 | ||||||||||||
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Dividends per common share |
$ | 0.21 | $ | 0.17 | $ | 0.42 | $ | 0.34 | ||||||||
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See accompanying Notes to the Condensed Consolidated Financial Statements.
3
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands of Canadian dollars)
Second quarter ended | Year-to-date period ended | |||||||||||||||
July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | |||||||||||||
Net income |
$ | 109,237 | $ | 96,440 | $ | 199,216 | $ | 177,854 | ||||||||
Other comprehensive income (loss) |
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Translation adjustments gain (loss) |
8,342 | (534 | ) | 506 | (11,765 | ) | ||||||||||
Unrealized gains (losses) from cash flow hedges (note 8) |
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Gain (loss) from change in fair value of derivatives |
2,114 | (2,337 | ) | (1,389 | ) | (8,898 | ) | |||||||||
Amount of net (loss) gain reclassified to earnings during the period |
(800 | ) | 2,969 | (1,948 | ) | 5,566 | ||||||||||
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Total cash flow hedges |
1,314 | 632 | (3,337 | ) | (3,332 | ) | ||||||||||
Tax effect on other comprehensive (loss) income |
(334 | ) | (173 | ) | 951 | 863 | ||||||||||
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Other comprehensive income (loss), net of tax |
9,322 | (75 | ) | (1,880 | ) | (14,234 | ) | |||||||||
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Comprehensive income |
118,559 | 96,365 | 197,336 | 163,620 | ||||||||||||
Comprehensive income attributable to noncontrolling interests |
1,170 | 891 | 2,370 | 1,626 | ||||||||||||
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Comprehensive income attributable to Tim Hortons Inc. |
$ | 117,389 | $ | 95,474 | $ | 194,966 | $ | 161,944 | ||||||||
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See accompanying Notes to the Condensed Consolidated Financial Statements.
4
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands of Canadian dollars, except share and per share data)
As at | ||||||||
July 1,
2012 |
January 1,
2012 |
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Assets |
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Current assets |
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Cash and cash equivalents |
$ | 57,733 | $ | 126,497 | ||||
Restricted cash and cash equivalents |
87,292 | 130,613 | ||||||
Accounts receivable, net |
200,665 | 173,667 | ||||||
Notes receivable, net (note 4) |
7,990 | 10,144 | ||||||
Deferred income taxes |
8,142 | 5,281 | ||||||
Inventories and other, net (note 5) |
130,550 | 136,999 | ||||||
Advertising fund restricted assets (note 12) |
29,325 | 37,765 | ||||||
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Total current assets |
521,697 | 620,966 | ||||||
Property and equipment, net |
1,480,954 | 1,463,765 | ||||||
Intangible assets, net |
4,060 | 4,544 | ||||||
Notes receivable, net (note 4) |
2,162 | 3,157 | ||||||
Deferred income taxes |
12,820 | 12,197 | ||||||
Equity investments |
42,765 | 43,014 | ||||||
Other assets |
70,607 | 56,307 | ||||||
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Total assets |
$ | 2,135,065 | $ | 2,203,950 | ||||
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Liabilities and equity |
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Current liabilities |
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Accounts payable (note 6) |
$ | 151,919 | $ | 177,918 | ||||
Accrued liabilities |
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Salaries and wages |
14,599 | 23,531 | ||||||
Taxes |
17,787 | 26,465 | ||||||
Other (note 6) |
137,311 | 179,315 | ||||||
Advertising fund liabilities (note 12) |
78,103 | 59,420 | ||||||
Current portion of long-term obligations |
10,572 | 10,001 | ||||||
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Total current liabilities |
410,291 | 476,650 | ||||||
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Long-term obligations |
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Long-term debt |
354,559 | 352,426 | ||||||
Capital leases |
97,538 | 94,863 | ||||||
Deferred income taxes |
4,738 | 4,608 | ||||||
Other long-term liabilities (note 6) |
120,796 | 120,970 | ||||||
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Total long-term obligations |
577,631 | 572,867 | ||||||
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Commitments and contingencies (note 9) |
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Equity |
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Equity of Tim Hortons Inc. |
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Common shares ($2.84 stated value per share), Authorized: unlimited shares. Issued: 155,188,401 and 157,814,980 shares, respectively (note 10) |
440,099 | 447,558 | ||||||
Common shares held in Trust, at cost: 370,650 and 277,189 shares, respectively (note 12) |
(15,605 | ) | (10,136 | ) | ||||
Contributed surplus |
11,147 | 6,375 | ||||||
Retained earnings |
839,103 | 836,968 | ||||||
Accumulated other comprehensive loss |
(130,097 | ) | (128,217 | ) | ||||
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Total equity of Tim Hortons Inc. |
1,144,647 | 1,152,548 | ||||||
Noncontrolling interests (note 12) |
2,496 | 1,885 | ||||||
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Total equity |
1,147,143 | 1,154,433 | ||||||
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Total liabilities and equity |
$ | 2,135,065 | $ | 2,203,950 | ||||
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See accompanying Notes to the Condensed Consolidated Financial Statements.
5
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands of Canadian dollars)
Year-to-date periods ended | ||||||||
July 1,
2012 |
July 3,
2011 |
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Cash flows provided from (used in) operating activities |
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Net income |
$ | 199,216 | $ | 177,854 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities |
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Depreciation and amortization |
61,637 | 56,564 | ||||||
Stock-based compensation expense (note 11) |
11,869 | 11,162 | ||||||
Deferred income taxes |
(2,081 | ) | (2,695 | ) | ||||
Changes in operating assets and liabilities |
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Restricted cash and cash equivalents |
43,290 | (5,886 | ) | |||||
Accounts receivable |
(32,425 | ) | (77,506 | ) | ||||
Inventories and other |
7,285 | (37,996 | ) | |||||
Accounts payable and accrued liabilities |
(64,156 | ) | (64,038 | ) | ||||
Taxes |
(8,674 | ) | (32,902 | ) | ||||
Other, net |
390 | 1,711 | ||||||
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Net cash provided from operating activities |
216,351 | 26,268 | ||||||
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Cash flows (used in) provided from investing activities |
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Capital expenditures (including Advertising Fundnote 12) |
(97,458 | ) | (63,414 | ) | ||||
Proceeds from sale of restricted investments |
0 | 38,000 | ||||||
Other investing activities |
(8,710 | ) | (13,467 | ) | ||||
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Net cash (used in) investing activities |
(106,168 | ) | (38,881 | ) | ||||
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Cash flows (used in) provided from financing activities |
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Repurchase of common shares (note 10) |
(136,509 | ) | (401,917 | ) | ||||
Dividend payments to common shareholders |
(65,661 | ) | (56,122 | ) | ||||
Other financing activities (including Advertising Fundnote 12) |
23,445 | (5,951 | ) | |||||
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Net cash (used in) financing activities |
(178,725 | ) | (463,990 | ) | ||||
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Effect of exchange rate changes on cash |
(222 | ) | (1,574 | ) | ||||
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(Decrease) in cash and cash equivalents |
(68,764 | ) | (478,177 | ) | ||||
Cash and cash equivalents at beginning of period |
126,497 | 574,354 | ||||||
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Cash and cash equivalents at end of period |
$ | 57,733 | $ | 96,177 | ||||
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Supplemental disclosures of cash flow information |
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Interest paid |
$ | 16,199 | $ | 14,607 | ||||
Income taxes paid |
$ | 94,605 | $ | 120,176 | ||||
Non-cash investing and financing activities |
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Capital lease obligations incurred |
$ | 13,133 | $ | 10,925 |
See accompanying Notes to the Condensed Consolidated Financial Statements.
6
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
Year-to-date period ended
July 1, 2012 |
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Shares
(in thousands) |
Dollars
(in thousands) |
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Common shares |
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Balance at beginning of period |
157,815 | $ | 447,558 | |||||
Repurchase of common shares (note 10) |
(2,627 | ) | (7,459 | ) | ||||
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Balance at end of period |
155,188 | $ | 440,099 | |||||
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Common shares held in Trust |
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Balance at beginning of period |
(277 | ) | $ | (10,136 | ) | |||
Purchased during the period |
(112 | ) | (6,139 | ) | ||||
Disbursed from Trust during the period |
18 | 670 | ||||||
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Balance at end of period |
(371 | ) | $ | (15,605 | ) | |||
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Contributed surplus |
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Balance at beginning of period |
$ | 6,375 | ||||||
Stock-based compensation |
4,771 | |||||||
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Balance at end of period |
$ | 11,147 | ||||||
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Retained earnings |
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Balance at beginning of period |
$ | 836,968 | ||||||
Net income attributable to Tim Hortons Inc. |
196,846 | |||||||
Dividends |
(65,661 | ) | ||||||
Stock-based compensation |
0 | |||||||
Repurchase of common sharesexcess of stated value |
(129,050 | ) | ||||||
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Balance at end of period |
$ | 839,103 | ||||||
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Accumulated other comprehensive loss |
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Balance at beginning of period |
$ | (128,217 | ) | |||||
Other comprehensive (loss) income |
(1,880 | ) | ||||||
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Balance at end of period |
$ | (130,097 | ) | |||||
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Total equity of Tim Hortons Inc. |
$ | 1,144,647 | ||||||
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Noncontrolling interests |
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Balance at beginning of period |
$ | 1,885 | ||||||
Net income attributable to noncontrolling interests |
2,370 | |||||||
Distributions, net |
(1,759 | ) | ||||||
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Balance at end of period |
$ | 2,496 | ||||||
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Total equity |
154,817 | $ | 1,147,143 | |||||
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See accompanying Notes to the Condensed Consolidated Financial Statements.
7
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
Tim Hortons Inc. is a corporation governed by the CBCA. References herein to Tim Hortons, or the Company refer to Tim Hortons Inc. and its subsidiaries, unless specifically noted otherwise.
The Companys principal business is the development and franchising of quick service restaurants primarily in Canada and the U.S., that serve premium coffee, espresso-based hot and cold specialty drinks, including lattes, cappuccinos and espresso shots, baked goods, sandwiches, soups, prepared foods and other food products. In addition, the Company has vertically integrated manufacturing, warehouse and distribution operations that supply a significant portion of the system restaurants with paper, equipment and food products. The Company also controls the real estate underlying the majority of the system restaurants, which generates another source of revenue.
The following table outlines the Companys systemwide restaurant counts and activity.
Second quarter ended | Year-to-date period ended | |||||||||||||||
July 1,
2012 |
July 3,
2011 |
July 1,
2012 |
July 3,
2011 |
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Systemwide Restaurant Count |
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Franchised restaurants in operationbeginning of period |
4,019 | 3,766 | 3,996 | 3,730 | ||||||||||||
Restaurants opened |
38 | 34 | 68 | 76 | ||||||||||||
Restaurants closed |
(10 | ) | (5 | ) | (12 | ) | (15 | ) | ||||||||
Net transfers within the franchised system |
3 | (6 | ) | (2 | ) | (2 | ) | |||||||||
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Franchised restaurants in operationend of period |
4,050 | 3,789 | 4,050 | 3,789 | ||||||||||||
Company-operated restaurants |
21 | 22 | 21 | 22 | ||||||||||||
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Total systemwide restaurantsend of period (1) |
4,071 | 3,811 | 4,071 | 3,811 | ||||||||||||
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% of restaurants franchisedend of period |
99.5 | % | 99.4 | % | 99.5 | % | 99.4 | % | ||||||||
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(1) |
Includes various types of standard and non-standard restaurant formats in Canada, the U.S. and if applicable, the Gulf Cooperation Council (GCC) with differing restaurant sizes and menu offerings as well as self-serve kiosks, which serve primarily coffee products and a limited product selection. Collectively, the Company refers to all of these restaurants and kiosks as systemwide restaurants. |
Excluded from the above systemwide restaurant count table are 243 and 260 primarily licensed locations in the Republic of Ireland and the United Kingdom as at July 1, 2012 and July 3, 2011, respectively.
Basis of presentation and principles of consolidation
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments (all of which are normal and recurring in nature) necessary to state fairly the Companys financial position as at July 1, 2012 and January 1, 2012, and the condensed consolidated results of operations, comprehensive income and cash flows for the second quarters ended July 1, 2012 and July 3, 2011. All of these financial statements are unaudited. These Condensed Consolidated Financial Statements should be read in conjunction with the 2011 Consolidated Financial Statements which are contained in the Companys Annual Report on Form 10-K filed with the SEC and the CSA on February 28, 2012. The January 1, 2012 Condensed Consolidated Balance Sheet was derived from the audited 2011 Consolidated Financial Statements, but does not include all of the year-end disclosures required by U.S. GAAP.
The Condensed Consolidated Financial Statements include the results and balances of Tim Hortons Inc., its wholly-owned subsidiaries and certain entities and joint ventures the Company consolidates as variable interest entities (VIEs) (see note 12). Intercompany accounts and transactions among consolidated entities have been eliminated upon consolidation. Investments in non-consolidated affiliates over which the Company exercises significant influence, but for which the Company is not the primary beneficiary and does not have control, are accounted for using the equity method. The Companys share of the earnings or losses of these non-consolidated affiliates is included in equity income, which is included as part of operating income since these investments are operating ventures closely integrated in the Companys business operations.
8
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
Accounting changes new accounting standards
Effective January 2, 2012, the Company adopted Accounting Standards Update (ASU) No. 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements . This ASU resulted in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP. The adoption of this ASU has been reflected in the Companys related financial disclosures (see note 7).
NOTE 2 INCOME TAXES
The effective income tax rate for the second quarter ended July 1, 2012 was 27.6%, compared to 29.4% for the second quarter ended July 3, 2011. The effective income tax rate for the year-to-date periods ended July 1, 2012 and July 3, 2011 was 27.6% and 29.3%, respectively. The effective tax rate was favourably impacted primarily by the benefit associated with Canadian statutory rate reductions.
The Canada Revenue Agency (CRA) continues to conduct its general examination of the Company and various subsidiaries for 2007 and subsequent taxation years. The CRA has extended its examination in respect of certain international issues related to transfer pricing for taxation years 2005 through to 2010. Submissions by the Company are anticipated to be delivered throughout the year to clarify certain assumptions that the CRA is making in its examination. The Company does not currently expect any material impact on earnings to result from the resolution of matters related to open taxation years; however, it is possible that actual settlements may differ from amounts accrued.
NOTE 3 EARNINGS PER COMMON SHARE ATTRIBUTABLE TO TIM HORTONS INC.
Second quarter ended | Year-to-date period ended | |||||||||||||||
July 1,
2012 |
July 3,
2011 |
July 1,
2012 |
July 3,
2011 |
|||||||||||||
Net income attributable to Tim Hortons Inc. |
$ | 108,067 | $ | 95,549 | $ | 196,846 | $ | 176,228 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average shares outstanding for computation of basic earnings per common share attributable to Tim Hortons Inc. (in thousands) |
155,351 | 163,448 | 155,589 | 165,555 | ||||||||||||
Dilutive impact of RSUs (1) |
317 | 264 | 311 | 254 | ||||||||||||
Dilutive impact of stock options with tandem SARs (2) |
327 | 249 | 307 | 205 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average shares outstanding for computation of diluted earnings per common share attributable to Tim Hortons Inc. (in thousands) |
155,995 | 163,961 | 156,207 | 166,014 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic earnings per common share attributable to Tim Hortons Inc. |
$ | 0.70 | $ | 0.58 | $ | 1.27 | $ | 1.06 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted earnings per common share attributable to Tim Hortons Inc. |
$ | 0.69 | $ | 0.58 | $ | 1.26 | $ | 1.06 | ||||||||
|
|
|
|
|
|
|
|
(1) |
Restricted stock units (RSUs). |
(2 ) |
Stock appreciation rights (SARs). |
9
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
NOTE 4 NOTES RECEIVABLE, NET
As at | ||||||||||||||||||||||||
July 1, 2012 | January 1, 2012 | |||||||||||||||||||||||
Portfolio Segment |
Gross | VIEs (2) | Total | Gross | VIEs (2) | Total | ||||||||||||||||||
FIPs (1) |
$ | 22,467 | $ | (16,294 | ) | $ | 6,173 | $ | 24,756 | $ | (16,219 | ) | $ | 8,537 | ||||||||||
Other (3) |
5,639 | 0 | 5,639 | 6,765 | 0 | 6,765 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Notes receivable |
$ | 28,106 | $ | (16,294 | ) | 11,812 | $ | 31,521 | $ | (16,219 | ) | 15,302 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Allowance |
(1,660 | ) | (2,001 | ) | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Notes receivable, net |
10,152 | 13,301 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Current portion, net |
(7,990 | ) | (10,144 | ) | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Long-term portion, net, discounted |
$ | 2,162 | $ | 3,157 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
As at | ||||||||||||||||||||||||
July 1, 2012 | January 1, 2012 | |||||||||||||||||||||||
Class and Aging |
Gross | VIEs (2) | Total | Gross | VIEs (2) | Total | ||||||||||||||||||
Current status (FIPs and other) |
$ | 8,172 | $ | (2,593 | ) | $ | 5,579 | $ | 10,471 | $ | (3,121 | ) | $ | 7,350 | ||||||||||
Past due status < 90 days (FIPs) |
1,237 | (906 | ) | 331 | 1,276 | (686 | ) | 590 | ||||||||||||||||
Past due status > 90 days (FIPs) |
18,697 | (12,795 | ) | 5,902 | 19,774 | (12,412 | ) | 7,362 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Notes receivable |
$ | 28,106 | $ | (16,294 | ) | $ | 11,812 | $ | 31,521 | $ | (16,219 | ) | $ | 15,302 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Franchise incentive program (FIP). |
(2) |
Variable interest entities (VIEs) (see note 12). |
(3) |
Other notes receivable relate primarily to various equipment and other financing programs and a note issued in 2009 to a vendor to finance a property sale. |
NOTE 5 INVENTORIES AND OTHER, NET
As at | ||||||||
July 1, 2012 | January 1, 2012 | |||||||
Raw materials |
$ | 44,928 | $ | 49,450 | ||||
Finished goods |
74,318 | 77,440 | ||||||
|
|
|
|
|||||
119,246 | 126,890 | |||||||
Inventory obsolescence provision |
(501 | ) | (844 | ) | ||||
|
|
|
|
|||||
Inventories, net |
118,745 | 126,046 | ||||||
Prepaids and other |
11,805 | 10,953 | ||||||
|
|
|
|
|||||
Inventories and other, net |
$ | 130,550 | $ | 136,999 | ||||
|
|
|
|
10
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
NOTE 6 ACCOUNTS PAYABLE, ACCRUED LIABILITIES, OTHER, AND OTHER LONGTERM LIABILITIES
Accounts payable
As at | ||||||||
July 1, 2012 | January 1, 2012 | |||||||
Trade payables |
$ | 133,112 | $ | 145,985 | ||||
Construction holdbacks and accruals |
18,807 | 31,933 | ||||||
|
|
|
|
|||||
Accounts payable |
$ | 151,919 | $ | 177,918 | ||||
|
|
|
|
Accrued liabilities, other
As at | ||||||||
July 1, 2012 | January 1, 2012 | |||||||
Tim Card obligations to guests |
$ | 91,980 | $ | 125,316 | ||||
Contingent rent expense accrual |
10,516 | 12,698 | ||||||
Deferred revenue |
9,024 | 8,847 | ||||||
Deferred supply contract liability |
7,929 | 8,335 | ||||||
Other accrued current liabilities (1) |
17,862 | 24,119 | ||||||
|
|
|
|
|||||
Accrued liabilities, other |
$ | 137,311 | $ | 179,315 | ||||
|
|
|
|
(1) |
Includes deposits, and various equipment and other accruals. |
Other long-term liabilities
As at | ||||||||
July 1, 2012 | January 1, 2012 | |||||||
Deferred supply contract liability |
$ | 19,519 | $ | 23,281 | ||||
Accrued rent leveling liability |
29,416 | 29,564 | ||||||
Uncertain tax position liability |
32,448 | 30,531 | ||||||
Stock-based compensation liabilities |
23,396 | 19,861 | ||||||
Other accrued long-term liabilities (1) |
16,017 | 17,733 | ||||||
|
|
|
|
|||||
Other long-term liabilities |
$ | 120,796 | $ | 120,970 | ||||
|
|
|
|
(1) |
Includes deferred revenues and various other accruals. |
11
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
NOTE 7 FAIR VALUES
Financial assets and liabilities measured at fair value
As at | ||||||||||||||||||||||||
July 1, 2012 | January 1, 2012 | |||||||||||||||||||||||
Notional
value |
Fair value
hierarchy |
Fair value
asset (liability) |
Notional
value |
Fair value
hierarchy |
Fair value
asset (liability) |
|||||||||||||||||||
Forward currency contracts |
$ | 209,737 | Level 2 | $ | 117 | $ | 196,412 | Level 2 | $ | 4,759 | ||||||||||||||
TRS (1) |
$ | 41,403 | Level 2 | $ | 12,698 | $ | 30,591 | Level 2 | $ | 9,286 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total derivatives |
$ | 251,140 | $ | 12,815 | $ | 227,003 | $ | 14,045 | ||||||||||||||||
|
|
|
|
|
|
|
|
(1) |
Total Return Swaps (TRS). |
The Company values its derivatives using valuations that are calibrated to the initial trade prices. Subsequent valuations are based on observable inputs to the valuation model. The fair value of forward currency contracts are determined using prevailing exchange rates. The fair value of each TRS is determined using the Companys closing common share price on the last business day of the fiscal period, as quoted on the Toronto Stock Exchange (TSX).
Other financial assets and liabilities not measured at fair value
The following table summarizes the fair value and carrying value of other financial assets and liabilities that are not recorded at fair value on a recurring basis on the Condensed Consolidated Balance Sheet:
As at | ||||||||||||||||||||||||
July 1, 2012 | January 1, 2012 | |||||||||||||||||||||||
Fair value
hierarchy |
Fair value
asset (liability) |
Carrying
value |
Fair value
hierarchy |
Fair value
asset (liability) |
Carrying
value |
|||||||||||||||||||
Cash and cash equivalents (1) |
Level 1 | $ | 57,733 | $ | 57,733 | Level 1 | $ | 126,497 | $ | 126,497 | ||||||||||||||
Restricted cash and cash equivalents (1) |
Level 1 | 87,292 | 87,292 | Level 1 | 130,613 | 130,613 | ||||||||||||||||||
Bearer deposit notes (2) |
Level 2 | 41,403 | 41,403 | Level 2 | 30,591 | 30,591 | ||||||||||||||||||
Notes receivable, net (3) |
Level 3 | 10,152 | 10,152 | Level 3 | 13,301 | 13,301 | ||||||||||||||||||
Senior unsecured notes, series 1 (4) |
Level 2 | (326,052 | ) | (301,719 | ) | Level 2 | (325,308 | ) | (301,893 | ) | ||||||||||||||
Advertising Fund debt (5) |
Level 2 | (42,500 | ) | (42,500 | ) | Level 2 | (9,929 | ) | (9,929 | ) | ||||||||||||||
Other debt (6) |
Level 3 | (109,014 | ) | (54,818 | ) | Level 3 | (102,114 | ) | (52,305 | ) |
(1) |
The carrying values of these financial assets approximate fair values due to the short-term nature of these investments. |
(2) |
The Company holds these notes as collateral to reduce the carrying costs of the TRS (see note 8). The interest rate on these notes resets every 90 days, therefore, the carrying values of these notes approximate their fair values. These notes are included in Other assets on the Condensed Consolidated Balance Sheet. |
(3) |
Management estimated the fair value based on the current value of the underlying business and collateral. |
(4) |
The fair value of the bond is based on publicly disclosed trades between arms length institutions as documented on Bloomberg LP. |
(5) |
The Advertising fund debt consists of a balance on its revolving credit facility withdrawn as bankers acceptances with maturities up to 180 days. The carrying value approximates fair value due to the short term nature of these borrowings. The Advertising fund debt is included in Advertising fund liabilities on the Condensed Consolidated Balance Sheet. |
( 6 ) |
Management estimated the fair value of its Other debt, primarily consisting of contributions received related to the construction costs of certain restaurants, by discounting future cash flows using a company risk adjusted rate, over the remaining term of the debt. |
12
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
NOTE 8 DERIVATIVES
As at | ||||||||||||||||||||
July 1, 2012 | January 1, 2012 | |||||||||||||||||||
Notional
value |
Fair value
asset (liability) |
Classification on
Condensed Consolidated Balance Sheet |
Notional
value |
Fair value
asset (liability) |
Classification on
Condensed Consolidated Balance Sheet |
|||||||||||||||
Derivatives designated as cash flow hedging instruments |
||||||||||||||||||||
Forward currency contracts (1) |
$ | 184,693 | $ | 172 |
Accounts
receivable, net |
$ | 175,566 | $ | 3,855 |
Accounts
receivable, net |
||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||||||
TRS (2) |
$ | 41,403 | $ | 12,698 | Other assets | $ | 30,591 | $ | 9,286 | Other assets | ||||||||||
Forward currency contracts (3) |
25,044 | (55 | ) |
Accounts
payable, net |
20,846 | 904 |
Accounts receivable,
net |
|||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
$ | 251,140 | $ | 12,815 | $ | 227,003 | $ | 14,045 | |||||||||||||
|
|
|
|
|
|
|
|
(1) |
Maturities as at July 1, 2012 range between July 2012 and June 2013. |
(2) |
Maturities as at July 1, 2012 of May 2015, May 2016, May 2017, May 2018 and May 2019. |
(3) |
Maturities as at July 1, 2012 range between July 2012 and April 2013. Includes a fair value hedge and certain cash flow hedges where the underlying transactions are not expected to occur as originally forecast, and therefore ceased to qualify as highly effective cash flow hedges. |
Second quarter ended July 1, 2012 | Second quarter ended July 3, 2011 | |||||||||||||||||||||||||
Derivatives designated as cash flow hedging instruments (3) |
Classification on
Condensed Consolidated Statement of Operations |
Amount of
gain (loss) recognized in OCI (1) |
Amount of net
(gain) loss reclassified to earnings |
Total effect
on OCI (1) |
Amount of
gain (loss) recognized in OCI (1) |
Amount of net
(gain) loss reclassified to earnings |
Total effect
on OCI (1) |
|||||||||||||||||||
Forward currency contracts |
Cost of sales | $ | 2,114 | $ | (973 | ) | $ | 1,141 | $ | (2,337 | ) | $ | 2,796 | $ | 459 | |||||||||||
Interest rate forwards (2) |
Interest (expense) | 0 | 173 | 173 | 0 | 173 | 173 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
2,114 | (800 | ) | 1,314 | (2,337 | ) | 2,969 | 632 | ||||||||||||||||||
Income tax effect |
Income taxes | (545 | ) | 211 | (334 | ) | 660 | (833 | ) | (173 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net of income taxes |
$ | 1,569 | $ | (589 | ) | $ | 980 | $ | (1,677 | ) | $ | 2,136 | $ | 459 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date period ended July 1, 2012 | Year-to-date period ended July 3, 2011 | |||||||||||||||||||||||||
Derivatives designated as cash flow hedging instruments (3) |
Classification on
Condensed Consolidated Statement of Operations |
Amount of
gain (loss) recognized in OCI (1) |
Amount of net
(gain) loss reclassified to earnings |
Total effect
on OCI (1) |
Amount of
gain (loss) recognized in OCI (1) |
Amount of net
(gain) loss reclassified to earnings |
Total effect
on OCI (1) |
|||||||||||||||||||
Forward currency contracts |
Cost of sales | $ | (1,389 | ) | $ | (2,294 | ) | $ | (3,683 | ) | $ | (8,898 | ) | $ | 5,220 | $ | (3,678 | ) | ||||||||
Interest rate forwards (2) |
Interest (expense) | 0 | 346 | 346 | 0 | 346 | 346 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
(1,389 | ) | (1,948 | ) | (3,337 | ) | (8,898 | ) | 5,566 | (3,332 | ) | |||||||||||||||
Income tax effect |
Income taxes | 441 | 510 | 951 | 2,424 | (1,561 | ) | 863 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net of income taxes |
$ | (948 | ) | $ | (1,438 | ) | $ | (2,386 | ) | $ | (6,474 | ) | $ | 4,005 | $ | (2,469 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Other comprehensive income (OCI). |
(2) |
The Company entered into and settled interest rate forwards in 2010 relating to the Companys outstanding term debt. |
(3) |
Excludes amounts related to ineffectiveness, as they were not significant. |
Derivatives relating to the TRS and certain foreign currency contracts not designated as hedging instruments resulted in a net gain of less than $0.1 million and $2.2 million in the second quarters ended July 1, 2012 and July 3, 2011, respectively ($2.5 million and $3.4 million for the year-to-date periods ended July 1, 2012 and July 3, 2011, respectively).
13
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
NOTE 9 COMMITMENTS AND CONTINGENCIES
On June 12, 2008, a claim was filed against the Company and certain of its affiliates in the Ontario Superior Court of Justice (the Court) by two of its franchisees, Fairview Donut Inc. and Brule Foods Ltd., alleging, generally, that the Companys Always Fresh baking system and expansion of lunch offerings have led to lower franchisee profitability. The claim, which sought class action certification on behalf of Canadian restaurant owners, asserted damages of approximately $1.95 billion. Those damages were claimed based on breach of contract, breach of the duty of good faith and fair dealing, negligent misrepresentations, unjust enrichment, price maintenance and waiver of tort. The plaintiffs filed a motion for certification of the putative class in May of 2009, and the Company filed its responding materials as well as a motion for summary judgment in November of 2009. The two motions were heard in August and October 2011. On February 24, 2012, the Court granted the Companys motion for summary judgment and dismissed the plaintiffs claims in their entirety. The Court also found that certain aspects of the test for certification of the action as a class proceeding had been met, but all of the underlying claims were nonetheless dismissed as part of the aforementioned summary judgment decision.
While the Court found in favour of the Company on all claims, the plaintiffs have filed a Notice of Appeal with respect to the claims for breach of contract, breach of the duty of good faith and fair dealing, price maintenance and waiver of tort. In the plaintiffs more recent court filings, they have narrowed their appeal to include only breach of contract and breach of duty of good faith and fair dealing. The Company will continue to vigorously defend against the plaintiffs claim. A hearing on the appeal will be held in the fourth quarter of 2012. If all potential appeals were determined adversely to the Company, the effect would be that the matters would ultimately proceed to trial. The Company remains of the view that it would have good and tenable defences at any such trial, and that the plaintiffs claims are without merit and will not be successful. However, if the matters were determined adversely to the Company at trial, and that determination was upheld by final order after all appeals, it is possible that the claims could have a material adverse impact on the Companys financial statements.
In addition, the Company is party to various legal actions and complaints arising in the ordinary course of business. Reserves related to the potential resolution of any outstanding legal proceedings based on the amounts that are determined by the Company to be reasonably probable and estimable are not significant and are included in Accounts payable on the Condensed Consolidated Balance Sheet. It is the opinion of the Company that the ultimate resolution of such matters will not materially affect the Companys financial statements.
NOTE 10 COMMON SHARES
Share repurchase programs
On February 23, 2012, the Company obtained regulatory approval from the TSX to commence a new share repurchase program (2012 Program) for up to $200.0 million in common shares. The Companys common shares have been or will be purchased under the 2012 Program through a combination of 10b5-1 automatic trading plan purchases, private agreements with an arms length third party seller, and/or purchases at managements discretion in compliance with regulatory requirements, and given market, cost and other considerations. Repurchases have been or will be made on the TSX, the New York Stock Exchange (NYSE), and/or other Canadian marketplaces, including private agreements under an issuer bid exemption order issued by a securities regulatory authority in Canada. The 2012 Program commenced on March 5, 2012 and is due to terminate on March 4, 2013, or earlier if the $200.0 million or the 10% share maximum is reached. Common shares purchased pursuant to the 2012 Program will be cancelled. The 2012 Program may be terminated by the Company at any time, subject to compliance with regulatory requirements. As such, there can be no assurance regarding the total number of shares or the equivalent dollar amount of shares that may be repurchased under the 2012 Program.
In the year-to-date period ended July 1, 2012, the Company purchased and cancelled approximately 2.6 million common shares under the Companys 2012 and 2011 repurchase program for a total cost of approximately $136.5 million, of which $7.5 million reduced the stated value of common shares and the remainder was recorded as a reduction to Retained earnings on the Condensed Consolidated Statement of Equity.
In the year-to-date period ended July 3, 2011, the Company purchased and cancelled approximately 9.2 million common shares for a total cost of approximately $401.9 million under the Companys 2010 and 2011 repurchase programs, of which $26.2 million reduced the stated value of common shares, and the remainder was recorded as a reduction to Retained earnings on the Condensed Consolidated Statement of Equity.
14
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
NOTE 11 STOCK-BASED COMPENSATION
Second quarter ended | Year-to-date period ended | |||||||||||||||
July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | |||||||||||||
RSUs |
$ | 3,132 | $ | 1,733 | $ | 5,790 | $ | 3,455 | ||||||||
Stock options and tandem SARs |
1,305 | 4,092 | 5,050 | 6,400 | ||||||||||||
DSUs (1) |
251 | 677 | 1,029 | 1,307 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stock-based compensation expense (2) |
$ | 4,688 | $ | 6,502 | $ | 11,869 | $ | 11,162 | ||||||||
|
|
|
|
|
|
|
|
(1) |
Deferred share units (DSUs). |
( 2 ) |
Included in General and administrative expenses on the Condensed Consolidated Statement of Operations. |
The Company has entered into TRS as economic hedges for a portion of its outstanding stock options with tandem SARs, and substantially all of its DSUs. The Company recognized gains relating to the TRS of $0.2 million and $2.2 million in the second quarters ended July 1, 2012 and July 3, 2011, respectively (gain of $3.4 million and $3.6 million in year-to-date 2012 and 2011, respectively). These gains are recorded as a reduction to General and administrative expenses on the Condensed Consolidated Statement of Operations.
The Companys Human Resource and Compensation Committee (HRCC) approves all stock-based compensation awards. All awards granted in May 2012 were granted under the Companys 2012 Stock Incentive Plan (the 2012 Plan). The 2012 Plan was approved by shareholders at the annual and special meeting of shareholders, held on May 10, 2012. The accounting policies under the 2012 Plan are consistent with those under the Companys 2006 Stock Incentive Plan (the 2006 Plan).
Details of stock-based compensation grants and settlements are set forth below.
Deferred share units
Approximately 8,100 and 12,300 DSUs were granted during the year-to-date periods of 2012 and 2011, respectively, at a fair market value of $53.78 and $43.91, respectively. There were approximately 9,400 DSUs settled during the second quarter and year-to-date periods of 2012 (nil for second quarter and year-to-date periods for 2011).
Restricted stock units
Awards of 35,000 and 154,000 RSUs with dividend equivalent rights were granted in February 2012 and May 2012, respectively. The fair market value of each RSU awarded as part of these grants (the closing price of the Companys common shares traded on the TSX on the business day preceding the grants) was $52.85 and $54.95, respectively.
Activity for RSUs granted to employees under the Companys 2006 Plan and the 2012 Plan (collectively the Plans) for the periods are set forth below:
Restricted Stock
Units |
Weighted Average Grant
Value per Unit |
|||||||
(in thousands) | (in dollars) | |||||||
Balance at January 2, 2011 |
293 | $ | 32.83 | |||||
|
|
|
|
|||||
Granted |
165 | $ | 45.76 | |||||
Dividend equivalent rights |
5 | 45.53 | ||||||
Vested and settled |
(138 | ) | 30.24 | |||||
Forfeited |
(19 | ) | 36.69 | |||||
|
|
|
|
|||||
Balance at January 1, 2012 |
306 | $ | 40.91 | |||||
|
|
|
|
|||||
Granted |
189 | $ | 54.60 | |||||
Dividend equivalent rights |
2 | 53.74 | ||||||
Vested and settled |
(41 | ) | 40.45 | |||||
Forfeited |
(15 | ) | 43.01 | |||||
|
|
|
|
|||||
Balance at July 1, 2012 |
441 | $ | 46.78 | |||||
|
|
|
|
15
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
In the second quarter ended July 1, 2012, the Company funded the TDL RSU Employee Benefit Plan Trust (the Trust), which, in turn, purchased approximately 112,000 common shares for $6.2 million (61,000 common shares for $2.8 million in second quarter of 2011).
RSUs that vested during the second quarter of 2012 and 2011 were settled with the participants in the following manner:
Restricted Stock Unit |
Restricted Stock Unit
Settlement, net of tax |
|||||||||||
(gross settlement) | Units | Amount | ||||||||||
(in thousands) | ||||||||||||
2011 |
||||||||||||
Settled with common shares from the Trust |
45 | 24 | $ | 833 | ||||||||
Settled by an open market purchase |
9 | 6 | 262 | |||||||||
|
|
|
|
|
|
|||||||
Total restricted stock settlement |
54 | 30 | $ | 1,095 | ||||||||
|
|
|
|
|
|
|||||||
2012 |
||||||||||||
Settled with common shares from the Trust |
34 | 18 | $ | 670 | ||||||||
Settled by an open market purchase |
7 | 5 | 250 | |||||||||
|
|
|
|
|
|
|||||||
Total restricted stock settlement |
41 | 23 | $ | 920 | ||||||||
|
|
|
|
|
|
Stock options and tandem SARs
Stock Options with
SARs |
Weighted Average
Exercise Price |
|||||||
(in thousands) | (in dollars) | |||||||
Balance at January 2, 2011 |
1,086 | $ | 31.87 | |||||
|
|
|
|
|||||
Granted |
339 | 45.76 | ||||||
Exercised |
(224 | ) | 30.56 | |||||
Forfeited |
(19 | ) | 35.10 | |||||
|
|
|
|
|||||
Balance at January 1, 2012 |
1,182 | $ | 36.05 | |||||
|
|
|
|
|||||
Granted |
249 | 54.95 | ||||||
Exercised |
(96 | ) | 33.31 | |||||
Forfeited |
(30 | ) | 38.16 | |||||
|
|
|
|
|||||
Balance at July 1, 2012 |
1,305 | $ | 39.81 | |||||
|
|
|
|
A total of 96,000 vested SARs were exercised and cash-settled, net of applicable withholding taxes for $1.5 million, in the year-to-date period ended July 1, 2012 (74,000 year-to-date 2011 for $0.8 million). The associated options were cancelled.
The fair value of outstanding stock options with tandem SARs was determined at the grant date and each subsequent re-measurement date by applying the Black-Scholes-Merton option-pricing model. The following assumptions were used to calculate the fair value of outstanding stock options/SARs:
As at | ||||
July 1, 2012 | January 1, 2012 | |||
Expected share price volatility |
15% 22% | 16% 22% | ||
Risk-free interest rate |
1.0% 1.2% | 1.0% 1.1% | ||
Expected life |
1.4 4.4 years | 1.7 3.9 years | ||
Expected dividend yield |
1.6% | 1.4% | ||
Closing share price (1) |
$53.67 | $49.36 |
(1) |
As quoted on the TSX. |
16
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
NOTE 12 VARIABLE INTEREST ENTITIES
VIEs for which the Company is the primary beneficiary
Non-owned restaurants
The Company has consolidated 312 and 309 non-owned restaurants as at July 1, 2012 and January 1, 2012, respectively, or approximately 7.7% of the Companys total systemwide restaurants during both of these periods. On average, a total of 309 and 258 non-owned restaurants were consolidated during the second quarter of 2012 and 2011, respectively (307 and 257 year-to-date 2012 and 2011, respectively).
Advertising Funds
The Tim Hortons Advertising and Promotion Fund (Canada) Inc. (Ad Fund) has rolled out a program to acquire and install LCD screens, media engines, drive-thru menu boards and ancillary equipment in our restaurants (Expanded Menu Board Program). To finance the Expanded Menu Board Program, a $95.8 million revolving credit facility was entered into in 2011. The facility is collateralized only by the Ad Funds assets. The Ad Fund had borrowings of $42.5 million and $9.9 million outstanding on this facility as at July 1, 2012 and January 1, 2012, respectively. Ad Fund borrowings are reflected in Advertising fund liabilities on the Condensed Consolidated Balance Sheet and Other financing activities on the Condensed Consolidated Statement of Cash Flows. These funds have been used to purchase related equipment of $35.2 million cumulatively since 2011. In year-to-date 2012, $30.8 million of capital expenditures is reflected in Capital expenditures on the Condensed Consolidated Statement of Cash Flows. The advertising levies, depreciation and interest costs associated with the Expanded Menu Board Program are presented on a gross basis on the Condensed Consolidated Statement of Operations.
Company contributions to the Canadian and U.S. advertising funds consisted of the following:
Second quarter ended | Year-to-date period ended | |||||||||||||||
July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | |||||||||||||
Company contributions |
$ | 2,718 | $ | 2,463 | $ | 5,321 | $ | 4,834 | ||||||||
Contributions from consolidated non-owned restaurants |
3,167 | 2,506 | 6,064 | 4,749 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Company contributions |
$ | 5,885 | $ | 4,969 | $ | 11,385 | $ | 9,583 | ||||||||
|
|
|
|
|
|
|
|
These advertising funds spent approximately $47.9 million and $52.0 million in the second quarters of 2012 and 2011, respectively ($121.8 million and $112.2 million year-to-date 2012 and 2011, respectively).
17
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
The revenues and expenses associated with the Companys consolidated Non-owned Restaurant VIEs and advertising funds presented on a gross basis, prior to consolidation adjustments, are as follows:
Second quarter ended | ||||||||||||||||||||||||
July 1, 2012 | July 3, 2011 | |||||||||||||||||||||||
Restaurant
VIEs |
Advertising
fund VIEs |
Total
VIEs |
Restaurant
VIEs |
Advertising
fund VIEs |
Total
VIEs |
|||||||||||||||||||
Sales |
$ | 85,459 | $ | 0 | $ | 85,459 | $ | 67,672 | $ | 0 | $ | 67,672 | ||||||||||||
Advertising levies (2) |
0 | 1,056 | 1,056 | 0 | 158 | 158 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenues |
85,459 | 1,056 | 86,515 | 67,672 | 158 | 67,830 | ||||||||||||||||||
Cost of sales (1) |
84,066 | 0 | 84,066 | 66,615 | 0 | 66,523 | ||||||||||||||||||
Operating expenses (2) |
0 | 677 | 677 | 0 | 158 | 158 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
1,393 | 379 | 1,772 | 1,057 | 0 | 1,149 | ||||||||||||||||||
Interest expense |
0 | 379 | 379 | 0 | 0 | 92 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before taxes |
1,393 | 0 | 1,393 | 1,057 | 0 | 1,057 | ||||||||||||||||||
Income taxes |
223 | 0 | 223 | 166 | 0 | 166 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to noncontrolling interests |
$ | 1,170 | $ | 0 | $ | 1,170 | $ | 891 | $ | 0 | $ | 891 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date period ended | ||||||||||||||||||||||||
July 1, 2012 | July 3, 2011 | |||||||||||||||||||||||
Restaurant
VIEs |
Advertising
fund VIEs |
Total
VIEs |
Restaurant
VIEs |
Advertising
fund VIEs |
Total
VIEs |
|||||||||||||||||||
Sales |
$ | 163,473 | $ | 0 | $ | 163,473 | $ | 128,142 | $ | 0 | $ | 128,142 | ||||||||||||
Advertising levies (2) |
0 | 1,543 | 1,543 | 0 | 343 | 343 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenues |
163,473 | 1,543 | 165,016 | 128,142 | 343 | 128,485 | ||||||||||||||||||
Cost of sales (1) |
160,654 | 0 | 160,654 | 126,217 | 0 | 126,103 | ||||||||||||||||||
Operating expenses (2) |
0 | 1,062 | 1,062 | 0 | 343 | 343 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
2,819 | 481 | 3,300 | 1,925 | 0 | 2,039 | ||||||||||||||||||
Interest expense |
0 | 481 | 481 | 0 | 0 | 114 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before taxes |
2,819 | 0 | 2,819 | 1,925 | 0 | 1,925 | ||||||||||||||||||
Income taxes |
449 | 0 | 449 | 299 | 0 | 299 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to noncontrolling interests |
$ | 2,370 | $ | 0 | $ | 2,370 | $ | 1,626 | $ | 0 | $ | 1,626 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes rents, royalties, advertising expenses and product purchases from the Company which are eliminated upon the consolidation of these VIEs. |
(2) |
Generally, the advertising levies that are not related to the Expanded Menu Board Program are netted with advertising and marketing expenses incurred by the advertising funds in operating expenses, as these contributions are designated for specific purposes. The Company acts as an agent with regard to these contributions. |
18
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
The assets and liabilities associated with the Companys consolidated Non-owned Restaurant VIEs and advertising funds presented on a gross basis, prior to consolidation adjustments, are as follows:
As at | ||||||||||||||||
July 1, 2012 | January 1, 2012 | |||||||||||||||
Restaurant
VIEs |
Advertising
fund VIEs |
Restaurant
VIEs |
Advertising
fund VIEs |
|||||||||||||
Cash and cash equivalents |
$ | 10,393 | $ | 0 | $ | 11,186 | $ | 0 | ||||||||
Advertising fund restricted assetscurrent |
0 | 29,325 | 0 | 37,765 | ||||||||||||
Other current assets (1) |
5,927 | 0 | 6,142 | 0 | ||||||||||||
Property and equipment, net |
20,128 | 47,813 | 19,492 | 20,814 | ||||||||||||
Other long-term assets |
448 | 2,535 | 312 | 2,850 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 36,896 | $ | 79,673 | $ | 37,132 | $ | 61,429 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Notes payable to the Companycurrent (1) |
$ | 15,607 | $ | 0 | $ | 15,370 | $ | 0 | ||||||||
Advertising fund liabilitiescurrent (2) |
0 | 78,103 | 0 | 59,420 | ||||||||||||
Other current liabilities (1) |
14,062 | 264 | 15,062 | 265 | ||||||||||||
Notes payable to the Companylong-term (1) |
687 | 0 | 849 | 0 | ||||||||||||
Advertising fund liabilitieslong-term |
0 | 345 | 0 | 463 | ||||||||||||
Other long-term liabilities |
4,044 | 961 | 3,966 | 1,281 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
34,400 | 79,673 | 35,247 | 61,429 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity |
2,496 | 0 | 1,885 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities and equity |
$ | 36,896 | $ | 79,673 | $ | 37,132 | $ | 61,429 | ||||||||
|
|
|
|
|
|
|
|
(1) |
Various assets and liabilities are eliminated upon the consolidation of these VIEs, the most significant of which are the FIP Notes payable to the Company, which reduces the Notes receivable, net reported on the Condensed Consolidated Balance Sheet. |
( 2 ) |
Includes $42.5 million and $9.9 million of borrowings drawn upon the revolving credit facilities as at July 1, 2012 and January 1, 2012, respectively. |
The liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims by the Companys creditors as they are not legally included within the Companys general assets.
Trust
In connection with RSUs granted to Company employees, the Company established the Trust, which purchases and retains common shares of the Company to satisfy the Companys contractual obligation to deliver shares to settle the awards for most Canadian employees. The cost of the shares held by the Trust of $15.6 million and $10.1 million as at July 1, 2012 and January 1, 2012, respectively (see note 11), are presented as a reduction in outstanding common shares on the Condensed Consolidated Balance Sheet.
VIEs for which the Company is not the primary beneficiary
These VIEs are primarily real estate ventures, the most significant being the TIMWEN Partnership. The Company does not consolidate these entities as control is considered to be shared by both Tim Hortons and the other joint owner(s).
19
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(in thousands of Canadian dollars, except share and per share data)
NOTE 13 SEGMENT REPORTING
Second quarter ended | Year-to-date period ended | |||||||||||||||
July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | |||||||||||||
Revenues (1) |
||||||||||||||||
Canada |
$ | 655,849 | $ | 598,858 | $ | 1,260,103 | $ | 1,146,231 | ||||||||
U.S. |
43,217 | 36,072 | 81,746 | 71,531 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total reportable segments |
699,066 | 634,930 | 1,341,849 | 1,217,762 | ||||||||||||
VIEs |
86,515 | 67,830 | 165,016 | 128,485 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 785,581 | $ | 702,760 | $ | 1,506,865 | $ | 1,346,247 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating Income |
||||||||||||||||
Canada |
$ | 164,563 | $ | 156,428 | $ | 305,050 | $ | 287,957 | ||||||||
U.S. |
5,617 | 4,008 | 8,827 | 6,619 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total reportable segments |
170,180 | 160,436 | 313,877 | 294,576 | ||||||||||||
VIEs |
1,772 | 1,149 | 3,300 | 2,039 | ||||||||||||
Corporate charges (2) |
(13,113 | ) | (18,367 | ) | (26,715 | ) | (32,794 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated Operating Income |
158,839 | 143,218 | 290,462 | 263,821 | ||||||||||||
Interest, Net |
(7,927 | ) | (6,576 | ) | (15,114 | ) | (12,276 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
$ | 150,912 | $ | 136,642 | $ | 275,348 | $ | 251,545 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Capital Expenditures |
||||||||||||||||
Canada (3) |
$ | 38,478 | $ | 24,254 | $ | 78,769 | $ | 54,375 | ||||||||
U.S. |
10,697 | 4,533 | 18,689 | 9,039 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 49,175 | $ | 28,787 | $ | 97,458 | $ | 63,414 | ||||||||
|
|
|
|
|
|
|
|
(1) |
There are no inter-segment revenues included in the table above. |
(2) |
Corporate charges include certain overhead costs which are not allocated to individual business segments, the impact of certain foreign currency exchange gains and losses, and the net operating results from the Companys GCC, Republic of Ireland and United Kingdom international operations, which continue to be managed corporately. |
(3) |
The second quarter of 2012 includes $16.8 million of capital spending by the Ad Fund ($30.8 million year-to-date 2012), related to the Expanded Menu Board Program (second quarter and year-to-date 2011: nil). |
Consolidated Sales and Cost of Sales consisted of the following:
Second quarter ended | Year-to-date period ended | |||||||||||||||
July 1, 2012 | July 3, 2011 | July 1, 2012 | July 3, 2011 | |||||||||||||
Sales |
||||||||||||||||
Distribution sales |
$ | 471,274 | $ | 422,471 | $ | 911,002 | $ | 812,304 | ||||||||
Company-operated restaurant sales |
7,039 | 7,915 | 12,599 | 12,089 | ||||||||||||
Sales from VIEs |
85,459 | 67,672 | 163,473 | 128,142 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Sales |
$ | 563,772 | $ | 498,058 | $ | 1,087,074 | $ | 952,535 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Cost of sales |
||||||||||||||||
Distribution cost of sales |
$ | 410,624 | $ | 367,577 | $ | 801,077 | $ | 711,897 | ||||||||
Company-operated restaurant cost of sales |
7,697 | 7,544 | 13,777 | 12,033 | ||||||||||||
Cost of sales from VIEs |
74,979 | 58,930 | 143,871 | 112,453 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Cost of sales |
$ | 493,300 | $ | 434,051 | $ | 958,725 | $ | 836,383 | ||||||||
|
|
|
|
|
|
|
|
NOTE 14 RECENT ACCOUNTING PRONOUNCEMENTS
In December 2011, the FASB issued ASU No. 2011-11 Disclosures about Offsetting Assets and Liabilities . The amendments in this ASU are intended to enhance disclosures by requiring improved information about financial instruments that are either: (i) offset in accordance with applicable GAAP; or (ii) subject to an enforceable master netting arrangement or similar arrangement. The amendments in this ASU are effective for fiscal years and interim periods beginning on or after January 1, 2013, and should be applied retrospectively for all comparative periods presented. The Company is currently assessing the potential impact, if any, the adoption of this ASU may have on its Condensed Consolidated Financial Statements and related disclosures.
20
TIM HORTONS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the fiscal 2011 Consolidated Financial Statements and accompanying Notes included in our Annual Report on Form 10-K for the year ended January 1, 2012 (Annual Report) filed with the U.S. Securities and Exchange Commission (SEC) and the Canadian Securities Administrators (CSA) on February 28, 2012, and the Condensed Consolidated Financial Statements and accompanying Notes included in our Interim Report on Form 10-Q for the quarter ended July 1, 2012 filed with the SEC and the CSA on August 9, 2012. All amounts are expressed in Canadian dollars unless otherwise noted. The following discussion includes forward-looking statements that are not historical facts, but reflect our current expectations regarding future results. Actual results may differ materially from the results discussed in the forward-looking statements because of a number of risks and uncertainties, including the matters discussed below. Please refer to Risk Factors included in our Annual Report and set forth in our long-form Safe Harbor Statement referred to below under Safe Harbor Statement, and attached hereto, as well as risks described herein, for a further description of risks and uncertainties affecting our business and financial results. Historical trends should not be taken as indicative of future operations and financial results.
Our financial results are driven largely by changes in systemwide sales, which include restaurant-level sales at franchisee-owned restaurants and restaurants run by independent operators (collectively, we hereunder refer to both franchisee-owned and franchisee-operated restaurants as franchised restaurants), and Company-operated restaurants. Please refer to Systemwide Sales Growth and Same-Store Sales Growth below for additional information.
We prepare our financial statements in accordance with accounting principles generally accepted in the United States (U.S. GAAP or GAAP).
References herein to Tim Hortons, the Company, we, our, or us refer to Tim Hortons Inc. and its subsidiaries, unless specifically noted otherwise.
Description of Business
We franchise Tim Hortons restaurants primarily in Canada and the U.S. As the franchisor, we collect royalty income from franchised restaurant sales. Our business model also includes controlling the real estate for the majority of our franchised restaurants, which generates a recurring stream of rental income. As of July 1, 2012, we leased or owned the real estate for approximately 83% of our full-serve system restaurants in North America. Real estate that is not controlled by us is generally for non-standard restaurants, including, for example, full-serve kiosks in offices, hospitals, colleges, stadiums, arenas, and airports, as well as self-serve kiosks located in gas and convenience locations, grocery stores and for our international locations. We distribute coffee and other beverages, non-perishable food, supplies, packaging and equipment to system restaurants in Canada through our 5 distribution centres, and, in some cases, through third-party distributors. In addition to dry goods, we also supply frozen and some refrigerated products from our Guelph and Kingston distribution facilities to approximately 62% of our Canadian restaurants, namely those located in Ontario and Quebec. In the U.S., we supply similar products to system restaurants through third-party distributors. In keeping with our vertical integration model, we also operate 2 coffee roasting facilities located in Hamilton, Ontario, and Rochester, New York, and a fondant and fills manufacturing facility in Oakville, Ontario.
Executive Overview
Systemwide sales grew 6.0% in the second quarter of 2012, driven by new restaurant development in both Canada and the U.S. and by continued same-store sales growth of 1.8% in Canada and 4.9% in the U.S. In the first half of 2012, systemwide sales grew by 7.6%, led by new restaurant development and same-store sales growth of 3.4% in Canada and 6.6% in the U.S. We also continued to grow total systemwide transactions in both Canada and the U.S. during the second quarter and first half of 2012.
Same-store sales growth in Canada during the second quarter of 2012 was driven by a higher average cheque due primarily to favourable product mix. Our product mix continued to benefit from our hot espresso and latte beverages, and the new hot beverage cup sizing including the 24-ounce cup, all of which were introduced in the first quarter. In addition, product mix benefited from strength in our breakfast category with the extension of our breakfast hours from 11 a.m. to noon across Canada. We believe our growth was negatively impacted in the second quarter of 2012 by the continued challenging economic climate and persistently high unemployment levels relative to pre-recessionary rates. These factors can impact consumer discretionary spending. We experienced a slight decline in same-store transactions in Canada, due in part, we believe, to these continued economic pressures, which may have impacted guest frequency.
For the first half of 2012, same-store sales growth in Canada was driven primarily by a higher average cheque, due to both favourable product mix and pricing. In addition to the factors noted above, same-store sales growth was favourably impacted by unseasonably warm weather across most of Canada in the first quarter of 2012, which resulted in the acceleration of sales in our specialty cold drinks early in the year, some of which have higher price points.
21
In the U.S., same-store sales growth benefited from a higher average cheque which was driven by a combination of pricing and favourable product mix. Our Panini sandwiches, which we promoted, continued to prove popular with our guests during the quarter. In addition, our specialty bagels and specialty cold drink category, including our new espresso-based iced beverages, contributed favourably to our product mix. We also experienced a slight increase in same-store transactions in the U.S. during the second quarter of 2012.
For the first half of 2012, same-store sales growth in the U.S. was driven by the same factors noted above, but was also favourably impacted by unseasonably warm weather in most of our U.S. markets in the first quarter of 2012, which drove growth in our specialty cold beverages earlier in the year.
The economic environment in both Canada and the U.S. remained volatile, and continued uncertainty appears to be impacting consumer confidence and likely had a moderating effect on the rate of our same-store sales growth in the second quarter, which has carried through into July. In both Canada and the U.S., we will continue to expand our menu with new prepared food and premium drink offerings throughout 2012. We will also maintain our focus on hospitality, speed of service and convenience so that we are reliable and relevant to our guests as we continue to reinforce our quality products at a reasonable price positioning.
Operating income increased 10.9% to $158.8 million in the second quarter of 2012 compared to $143.2 million in the second quarter of 2011. This growth was driven primarily by systemwide sales growth in both Canada and the U.S., resulting in both higher rents and royalties and distribution income. In addition, lower general and administrative expenses were incurred, due primarily to a $6.3 million charge in the second quarter of 2011 related to the separation agreement with our previous CEO (CEO Separation Agreement), which increased operating income growth in the second quarter of 2012 by approximately 4.6%. Partially offsetting this decline in general and administrative expenses were higher salaries and benefits and higher professional fees in 2012. We also had a temporary positive impact from the timing of coffee pricing and underlying costs in our supply chain in the second quarter of 2011, which negatively impacted operating income growth on a year-over-year basis.
Year-to-date, operating income was $290.5 million in 2012 compared to $263.8 million in 2011, increasing $26.6 million or 10.1%. In addition to the factors noted above, operating income growth was partially offset by lower franchise fee income and resource investments that we made at our replacement distribution centre in Kingston, Ontario to optimize service levels to our restaurants as we transitioned the facility.
Net income attributable to Tim Hortons Inc. increased $12.5 million, or 13.1%, to $108.1 million in the second quarter of 2012, and increased $20.6 million, or 11.7%, to $196.8 million in the first half of 2012. The primary factors driving the increase in both periods was higher operating income, as noted above, and a lower effective tax rate on these earnings, partially offset by higher net interest expense.
Diluted earnings per share attributable to Tim Hortons Inc. (EPS) increased 18.9% to $0.69 in the second quarter of 2012, compared to $0.58 in the second quarter of 2011. In addition to higher net income attributable to Tim Hortons Inc., our EPS growth continued to benefit from the positive, cumulative impact of our share repurchase programs. On average, we had approximately 156.0 million fully diluted common shares outstanding during the second quarter of 2012, which was, on average, approximately 8.0 million, or 4.9%, fewer fully diluted common shares outstanding than in the second quarter of 2011. For the first half of 2012, EPS increased 18.7% to $1.26 compared to $1.06 in the first half of 2011. Our share repurchase program was a strong contributor to EPS growth in the year-to-date period as well. The CEO Separation Agreement in 2011 reduced EPS by approximately $0.03 per share in both the second quarter and first half of 2011.
Selected Operating and Financial Highlights
Second quarter ended | Year-to-date period ended | |||||||||||||||
($ in millions, except per share data) |
July 1,
2012 |
July 3,
2011 |
July 1,
2012 |
July 3,
2011 |
||||||||||||
Systemwide sales growth (1) |
6.0 | % | 7.2 | % | 7.6 | % | 6.1 | % | ||||||||
Same-store sales growth |
||||||||||||||||
Canada |
1.8 | % | 3.8 | % | 3.4 | % | 2.9 | % | ||||||||
U.S. |
4.9 | % | 6.6 | % | 6.6 | % | 5.7 | % | ||||||||
Systemwide restaurants |
4,071 | 3,811 | 4,071 | 3,811 | ||||||||||||
Revenues |
$ | 785.6 | $ | 702.8 | $ | 1,506.9 | $ | 1,346.2 | ||||||||
Operating income |
$ | 158.8 | $ | 143.2 | $ | 290.5 | $ | 263.8 | ||||||||
Net income attributable to Tim Hortons Inc. |
$ | 108.1 | $ | 95.5 | $ | 196.8 | $ | 176.2 | ||||||||
Diluted EPS |
$ | 0.69 | $ | 0.58 | $ | 1.26 | $ | 1.06 | ||||||||
Weighted average number of common shares outstandingDiluted (in millions) |
156.0 | 164.0 | 156.2 | 166.0 |
(1) |
Total systemwide sales growth is determined using a constant exchange rate to exclude the effects of foreign currency translation. Systemwide sales growth in Canadian dollars, which includes the effects of foreign currency translation, was 6.4% and 6.7% for the second quarters of 2012 and 2011, respectively (7.9% and 5.6% year-to-date 2012 and 2011, respectively). |
22
We believe systemwide sales growth and same-store sales growth provide meaningful information to investors regarding the size of our system, the overall health and financial performance of the system, and the strength of our brand and restaurant owner base, which ultimately impact our consolidated and segmented financial performance.
Systemwide Sales Growth
Systemwide sales include restaurant-level sales at both franchised and Company-operated restaurants. Systemwide sales growth is determined using a constant exchange rate to exclude the effects of foreign currency translation. Foreign currency sales are converted into Canadian dollar amounts using the average exchange rate of the base year for the period covered.
Our financial results are driven by changes in systemwide sales, primarily in Canada and the U.S, with approximately 99.5% of our system franchised. Franchised restaurant sales and transactional data are reported to us by our restaurant owners. Franchised restaurant sales are not included in our Condensed Consolidated Financial Statements, other than approximately 307 and 257 non-owned restaurants, on average, for the first half of 2012 and 2011, respectively, whose results of operations are consolidated with ours pursuant to variable interest entity accounting rules. The amount of systemwide sales impacts our rental and royalties revenues, as well as our distribution revenues.
Changes in systemwide sales are driven by changes in same-store sales and changes in the number of restaurants ( i.e., historically, the net addition of new restaurants) and are ultimately driven by consumer demand. Systemwide sales growth excludes sales from our Republic of Ireland and United Kingdom licensed locations as these locations operate on a significantly different business model compared to our other International and North American operations.
Same-Store Sales Growth
Same-store sales growth represents the average growth in retail sales at restaurants (franchised and Company-operated restaurants) operating systemwide that have been open for thirteen or more months. It is one of the key metrics we use to assess our performance and provides a useful comparison between periods. Our same-store sales growth is generally attributable to several key factors, including new product introductions, improvements in restaurant speed of service and other operational efficiencies, hospitality initiatives, frequency of guest visits, expansion into, and enhancement of, broader menu offerings, promotional activities and pricing. Restaurant-level price increases are primarily used to offset higher restaurant-level costs on key items such as coffee and other commodities, labour, supplies, utilities and business expenses. There can be no assurance that these price increases will result in an equivalent level of sales growth, which depends upon guests maintaining the frequency of their visits and the same level of purchases at the new pricing.
Product innovation is one of our long-standing, focused strategies to drive same-store sales growth, including innovation at breakfast, lunch and snacking dayparts. During the second quarter of 2012, we promoted our cold beverage category, with a focus on our popular Iced Capp, our new frozen lemonade (Canada) and fruit smoothies (U.S.). In addition, we also promoted our lunch category, with lasagna casserole featured in Canada and our Tuscan Chicken Panini sandwich in the U.S. The combination of unseasonably warm spring in the second quarter of 2012, and our marketing and promotional activities focused on cold beverages during this period, including an introductory price point for small frozen lemonade for $1 (Canada) and promotional price points for a freshly brewed iced tea or a small iced coffee for $0.99 (U.S.), drove sales volumes in our cold drink category.
Other recent marketing and operational initiatives
We have reached a North American-wide agreement with Kraft Foods Inc. (Kraft) to enter the single-serve, on-demand coffee market, leveraging Tim Hortons premium coffee and Krafts Tassimo ® system. Under the terms of the agreement, Tim Hortons premium-blend coffee, decaffeinated coffee, and lattes, in a single-serve format, will be sold in Tim Hortons restaurants in Canada and the U.S., and online, using the Tassimo T-Disc on-demand beverage platform. Tim Hortons and Kraft are planning to launch the new Tim Hortons single-serve T-Discs in time for the 2012 holiday season.
We also continue to make excellent progress on a number of initiatives in Canada. We have installed free Wi-Fi internet access at more than 1,100 of our Canadian restaurants in order to provide our guests with the added convenience of staying connected while visiting our restaurants and expect that approximately 2,000 restaurants in Canada will have free Wi-Fi by the end of 2012. We have also installed digital menu boards to enhance the overall guest experience inside approximately 60% of our restaurants during the first half of 2012 and expect installations to be completed in the fourth quarter of 2012. We will also continue to implement our enhanced drive-thru menu boards into 2013. In addition, we have recently broadened the roll-out of a grilling platform to our Canadian restaurants in preparation for our national launch of Panini sandwiches later in the second half of 2012. We also continue to implement the first stages of drive-thru double order stations as part of our capacity-building efforts. These initiatives support of our More than a Great Brand strategic plan, which is designed to drive growth over the life of the plan through a range of strategies and initiatives.
23
New Restaurant Development
Opening restaurants in new and existing markets in Canada and the U.S. has historically been a significant contributor to our growth. Below is a summary of restaurant openings and closures for the second quarters and year-to-date periods ended July 1, 2012 and July 3, 2011, respectively:
Second quarter ended July 1, 2012 | Second quarter ended July 3, 2011 | |||||||||||||||||||||||
Full-serve
Standard and Non-standard |
Self-serve
Kiosks |
Total |
Full-serve
Standard and Non-standard |
Self-serve
Kiosks |
Total | |||||||||||||||||||
Canada |
||||||||||||||||||||||||
Restaurants opened |
19 | | 19 | 23 | 1 | 24 | ||||||||||||||||||
Restaurants closed |
(3 | ) | (5 | ) | (8 | ) | (3 | ) | (1 | ) | (4 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net change |
16 | (5 | ) | 11 | 20 | 0 | 20 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
U.S. |
||||||||||||||||||||||||
Restaurants opened |
6 | 9 | 15 | 8 | 2 | 10 | ||||||||||||||||||
Restaurants closed |
(1 | ) | (1 | ) | (2 | ) | (1 | ) | | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net change |
5 | 8 | 13 | 7 | 2 | 9 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
International (GCC) |
||||||||||||||||||||||||
Restaurants opened |
5 | | 5 | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Company |
||||||||||||||||||||||||
Restaurants opened |
30 | 9 | 39 | 31 | 3 | 34 | ||||||||||||||||||
Restaurants closed |
(4 | ) | (6 | ) | (10 | ) | (4 | ) | (1 | ) | (5 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net change |
26 | 3 | 29 | 27 | 2 | 29 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date period ended July 1, 2012 | Year-to-date period ended July 3, 2011 | |||||||||||||||||||||||
Full-serve
Standard and Non-standard |
Self-serve
Kiosks |
Total |
Full-serve
Standard and Non-standard |
Self-serve
Kiosks |
Total | |||||||||||||||||||
Canada |
||||||||||||||||||||||||
Restaurants opened |
40 | 1 | 41 | 52 | 3 | 55 | ||||||||||||||||||
Restaurants closed |
(5 | ) | (5 | ) | (10 | ) | (13 | ) | (1 | ) | (14 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net change |
35 | (4 | ) | 31 | 39 | 2 | 41 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
U.S. |
||||||||||||||||||||||||
Restaurants opened |
12 | 10 | 22 | 14 | 7 | 21 | ||||||||||||||||||
Restaurants closed |
(1 | ) | (1 | ) | (2 | ) | (1 | ) | | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net change |
11 | 9 | 20 | 13 | 7 | 20 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
International (GCC) |
||||||||||||||||||||||||
Restaurants opened |
6 | | 6 | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Company |
||||||||||||||||||||||||
Restaurants opened |
58 | 11 | 69 | 66 | 10 | 76 | ||||||||||||||||||
Restaurants closed |
(6 | ) | (6 | ) | (12 | ) | (14 | ) | (1 | ) | (15 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net change |
52 | 5 | 57 | 52 | 9 | 61 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
From the end of the second quarter of 2011 to the end of the second quarter of 2012, we opened 260 system restaurants, net of restaurant closures, including both full-serve and self-serve locations. Typically, 20 to 40 system restaurants are closed annually, the majority of which have been in Canada. Restaurant closures made in the normal course of operations may result from an opportunity to acquire a more suitable location, permitting us to upgrade size and layout or add a drive-thru or when a restaurant performs below our expectations for an extended period of time. These closures typically occur at the end of a lease term or at the end of the useful life of the principal asset.
Self-serve locations generally have significantly different economics than our full-serve restaurants, including substantially less capital investment, as well as significantly lower sales in their respective markets and, therefore, lower associated royalties and distribution income. In the U.S., self-serve locations are intended to increase our brand presence and create another outlet to drive convenience, which we believe is important in our developing markets. In Canada, we use self-serve kiosks in locations where existing full-serve locations are at capacity.
24
We have a master license agreement with Apparel FZCO (Apparel) for the development and operation of Tim Hortons restaurants in the Gulf Cooperation Council (GCC). The master license agreement with Apparel is primarily a royalty-based model that also includes an up-front license fee, franchise fees with the opening of each location, and restaurant equipment and distribution sales. Apparel is responsible for the capital spending and real estate development to open restaurants, along with operations and marketing. As at July 1, 2012 we had 11 restaurants in the GCC.
In addition, we have exclusive development rights in Canada, and certain rights to use licenses within the U.S. to operate Cold Stone Creamery ® ice cream and frozen confection retail outlets within Tim Hortons locations. As of July 1, 2012, we had 239 co-branded locations, including 139 co-branded locations in Tim Hortons restaurants in Canada and 100 co-branded locations in the U.S. (93 in Tim Hortons restaurants and 7 in Cold Stone Creamery locations).
The following table shows our restaurant count, by restaurant type, in Canada, the U.S., and the GCC:
Systemwide Restaurant Count
As at: | ||||||||||||
July 1,
2012 |
January 1,
2012 |
July 3,
2011 |
||||||||||
Canada |
||||||||||||
Company-operated |
11 | 10 | 16 | |||||||||
Franchisedstandard and non-standard |
3,200 | 3,166 | 3,059 | |||||||||
Franchisedself-serve kiosks |
115 | 119 | 114 | |||||||||
|
|
|
|
|
|
|||||||
Total |
3,326 | 3,295 | 3,189 | |||||||||
|
|
|
|
|
|
|||||||
% Franchised |
99.7 | % | 99.7 | % | 99.5 | % | ||||||
U.S. |
||||||||||||
Company-operated |
10 | 8 | 6 | |||||||||
Franchisedstandard and non-standard |
551 | 542 | 486 | |||||||||
Franchisedself-serve kiosks |
173 | 164 | 130 | |||||||||
|
|
|
|
|
|
|||||||
Total |
734 | 714 | 622 | |||||||||
|
|
|
|
|
|
|||||||
% Franchised |
98.6 | % | 98.9 | % | 99.0 | % | ||||||
International (GCC) |
||||||||||||
Franchisedstandard and non-standard |
11 | 5 | | |||||||||
|
|
|
|
|
|
|||||||
% Franchised |
100.0 | % | 100.0 | % | n/a | |||||||
Total system |
||||||||||||
Company-operated |
21 | 18 | 22 | |||||||||
Franchisedstandard and non-standard |
3,762 | 3,713 | 3,545 | |||||||||
Franchisedself-serve kiosks |
288 | 283 | 244 | |||||||||
|
|
|
|
|
|
|||||||
Total |
4,071 | 4,014 | 3,811 | |||||||||
|
|
|
|
|
|
|||||||
% Franchised |
99.5 | % | 99.6 | % | 99.4 | % |
Segment Operating Income
Systemwide sales and same-store sales growth are affected by the business and economic environments in Canada and the U.S. We manage and review financial results from Canadian and U.S. operations separately. We, therefore, have determined the reportable segments for our business to be the geographic locations of Canada and the U.S. Each segment includes the gross operating results of all manufacturing and distribution operations that are located in its respective geographic locations. We continue to manage the development of our international operations in the Republic of Ireland and the United Kingdom, which consist primarily of 243 branded, licensed self-serve kiosk locations at the end of the second quarter of 2012 (260 at the end of the second quarter 2011), corporately. In addition, our international operations now include our expansion into the GCC and consisted of 11 restaurants at the end of the second quarter of 2012 (nil at the end of the second quarter of 2011). Our expansion into the GCC is in its early stages and is also being managed corporately. As such, results from these operations, which are not currently significant, are included in Corporate charges in our segmented operating results. Corporate charges also include overhead costs that support all business segments. Our reportable segments exclude financial results of VIEs, reflective of the way our business is managed.
25
The following tables contain information about the operating income of our reportable segments:
Second quarter ended | Change | |||||||||||||||||||||||
July 1, 2012 |
% of
Revenues |
July 3, 2011 |
% of
Revenues |
Dollars | Percentage | |||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Operating Income |
||||||||||||||||||||||||
Canada |
$ | 164,563 | 20.9 | % | $ | 156,428 | 22.3 | % | $ | 8,135 | 5.2 | % | ||||||||||||
U.S. |
5,617 | 0.8 | % | 4,008 | 0.5 | % | 1,609 | 40.1 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Reportable segment operating income |
170,180 | 21.7 | % | 160,436 | 22.8 | % | 9,744 | 6.1 | % | |||||||||||||||
VIEs |
1,772 | 0.2 | % | 1,149 | 0.2 | % | 623 | 54.2 | % | |||||||||||||||
Corporate charges |
(13,113 | ) | (1.7 | )% | (18,367 | ) | (2.6 | )% | 5,254 | (28.6 | )% | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Consolidated operating income |
$ | 158,839 | 20.2 | % | $ | 143,218 | 20.4 | % | $ | 15,621 | 10.9 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date period ended | Change | |||||||||||||||||||||||
July 1, 2012 |
% of
Revenues |
July 3, 2011 |
% of
Revenues |
Dollars | Percentage | |||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Operating Income |
||||||||||||||||||||||||
Canada |
$ | 305,050 | 20.2 | % | $ | 287,957 | 21.4 | % | $ | 17,093 | 5.9 | % | ||||||||||||
U.S. |
8,827 | 0.6 | % | 6,619 | 0.5 | % | 2,208 | 33.4 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Reportable segment operating income |
313,877 | 20.8 | % | 294,576 | 21.9 | % | 19,301 | 6.6 | % | |||||||||||||||
VIEs |
3,300 | 0.2 | % | 2,039 | 0.2 | % | 1,261 | 61.8 | % | |||||||||||||||
Corporate charges |
(26,715 | ) | (1.7 | )% | (32,794 | ) | (2.4 | )% | 6,079 | (18.5 | )% | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Consolidated operating income |
$ | 290,462 | 19.3 | % | $ | 263,821 | 19.6 | % | $ | 26,641 | 10.1 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income increased by $15.6 million in the second quarter of 2012 and $26.6 million in the first half of 2012. Operating income growth was driven by continued growth in our Canadian and U.S. operating segments. In addition, lower corporate charges and higher VIE operating income also contributed to our operating income growth year-over-year.
Canada
Operating income increased $8.1 million, or 5.2%, in the second quarter of 2012 to $164.6 million. Systemwide sales growth of 5.3%, driven by incremental sales from the net addition of 137 new restaurants year-over-year and same-store sales growth of 1.8%, resulted in higher rents and royalties and distribution income, was the primary growth driver. Also contributing to growth year-over-year was favourable product mix in distribution. Partially offsetting these growth factors was a temporary positive impact from the timing of coffee pricing and underlying costs in our supply chain in the second quarter of 2011, which negatively impacted operating income growth versus the prior year. In addition, general and administration expenses increased due primarily to higher salaries and benefits required to support growth of the business. Total restaurant transactions continued to grow during the second quarter and first half of 2012 as a result of the addition of new restaurants.
Same-store sales growth in the second quarter of 2012 was driven by a higher average cheque, due primarily to favourable product mix. Our product mix continued to benefit from our hot espresso and latte beverages, and new hot beverage cup sizing, including the 24-ounce cup, all of which were introduced in the first quarter. In addition, product mix in the second quarter benefited from strength in our breakfast category with the extension of our breakfast hours from 11 a.m. to noon across Canada. Higher average cheque growth more than offset the slight decline in same-store transactions during the second quarter of 2012. We opened 19 restaurants and closed 8 in the second quarter of 2012, compared to opening 24 restaurants and closing 4 in the second quarter of 2011. We will continue to focus on improving speed of service, as we build incremental capacity at existing restaurants through a number of initiatives, and on increased convenience through the net addition of new restaurants in Canada for the remainder of 2012.
For the first half of 2012, operating income was $305.1 million compared to $288.0 million in the first half of 2011, increasing $17.1 million, or 5.9%. The same factors influencing growth rates in the second quarter were prevalent in the first half, with the exception that systemwide sales growth was stronger resulting in higher growth from rents and royalties and distribution income. On a year-to-date basis, the favourable timing of benefits and other costs was also a factor. Partially offsetting these additional growth factors were lower franchise fee income related primarily to timing of restaurant openings year-over-year and higher support costs, and resource investments made in the first quarter of 2012 to optimize service levels to our restaurants as we transition our replacement distribution centre in Kingston, Ontario. Canadian systemwide sales growth was 6.9% in the first half of 2012, driven by the net addition of restaurants and same-store sales growth of 3.4%. From a development perspective, we opened 41 restaurants and closed 10 in the first half of 2012 compared to opening 55 restaurants and closing 14 in the first half of 2011.
26
U.S.
Operating income grew by $1.6 million to $5.6 million in the second quarter of 2012, from $4.0 million in the second quarter of 2011. Higher systemwide sales, which resulted in higher rents and royalties and distribution income, were the primary growth drivers in the second quarter of 2012. A $0.7 million benefit associated primarily with the reversal of previously accrued closure costs upon the conclusion of activities related to our New England markets was also included in the second quarter of 2012. In addition, we had higher franchise fee income due to a higher number of sales. Partially offsetting operating income growth in the second quarter of 2012 was higher relief relating primarily to restaurants that have been open for less than 13 months, and higher general and administrative costs due to higher salaries and benefits required to support the growth of the business.
Systemwide sales grew 12.8% in the second quarter of 2012, driven by the net addition of 69 new full-serve restaurants year-over-year and continued same-store sales growth of 4.9%. Same-store sales growth benefited from a higher average cheque, which was driven by a combination of pricing and favourable product mix. Our Panini sandwiches continued to prove popular with our guests during the quarter. In addition, our specialty bagels and specialty cold drinks category, including our new iced espresso based beverages, contributed favourably to our product mix. We also experienced a slight increase in transactions in the U.S. during the second quarter of 2012. We opened 15 restaurants and closed 2 in the U.S. in the second quarter of 2012 (including the net addition of 8 self-serve kiosks), compared to 10 openings and 1 closure (including the net addition of 2 self-serve kiosks) in the second quarter of 2011.
For the first half of 2012, operating income was $8.8 million compared to $6.6 million in the first half of 2011, increasing $2.2 million, or 33.4%. The same factors influencing growth rates in the second quarter were prevalent in the first half, with the exception that systemwide sales growth was stronger resulting in higher growth from rents and royalties and distribution income, and we had higher manufacturing income. Systemwide sales growth was 14.3% in the first half of 2012, driven by the net addition of restaurants and continued same-store sales growth of 6.6%. We opened 22 restaurants and closed 2 in the first half of 2012 (including the net addition of 9 self-serve kiosks) compared to opening 21 restaurants and closing 1 in the first half of 2011 (including the net addition of 7 self-serve kiosks).
Variable interest entities (VIEs)
Operating income for VIEs pertains primarily to the non-owned entities that operate restaurants where we may own the equipment in addition to controlling the real estate, and for accounting purposes, we are deemed to be the primary beneficiary (Non-owned Restaurants). Beginning in 2012, operating income also includes advertising levies and depreciation associated with the Tim Hortons Advertising and Promotion Fund (Canada) Inc. (Ad Fund) program to acquire and install LCD screens, media engines, drive-thru menu boards and ancillary equipment in our restaurants (Expanded Menu Board Program) as the Ad Fund retains ownership and controls this equipment. Generally, the advertising levies and advertising and marketing expenses incurred by our advertising funds that are not related to the Expanded Menu Board Program continue to be netted in operating expenses as the Company acts as an agent with regard to these contributions.
In the second quarter of 2012, the operating income for VIEs was $1.8 million, including $0.4 million associated with the Ad Fund. Comparatively, operating income was $1.1 million in the second quarter of 2011. We consolidated 309 and 258 Non-owned Restaurants, on average, in the second quarters of 2012 and 2011, respectively. In the first half of 2012, operating income was $3.3 million (including $0.5 million from the Ad Fund) compared to $2.0 million in the first half of 2011. We consolidated, on average, 307 and 257 Non-owned Restaurants in the first half of 2012 and 2011, respectively.
The increase in Non-owned Restaurants consolidated as VIEs year-over-year relates primarily to an increase in restaurant openings under operator agreements, principally in the U.S., which require minimal up-front capital from the restaurant owner. Operating income related to our VIEs depends largely on the number of Non-owned Restaurants consolidated, but also varies depending on the size, type, same-store sales growth and, ultimately, average unit volumes and financial results of the restaurants. The consolidation of VIEs also has the effect of reducing overall operating margins as a percentage of revenues, given the nature of the entities consolidated.
Corporate charges
Corporate charges were $13.1 million in the second quarter of 2012 and $26.7 million in first half of 2012. Comparatively, corporate charges were $18.4 million and $32.8 million in the second quarter and first half of 2011, respectively. The primary factor contributing to lower Corporate charges in both the second quarter and first half of 2012 was a $6.3 million charge in the second quarter of 2011 related to the CEO Separation Agreement. Partially offsetting this impact in the second quarter of 2012 were higher professional fees. In the first half of 2012 we also had higher stock-based compensation expenses, due in part to an equity grant in February 2012.
27
Results of Operations
Below is a summary of comparative results of operations and is followed by a more detailed discussion of results for the second quarter and year-to-date periods of 2012, as compared to the second quarter and year-to-date periods of 2011:
Second quarter ended | Change (1) | |||||||||||||||||||||||
July 1,
2012 |
% of
Revenues |
July 3,
2011 |
% of
Revenues |
Dollars | Percentage | |||||||||||||||||||
($s in thousands) | ||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Sales |
$ | 563,772 | 71.8 | % | $ | 498,058 | 70.9 | % | $ | 65,714 | 13.2 | % | ||||||||||||
Franchise revenues |
||||||||||||||||||||||||
Rents and royalties (2) |
198,973 | 25.3 | % | 185,389 | 26.4 | % | 13,584 | 7.3 | % | |||||||||||||||
Franchise fees |
22,836 | 2.9 | % | 19,313 | 2.7 | % | 3,523 | 18.2 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
221,809 | 28.2 | % | 204,702 | 29.1 | % | 17,107 | 8.4 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenues |
785,581 | 100.0 | % | 702,760 | 100.0 | % | 82,821 | 11.8 | % | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Costs and expenses |
||||||||||||||||||||||||
Cost of sales |
493,300 | 62.8 | % | 434,051 | 61.8 | % | 59,249 | 13.7 | % | |||||||||||||||
Operating expenses |
73,068 | 9.3 | % | 65,102 | 9.3 | % | 7,966 | 12.2 | % | |||||||||||||||
Franchise fee costs |
24,794 | 3.2 | % | 20,419 | 2.9 | % | 4,375 | 21.4 | % | |||||||||||||||
General and administrative expenses |
40,395 | 5.1 | % | 43,969 | 6.3 | % | (3,574 | ) | (8.1 | )% | ||||||||||||||
Equity (income) |
(3,859 | ) | (0.5 | )% | (3,820 | ) | (0.5 | )% | (39 | ) | 1.0 | % | ||||||||||||
Other (income), net |
(956 | ) | (0.1 | )% | (179 | ) | | % | (777 | ) | n/m | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total costs and expenses, net |
626,742 | 79.8 | % | 559,542 | 79.6 | % | 67,200 | 12.0 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
158,839 | 20.2 | % | 143,218 | 20.4 | % | 15,621 | 10.9 | % | |||||||||||||||
Interest (expense) |
(8,650 | ) | (1.1 | )% | (7,427 | ) | (1.1 | )% | (1,223 | ) | 16.5 | % | ||||||||||||
Interest income |
723 | 0.1 | % | 851 | 0.1 | % | (128 | ) | (15.0 | )% | ||||||||||||||
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|
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|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income taxes |
150,912 | 19.2 | % | 136,642 | 19.4 | % | 14,270 | 10.4 | % | |||||||||||||||
Income taxes |
41,675 | 5.3 | % | 40,202 | 5.7 | % | 1,473 | 3.7 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
109,237 | 13.9 | % | 96,440 | 13.7 | % | 12,797 | 13.3 | % | |||||||||||||||
Net income attributable to noncontrolling interests |
1,170 | 0.1 | % | 891 | 0.1 | % | 279 | 31.3 | % | |||||||||||||||
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|
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|
|
|
|
|
|
|
|||||||||||||
Net income attributable to Tim Hortons Inc. |
$ | 108,067 | 13.8 | % | $ | 95,549 | 13.6 | % | $ | 12,518 | 13.1 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
n/m |
Not meaningful |
(1) |
The financial results of our U.S. segment are denominated in U.S. dollars and translated into Canadian dollars for consolidated reporting purposes. The change of the Canadian dollar relative to the U.S. dollar year-over-year did not have a significant impact on any component of net income in the second quarter of 2012. |
(2) |
Rents and royalties revenues consist of: (i) royalties, which typically range from 3.0% to 4.5% of gross franchised restaurant sales; (ii) advertising levies of $1.1 million and $0.2 million in 2012 and 2011, respectively, associated with the Ad Fund (see note 12 to the Condensed Consolidated Financial Statements); and (iii) rents, which consist of base and percentage rent in Canada and percentage rent only in the U.S., and typically range from 8.5% to 10.0% of gross franchised restaurant sales. Franchised restaurant sales are reported to us by our restaurant owners. Franchised restaurant sales are not included in our Condensed Consolidated Financial Statements, other than approximately 309 and 258 Non-Owned Restaurants, on average, in the second quarter of 2012 and 2011, respectively, whose results of operations are consolidated with ours pursuant to applicable accounting rules. Franchised restaurant sales do, however, result in royalties and rental income, which are included in our franchise revenues, as well as distribution income. The reported franchised restaurant sales (including those consolidated pursuant to applicable accounting rules) were: |
Q2 2012 | Q2 2011 | |||||||
(in thousands) | ||||||||
Franchised restaurant sales: |
||||||||
Canada (Canadian dollars) |
$ | 1,504,083 | $ | 1,426,466 | ||||
U.S. (U.S. dollars) |
$ | 133,120 | $ | 118,311 |
28
Year-to-date period ended | Change (1) | |||||||||||||||||||||||
July 1, 2012 |
% of
Revenues |
July 3, 2011 |
% of
Revenues |
Dollars | Percentage | |||||||||||||||||||
($s in thousands) | ||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Sales |
$ | 1,087,074 | 72.1 | % | $ | 952,535 | 70.8 | % | $ | 134,539 | 14.1 | % | ||||||||||||
Franchise revenues |
||||||||||||||||||||||||
Rents and royalties (2) |
379,159 | 25.2 | % | 353,219 | 26.2 | % | 25,940 | 7.3 | % | |||||||||||||||
Franchise fees |
40,632 | 2.7 | % | 40,493 | 3.0 | % | 139 | 0.3 | % | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||||
419,791 | 27.9 | % | 393,712 | 29.2 | % | 26,079 | 6.6 | % | ||||||||||||||||
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|
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|
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|
|
|
|
|
|
|||||||||||||
Total revenues |
1,506,865 | 100.0 | % | 1,346,247 | 100.0 | % | 160,618 | 11.9 | % | |||||||||||||||
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|
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|
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Costs and expenses |
||||||||||||||||||||||||
Cost of sales |
958,725 | 63.6 | % | 836,383 | 62.1 | % | 122,342 | 14.6 | % | |||||||||||||||
Operating expenses |
139,784 | 9.3 | % | 127,256 | 9.5 | % | 12,528 | 9.8 | % | |||||||||||||||
Franchise fee costs |
45,076 | 3.0 | % | 41,736 | 3.1 | % | 3,340 | 8.0 | % | |||||||||||||||
General and administrative expenses |
80,522 | 5.3 | % | 83,965 | 6.2 | % | (3,443 | ) | (4.1 | )% | ||||||||||||||
Equity (income) |
(7,105 | ) | (0.5 | )% | (6,933 | ) | (0.5 | )% | (172 | ) | 2.5 | % | ||||||||||||
Other (income) expense, net |
(599 | ) | | % | 19 | | % | (618 | ) | n/m | ||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total costs and expenses, net |
1,216,403 | 80.7 | % | 1,082,426 | 80.4 | % | 133,977 | 12.4 | % | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
290,462 | 19.3 | % | 263,821 | 19.6 | % | 26,641 | 10.1 | % | |||||||||||||||
Interest (expense) |
(16,548 | ) | (1.1 | )% | (14,803 | ) | (1.1 | )% | (1,745 | ) | 11.8 | % | ||||||||||||
Interest income |
1,434 | 0.1 | % | 2,527 | 0.2 | % | (1,093 | ) | (43.3 | )% | ||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income taxes |
275,348 | 18.3 | % | 251,545 | 18.7 | % | 23,803 | 9.5 | % | |||||||||||||||
Income taxes |
76,132 | 5.1 | % | 73,691 | 5.5 | % | 2,441 | 3.3 | % | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
199,216 | 13.2 | % | 177,854 | 13.2 | % | 21,362 | 12.0 | % | |||||||||||||||
Net income attributable to noncontrolling interests |
2,370 | 0.2 | % | 1,626 | 0.1 | % | 744 | 45.8 | % | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to Tim Hortons Inc. |
$ | 196,846 | 13.1 | % | $ | 176,228 | 13.1 | % | $ | 20,618 | 11.7 | % | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
n/m |
Not meaningful |
(1) |
The financial results of our U.S. segment are denominated in U.S. dollars and translated into Canadian dollars for consolidated reporting purposes. The change of the Canadian dollar relative to the U.S. dollar year-over-year did not have a significant impact on any component of net income in the year-to-date period ended July 1, 2012. |
(2) |
Rents and royalties revenues consist of: (i) royalties, which typically range from 3.0% to 4.5% of gross franchised restaurant sales; (ii) advertising levies of $1.5 million and $0.3 million in 2012 and 2011, respectively, associated with the Ad Fund (see note 12 to the Condensed Consolidated Financial Statements); and (iii) rents, which consist of base and percentage rent in Canada and percentage rent only in the U.S., and typically range from 8.5% to 10.0% of gross franchised restaurant sales. Franchised restaurant sales are reported to us by our restaurant owners. Franchised restaurant sales are not included in our Condensed Consolidated Financial Statements, other than approximately 307 and 257 Non-owned Restaurants, on average, in the year-to-date periods of 2012 and 2011, respectively, whose results of operations are consolidated with ours pursuant to applicable accounting rules. Franchised restaurant sales do, however, result in royalties and rental income, which are included in our franchise revenues, as well as distribution income. The reported franchised restaurant sales (including those consolidated pursuant to applicable accounting rules) were: |
Year-to-date
2012 |
Year-to-date
2011 |
|||||||
(in thousands) | ||||||||
Franchised restaurant sales: |
||||||||
Canada (Canadian dollars) |
$ | 2,879,357 | $ | 2,692,737 | ||||
U.S. (U.S. dollars) |
$ | 259,602 | $ | 228,174 |
29
Revenues
Our revenues include Sales, which is comprised of distribution sales, sales from Company-operated restaurants, and sales from VIEs that we consolidate for accounting purposes as we are deemed to be the primary beneficiary, along with Franchise revenues.
Sales
Sales for the second quarter of 2012 increased $65.7 million, or 13.2%, over the second quarter of 2011, to $563.8 million and, for the first half of 2012 increased $134.5 million, or 14.1% to $1,087.1 million. The increase in sales during both periods was primarily driven from our distribution business and higher VIE sales.
Distribution sales . Distribution sales were $471.3 million in the second quarter of 2012, compared to $422.5 million in the second quarter of 2011, increasing $48.8 million, or 11.6%, year-over-year. Systemwide sales growth increased distribution sales by approximately $27.8 million due to the higher number of system restaurants year-over-year, continued same-store sales growth, and new products managed through our supply chain. In addition, pricing and favourable product mix represented approximately $20.1 million of the increase in distribution sales, due primarily to higher prices for coffee and other commodities reflective of their higher underlying costs.
For the first half of 2012, distribution sales increased $98.7 million, or 12.2%, to $911.0 million compared to $812.3 million in the first half of 2011. Growth year-over-year was related primarily to systemwide sales growth, approximately $54.1 million, and pricing and favourable product mix, approximately $43.3 million, due primarily to higher prices for coffee and other commodities, reflective of their higher underlying costs.
Our distribution revenues continue to be subject to changes related to the underlying costs of key commodities, such as coffee, wheat, sugar, and other product costs. Increases and decreases in underlying costs are largely passed through to restaurant owners, which typically occurs after changes in market prices as we generally utilize fixed-price contracts as a method to provide restaurant owners with consistent, predictable pricing and to secure a stable source of supply. We generally have forward purchasing contracts in place for 6 months of future supply for our key commodities, but have occasionally extended beyond this time frame in periods of elevated market volatility or tight supply conditions. Underlying commodity costs can also be impacted by currency fluctuations. These cost changes can impact distribution sales, and cost of sales, and can create volatility quarter-over-quarter and year-over-year. These changes may impact margins as a percentage of revenues in a quarter as many of these products are typically priced based on a fixed-dollar mark-up and can relate to a pricing period which may extend beyond a quarter. This was the case in the second quarter of 2011, with a temporary positive impact from the timing of coffee pricing and underlying costs in our supply chain. This temporary positive impact reversed in the fourth quarter of 2011 and had a neutral effect on 2011.
Company-operated restaurants sales . Company-operated restaurant sales vary with the average number and mix ( i.e. , size, location and type) of Company-operated restaurants. Company-operated restaurant sales were $7.0 million in the second quarter of 2012, compared to $7.9 million in the second quarter of 2011. On average, we operated 21 Company-operated restaurants during the second quarter of 2012 compared to 20 during the second quarter of 2011. While the total number of restaurants increased in 2012, we had a higher proportion of Company-operated restaurants in the U.S., which have lower sales than Company-operated restaurants in Canada, which was the primary factor in the decline in sales.
For the first half of 2012, Company-operated restaurant sales were $12.6 million compared to $12.1 million in the first half of 2011. On average, we operated 21 Company-operated restaurants during the first half of 2012 compared to 17 during the first half of 2011. The increase in sales was primarily due to the increased number of restaurants, partially offset by a higher proportion of restaurants in the U.S.
We ended the second quarter of 2012 with 11 Company-operated restaurants in Canada, and 10 in the U.S., representing in total approximately 0.6% of total systemwide restaurants. On occasion, we may repurchase restaurants from existing restaurant owners, operate them corporately for a short period of time, and then refranchise these restaurants. Therefore, Company-operated restaurant sales are also impacted by the timing of these events throughout the year.
Variable interest entities sales . VIEs sales represent sales from the consolidation of certain Non-owned Restaurants of which we are deemed to be the primary beneficiary. VIEs sales were $85.5 million and $67.7 million in the second quarters of 2012 and 2011, respectively, and were $163.5 million and $128.1 million in the first half of 2012 and 2011, respectively. The increase in sales of $17.8 million in the second quarter of 2012 and $35.3 million in the first half of 2012 were primarily due to an increase in the number of Non-owned Restaurants consolidated in both the U.S. and Canada, and from same-store sales growth at existing consolidated restaurants. During the second quarter of 2012, we consolidated approximately 309 Non-owned Restaurants (121 in Canada and 188 in the U.S.), on average, compared to 258 Non-owned Restaurants (101 in Canada and 157 in the U.S.), on average, during the second quarter of 2011. For the first half of 2012, we consolidated 307 Non-owned restaurants, on average, compared to 257 Non-owned restaurants in the first half of 2011. The increase in Non-owned Restaurants consolidated as VIEs during these periods relates primarily to an increase in restaurant openings under operator agreements, primarily in the U.S., which require minimal up-front capital from the restaurant owner.
30
Franchise Revenues
Rents and Royalties . Revenues from rents and royalties increased $13.6 million, or 7.3%, to $199.0 million in the second quarter of 2012, from $185.4 million in the second quarter of 2011. Rents and royalties growth was driven primarily by sales from the net addition of 205 new full-serve restaurants in Canada and the U.S. year-over-year and same-store sales growth, both of which resulted in approximately $13.1 million, or 7.1% growth in rents and royalties revenues. In addition, we recognized the advertising levies specifically attributed to the Expanded Menu Board Program of $0.9 million in the second quarter of 2012. Partially offsetting these growth factors was a negative impact resulting from a greater number of consolidated Non-owned Restaurant VIEs, which reduced growth as the consolidation of Non-owned Restaurant VIEs essentially replaces our rents and royalties, with restaurant sales, which are included in VIE sales (see above).
For the first half of 2012, rents and royalties increased $25.9 million, or 7.3%, to $379.2 million compared to $353.2 million in the first half of 2011. Similar to the second quarter, the primary driver was higher systemwide sales which resulted in $28.3 million, or 8.0%, growth in rents and royalties. Advertising levies specifically attributed to the Expanded Menu Board Program of $1.2 million were recognized. Partially offsetting this growth was the negative impact of Non-owned Restaurant VIEs of approximately $4.0 million, or 1.1%.
Franchise Fees . Franchise fees were $22.8 million in the second quarter of 2012, increasing $3.5 million from the second quarter of 2011. A combination of international restaurant openings and equipment sales, a higher number of U.S. sales, and a higher number of renovations were the primary factors resulting in higher franchise fee revenues, which were partially offset by the recognition of up-front fees associated with the MLA related to our international expansion in 2011.
In the second quarter of 2012, we opened a total of 30 full-serve standard and non-standard restaurants compared to 31 full-serve standard and non-standard restaurants in the second quarter of 2011. In the second quarter of 2011, we opened more restaurants under operator agreements in the U.S., which do not result in the recognition of any franchise fees as we retain ownership of the equipment. Non-standard restaurants include full-serve kiosks and locations in gas and convenience locations, hospitals, grocery stores, universities, stadiums, arenas and office buildings. In addition, we opened 9 self-serve kiosks in the second quarter of 2012 compared to 3 self-serve kiosks in the second quarter of 2011. Self-serve kiosks do not represent a significant portion of franchise fees as the franchise fees related to these units are significantly lower than franchise fees for full-serve standard and non-standard restaurants, due primarily to the size of the equipment package required.
For the first half of 2012, franchise fees were relatively unchanged at $40.6 million compared to the first half of 2011at $40.5 million with the same factors driving higher franchise fees in the second quarter prevalent during the first half of 2012, almost entirely offset by the timing of restaurant openings in Canada. In the first half of 2012, we opened 58 full-serve restaurants and 11 self-serve kiosks, compared to 66 full-serve restaurants and 10 self-serve kiosks in the first half of 2011.
Total Costs and Expenses
Cost of Sales
Cost of sales was $493.3 million in the second quarter of 2012, compared to $434.1 million in the second quarter of 2011, representing an increase of $59.2 million, or 13.7%. For the first half of 2012, cost of sales increased $122.3 million, or 14.6%. Cost of sales growth during both of these periods was driven by higher distribution cost of sales, higher cost of sales from VIEs and, to a much lesser extent, higher Company-operated restaurants cost of sales.
Distribution cost of sales. Distribution cost of sales was $410.6 million in the second quarter of 2012, compared to $367.6 million in the second quarter of 2011, increasing $43.0 million, or 11.7%. Systemwide sales growth, resulting in growth of existing product sales and the addition of new products managed through our supply chain, contributed approximately $24.0 million of the increase in cost of sales. Approximately $18.2 million of the distribution cost of sales increase related primarily to higher underlying commodity costs and product mix.
For the first half of 2012, distribution cost of sales was $801.1 million, compared to $711.9 million in the second quarter of 2011, increasing $89.2 million, or 12.5%. Systemwide sales growth resulted in $47.4 million of additional costs and higher underlying commodity costs and product mix increased cost of sales by $40.6 million. We also made resource investments at our replacement distribution centre in Kingston, Ontario to optimize service levels to our restaurants as we transitioned the facility.
Company-operated restaurants cost of sales . Cost of sales for our Company-operated restaurants, which includes food, paper, labour and occupancy costs, varies with the average number and mix ( i.e. , size, location and type) of Company-operated restaurants. These costs increased by $0.2 million to $7.7 million in the second quarter of 2012, compared to $7.5 million in the second quarter of 2011. We operated, on average, 1 additional Company-operated restaurant year-over-year, which resulted in higher cost of sales. In addition, existing restaurants generated higher sales, resulting in higher cost of sales. Partially offsetting these higher costs was a higher proportion of Company-operated restaurants in the U.S., which typically have lower sales, and consequently, lower associated cost of sales.
31
For the first half of 2012, Company-operated cost of sales was $13.8 million compared to $12.0 million in the first half of 2011. We operated, on average, 21 restaurants in the first half of 2012 compared to, on average, 17 restaurants in the first half of 2011. The addition of 4 restaurants year-over-year was the primary driver of increased cost of sales.
Variable interest entities cost of sales. VIEs cost of sales was $75.0 million and $58.9 million in the second quarters of 2012 and 2011, respectively. VIEs cost of sales represents cost of sales from the consolidation of certain Non-owned Restaurants of which we are deemed to be the primary beneficiary. The increase in cost of sales of $16.0 million was primarily due to an increase in the number of Non-owned Restaurants consolidated, on average, in both the U.S. and Canada, and from existing consolidated Non-owned Restaurants with higher same-store sales and, consequently, higher cost of sales.
For the first half of 2012, VIEs cost of sales increased $31.4 million to $143.9 million, compared to $112.5 million in the first half of 2011. Similar to the second quarter, a higher number of Non-owned Restaurants consolidated and higher same-store sales and, consequently, cost of sales from existing Non-owned Restaurants were the primary drivers during the year-to-date period.
Operating Expenses
Total operating expenses, representing primarily rent expense, depreciation, and other property and support costs, increased $8.0 million to $73.1 million in the second quarter of 2012. Rent expense increased by $4.1 million year-over-year, primarily due to 133 additional properties that were leased and then subleased to restaurant owners, and higher percentage rent expense on certain properties resulting from increased restaurant sales. Additionally, depreciation expense increased by $2.4 million as the total number of properties we either own or lease and then sublease to restaurant owners increased to 3,127 at the end of the second quarter of 2012, compared to 2,978 at the end of the second quarter of 2011. In addition, depreciation expense associated with the Ad Fund increased by $0.5 million, related to the Expanded Menu Board Program, in the second quarter of 2012. The remaining increase in operating expense was primarily associated with higher project-related and renovation expenses.
For the first half of 2012, operating expenses increased $12.5 million, or 9.8%, to $139.8 million compared to $127.3 million in the first half of 2011. Rent expense increased $5.7 million due to additional properties opened year-over-year and higher percentage rent on certain properties. Additionally, depreciation expense increased $4.7 million. Depreciation expense associated with the Ad Fund also increased by $0.7 million, related to the Expanded Menu Board Program. The remaining increase was primarily associated with higher project-related and renovation expenses.
Franchise Fee Costs
Franchise fee costs include the cost of equipment sold to restaurant owners as part of the commencement or renovation of their restaurant business, including training and other costs necessary to assist with a successful restaurant opening, and/or the introduction of our Cold Stone Creamery co-branding offering into existing locations.
Franchise fee costs in the second quarter of 2012 were $24.8 million, an increase of $4.4 million from the second quarter of 2011. Higher costs were driven primarily by a combination of international openings and equipment sales, a higher number of U.S. sales, a higher number of renovations and higher support costs. Year-to-date in 2012, franchise fee costs were $45.1 million, compared to $41.7 million year-to-date in 2011 with the same factors driving higher costs in the second quarter prevalent during the first half of 2012, partially offset by the timing of restaurant openings in Canada.
General and Administrative Expenses
General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support current operations and provide the infrastructure to support future growth.
General and administrative expenses were $40.4 million in the second quarter of 2012, decreasing by $3.6 million from the second quarter of 2011. The primary factor resulting in this decrease was a $6.3 million charge related to the CEO Separation Agreement that was incurred in the second quarter of 2011. Partially offsetting this decrease were higher salaries and benefits required to support growth of the business, and higher professional fees.
For the first half of 2012, general and administrative expenses were $3.4 million lower than the first half of 2011. The same factors resulting in a net decrease in general and administrative expenses in the second quarter were prevalent in the first half of 2012 as well. In addition, we also had favourable timing of certain benefit and other expenses in 2012.
There can be quarterly fluctuations in general and administrative expenses due to the timing of investments, certain expenses, or events that may cause growth rates in any particular quarter to be higher than systemwide sales growth.
Equity Income
Equity income relates to income from equity investments in joint ventures and other investments over which we exercise significant influence but do not control their activities and/or are not the primary beneficiary. Our most significant equity investment is our 50% interest in TIMWEN Partnership, which leases the Canadian Tim Hortons/Wendys ® combination restaurants to restaurant owners or operators.
32
Equity income was $3.9 million in the second quarter of 2012, compared to $3.8 million in the second quarter of 2011. For the first half of 2012, equity income was $7.1 million compared to $6.9 million in the first half of 2011. Equity income from our TIMWEN Partnership reflects the growth in sales at existing restaurants as we have not been developing any new combination restaurants for a number of years.
Other (Income) Expense, net
Other (income) expense, net, includes amounts that are not directly derived from our primary businesses. This includes gains and losses on asset sales, other asset write-offs, and foreign exchange gains and losses. In the second quarter of 2012, other income, net, was $1.0 million versus $0.2 million in the second quarter of 2011. For the first half of 2012, other (income), net was $0.6 million compared to a small expense in the first half of 2011. Included in the second quarter of 2012 was a $0.7 million benefit associated primarily with the reversal of previously accrued closure costs upon the conclusion of closure activities related to our New England markets.
Interest Expense
Total interest expense, including interest on our long-term debt, capital leases and credit facilities, was $8.7 million in the second quarter of 2012 and $7.4 million in the second quarter of 2011. On a year-to-date basis, interest expense was $16.5 million and $14.8 million in 2012 and 2011, respectively. The increase in interest expense during both of these periods related primarily to additional interest on an increased number of capital leases outstanding year-over-year and interest expenses associated with the Ad Funds borrowings under its revolving credit facility which was used to fund the Expanded Menu Board Program.
Interest Income
Interest income is comprised of interest earned from our cash and cash equivalents as well as imputed interest on our franchise incentive program and other notes receivable. Interest income was $0.7 million in the second quarter of 2012 and $0.9 million in the second quarter of 2011. On a year-to-date basis, interest income was $1.4 million and $2.5 million in 2012 and 2011, respectively. The decrease in both of these periods relate primarily to lower cash balances year-over-year. Early in 2011, we continued to hold a significant portion of the proceeds received from the sale of our 50% joint venture interest in Maidstone Bakeries in late 2010, which were used throughout fiscal 2011 to repurchase common shares under our 2011 share repurchase program.
Income Taxes
The effective income tax rate for the second quarter ended July 1, 2012 was 27.6%, compared to 29.4% for the second quarter ended July 3, 2011. The effective income tax rate for the year-to-date periods ended July 1, 2012 and July 3, 2011 was 27.6% and 29.3%, respectively. The effective tax rate was favourably impacted primarily by the benefit associated with Canadian statutory rate reductions.
The Canada Revenue Agency (CRA) continues to conduct its general examination of the Company and various subsidiaries for 2007 and subsequent taxation years. The CRA has extended its examination in respect of certain international issues related to transfer pricing for taxation years 2005 through to 2010. Submissions by the Company are anticipated to be delivered throughout the year to clarify certain assumptions that the CRA is making in its examination. A Notice of Appeal to the Tax Court of Canada was filed on July 27, 2012 in respect of a dispute with CRA related to the deductibility of approximately $10.0 million of interest expense for the 2002 taxation year. As of the date hereof, the Company believes that it will ultimately prevail in sustaining the tax benefit of the interest deduction. We do not currently expect any material impact on earnings to result from the resolution of the aforementioned matters; however, it is possible that actual settlements may differ from amounts accrued.
Under the separation agreements entered into by the Company with Wendys International Inc. (Wendys) in connection with our initial public offering and spin-off from Wendys, either we or Wendys may be required to reimburse the other party for the use of tax attributes while we filed U.S. consolidated or state and local combined tax returns. As previously disclosed in our Quarterly Report on Form 10-Q for the fiscal quarter ended April, 1, 2012, we have notified Wendys of an outstanding reimbursement claim under these agreements and Wendys has notified us of an offsetting claim of a much lower amount. Resolution of these claims could result in arbitration, litigation and/or, ultimately, the payment by one party to the other for the use of such attributes. No such payments were made by either party to the other under any of these separation agreements during 2012.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests increased $0.3 million to $1.2 million in the second quarter of 2012, compared to $0.9 million in the second quarter of 2011. For the first half of 2012, net income attributable to noncontrolling interests increased $0.7 million to $2.4 million, compared to $1.6 million in the first half of 2011. Net income attributable to noncontrolling interests relates to the consolidation of certain Non-owned Restaurants that we are deemed to be the primary beneficiary. We consolidated approximately 309 and 258 Non-owned Restaurants, on average, during the second quarters of 2012 and 2011, respectively, and 307 and 257 Non-owned Restaurants during the first half of 2012 and 2011, respectively. The increase in the number of VIEs consolidated and same-store sales growth of existing VIEs were the primary factors resulting in higher net income attributable to noncontrolling interests during both periods.
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Comprehensive Income
In the second quarter of 2012, comprehensive income attributable to Tim Hortons Inc. was $117.4 million, compared to $95.5 million in the second quarter of 2011, increasing $21.9 million due primarily to higher Net income attributable to Tim Hortons Inc. of $12.5 million. Additionally, in the second quarter of 2012, we had an $8.3 million translation adjustment gain compared to a $0.5 million translation adjustment loss in the second quarter of 2011, resulting in a $8.8 million favourable translation adjustment year-over-year. Translation adjustment gains/losses arise primarily from the translation of our U.S. net assets into our reporting currency, Canadian dollars, at the period-end rates. When the U.S. dollar strengthens or weakens relative to the Canadian dollar, we incur a translation adjustment gain or loss. Additionally, in the second quarter of 2012, we had a $1.0 million gain related to cash flow hedges, net of taxes, compared to a gain of $0.4 million, net of taxes, in the second quarter of 2011.
For the first half of 2012, comprehensive income attributable to Tim Hortons Inc. was $195.0 million, compared to $161.9 million in the first half of 2011, increasing $33.0 million due primarily to higher Net income attributable to Tim Hortons Inc. of $20.6 million and $12.3 million favourable translation adjustment year-over-year.
The 2012 exchange rates were Cdn$1.0181 and Cdn$0.9975 for US$1.00 on July 1, 2012 and April 1, 2012, respectively. The exchange rates were Cdn$1.0170, Cdn$0.9645 and Cdn$0.9644 for US$1.00 on January 1, 2012, July 3, 2011 and April 3, 2011, respectively. The exchange rate was Cdn$0.9946 for US$1.00 on January 2, 2011.
XBRL Filing
Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). The financial information contained in the XBRL-related documents are unaudited and/or unreviewed, as applicable.
As a result of the inherent limitations within the rendering tools, we have identified discrepancies that could not be corrected and, therefore, our XBRL tagged financial statements and footnotes should be read in conjunction with our Condensed Consolidated Financial Statements contained within this Form 10-Q.
Liquidity and Capital Resources
Overview
Our primary source of liquidity has historically been, and continues to be, cash generated from Canadian operations which has, for the most part, self-funded our operations, growth in new restaurants, capital expenditures, dividends, normal course share repurchases, acquisitions and investments. Our U.S. operations have historically been a net user of cash given investment plans and stage of growth, and we expect this trend to continue through the remainder of 2012. Our $250.0 million revolving bank facility (Revolving Bank Facility) provides an additional source of liquidity, of which approximately $243.3 million is undrawn as at July 1, 2012 (see Credit Facilities below for additional information).
In the first half of 2012, we generated $216.4 million of net cash from operations, as compared to $26.3 million of cash from operations in the first half of 2011 (see Comparative Cash Flows below for a description of sources and uses of cash). We believe that we will continue to generate adequate operating cash flows to fund both our capital expenditures and expected debt service requirements over the next twelve months. If additional funds are needed for strategic initiatives or other corporate purposes beyond current availability under our Revolving Bank Facility, we believe, with the strength of our balance sheet and our strong capital structure, we could borrow additional funds. Our ability to incur additional indebtedness will be limited by our financial and other covenants under our Revolving Bank Facility. Our Senior Unsecured Notes, 4.2% coupon, Series 1, due June 1, 2017 (Senior Notes) are not subject to any financial covenants; however, the Senior Notes contain certain other covenants, which are described below. Any such borrowings may result in an increase in our borrowing costs. If such additional borrowings are significant, our credit rating may be downgraded, and it is possible that we would not be able to borrow on terms which are favourable to us.
When evaluating our leverage position, we look at metrics that consider the impact of long-term operating and capital leases as well as other long-term debt obligations. We believe this provides a more meaningful measure of our leverage position given our significant investments in real estate. At July 1, 2012, we had approximately $452.1 million in long-term debt and capital leases on our balance sheet. We continue to believe that the strength of our balance sheet, including our cash position, provides us with opportunity and flexibility for future growth, while still enabling us to return excess cash to our shareholders through a combination of dividends and our share repurchase program.
Historically, our annual working capital needs have not been significant. We do not anticipate our finished goods or green coffee inventory volumes will remain at current levels for an extended period of time, although green coffee inventory values can fluctuate with changes in commodity costs.
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In each of the last 5 fiscal years, operating cash flows have funded our capital expenditure requirements for new restaurant development, remodeling, technology initiatives and other capital needs. Our capital spending in 2012 is expected to be higher than in previous years, as we execute a number of operational initiatives along with our restaurant owners, which may continue at these higher levels in the future. In addition to restaurant development in both Canada and the U.S., our increased spending also includes our share of costs to increase restaurant capacity in Canada, including initiatives such as selectively implementing drive-thru order station relocations, double-order stations, and double-lane drive-thrus. Our increased capital expenditures also reflect investments to accelerate renovations in Canada, which will feature more contemporary design elements similar to our new restaurant development locations. We will also continue with the Expanded Menu Board Program, which consists of the installation of digital menu boards, along with new drive-thru rotating menu boards, that began late in fiscal 2011 to enhance our overall guest experience at our Canadian restaurants. This Expanded Menu Board Program of up to $100.0 million is being funded directly by the Tim Hortons Advertising and Promotion Fund (Canada) Inc. (Ad Fund), which is currently being financed primarily with third-party borrowings, collateralized only by the Ad Funds assets. Although the majority of spending is expected to occur in 2012, there will be spending beyond 2012 to complete the projects.
On February 23, 2012, we announced that we had obtained regulatory approval from the Toronto Stock Exchange (TSX) to commence a new share repurchase program (2012 Program) for up to $200.0 million in common shares, not to exceed the regulatory maximum of 13,668,332 shares, representing 10% of our public float, as defined under the TSX rules, as of February 20, 2012. Our common shares are and will be repurchased under the 2012 Program through a combination of a 10b5-1 automatic trading plan purchases, as well as purchases at managements discretion in compliance with regulatory requirements, and given market, cost and other considerations. Repurchases are being, and will be made, on the TSX, the New York Stock Exchange (NYSE), and/or other Canadian marketplaces, subject to compliance with applicable regulatory requirements, or by such other means as may be permitted by the TSX and/or NYSE, and under applicable laws, including private agreements under an issuer bid exemption order issued by a securities regulatory authority in Canada. Purchases made by way of private agreements under an issuer bid exemption order by a securities regulatory authority in the first quarter of 2012 were at a discount to the prevailing market price as provided in the exemption order. The 2012 Program commenced on March 5, 2012 and is due to terminate on March 4, 2013, or earlier if the $200.0 million or the 10% share maximum is reached. Common shares purchased pursuant to the 2012 Program will be cancelled. The 2012 Program may be terminated by us at any time, subject to compliance with regulatory requirements. As such, there can be no assurance regarding the total number of shares or the aggregate dollar amount of shares that may be repurchased under the 2012 Program.
During the first half of 2012, we spent $136.5 million to purchase and cancel approximately 2.6 million of our common shares as part of our 2011 and 2012 share repurchase programs at an average cost of $51.97 per share. The timing of share repurchases under the 2012 Program was accelerated in the first half of 2012 as we repurchased 1.2 million of our common shares under private agreements in the first quarter of 2012. As a result, cash required for the remainder of our 2012 Program will be lower in subsequent periods.
Our outstanding share capital is comprised of common shares. An unlimited number of common shares, without par value, is authorized, and we had 155,188,401 common shares outstanding at July 1, 2012. As at this same date, we had outstanding stock options with tandem SARs to acquire 1,305,196 of our common shares to officers of the Company pursuant to our 2006 and 2012 Stock Incentive Plans, of which 715,594 were exercisable.
In February 2012, our Board of Directors approved an increase in the dividend from $0.17 to $0.21 per common share paid quarterly, representing an increase of 23.5%, reflecting our strong cash flow position, which allows us to continue our first priority of funding our business growth investment needs while still returning value to our shareholders in the form of dividends and share repurchases. The Board declared and we paid our March and June 2012 dividends at this new rate. On August 9, 2012, our Board of Directors declared a $0.21 per share quarterly dividend, payable on September 5, 2012 to shareholders of record as of August 20, 2012. Dividends are declared and paid in Canadian dollars to all shareholders with Canadian resident addresses. For U.S. resident shareholders, dividends paid will be converted to U.S. dollars based on prevailing exchange rates at time of conversion by the Clearing and Depository Services Inc. for beneficial shareholders and by us for registered shareholders. Notwithstanding our targeted payout range and the recent increase in our dividend, the declaration and payment of all future dividends remain subject to the discretion of our Board of Directors and the Companys continued financial performance, debt covenant compliance, and other risk factors.
Credit Facilities
We have an unsecured Revolving Bank Facility, which was set to mature on December 15, 2014, however, we amended the facility on January 26, 2012 to take advantage of reduced commitment fees of 0.20% and lower applicable margins, and to extend the term to January 26, 2017. We may use the borrowings under the Revolving Bank Facility for general corporate purposes, including potential acquisitions and other business initiatives.
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In the first quarter of 2012, we borrowed $25.0 million on our Revolving Bank Facility as a short-term source of cash due to the acceleration of common shares repurchased under our 2012 Program. As a result of this timing, we expect that cash required for the remainder of the 2012 Program will be lower in subsequent periods. Late in the second quarter of 2012, we repaid the $25.0 million we borrowed on our Revolving Bank Facility. We had $6.7 million and $7.1 million of standby letters of credits drawn on the facility as at July 1, 2012 and January 1, 2012, respectively.
The Revolving Bank Facility provides variable rate funding options including bankers acceptances or LIBOR base rate or prime rate loans plus an applicable margin. This facility does not carry a market disruption clause. The Revolving Bank Facility contains various covenants which, among other things, require the maintenance of 2 financial ratios: a consolidated maximum total debt coverage ratio, and a minimum fixed charge coverage ratio. We were in compliance with these covenants as at July 1, 2012.
The Ad Fund has a $95.8 million revolving credit facility to be used to finance the Expanded Menu Board Program, described above, which consisted of the installation of LCD screens, media engines, drive-thru menu boards and ancillary equipment in our restaurants. At the end of the second quarter of 2012, approximately $42.5 million of this facility had been drawn. The facility is not guaranteed by Tim Hortons Inc. or any of its subsidiaries and is secured only by the Ad Funds assets. The facility matures on December 31, 2012, at which point, the Ad Fund currently intends to refinance this facility.
Comparative Cash Flows
Operating Activities. Net cash provided from operating activities in the first half of 2012 was $216.4 million, compared to $26.3 million in the first half of 2011, representing an increase of $190.1 million. Strong earnings were the primary drivers of operating cash flows in the first half of both 2012 and 2011. The increase year-over-year was primarily driven by working capital movements specific to the first half of 2011. We made tax payments, including approximately $45.0 million related to the sale of our joint venture interest in Maidstone Bakeries that were remitted in early fiscal 2011. In addition, in the first quarter of 2011, we had $38.0 million of Tim Card redemptions that were not offset by a reduction in restricted cash and cash equivalents as restricted investments matured and were reflected in investing activities. Accounts receivable collections in the second quarter of 2011 were temporarily delayed until the first day of the third quarter of 2011 due to the timing of the Canada Day holiday. We also distributed the majority of our $30.0 million commitment to restaurant owners (related to the sale of Maidstone Bakeries) in the first quarter of 2011, which was offset by the timing of other payables in the first quarter of 2012. Working capital requirements associated with inventories has also moderated relative to requirements in 2011 when we increased our green coffee inventories.
Investing Activities. Net cash used in investing activities was $106.2 million in the first half of 2012, compared to $38.9 million in the first half of 2011, representing an increase of $67.3 million. The increase year-over-year was due primarily to the proceeds received from the sale of restricted investments of $38.0 million in the first quarter of 2011, and an increase in capital expenditures of $34.1 million. Capital expenditures are typically the largest ongoing component of our investing activities and include expenditures for new restaurants, improvements to existing restaurants, and other corporate capital needs. A summary of capital expenditures for the year-to-date periods of 2012 and 2011 is as follows:
Year-to-date
2012 |
Year-to-date
2011 |
|||||||
(in millions) | ||||||||
Capital expenditures (1) |
||||||||
New restaurants |
$ | 31.7 | $ | 20.3 | ||||
Existing restaurants (2) |
27.3 | 13.1 | ||||||
Replacement distribution facility |
0.5 | 13.1 | ||||||
Ad FundMenu Board Program (3) |
30.8 | | ||||||
Other capital needs (4) |
7.2 | 16.9 | ||||||
|
|
|
|
|||||
Total capital expenditures |
$ | 97.5 | $ | 63.4 | ||||
|
|
|
|
(1) |
Reflected on a cash basis, which can be impacted by the timing of payments compared to the actual date of acquisition. |
(2) |
Relates primarily to renovations and restaurant replacements. |
(3) |
Relates to the acquisition and installation of LCD screens, media engines, drive-thru menu boards and ancillary equipment in our Canadian restaurants which is being funded by the Ad Fund. |
(4) |
Relates primarily to other equipment purchases required for ongoing business needs and software implementations. |
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Capital expenditures for new restaurants by operating segment were as follows:
Year-to-date
2012 |
Year-to-date
2011 |
|||||||
(in millions) | ||||||||
Canada |
$ | 17.2 | $ | 14.4 | ||||
U.S. |
14.5 | 5.9 | ||||||
|
|
|
|
|||||
Total |
$ | 31.7 | $ | 20.3 | ||||
|
|
|
|
Financing Activities. Financing activities used cash of $178.7 million in the first half of 2012, compared to $464.0 million in the first half of 2011. We purchased and cancelled $136.5 million of common shares and paid dividends of $65.7 million in the first half of 2012, compared to $401.9 million and $56.1 million, respectively, in the first half of 2011. Our decreased spending for financing activities is a direct result of fewer share repurchases in 2012. In the first half of 2011, additional funds were available from the net proceeds received from the 2010 sale of our 50% joint venture interest in Maidstone Bakeries for use in the 2011 share repurchase program, which authorized repurchases for up to $445.0 million, whereas our 2012 Program authorizes repurchases for up to $200.0 million. In addition, the Ad Fund has drawn $42.5 million on its revolving credit facility in the first half 2012 to fund its Menu Board Program capital spending.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements as of July 1, 2012 or July 3, 2011, as that term is described by the SEC.
Basis of Presentation
The functional currency of Tim Hortons Inc. is the Canadian dollar as the majority of our cash flows are in Canadian dollars. The functional currency of each of our subsidiaries and legal entities is the primary currency in which each subsidiary operates, which is the Canadian dollar, the U.S. dollar or the Euro. The majority of our operations, restaurants and cash flows are based in Canada, and we are primarily managed in Canadian dollars. As a result, our reporting currency is the Canadian dollar.
Application of Critical Accounting Policies
The Condensed Consolidated Financial Statements and accompanying footnotes included in this report have been prepared in accordance with GAAP with certain amounts based on managements best estimates and judgments. To determine appropriate carrying values of assets and liabilities that are not readily available from other sources, management uses assumptions based on historical results and other factors that they believe are reasonable. Actual results could differ from those estimates. Also, materially different amounts may result under materially different conditions or from using materially different assumptions. However, management currently believes that any materially different amounts resulting from materially different conditions or material changes in facts or circumstances are unlikely.
Other than the adoption of the new accounting standards, as noted below, there have been no significant changes in critical accounting policies or management estimates since the year ended January 1, 2012. A comprehensive discussion of our critical accounting policies and management estimates is included in Managements Discussion and Analysis of Financial Condition and Results of Operations in our 2011 Form 10-K for the year ended January 1, 2012, filed with the SEC and the CSA on February 28, 2012.
Effective January 2, 2012, the Company adopted Accounting Standards Update (ASU) No. 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements . This ASU resulted in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP. The adoption of this ASU has been reflected in our related financial disclosures (see note 7 to the Condensed Consolidated Financial Statements).
Recently Issued Accounting Standards
In December 2011, the FASB issued ASU No. 2011-11 Disclosures about Offsetting Assets and Liabilities . The amendments in this ASU are intended to enhance disclosures by requiring improved information about financial instruments that are either: (i) offset in accordance with applicable GAAP; or (ii) subject to an enforceable master netting arrangement or similar arrangement. The amendments in this ASU are effective for fiscal years and interim periods beginning on or after January 1, 2013, and should be applied retrospectively for all comparative periods presented. We are currently assessing the potential impact, if any, the adoption of this ASU may have on our Condensed Consolidated Financial Statements and related disclosures.
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Market Risk
Foreign Exchange Risk
Our exposure to various foreign exchange risks remains substantially the same as reported in our 2011 Form 10-K for the year ended January 1, 2012.
Commodity Risk
Our exposure to various commodity risks remains substantially the same as reported in our 2011 Form 10-K for the year ended January 1, 2012.
Interest Rate Risk
Our exposure to various interest rate risks remains substantially the same as reported in our 2011 Form 10-K for the year ended January 1, 2012.
Inflation
Our exposure to various inflationary risks remains substantially the same as reported in our 2011 Form 10-K for the year ended January 1, 2012.
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SAFE HARBOR STATEMENT
Certain information contained in our Report on Form 10-Q for the second quarter ended July 1, 2012 (Report), including information regarding future financial performance and plans, expectations, and objectives of management constitute forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. We refer to all of these as forward-looking statements. A forward-looking statement is not a guarantee of the occurrence of future events or circumstances, and such future events or circumstances may not occur. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as believes, expects, anticipates, estimates, intends, plans, seeks, outlook, forecast or words of similar meaning, or future or conditional verbs, such as will, should, could or may. Examples of forward-looking statements in the Report include, but are not limited to, statements concerning managements expectations relating to possible or assumed future results, our strategic goals and our priorities, and the economic and business outlook for us, for each of our business segments and for the economy generally. The forward-looking statements contained in our Report are based on currently-available information and are subject to various risks and uncertainties, including, but not limited to, risks described in our Report on Form 10-K filed on February 28, 2012 (the 2011 Form 10-K) with the U.S. Securities and Exchange Commission and the Canadian Securities Administrators, and the risks and uncertainties discussed in the Report, that could materially and adversely impact our business, financial condition and results of operations (i.e. , the risk factors). Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also materially adversely affect our business, financial condition, and/or operating results. Forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about: the absence of an adverse event or condition that damages our strong brand position and reputation; the absence of a material increase in competition within the quick service restaurant segment of the food service industry; cost and availability of commodities; continuing positive working relationships with the majority of the Companys restaurant owners; the absence of any material adverse effects arising as a result of litigation; there being no significant change in the Companys ability to comply with current or future regulatory requirements; and general worldwide economic conditions. We are presenting this information for the purpose of informing you of managements current expectations regarding these matters, and this information may not be appropriate for other purposes.
Many of the factors that could determine our future performance are beyond our ability to control or predict. Investors should carefully consider our risk factors and the other information set forth in our Report (including our long-form Safe Harbor statement contained in Exhibit 99 thereto), and our 2011 Form 10-K, and are further cautioned not to place undue reliance on the forward-looking statements contained in our Report, which speak only as to managements expectations as of the date of the Report. The events and uncertainties outlined in the risk factors, as well as other events and uncertainties not set forth below, could cause our actual results to differ materially from the expectation(s) included in the forward-looking statement, and if significant, could materially affect the Companys business, sales revenues, stock price, financial condition, and/or future results, including, but not limited to, causing the Company to: (i) close restaurants, (ii) fail to realize our same-store sales, which are critical to achieving our operating income and other financial targets, (iii) fail to meet the expectations of our securities analysts or investors, or otherwise fail to perform as expected, (iv) have insufficient cash to engage in or fund expansion activities, dividends, or share repurchase programs, or (v) increase costs, corporately or at restaurant level, which may result in increased restaurant-level pricing, which, in turn, may result in decreased guest demand for our products resulting in lower sales, revenues, and earnings. We assume no obligation to update or alter any forward-looking statements after they are made, whether as a result of new information, future events, or otherwise, except as required by applicable law.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
This information is incorporated by reference from the section titled Market Risk on page 38 of this Form 10-Q.
ITEM 4. | CONTROLS AND PROCEDURES |
(a) | The Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, performed an evaluation of the Companys disclosure controls and procedures, as contemplated by Securities Exchange Act Rule 13a-15. Disclosure controls and procedures include those designed to ensure that information required to be disclosed is accumulated and communicated to the Companys management as appropriate to allow timely decisions regarding disclosure. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that such disclosure controls and procedures were effective. |
(b) | There was no change in the Companys internal control over financial reporting during the Companys most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting. |
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ITEM 1. | LEGAL PROCEEDINGS |
On June 12, 2008, a claim was filed against the Company and certain of its affiliates in the Ontario Superior Court of Justice (the Court) by two of its franchisees, Fairview Donut Inc. and Brule Foods Ltd., alleging, generally, that the Companys Always Fresh baking system and expansion of lunch offerings have led to lower franchisee profitability. The claim, which sought class action certification on behalf of Canadian restaurant owners, asserted damages of approximately $1.95 billion. Those damages were claimed based on breach of contract, breach of the duty of good faith and fair dealing, negligent misrepresentations, unjust enrichment, price maintenance, and waiver of tort. The plaintiffs filed a motion for certification of the putative class in May of 2009, and the Company filed its responding materials as well as a motion for summary judgment in November of 2009. The 2 motions were heard in August and October 2011. On February 24, 2012, the Court granted the Companys motion for summary judgment and dismissed the plaintiffs claims in their entirety. The Court also found that certain aspects of the test for certification of the action as a class proceeding had been met, but all of the underlying claims were nonetheless dismissed as part of the aforementioned summary judgment decision.
While the Court found in favour of the Company on all claims, the plaintiffs have filed a Notice of Appeal with respect to the claims for breach of contract, breach of the duty of good faith and fair dealing, price maintenance, and waiver of tort. In the plaintiffs more recent court filings, they have narrowed their appeal to include only breach of contract and breach of duty of good faith and fair dealing. The Company will continue to vigorously defend against the plaintiffs claim. A hearing on the appeal will be held in the fourth quarter of 2012. If all potential appeals were determined adversely to the Company, the effect would be that the matters would ultimately proceed to trial. The Company remains of the view that it would have good and tenable defences at any such trial, and that the plaintiffs claims are without merit and will not be successful. However, if the matters were determined adversely to the Company at trial, and that determination was upheld by final order after appeals, it is possible that the claims could have a material adverse impact on the Companys financial statements.
In addition, the Company and its subsidiaries are parties to various legal actions and complaints arising in the ordinary course of business. As of the date hereof, the Company believes that the ultimate resolution of such matters will not materially affect the Companys financial statements.
ITEM 1A. | RISK FACTORS |
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed under the heading Risk Factors in our 2011 Form 10-K filed on February 28, 2012 with the SEC and the CSA, as well as information in our other public filings, press releases, and in our Safe Harbor statement. Any of these risk factors could materially affect our business, financial condition or future results. The risks described in the 2011 Form 10-K, and the additional information provided in this Form 10-Q and elsewhere, as described above, may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
We are updating certain of the risk factors previously disclosed in Part I, Item 1A of our 2011 Form 10-K, as set forth below, in order to reflect certain events which have occurred since the 2011 Form 10-K was filed.
Increases in the cost of commodities or decreases in the availability of commodities could have an adverse impact on our restaurant owners and on our business and financial results.
Our restaurant system is exposed to price volatility in connection with certain key commodities that we purchase in the ordinary course of business such as coffee, wheat, edible oil and sugar, which can impact revenues, costs and margins. Although we monitor our exposure to commodity prices and our forward hedging program (of varied duration, depending upon the type of underlying commodity) partially mitigates the negative impact of any cost increases, price volatility for commodities we purchase has increased due to conditions beyond our control, including economic and political conditions, currency fluctuations, availability of supply, weather conditions, pest damage and changing global consumer demand and consumption patterns. Increases and decreases in commodity costs are largely passed through to restaurant owners, and we and our restaurant owners have some ability to increase product pricing to offset a rise in commodity prices, subject to restaurant owner and guest acceptance, respectively. Notwithstanding the foregoing, while it is not our operating practice, we may choose not to pass along all price increases to our restaurant owners. As a result, commodity cost increases could have a more significant effect on our business and results of operations than if we had passed along all increases to our restaurant owners. Price fluctuations may also impact margins as many of these commodities are typically priced based on a fixed-dollar mark-up. A number of commodities have recently experienced elevated prices relative to historic prices. Although we generally secure commitments for most of our key commodities that generally extend over a six-month period, these may be at higher prices than our previous commitments. In addition, if escalation in prices continues, we may be forced to purchase commodities at higher prices at the end of the respective terms of our current commitments. See Item 7A. Quantitative and Qualitative Disclosures about Market RiskCommodity Risk of our 2011 Form 10-K.
40
If the supply of commodities, including coffee, fail to meet demand, our restaurant owners may experience reduced sales which in turn, would reduce our rents and royalty income as well as distribution income. Such a reduction in our rents and royalty income and distribution income may adversely impact our business and financial results.
Our business activities subject us to litigation risk that could affect us adversely by subjecting us to significant monetary damages and other remedies or by increasing our litigation expense.
From time to time, we are subject to claims incidental to our business, such as illness or injury relating to food quality or food handling. In addition, class action lawsuits have been filed in the past, and may continue to be filed, against quick service restaurants alleging, among other things, that quick service restaurants have failed to disclose the health risks associated with their products or that certain food products contribute to obesity. These types of claims could also harm our brand reputation, making it more difficult to attract and retain qualified restaurant owners and grow the business. We may also be subject to claims from employees, guests, and others relating to health and safety risks and conditions of our restaurants associated with design, construction, site location and development, indoor or airborne contaminants and/or certain equipment utilized in operations. In addition, from time to time, we face claims from: our employees relating to employment or labour matters, including potentially class action suits, regarding wages, discrimination, unfair or unequal treatment, harassment, wrongful termination, or overtime compensation; our restaurant owners and/or operators regarding their profitability (which is a present claim against us), wrongful termination of their franchise or operating (license) agreement, as the case may be, or other restaurant owner relationship matters; taxation authorities regarding certain tax disputes; patent infringement claims from patent-holding companies; or, other stakeholders or business partners. We are also exposed to a wide variety of falsified claims due to our size and brand recognition. All of these types of matters have the potential to unduly distract management attention and increase costs, including costs associated with defending such claims. Any negative publicity resulting from these claims may adversely affect our reputation. Our current exposure with respect to legal matters pending against us could change if determinations by judges and other finders of fact are not in accordance with managements evaluation of the claims. Should managements evaluations prove incorrect, our exposure could exceed expectations and have a material adverse effect on our financial condition and results of operations. If successful, any such claims could adversely affect our business, financial condition, and financial results. A judgment significantly in excess of our insurance coverage for any claims could materially and adversely affect our consolidated financial condition or results of operations. See Item 1. Legal Proceedings of this Report that is incorporated in this section by reference.
41
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ISSUER PURCHASES OF EQUITY SECURITIES
Period |
(a)
Total Number of Shares Purchased (1) |
(b)
Average Price Paid per Share (Cdn.) (2) |
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
(d)
Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (Cdn.) (3) (4) |
||||||||||||
Monthly Period #4 (April 2, 2012 May 6, 2012) |
242,775 | $ | 54.33 | 242,775 | $ | 125,576,694 | ||||||||||
Monthly Period #5 (May 7, 2012 June 3, 2012) |
561,699 | ( 5 ) | 55.18 | 445,402 | 100,987,701 | |||||||||||
Monthly Period #6 (June 4, 2012 July 1, 2012) |
227,340 | 54.16 | 227,340 | 88,677,392 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total |
1,031,814 | $ | 54.74 | 915,517 | $ | 88,677,392 |
(1) |
Based on settlement date. |
(2) |
Inclusive of commissions paid to the broker to repurchase the common shares. |
(3) |
Exclusive of commissions paid to the broker to repurchase the common shares. |
( 4 ) |
On February 23, 2012, we announced we obtained regulatory approval from the TSX to commence a 2012 share repurchase program (2012 program) for up to $200.0 million in common shares, not to exceed the regulatory maximum of 13,668,332 common shares, representing 10% of our public float as of February 20, 2012. The 2012 program commenced March 5, 2012 and is due to terminate on March 4, 2013 or earlier if the $200.0 million or the 10% share maximum is reached. The first purchases were made under the 2012 program on March 5, 2012. |
(5) |
In May 2012, Computershare Trust Company of Canada (the Trustee), on behalf of The TDL RSU Plan Trust (the Trust), purchased 111,784 common shares on the TSX through a broker, the same broker utilized for our publicly announced share repurchase program, as a means of fixing the cash flow requirements in connection with the settlement (after vesting at a future date) of restricted stock units awarded in May 2012 to most of our eligible Canadian employees under our 2012 Stock Incentive Plan (the Plan). As such, the shares acquired by the Trust remain outstanding, and the Trust will retain and hold these shares until directed by us to distribute shares to Canadian employees in settlement of vested restricted stock units. Shares held by the Trust will not count toward determining whether a quorum exists nor are they entitled to voting rights. Dividends paid on the shares owned by the Trust will be paid to the Trust in cash, and, at our direction, the Trustee may acquire additional shares of our stock with such cash in order to pay trust expenses, obtain additional shares to settle dividend equivalent rights that accrue in respect of the outstanding and unvested restricted stock units, or acquire additional shares to fix the cash cost of future grants. In addition, in May 2012, the Trustee, as an agent of ours, also using the same broker utilized for our publicly announced share repurchase program, purchased 4,514 shares on the open market, to settle, after provision for payment of the employees minimum statutory withholding tax requirements, our settlement obligation for restricted stock units to certain other employees who do not receive shares from the Trust. |
Dividend Restrictions with Respect to Part II, Item 2 Matters
The Companys Revolving Bank Facility limits the payment of dividends by the Company. The Company may not make any dividend distribution unless, at the time of, and after giving effect to the aggregate dividend payment, the Company is in compliance with the financial covenants contained in the Revolving Bank Facility, and there is no default outstanding under the Revolving Bank Facility.
ITEM 6. | EXHIBITS |
(a) Index to Exhibits on Page 44.
42
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TIM HORTONS INC. (Registrant) | ||||
Date: August 9, 2012 | /s/ CYNTHIA J. DEVINE | |||
Cynthia J. Devine | ||||
Chief Financial Officer |
43
TIM HORTONS INC. AND SUBSIDIARIES
Exhibit |
Description |
Where found |
||
*10(a) | Executive Annual Performance Plan, as amended effective August 9, 2012 | Filed herewith. | ||
*10(b) | Form of Restricted Stock Unit Award Agreement (2012 Award) | Filed herewith. | ||
*10(c) | Form of Nonqualified Stock Option Award Agreement (2012 Award) | Filed herewith. | ||
31(a) | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | Filed herewith. | ||
31(b) | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | Filed herewith. | ||
32(a) | Section 1350 Certification of Chief Executive Officer | Filed herewith. | ||
32(b) | Section 1350 Certification of Chief Financial Officer | Filed herewith. | ||
99 | Safe Harbor under the Private Securities Litigation Reform Act 1995 and Canadian securities laws | Filed herewith. | ||
101.INS | XBRL Instance Document. | Filed herewith. | ||
101.SCH | XBRL Taxonomy Extension Schema Document. | Filed herewith. | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | Filed herewith. | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | Filed herewith. | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | Filed herewith. | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | Filed herewith. |
* | Denotes management contract or compensatory arrangement |
Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). The financial information contained in the XBRL-related documents is unaudited and/or unreviewed.
44
Exhibit 10(a)
TIM HORTONS INC.
EXECUTIVE ANNUAL PERFORMANCE PLAN
(As amended and restated effective September 28, 2009)
Most Recently Amended: August 9, 2012
1. Purpose . The purpose of the Executive Annual Performance Plan (the Plan) is to enhance the ability of Tim Hortons Inc., a corporation incorporated under the Canada Business Corporations Act (the Company) and its subsidiaries to attract, motivate, reward, and retain key employees, to strengthen their commitment to the success of the Company and to align their interests with those of the Companys shareholders by providing additional compensation to designated key employees of the Company based on the achievement of performance objectives. To this end, the Plan provides a means of rewarding Participants based on the performance of the Company and/or one or more of its Operating Units, and/or based on a Participants individual performance.
2. Administration .
(i) The Plan shall be administered by the Committee and the CEO as provided herein. The Committee shall have full authority to: (A) establish the rules and regulations relating to the Plan, (B) interpret the Plan and those rules and regulations, (C) determine the Performance Objectives of the Company, and/or one or more the Operating Units, and/or one or more Participants, (D) decide the facts in any case arising under the Plan, and (E) to make all other determinations and to take all other actions necessary or appropriate for the proper administration of the Plan, including the delegation of such authority or power, where appropriate. The Committees administration of the Plan, including all such rules and regulations, interpretations, selections, determinations, approvals, decisions, delegations, amendments, terminations and other actions, shall be final and binding on the Company, its shareholders and the Participants and their beneficiaries.
(ii) Subject to the authority and discretion of the Committee, the CEO shall have the full authority to determine: (A) the Participants in the Plan; (B) the Award opportunities for such Participants, and (C) whether such Award opportunities shall be based on: (I) the Performance Objectives of the Company, or (II) a combination of the Performance Objectives of the Company and one or more Operating Units and/or, for Participants that are not Executive Officers, the Performance Objectives of one or more individual Participants.
3. Eligible Employees . Generally, all Employees are eligible to participate in the Plan for any fiscal year. However, participation shall be limited to those Employees selected by the CEO, subject to the authority and discretion of the Committee, to participate in the Plan for each fiscal year, in accordance with Section 4.
4. Determination of Awards . For each fiscal year, the Committee shall establish the Performance Objectives of the Company and/or Operating Units and/or for one or more individual Participants. Subject to the authority and discretion of the Committee, the CEO shall determine (i) the Employees who shall be Participants during each fiscal year, (ii) whether Awards for each Participant shall be based solely upon the achievement of Performance Objectives of the Company, or on a combination of the achievement of Performance Objectives
for the Company and for one or more Operating Units and/or, for Participants that are not Executive Officers, the achievement of Performance Objectives of one or more individual Participants, (iii) the Award opportunities for each Participant, including the extent to which Awards will be payable for actual performance between each level of the Performance Objectives, and (iv) any adjustments described in Section 10 hereof. The CEO shall provide to the Committee, for consideration in accordance with its delegated authority from the Board, a schedule that indicates the Participants selected, their Award opportunities, and whether such Awards will be based on the Performance Objectives of the Company or a combination of the Company and one or more Operating Units and/or the individual Performance Objectives of such Participants, and any proposed adjustments as described in Section 10 hereof. The Company shall notify each Participant of the applicable Performance Objectives for such Participant and his or her corresponding Award opportunities for each fiscal year.
5. Payment of Awards . As soon as practicable after the determination of the Companys and, if applicable, the Operating Units financial performance for a fiscal year, but no later than the 15 th day of the third month following the end of such fiscal year, each Award to the extent earned shall be paid in a single lump sum cash payment, less applicable withholding taxes. Notwithstanding the foregoing, a Participant may elect to defer all or a portion of any Award that will otherwise become payable in accordance with this Section, if permitted pursuant to (and in accordance with) a deferred compensation plan adopted by, or an agreement entered into with, the Company or any of its subsidiaries.
6. Discretionary Bonuses . In addition to any Awards payable under Section 4, the CEO, after consultation with the Committee and subject to the authority and discretion of the Committee, shall have the authority to make additional cash incentive awards to any Employees selected by the CEO in amounts determined by the CEO. Any such Award shall be paid to the applicable employee no later than the 15 th day of the third month following the end of the fiscal year in which the award is determined.
7. Termination of Employment .
(i) No Award or pro-rated portion of an Award for a fiscal year shall be payable to any Participant unless he or she is employed by the Company or one of its subsidiaries on the payment date for Awards payable in respect of the fiscal year, unless the Participants employment was terminated because of his or her (i) death, (ii) disability or (iii) Retirement, in which event the Participant will be entitled to a pro-rata portion (which shall be 100% if such termination occurs after the end of the fiscal year and prior to the payment date) of the Award otherwise payable in respect of that fiscal year, subject to the Committees discretion as set forth in Section 2 hereof, or the discretion of the CEO or the Chair of the Committee, as described in Section 7(ii) hereof, as applicable. For purposes of further clarity, without limiting the generality of the foregoing, even if a Participant is terminated without Cause or is otherwise found by a court of competent jurisdiction to have been wrongfully terminated prior to the payment date for Awards in respect of a fiscal year, the Participant will receive no pro-rated Award, and the notice or pay in lieu of notice that the Participant receives in connection with termination will not have any component for damages representing the amount of an Award over any period of notice and, further, the employee will not be eligible for an Award for such period.
(ii) The Chief Executive Officer of the Company shall have the discretion to determine, at any time prior to or after a termination of employment of a Participant who is not an Executive
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Officer, whether and, if applicable, the amount of any pro-rata portion of an Award that the CEO determines may be payable to such individual pursuant to Section 7(i), provided that the aggregate value of the pro-rata portion of the Award to which such Participant would be entitled does not exceed $500,000. The Chair of the Committee shall have this discretion for Participants who are not Executive Officers where the aggregate value of any pro-rata portion of an Award that the CEO determines may be payable to such Participant would exceed $500,000.
8. Misconduct . In the event that a Participant has (i) used for profit or disclosed to unauthorized persons, confidential information or trade secrets of the Company or its subsidiaries, or (ii) breached any contract with or violated any fiduciary obligation to the Company or its subsidiaries, or (iii) engaged in unlawful trading in the securities of the Company or its subsidiaries or of another company based on information gained as a result of that Participants employment with, or status as a director to, the Company or its Subsidiaries, no Award or pro-rated portion of an Award for a fiscal year shall be payable to any such Participant, unless the Committee shall determine otherwise.
9. Change in Control . Notwithstanding any provision in the Plan to the contrary, upon the occurrence of a Change in Control of the Company, the following provisions shall apply:
(i) The minimum Award payable to each Participant under Section 5 in respect of the fiscal year in which the Change in Control occurs shall be the greatest of:
(A) the Award or other annual bonus paid or payable to the Participant in respect of the fiscal year prior to the year in which the Change in Control occurs;
(B) the Award amount that would be payable to the Participant assuming that the Company achieved the target level of the Performance Objectives for such fiscal year; and
(C) the Award amount that would be payable to the Participant based on the Companys actual performance and achievement of applicable Performance Objectives for such fiscal year through the date of the Change in Control.
(ii) Notwithstanding anything to the contrary contained herein, in the event that following the date of a Change in Control and prior to the payment date for Awards payable in respect of the fiscal year in which the Change in Control occurs a Participants employment is terminated by the Company and its subsidiaries without Cause or by the Participant for Good Reason, such Participant shall be entitled to receive the Award otherwise payable pursuant to the terms of the Plan in respect of that fiscal year as if he or she had remained in the employ of the Company through the payment date for Awards payable in respect of such fiscal year.
(iii) If a Participants employment is terminated by the Company and its subsidiaries without Cause prior to the date of a Change in Control but the Participant reasonably demonstrates that the termination (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control or (B) otherwise arose in connection with, or in anticipation of, a Change in Control which has been threatened or proposed, such termination shall be deemed to have occurred after a Change in Control for purposes of this Plan provided a Change in Control shall actually have occurred.
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10. Adjustments . The Committee or the CEO, subject to the authority and discretion of the Committee, may, at the time Performance Objectives are determined for a fiscal year, or at any time prior to the final determination of Awards in respect of such fiscal year, provide for the manner in which performance will be measured against the Performance Objectives or may adjust the Performance Objectives (or the Companys performance against said Performance Objectives) to reflect the impact of specified corporate transactions (such as a stock split or stock dividend), special charges, accounting or tax law changes, and/or other extraordinary, nonrecurring, or special events or circumstances.
11. Designation of Beneficiary . In the event of a Participants death prior to full payment of any Award hereunder, unless such Participant shall have designated a beneficiary or beneficiaries in accordance with this Section 11, payment of any Award due under the Plan shall be made to the beneficiary or beneficiaries designated by the Participant under the Companys basic life insurance program, or if no beneficiary has been designated under the basic life insurance program, the Participants designated beneficiary dies prior to receiving any payment of an Award or if such designation shall for any reason be illegal or ineffective, Awards payable under the Plan shall be paid to the Participants estate. A beneficiary designation under this Plan, or revocation of a prior beneficiary designation, will be effective only if it is made in writing on a form provided by the Company, signed by the Participant and received by the Benefits Department of the Company. If a beneficiary has been designated under this Plan and such beneficiary dies prior to receiving any payment of an Award or if such designation shall for any reason be illegal or ineffective, Awards payable under the Plan shall be paid to the Participants estate.
12. Amendment or Termination . The Board may amend or terminate the Plan at any time in its discretion; provided , however , that no amendment or termination of the Plan may affect any Award made under the Plan prior to that time; and provided further , however , that the Plan may not be amended or terminated through and including the fiscal year in which a Change in Control occurs (i) at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control or (ii) otherwise in connection with, or in anticipation of, a Change in Control which has been threatened or proposed, in either case provided that a Change in Control shall actually have occurred.
13. Recoupment Policy Relating to Performance-Based Compensation; Other Agreements . Notwithstanding anything to the contrary contained herein, any Award made under the Plan is subject to the Companys (or an affiliate of the Companys) right to reclaim, or require forfeiture of, such Award or payment or other amounts in connection with or settlement of such Award:
(i) | in the event of a financial restatement in accordance with the Companys Recoupment Policy Relating to Performance-Based Compensation adopted by the Board, as amended from time to time; or |
(ii) | in accordance with the terms of any separate agreement, understanding, or arrangement between a Participant and the Company or any affiliate of the Company, including but not limited to any employment agreement, offer letter for initial employment, promotional letter setting forth the terms of a Participants promotion, change in control agreement, and/or post-employment covenant agreement. |
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14. Section 409A of the U.S. Internal Revenue Code . The Plan is intended to be exempt from the requirements of Section 409A of the Code and the Treasury Regulations promulgated thereunder, and the Plan shall be interpreted, administered and operated accordingly. Nothing in the Plan shall be construed as an entitlement to or guarantee of any particular tax treatment to a Participant and none of the Company, its affiliates, the Board or the Committee shall have any liability with respect to any failure to comply with the requirements of Section 409A of the Code.
15. Miscellaneous Provisions
(a) Neither the establishment of this Plan, nor any action taken hereunder, shall be construed as giving any Employee or any Participant any right to be retained in the employ of the Company or any of its subsidiaries.
(b) A Participants rights and interests under the Plan may not be assigned or transferred, except as provided in Section 10, and any attempted assignment or transfer shall be null and void and shall extinguish, in the Companys sole discretion, the Companys obligation under the Plan to pay Awards with respect to the Participant.
(c) The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund, or to make any other segregation of assets, to assure payment of Awards.
(d) The Company shall have the right to deduct from Awards paid any taxes or other amounts required by law to be withheld.
(e) Nothing contained in the Plan shall limit or affect in any manner or degree the normal and usual powers of management, exercised by the officers and the Board or committees thereof, to change the duties or the character of employment of any employee of the Company or any of its subsidiaries or to remove the individual from the employment of the Company or any of its subsidiaries at any time, all of which rights and powers are expressly reserved.
(f) This Plan shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.
16. Definitions .
(a) Award shall mean the cash incentive award earned by a Participant under the Plan for any fiscal year and/or any discretionary bonus described in Section 6 hereof.
(b) Base Salary shall mean the Participants annual base salary actually paid by the Company and/or any of its subsidiaries and received by the Participant during the applicable fiscal year. Annual base salary does not include (i) Awards under the Plan, (ii) long-term incentive awards, (iii) signing bonuses or any similar bonuses, (iv) imputed income from such programs as executive life insurance, or (v) nonrecurring earnings such as moving expenses, and is based on salary earnings before reductions for (I) such items as contributions under Sections 125 or 401(k) of the Code or to a registered retirement savings plan, or (II) any remuneration, award, grant, bonus or contribution made pursuant to any nonqualified deferred compensation plan or agreement or any retirement savings plans.
(c) Board shall mean the Board of Directors of the Company.
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(d) Cause means:
(i) in the case of a Participant whose employment with the Company or an affiliate thereof is subject to the terms of an employment or change in control agreement between such Participant and the Company or affiliate, which employment or change in control agreement includes a definition of Cause, for purposes of termination, the term Cause as used in this Plan shall have the meaning set forth in such employment or change in control agreement during the period that such employment or change in control agreement remains in effect following a Change in Control; and
(ii) in all other cases, (a) intentional failure to perform reasonably assigned duties, (b) dishonesty or willful misconduct in the performance of duties, (c) intentional violation of Company or applicable affiliate policy, (d) involvement in a transaction in connection with the performance of duties to the Company or any of its affiliates which transaction is adverse to the interests of the Company or any of its affiliates and which is engaged in for personal profit, (e) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses) or (f) any other act, event or circumstance which would constitute just cause at law for termination of the Participants employment.
(e) CEO shall mean the Chief Executive Officer of the Company.
(f) Change in Control shall mean the occurrence during the term of the Plan of:
(i) An acquisition (other than directly from the Company) of any common shares or other voting securities of the Company entitled to vote generally for the election of directors (the Voting Securities) by any Person (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 , as amended (the Exchange Act)), immediately after which such Person has Beneficial Ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty percent (30%) or more of the Companys then outstanding common shares or the combined voting power of the Companys then outstanding Voting Securities; provided , however , in determining whether a Change in Control has occurred, common shares or Voting Securities which are acquired in a Non-Control Acquisition (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A Non-Control Acquisition shall mean an acquisition by (A) an employee benefit plan (or a trust forming a part thereof) maintained by (1) the Company or (2) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a Subsidiary), (B) the Company or its Subsidiaries, or (C) any Person in connection with a Non-Control Transaction (as hereinafter defined);
(ii) The individuals who, as of September 28, 2009, are members of the Board (the Incumbent Board), cease for any reason to constitute at least seventy percent (70%) of the members of the Board; provided , however , that if the election, or nomination for election by the Companys common shareholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further , however , that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a Proxy Contest) including by reason of any agreement intended to avoid or settle any Proxy Contest; or
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(iii) The consummation of:
(A) A merger, consolidation, amalgamation or reorganization with or into the Company or in which securities of the Company are issued (a Merger), unless such Merger is a Non-Control Transaction. A Non-Control Transaction shall mean a Merger where:
(1) the shareholders of the Company immediately before such Merger own directly or indirectly immediately following such Merger at least seventy percent (70%) of the combined voting power of the outstanding voting securities of the corporation resulting from such Merger (the Surviving Corporation) in substantially the same proportion as their ownership of the Voting Securities immediately before such Merger;
(2) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such Merger constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, or a corporation beneficially directly or indirectly owning a majority of the voting securities of the Surviving Corporation; and
(3) no Person other than (i) the Company, (ii) any Subsidiary, (iii) any employee benefit plan (or any trust forming a part thereof) that immediately prior to such Merger was maintained by the Company or any Subsidiary, or (iv) any Person who, immediately prior to such Merger had Beneficial Ownership of thirty percent (30%) or more of the Companys then outstanding common shares or the combined voting power of the Companys then outstanding Voting Securities, has Beneficial Ownership of thirty percent (30%) or more of the then outstanding common shares of the Surviving Corporation or the combined voting power of the Surviving Corporations then outstanding voting securities.
(B) A complete liquidation or dissolution of the Company; or
(C) The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the Subject Person) acquired Beneficial Ownership of more than the permitted amount of the then outstanding common shares or Voting Securities as a result of the acquisition of common shares or Voting Securities by the Company which, by reducing the number of common shares or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of common shares or Voting Securities by the Company, and after such acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional common shares or Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.
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(g) Code shall mean the Internal Revenue Code of 1986, as amended.
(h) Committee shall mean the Human Resource and Compensation Committee of the Board or such other committee of the Board appointed by the Board from time to time to administer the Plan and to perform the functions set forth herein.
(i) Employee shall mean any employee of the Company or any of its affiliates, subsidiaries or parent organization.
(j) Executive Officer shall mean an Employee designated as an executive officer by the Board from time to time or any Employee that reports directly to the CEO.
(k) Good Reason shall mean the occurrence after a Change in Control of any of the following events or conditions without the Participants express written consent:
(i) a change in the Participants status, title, position or responsibilities (including reporting responsibilities) which, in the Participants reasonable judgment, does not represent a promotion from his or her status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Participant of any duties or responsibilities which, in the Participants reasonable judgment, are inconsistent with such status, title, position or responsibilities; or any removal of the Participant from or failure to reappoint or reelect him or her to any of such positions, except in connection with the termination of his or her employment for disability, for Cause, as a result of his or her death or by the Participant other than for Good Reason;
(ii) a reduction by the Company in the Participants Base Salary as in effect immediately prior to the Change in Control or as the same may be increased from time to time;
(iii) the Companys requiring the Participant to be based at any place outside a 50-kilometer radius from the Participants business office location immediately prior to the Change in Control, except for reasonably required travel on the Companys behalf, or on behalf of a subsidiary of the Companys (or its successors) business (or the business of any successor to the Company as the controlling voting shareholder (whether direct or indirect) of the Company) which is not materially greater than such travel requirements prior to the Change in Control;
(iv) the failure by the Company to continue to provide the Participant with compensation and benefits substantially similar (in terms of benefit levels and/or reward opportunities) to those provided for under the Participants Employment Agreement, if applicable, and those provided to him or her under any of the employee benefit plans in which the Participant becomes a participant, or the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Participant of any material fringe benefit enjoyed by him or her at the time of the Change in Control;
(v) any material breach by the Company of any provision of the Participants Employment Agreement with the Company, if applicable; and
(vi) the failure of the Company to notify the Participant within the 30-day period following any transfer of business and assets to any other person by merger, consolidation, sale of assets or otherwise, that the Company has obtained a satisfactory agreement from a successor or assign of the Company to assume and agree to perform the Participants Employment Agreement with the Company, if any.
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(l) Operating Unit , for any fiscal year, shall mean a division, Company subsidiary, affiliate, group, product line or product line grouping for which an income statement reflecting sales and operating income is produced.
(m) Participant , for any fiscal year, shall mean an Employee selected by the CEO, subject to the authority and discretion of the Committee, to participate in the Plan for such fiscal year.
(n) Performance Objectives , for any fiscal year, shall mean one or more financial performance objectives of the Company and/or Operating Unit(s) and/or one or more performance objectives of individual Participant(s), established by the Committee in accordance with Section 4, which may include threshold Performance Objectives, target Performance Objectives, maximum Performance Objectives, or other levels of achievement, depending on the nature and type of Performance Objective. Performance Objectives for the Company and/or Operating Unit(s) may be expressed in terms of earnings per share, earnings (which may be expressed as earnings before specified items), return on assets, return on invested capital, revenue, operating income, cash flow, total shareholder return or any combination thereof. Performance Objectives for individual Participant(s) may be expressed in terms of any financial or non-financial metric, target, goal or objective approved by the Committee or, subject to the authority and discretion of the Committee, the CEO, as applicable, for such Participant(s). Performance Objectives may be expressed as a combination of Company and/or Operating Unit(s) and/or individual Participant Performance Objectives, and may be absolute or relative (to prior performance or to the performance of one or more other entities or external indices) and may be expressed in terms of a progression within a specified range.
(o) Retirement means (i) termination of employment after attaining age 60 with at least ten years of service (as defined in the Companys qualified retirement plans) other than by (A) death; (B) disability; (C) for cause; or (D) without cause termination by the Company, unless the Company mutually agrees that such without cause termination shall be considered a Retirement; p rovided, however, that for any Participant who has reached the age of 55 and the completion of 10 years of continuous service with the Company and/or its subsidiaries as of November 5, 2008, the applicable age in (i) above shall be 55, as opposed to age 60. The foregoing proviso shall expire by its terms and be void and of no further force and effect on and as of November 5, 2013.
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Exhibit 10(b)
[Note: Text in [ ] is only included in agreements with individuals employed by U.S. subsidiaries of Tim Hortons Inc., with the exception that text in [ ] in Sections 1 and 9 are only included in agreements with individuals employed by Tim Hortons Inc.]
Form of Restricted Stock Unit Award Agreement | ||
(2012 Award NEOs, VPs and Up) | ||
Participant Name (Grantee): | ||
Employee Number: | ||
Grant Name: | ||
Date of Grant: May 15, 2012 | ||
Total Award: |
Vest Schedule RSUs
|
||
Vest Date | Vest Quantity | |
November 15, 2014 | 100% |
RESTRICTED STOCK UNIT AWARD AGREEMENT
(with related Dividend Equivalent Rights)
Tim Hortons Inc.
Grant Year: 2012
May 15, 2012
THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (this Agreement) is made effective as of the 15 th day of May, 2012 (the Date of Grant), [by and among] between Tim Hortons Inc., a corporation incorporated under the Canada Business Corporations Act (the Company), [the below noted Employer,] and the above-noted Grantee (collectively, the Parties).
WHEREAS, the Company has adopted the Tim Hortons Inc. 2012 Stock Incentive Plan, as amended from time to time (the Plan), in order to provide additional incentive compensation to certain employees and directors of the Company and its Subsidiaries (as defined in the Plan); and
WHEREAS, pursuant to Section 4.2 of the Plan, the Human Resource and Compensation Committee (Committee) of the Board of Directors of the Company (Board) has determined to grant to the Grantee on the Date of Grant an Award of Restricted Stock Units with related Dividend Equivalent Rights as provided herein to encourage the Grantees efforts toward the continuing success of the Company and its Subsidiaries; and
WHEREAS, the Award is evidenced by this Agreement, which (together with the Plan), describes all the terms and conditions of the Award.
NOW, THEREFORE, the Parties agree as follows:
1. | Award . |
1.1 | The Company (or in the case of a Grantee employed by a Subsidiary [(the Employer)], the Employer) hereby grants to the Grantee in respect of employment services provided by the Grantee an award of the above-noted number of Restricted Stock Units (the Award) with an equal number of related Dividend Equivalent Rights (as defined in the Plan). Subject to Section 6 hereof, each Restricted Stock Unit represents the right to receive, at the absolute discretion of the Company, (i) one (1) Share (as defined in the Plan) from the Company, (ii) cash delivered to a broker to acquire one (1) Share on the Grantees behalf, or (iii) one (1) Share delivered by the Trustee (as defined in Section 7), in any case at the time and in the manner set forth in Section 7 hereof. |
1.2 | Each Dividend Equivalent Right represents the right to receive the equivalent of all of the cash dividends that would be payable with respect to the Share represented by the Restricted Stock Unit to which the Dividend Equivalent Right relates. With respect to each Dividend Equivalent Right, any amount related to cash dividends shall be converted into additional Restricted Stock Units based on the Fair Market Value of a Share on the date such dividend is made. Any additional Restricted Stock Units granted pursuant to this Section shall be subject to the same terms and conditions applicable to the Restricted Stock Unit to which the Dividend Equivalent Right relates, including, without limitation, the restrictions on transfer, forfeiture, vesting and payment provisions contained in Sections 2 through 7, inclusive, of this Agreement. In the event that a Restricted Stock Unit is forfeited pursuant to Section 6 hereof, the related Dividend Equivalent Right shall also be forfeited. Fractional Restricted Stock Units may be generated upon the automatic settlement of Dividend Equivalent Rights into additional Restricted Stock Units and upon the vesting of a portion of a Restricted Stock Unit award (see Section 3). These fractional Restricted Stock Units continue to accrue additional Dividend Equivalent Rights and accumulate until the fractional interest is of sufficient value to acquire an additional Restricted Stock Unit as a result of the settlement of future Dividend Equivalent Rights, subject to adjustment upon the vesting of a portion of the underlying Restricted Stock Unit award (see Section 3). The Committee shall determine appropriate administration for the tracking and settlement of Dividend Equivalent Rights, including with respect to fractional interests, and the Committees determination in this regard shall be final and binding upon all Parties. |
1.3 | This Agreement shall be construed in accordance and consistent with, and is subject to, the provisions of the Plan (the provisions of which are hereby incorporated by reference), as well as any and all determinations, policies, instructions, interpretations, rules, etc., of the Committee in connection with the Plan. Except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. |
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2. | Restrictions on Transfer . |
The Restricted Stock Units and Dividend Equivalent Rights granted pursuant to this Agreement may not be sold, transferred or otherwise disposed of and may not be pledged or otherwise hypothecated.
3. | Vesting . |
Except as otherwise provided in this Agreement, Restricted Stock Units granted hereunder shall vest in their entirety on November 15, 2014. Fractional Restricted Stock Units may be generated and/or adjusted upon the vesting of the Restricted Stock Units awarded under this Agreement. See Section 7 regarding settlement of fractional Restricted Stock Units.
4. | Effect of Terminations of Employment . |
4.1 | Death, Disability or Termination in Connection with Certain Dispositions . If Grantees employment terminates as a result of Grantees death or becoming Disabled (as defined in the Plan), or if the Grantee is terminated without Cause in connection with the sale or disposition of a Subsidiary, in each case if such termination occurs on or after the Date of Grant, all Restricted Stock Units which have not become vested in accordance with Section 3 or 5 hereof shall vest as of the Termination Date. |
4.2 | Retirement. If Grantees employment terminates as a result of the Grantees Retirement, and if such termination occurs on or after the Date of Grant, any unvested Restricted Stock Units will remain outstanding and will continue to vest in accordance with the vesting schedule described in Section 3 of this Agreement. For the purposes of this Agreement, Retirement means a termination of employment after attaining age 60 with at least ten (10) years of service (as defined in the Companys qualified retirement plans) and other than by (A) death; (B) Disability; (C) for Cause; or (D) a voluntary termination by the Grantee or without Cause termination by the Company, unless the Company and Grantee mutually agree that such termination shall be considered a Retirement; provided that if an Award is subject to Section 409A of the Code, a termination of employment must also constitute a separation from service within the meaning of Section 409A of the Code in order for the foregoing to apply. |
4.3 | Trading Policies and Transfer of Shares. For a period of six (6) months following a termination of employment, whether under Section 4, 5, or 6 of this Agreement, Grantee shall continue to be subject to the Companys insider trading and window trading policies and must follow all pre-clearance procedures, and all other requirements, included in those policies. In the case of Retirement, a termination due to Disability, or death, Grantee or Grantees estate or legal representative, as the case may be, shall take all reasonable steps to transfer all Shares received under this Agreement (and all other Shares that have vested and are maintained by the Plan Administrator (as defined in Section 7) in a brokerage account for the benefit of Grantee) from the Plan Administrator within five (5) years following the Grantees |
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termination of employment. For terminations arising for any reason other than death, Disability or Retirement, Grantee shall transfer all Shares received under this Agreement (and all other Shares that have vested and are maintained by the Plan Administrator in a brokerage account for the benefit of Grantee) from the Plan Administrator within one (1) year following the Grantees termination of employment. |
4.4 | Termination . For purposes of this Agreement, the word terminate or termination in connection with the Grantees employment shall mean the Grantee ceasing to perform services for the Company or such Subsidiary, as the case may be, without regard to: (i) whether such Grantee continues thereafter to receive any payment from the Company or such Subsidiary, as the case may be, in respect of the termination of such Grantees employment, including, without limitation, any continuation of salary or other compensation in lieu of notice of such termination, or (ii) whether or not Grantee is entitled or claims to be entitled at law to greater notice of such termination or greater compensation in lieu thereof than has been received by such Grantee. In addition, to the extent necessary to comply with the requirements of Section 409A of the Code, any reference to the Grantees Termination shall mean the Grantees separation from service as defined by Section 409A of the Code. |
5. | Effect of Change in Control . |
Subject to Section 6 hereof, in the event of a Change in Control (as defined in the Plan), Section 10.6 of the Plan will apply to the unvested portion of the Award.
6. | Forfeiture of Award . |
Except as otherwise provided in this Agreement, any and all Restricted Stock Units which have not become vested in accordance with Section 3, 4 or 5 hereof shall be forfeited upon:
(a) the termination of the Grantees employment with the Company or any Subsidiary for any reason other than those set forth in Section 4 hereof prior to such vesting; or
(b) the commission by the Grantee of an Act of Misconduct prior to such vesting.
For purposes of this Agreement, an Act of Misconduct shall mean the occurrence of one or more of the following events: (x) the Grantee uses for profit or discloses to unauthorized persons, confidential information or trade secrets of the Company or any of its Subsidiaries, (y) the Grantee breaches any contract with or violates any fiduciary obligation to the Company or any of its Subsidiaries, or (z) the Grantee engages in unlawful trading in the securities of the Company or any of its Subsidiaries or of another company based on information gained as a result of the Grantees employment with, or status as a director to, the Company or any of its Subsidiaries.
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7. | Satisfaction of Award . |
In order to satisfy Restricted Stock Units after vesting pursuant to this Agreement, the Company (or in the case of a Grantee employed by a Subsidiary, the Employer) shall, at its election either (i) deliver authorized but unissued Shares; (ii) deliver cash to a broker designated by the Company who, as agent for the Grantee, shall purchase the appropriate number of Shares on the open market; (iii) contribute cash to a trust fund (the Trust) to be used by the trustee thereof (the Trustee) to purchase Shares for the purpose of satisfying the Grantees entitlements under this Agreement, which Shares shall be held by the Trustee, and the Trustee, upon direction, shall deliver such Shares to the Grantee; or, (iv) any combination of the above.
The aggregate number of Shares issued by the Company, purchased by a broker for the Grantee or delivered by the Trustee to a Grantee at any particular time pursuant to this Section 7 shall correspond to the number of Restricted Stock Units that become vested on the vesting date, with one (1) Restricted Stock Unit corresponding to one (1) Share, subject to any withholding as may be required under Section 9 of this Agreement, notwithstanding any delay between a vesting date and the settlement date. Fractional Shares may be issued or delivered upon settlement of vested Restricted Stock Units. All parties understand, acknowledge and agree that fractional Shares cannot be traded in the public markets, and therefore, any fractional Share issued or delivered to Grantee upon settlement of a vested Restricted Stock Unit, after taking into account the reduction to the number of Shares as required under Section 9 of this Agreement, if applicable, will ultimately be settled in cash when the Grantee sells Shares through the Plan Administrator or transfers Shares out of the Plan Administrators system. The Committee shall determine appropriate administration for the settling of vested Restricted Stock Units, including with respect to fractional interests, and the Committees determination in this regard shall be final and binding upon all Parties. As used herein, Plan Administrator shall mean the party engaged by the Company to administratively track awards and accompanying Dividend Equivalent Rights granted under the Plan, as well as handle the process of vesting and settlement of such awards.
The Company will satisfy its obligations in this Section 7 on each vesting date or as soon as administratively practicable but no later than December 31 of the year in which such vesting date occurs. Notwithstanding the foregoing, with respect to Restricted Stock Units that become vested pursuant to Section 4 (other than as a result of the Grantees death), if the Grantee is a specified employee within the meaning of Section 409A of the Code as of the date the Grantees employment terminates and settlement of such Restricted Stock Units is required to be delayed pursuant to Section 409A(a)(2)(B)(i) of the Code, then the Company shall satisfy its obligations in this Section 7 by the later of (i) the date otherwise required by this Section 7 or (ii) the first business day of the calendar month following the date which is six (6) months after the Grantees employment terminates.
Any of the Companys obligations in this Section 7 may be satisfied by the Company or the Employer.
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8. | No Right to Continued Employment . |
Nothing in this Agreement or the Plan shall interfere with or limit in any way the right of the Company or its Subsidiaries to terminate the Grantees employment, nor confer upon the Grantee any right to continuance of employment by the Company or any of its Subsidiaries or continuance of service as a Board member.
9. | Withholding of Taxes . |
Upon (i) the delivery to the Grantee (or the Grantees estate, if applicable) of authorized and unissued Shares; (ii) the delivery of cash to a broker to purchase and deliver Shares; or (iii) the delivery by the Trustee of Shares pursuant to the Trust Agreement, in each case pursuant to Sections 1 and 7 hereof, the Company [(or in the case of a Grantee employed by a Subsidiary], the Employer or the Trust, as applicable, shall require payment of or other provision for, as determined by the Company, an amount equal to the federal, state, provincial and local income taxes and other amounts required by law to be withheld or determined to be necessary or appropriate to be withheld by the Company, the Employer or the Trust, as applicable, in connection with such delivery. In its sole discretion, the Company, the Employer or the Trust, as applicable, may require or permit payment of or provision for such withholding taxes through one or more of the following methods: (a) in cash, bank draft, certified cheque, personal cheque or other manner acceptable to the Committee and/or set forth in the relevant exercise procedures; (b) by withholding such amount from other amounts due to the Grantee; (c) by withholding a portion of the Shares then issuable or deliverable to the Grantee having an aggregate fair market value equal to such withholding taxes and, at the Companys election, either (I) canceling the equivalent portion of the underlying Award and the Company or the Trust paying the withholding taxes on behalf of the Grantee in cash, or (II) selling such Shares on the Grantees behalf; or (d) by withholding such amount from the cash then issuable in connection with the Award.
Fractional Shares may be issued or delivered and/or adjusted upon the withholding of taxes in accordance with this Section 9, and the settlement of the Restricted Stock Units into Shares will be adjusted by the amount of the withholding, including by the fractional Shares generated and/or adjusted upon the withholding transaction. Any fractional Shares will ultimately be paid or settled in cash in accordance with Section 7 of this Agreement. Additional fractional Shares may continue to accrue and be added to existing fractional Shares upon future vesting and settlement of Restricted Stock Units (in accordance with the terms of this Agreement) if vested Shares remain in the Plan Administrators system.
10. | Grantee Bound by the Plan . |
The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. This Agreement shall be construed in accordance and consistent with, and is subject to, the provisions of the Plan (the provisions of which are hereby incorporated by reference), as well as any and all determinations, policies, instructions, interpretations and rules of the Committee in connection with the Plan. Except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan.
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11. | Modification of Agreement . |
This Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the Parties hereto.
12. | Severability . |
Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.
13. | Governing Law . |
The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.
14. | Successors in Interest and Assigns . |
The Company and the Employer may assign any of their respective rights and obligations under this Agreement without the consent of the Grantee. This Agreement shall inure to the benefit of and be binding upon any successors and assigns of the Company and the Employer. This Agreement shall inure to the benefit of the successors of the Grantee including, without limitation, the estate of the Grantee and the executor, administrator or trustee of such estate. All obligations imposed upon the Grantee and all rights granted to the Company and the Employer under this Agreement shall be binding upon the successors of the Grantee including, without limitation, the estate of the Grantee and the executor, administrator or trustee of such estate.
15. | Language . |
The Parties hereto acknowledge that they have requested that this Agreement and all documents ancillary thereto, including all the documentation provided to the Grantee in respect of the Award, be drafted in the English language only. Les parties aux présentes reconnaissent quelles ont exigé que la présente convention et tous les documents y afférents, y compris toute la documentation transmise au bénéficiaire relativement à loctroi des droits prévu aux présentes, soient rédigés en langue anglaise seulement.
16. | Resolution of Disputes . |
Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Grantee, the Grantees heirs, executors, administrators and successors, and the Company and its Subsidiaries for all purposes.
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17. | Entire Agreement . |
This Agreement and the terms and conditions of the Plan constitute the entire understanding between the Grantee and the Company and its Subsidiaries, and supersede all other agreements, whether written or oral, with respect to the Award.
18. | Headings . |
The headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.
19. | Counterparts . |
This Agreement may be executed simultaneously in two or more counterparts, each of which shall constitute an original, but all of which taken together shall constitute one and the same agreement.
20. | Compliance with Section 409A . |
This Agreement is intended to satisfy the requirements of Section 409A of the Code and is intended not to be a salary deferral arrangement (a SDA) within the meaning of the Income Tax Act (Canada) (Canadian Tax Act), and shall be interpreted and administered consistent with such intent. To the extent that the interpretation and administration of this Agreement in accordance with Section 409A of the Code would cause any of the arrangements contemplated herein to be a SDA, then for any Grantee who is subject to the Canadian Tax Act and not subject to Section 409A of the Code, the Agreement shall be interpreted and administered with respect to such Grantee so that the arrangements are not SDAs. For Grantees subject to both Section 409A of the Code and the Canadian Tax Act, the terms of this Award shall be interpreted, construed, and given effect to achieve compliance with both Section 409A of the Code and the Canadian Tax Act, to the extent practicable. If compliance with both Section 409A of the Code and the Canadian Tax Act is not practicable in connection with the Award covered by this Agreement, the terms of this Award and this Agreement remain subject to amendment at the sole discretion of the Committee to reach a resolution of the conflict as it shall determine in its sole discretion.
21. | Recoupment Policy upon Restatement of Financial Results . |
The Award, and any proceeds therefrom, is subject to the Companys right to reclaim its benefits: (i) in the event of a financial restatement pursuant to the Recoupment Policy Relating to Performance-Based Compensation (the Recoupment Policy) adopted by the Board, as may be amended from time to time; or (ii) in accordance with the terms of any separate agreement, understanding or arrangement between the Grantee and the Company, or any affiliate thereof. In accordance with the Recoupment Policy, if the Companys financial statements are required to be restated for any reason (other than restatements due to changes in accounting policy with retroactive effect), the Board will review the Award earned by the Grantee. If the Board determines that, after a review of all of the relevant facts and circumstances, the grant of the Award was predicated upon the achievement of certain financial results that were subsequently corrected as part of a restatement and a lower Award
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would have been made to the Grantee based upon the restated financial results; then, the Board will seek recoupment of the Award to the extent that the Board deems appropriate and as provided by applicable law.
22. | Accessing Information . |
A copy of the Plan and prospectus for the Plan, as may be amended, can be found by the Grantee by accessing his/her Solium Shareworks account at www.solium.com . That site also contains other general information about the Award.
23. | Confirming Information . |
By accepting this Agreement, either through electronic means or by providing a signed copy, the Grantee (i) acknowledges and confirms that he/she has read and understood the Plan, the related prospectus, this Agreement and all information about the Award available at the Solium website, and that he/she has had an opportunity to seek separate fiscal, legal and taxation advice in relation thereto; (ii) acknowledges that he/she has been provided with a hard copy or an electronic copy of the Annual Report on Form 10-K for the most recently completed fiscal year of the Company; (iii) agrees to be bound by the terms and conditions stated in this Agreement, including without limitation the terms and conditions of the Plan, incorporated by reference herein; and (iv) acknowledges and agrees that acceptance of this Agreement through electronic means is equivalent to doing so by providing a signed copy.
TIM HORTONS INC. | ||
by |
||
Name: | ||
Title: | ||
[ (Employer) | ||
by |
||
Name: | ||
Title:] |
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Exhibit 10(c)
[Note: Text in [ ] is only included in agreements with individuals employed by U.S. subsidiaries of Tim Hortons Inc., with the exception that text in [ ] in Sections 1, 3, 9 and 23 are only included in agreements with individuals employed by Tim Hortons Inc.]
Vest Schedule Options
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Vest Date | Vest Quantity | |
May 15, 2013 | 1/3 | |
May 15, 2014 | 1/3 | |
May 15, 2015 | 1/3 |
TIM HORTONS INC.
2012 STOCK INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AWARD AGREEMENT
(with related Stock Appreciation Right)
Grant Year: 2012
THIS NONQUALIFIED STOCK OPTION AWARD AGREEMENT (this Agreement) is made effective as of the 15 th day of May, 2012 (the Date of Grant), [by and among] between Tim Hortons Inc., a corporation incorporated under the Canada Business Corporations Act (the Company), [the below-noted Employer,] and the above-noted Grantee (collectively, the Parties).
WHEREAS, the Company has adopted the Tim Hortons Inc. 2012 Stock Incentive Plan, as amended from time to time (the Plan), in order to provide additional incentive compensation to certain employees and directors of the Company and its Subsidiaries;
WHEREAS, pursuant to Sections 5 and 6 of the Plan, the Human Resource and Compensation Committee (the Committee) of the Board of Directors of the Company (the Board) has determined to grant to the Grantee on the Date of Grant a Nonqualified Stock Option and a related Stock Appreciation Right (SAR), each as provided herein, to encourage the Grantees efforts toward the continuing success of the Company and its Subsidiaries; and
WHEREAS, the Award is evidenced by this Agreement, which (together with the Plan) describes all the terms and conditions of the Award.
NOW, THEREFORE, the Parties agree as follows:
1. Grant of Award . The Company (or in the case of a Grantee employed by a Subsidiary [ (the Employer)], the Employer) hereby grants to the Grantee, on the Date of Grant, a Nonqualified Stock Option (the Option) with a related SAR to purchase the above-noted number of Shares at the above-noted Option Price, subject to the terms and conditions of this Agreement and the Plan (the Award). The Option is not intended to be treated as an option that complies with Section 422 of the Internal Revenue Code of 1986, as amended.
2. Vesting; Term of Award . Except as otherwise provided in this Agreement, the Award shall vest as follows:
(a) One-third (1/3) of the total Shares covered by the Award shall vest on May 15, 2013, subject to rounding down the Award to the nearest whole Share as of the vesting date;
(b) One-third (1/3) of the total Shares covered by the Award shall vest on May 15, 2014, subject to rounding down the Award to the nearest whole Share as of the vesting date; and
(c) One-third (1/3) of the total Shares covered by the Award shall vest on May 15, 2015, subject to rounding down the Award to the nearest whole Share as of the vesting date.
The Award shall expire May 15, 2019 (the Expiration Date), whether or not the Award (or any portion thereof) has been exercised, unless sooner terminated as provided in Section 4 of this Agreement. Notwithstanding anything to the contrary contained in this Agreement, if the Award expires outside of a Trading Window, then the expiration of the term of the Award shall be the later of: (i) the date the Award would have expired by its original terms (including the terms set forth in Section 4 of this Agreement), or (ii) the end of the tenth trading day of the immediately succeeding Trading Window during which the Company would allow the Grantee to trade in its securities; provided, however, that in no event shall the Award expire beyond the tenth anniversary of the Date of Grant.
3. Exercise of Award . Subject to the limitations set forth in this Agreement, the Plan, and in the exercise procedures and requirements established by the Committee, the vested portion of the Award may be exercised in whole or in part by providing to the Company or its designee written notice of exercise; provided that the Award may be exercised with respect to whole Shares only. Such notice shall specify (i) whether the Grantee intends to exercise the Option or the SAR and (ii) the number of Shares with respect to which the Award is to be exercised. The Grantee shall have the discretion to determine whether to exercise the Option or the SAR.
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(a) Exercise of SAR . If the Grantee desires to receive cash, as opposed to Shares, upon exercise of all or a portion of the vested amount of the Award, the Grantee will exercise the SAR. Upon the exercise of the SAR, the Grantee shall be entitled to receive a cash amount from the Company or the Employer equal to the product of: (i) the excess of the Fair Market Value of a Share on the date of exercise of the SAR over the Option Price; multiplied by (ii) the number of Shares as to which the SAR is being exercised [ , less applicable withholdings].
(b) Exercise of Option . If the Grantee desires to receive Shares, as opposed to cash, upon exercise of all or a portion of the vested amount of the Award, the Grantee will exercise the Option. If the Option is exercised, payment of the Option Price for the number of Shares specified in the notice of exercise shall accompany the written notice of exercise. The payment of the Option Price may be made, as determined by the Committee in its sole discretion as of the time of exercise, as follows: (i) in cash, personal or certified cheque, bank draft or other property acceptable to the Committee; or (ii) through a cashless exercise, including through a registered broker-dealer. The Committee shall determine the means and manner by which Shares to be delivered upon exercise of the Option shall be settled and/or satisfied, in its sole and absolute discretion. Notwithstanding the foregoing sentence and Section 3.1(i) of the Plan, Shares delivered upon the exercise of an Option shall be newly-issued Shares.
(c) Tandem Nature of Award . Upon the exercise of the SAR, the Option shall be canceled ( i.e ., surrendered to the Company) to the extent of the number of Shares as to which the SAR is exercised. Upon the exercise of the Option, the SAR shall be canceled ( i.e ., surrendered to the Company) to the extent of the number of Shares as to which the Option is exercised or surrendered.
4. Termination of Employment .
(a) Death or Disability . Upon termination of the Grantees employment with the Company and its Subsidiaries as a result of the Grantees death or the Grantee becoming Disabled, the Award shall become immediately exercisable as of the Termination Date, and the Grantee (or, to the extent applicable, the Grantees legal guardian, legal representative or estate) shall have the right to exercise the Award for a period of four (4) years after the date of such termination or, if earlier, until the Expiration Date.
(b) Retirement . Upon termination of the Grantees employment with the Company and its Subsidiaries by reason of the Grantees Retirement, for a period of four (4) years following the Termination Date (but in no event beyond the Expiration Date), the Award shall remain outstanding and (i) to the extent not then fully vested, shall continue to vest in accordance with the vesting schedule set forth in Section 2 of this Agreement, and (ii) the Grantee shall have the right to exercise the vested portion of the Award. For the purposes of this Agreement, Retirement means a termination of employment after attaining age 60 with at least ten (10) years of service (as defined in the
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Companys qualified retirement plans) and other than by (A) death; (B) Disability; (C) for Cause; or (D) a voluntary termination by the Grantee or without Cause termination by the Company, unless the Company and Grantee mutually agree that such termination shall be considered a Retirement; provided that if an Award is subject to Section 409A of the Code, a termination of employment must also constitute a separation from service within the meaning of Section 409A of the Code in order for the foregoing to apply.
(c) Termination in Connection with Certain Dispositions . In the event the Grantees employment with the Company and its Subsidiaries is terminated without Cause in connection with a sale or other disposition of a Subsidiary, the Award shall remain outstanding and (i) to the extent not then fully vested, will become immediately vested on the Termination Date, and (ii) the Grantee will have the right to exercise such vested portion of the Award for a period of one (1) year following the Termination Date or, if earlier, until the Expiration Date.
(d) Termination for Cause . Upon the termination of the Grantees employment with the Company and its Subsidiaries for Cause (as defined in the Plan), the portion of the Award that has not been exercised shall be forfeited (whether or not then vested and exercisable) on the Termination Date.
(e) Termination for Any Other Reason . Upon the termination of the Grantees employment with the Company and its Subsidiaries for any reason not described in Section 4(a), 4(b), 4(c), or 4(d) of this Agreement, the Award shall (i) to the extent not vested and exercisable as of the Termination Date, terminate as of the Termination Date, and (ii) to the extent vested and exercisable as of the Termination Date, remain exercisable for a period of ninety (90) days following the Termination Date or, in the event of the Grantees death during such ninety (90) day period, remain exercisable by the Grantees estate until the end of one (1) year period following the Termination Date; provided, however, that, in either case, the Award shall not remain exercisable beyond the Expiration Date.
(f) Termination Date . For purposes of this Agreement, the word terminate or termination in connection with the Grantees employment shall mean the Grantee ceasing to perform services for the Company or such Subsidiary, as the case may be, without regard to: (i) whether such Grantee continues thereafter to receive any payment from the Company or such Subsidiary, as the case may be, in respect of the termination of such Grantees employment, including, without limitation, any continuation of salary or other compensation in lieu of notice of such termination, or (ii) whether or not Grantee is entitled or claims to be entitled at law to greater notice of such termination or greater compensation in lieu thereof than has been received by such Grantee.
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5. Effect of Change in Control . In the event of a Change in Control (as defined in the Plan), Section 10.6 of the Plan will apply to the unvested portion of the Award.
6. Forfeiture of Award . Except as otherwise provided in this Agreement, any and all Awards which have not become vested in accordance with Section 2, 4 or 5 hereof shall be forfeited upon the commission by the Grantee of an Act of Misconduct prior to such vesting. For purposes of this Agreement, an Act of Misconduct shall mean the occurrence of one or more of the following events: (x) the Grantee uses for profit or discloses to unauthorized persons, confidential information or trade secrets of the Company or any of its Subsidiaries, (y) the Grantee breaches any contract with or violates any fiduciary obligation to the Company or any of its Subsidiaries, or (z) the Grantee engages in unlawful trading in the securities of the Company or any of its Subsidiaries or of another company based on information gained as a result of the Grantees employment with, or status as a director to, the Company or any of its Subsidiaries.
7. Non-Transferability of Award . Except to the extent that the Grantees legal representative or estate is permitted to exercise the Award pursuant to the terms of the Plan or in accordance with a determination of the Committee, the Award is exercisable only during the Grantees lifetime and only by the Grantee. Unless otherwise provided for by a determination of the Committee, the Award shall not be transferable except by will or the laws of descent and distribution.
8. No Right to Continued Employment . Nothing in this Agreement or the Plan shall interfere with or limit in any way the right of the Company or its Subsidiaries to terminate the Grantees employment, nor be construed as giving the Grantee any right to continuance of employment by the Company or any of its Subsidiaries or continuance of service to the Company or any of its Subsidiaries.
9. Withholding of Taxes . Upon the exercise of the Award, the Company or the Employer [ , as applicable,] shall require payment of or other provision for, as determined by the Company, an amount equal to the federal, state, provincial and local income taxes and other amounts required by law to be withheld or determined to be necessary or appropriate to be withheld by the Company or the Employer, as applicable, in connection with such exercise. In its sole discretion, the Company or the Employer, as applicable, may require or permit payment of or provision for such withholding taxes through one or more of the following methods: (a) in cash, bank draft, certified cheque, personal cheque or other manner acceptable to the Committee and/or set forth in the relevant exercise procedures; (b) by withholding such amount from other amounts due to the Grantee; (c) by withholding the delivery of a portion of the Shares then deliverable to the Grantee having an aggregate fair market value equal to such withholding taxes (provided that, for clarity, Shares with an aggregate value equal to the gross amount of the Award shall be issued) and, at the Companys election, either (I) the Company or the Employer paying the withholding taxes on behalf of the Grantee in cash, or (II) selling such Shares on the Grantees behalf; (d) by withholding such amount from the cash then
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issuable in connection with the Award; or (e) by entering into any other arrangements for the receipt of such amount suitable to the Company. The Grantee acknowledges and agrees that, notwithstanding that the Employer is not a party to this Agreement, the Employer, if applicable, shall be entitled to take such actions provided for in this Section as the Employer shall deem appropriate.
10. Grantee Bound by Plan; Award Subject to Terms of Plan . The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. This Agreement shall be construed in accordance and consistent with, and is subject to, the provisions of the Plan (the provisions of which are hereby incorporated by reference), as well as any and all determinations, policies, instructions, interpretations and rules of the Committee in connection with the Plan, including the Option/SAR Exercise and Settlement Policy and related procedures adopted by the Committee. Except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan.
11. Modification of Agreement . The Board or Committee may make amendments or changes to this Award, subject to the terms and conditions of Section 21 of the Plan.
12. Severability . Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.
13. Governing Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.
14. Successors in Interest and Assigns . The Company and the Employer may assign any of their respective rights and obligations under this Agreement without the consent of the Grantee. This Agreement shall inure to the benefit of and be binding upon any successors and assigns of the Company and the Employer. This Agreement shall inure to the benefit of the successors of the Grantee including, without limitation, the estate of the Grantee and the executor, administrator or trustee of such estate. All obligations imposed upon the Grantee and all rights granted to the Company and the Employer under this Agreement shall be binding upon the successors of the Grantee including, without limitation, the estate of the Grantee and the executor, administrator or trustee of such estate.
15. Resolution of Disputes . Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Grantee, the Grantees heirs, executors, administrators and successors, and the Company and its Subsidiaries for all purposes.
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16. Entire Agreement . This Agreement and the terms and conditions of the Plan constitute the entire understanding between the Grantee and the Company and its Subsidiaries, and supersede all other agreements, whether written or oral, with respect to the Award.
17. Headings . The headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.
18. Counterparts . This Agreement may be executed simultaneously in two or more counterparts, each of which shall constitute an original, but all of which taken together shall constitute one and the same agreement.
19. Recoupment Policy upon Restatement of Financial Results . The Award, and any proceeds therefrom, is subject to the Companys right to reclaim its benefits: (i) in the event of a financial restatement pursuant to the Recoupment Policy Relating to Performance-Based Compensation (the Recoupment Policy) adopted by the Board, as may be amended from time to time; or (ii) in accordance with the terms of any separate agreement, understanding or arrangement between the Grantee and the Company, or any affiliate thereof. In accordance with the Recoupment Policy, if the Companys financial statements are required to be restated for any reason (other than restatements due to changes in accounting policy with retroactive effect), the Board will review the Award earned by the Grantee. If the Board determines that, after a review of all of the relevant facts and circumstances, the grant of the Award was predicated upon the achievement of certain financial results that were subsequently corrected as part of a restatement and a lower Award would have been made to the Grantee based upon the restated financial results; then, the Board will seek recoupment of the Award to the extent that the Board deems appropriate.
20. Language . The Parties hereto acknowledge that they have requested that this Agreement and all documents ancillary thereto, including all the documentation provided to the Grantee in respect of the Award, be drafted in the English language only. Les parties aux présentes reconnaissent quelles ont exigé que la présente convention et tous les documents y afférents, y compris toute la documentation transmise au bénéficiaire relativement à loctroi des droits prévu aux présentes, soient rédigés en langue anglaise seulement.
21. Accessing Information . A copy of the Plan and prospectus for the Plan, as may be amended, can be found by the Grantee by accessing his/her Solium Shareworks account at www.solium.com . That site also contains other general information about the Award.
22. Confirming Information . By accepting this Agreement, either through electronic means or by providing a signed copy, the Grantee (i) acknowledges and confirms that he/she has read and understood the Plan, the related prospectus, this Agreement and all information about the Award available at the Solium website, and that
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he/she has had an opportunity to seek separate fiscal, legal and taxation advice in relation thereto; (ii) acknowledges that he/she has been provided with a hard copy or an electronic copy of the Annual Report on Form 10-K for the most recently completed fiscal year of the Company; (iii) agrees to be bound by the terms and conditions stated in this Agreement, including without limitation the terms and conditions of the Plan, incorporated by reference herein; and (iv) acknowledges and agrees that acceptance of this Agreement through electronic means is equivalent to doing so by providing a signed copy.
[23. Company Election. Unless the Committee has expressly indicated in writing and delivered to the Grantee, the Committees intention to cause the Company to elect in prescribed form and duly file any election (the Company Election) required in subsection 110(1.1) of the Income Tax Act (Canada) that neither the Company nor any person not dealing at arms length with the Company will deduct in computing its income for a taxation year, any amount paid to a Grantee upon the exercise by the Grantee of a SAR hereunder in accordance with the provisions of paragraph 3(a), then upon the exercise by a Grantee of a SAR hereunder, the Committee at its sole discretion, may or may not cause the Company to make the Company Election.]
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Exhibit 31(a)
CERTIFICATIONS
I, Paul D. House, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Tim Hortons Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 9, 2012 | /s/ PAUL D. HOUSE | |||
Name: Paul D. House | ||||
Title: Chief Executive Officer |
Exhibit 31(b)
CERTIFICATIONS
I, Cynthia J. Devine, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Tim Hortons Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 9, 2012
/s/ CYNTHIA J. DEVINE | ||
Name: Cynthia J. Devine | ||
Title: Chief Financial Officer |
Exhibit 32(a)
Certification of CEO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *
This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies the quarterly report on Form 10-Q (the Form 10-Q) for the quarter ended July 1, 2012 of Tim Hortons Inc. (the Issuer).
I, Paul D. House, the Chief Executive Officer of Issuer certify that, to the best of my knowledge:
(i) | the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and |
(ii) | the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. |
Dated: August 9, 2012
/s/ PAUL D. HOUSE | ||
Name: Paul D. House |
* | This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the Exchange Act) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the Company specifically incorporates this certification therein by reference. |
Exhibit 32(b)
Certification of CFO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *
This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies the quarterly report on Form 10-Q (the Form 10-Q) for the quarter ended July 1, 2012 of Tim Hortons Inc. (the Issuer).
I, Cynthia J. Devine, the Chief Financial Officer of Issuer certify that, to the best of my knowledge:
(i) | the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and |
(ii) | the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. |
Dated: August 9, 2012
/s/ CYNTHIA J. DEVINE | ||
Name: Cynthia J. Devine |
* | This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the Exchange Act) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the Company specifically incorporates this certification therein by reference. |
Exhibit 99
TIM HORTONS INC.
Safe Harbor Under the Private Securities Litigation Reform Act of 1995 and Canadian Securities Laws
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those disclosed in the statement. Canadian securities laws have corresponding safe harbor provisions, subject to certain additional requirements including the requirement to state the assumptions used to make the forecasts set out in forward-looking statements. Tim Hortons Inc. (the Company) desires to take advantage of these safe harbor provisions.
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as believes, expects, anticipates, estimates, intends, plans, seeks, outlook, forecast or words of similar meaning, or future or conditional verbs, such as will, should, could or may. Examples of forward-looking statements that may be contained in our public disclosure from time to time include, but are not limited to, statements concerning managements expectations relating to possible or assumed future results, our strategic goals and our priorities, and the economic and business outlook for us, for each of our business segments and for the economy generally. Many of the factors that could determine our future performance are beyond our ability to control or predict. The following factors, in addition to other factors set forth in our Form 10-K filed on February 28, 2012 (Form 10-K), as updated in the Quarterly Report on Form 10-Q filed May 9, 2012, with the U.S. Securities and Exchange Commission (SEC) and the Canadian Securities Administrators (CSA), and in other press releases, communications, or filings made with the SEC or the CSA, could cause our actual results to differ materially from the expectation(s) included in forward-looking statements and, if significant, could materially affect the Companys business, sales revenue, share price, financial condition, and/or future results, including causing the Company to (i) close restaurants, (ii) fail to realize same-store sales growth targets, which are critical to achieving our financial targets, (iii) fail to meet the expectations of our securities analysts or investors, or otherwise fail to perform as expected, (iv) have insufficient cash to engage in or fund expansion activities, dividends, or share repurchase programs, or (v) increase costs, corporately or at restaurant level, which may result in increased restaurant-level pricing, which in turn may result in decreased guest demand for our products resulting in lower sales, revenue, and earnings. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also materially adversely affect our business, financial condition, and/or operating results. We assume no obligation to update or alter any forward-looking statements after they are made, whether as a result of new information, future events, or otherwise, except as required by applicable law.
Forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about: the absence of an adverse event or condition that damages our strong brand position and reputation; the absence of a material increase in competition within the quick service restaurant segment of the food service industry; cost and availability of commodities; continuing positive working relationships with the majority of the Companys restaurant owners; the absence of any material adverse effects arising as a result of litigation; there being no significant change in the Companys ability to comply with current or future regulatory requirements; and general worldwide economic conditions. We are presenting this information for the purpose of informing you of managements current expectations regarding these matters, and this information may not be appropriate for any other purposes.
Factors Affecting Growth and Other Important Strategic Initiatives. There can be no assurance that the Company will be able to achieve new restaurant or same-store sales growth objectives, that new restaurants will be profitable or that strategic initiatives will be successfully implemented. Early in the development of new markets, the opening of new restaurants may have a negative effect on the same-store sales of existing restaurants in the market. The Company may also enter markets where its brand is not well known and where it has little or no operating experience and as a result, may not achieve the level of penetration needed in order to drive brand recognition, convenience, increased leverage to marketing dollars, and other benefits the Company believes penetration yields. When the Company enters new markets, it may be necessary to increase restaurant owner relief and support costs, which lowers its earnings. There can be no assurance that the Company will be able to successfully adapt its brand, development efforts, and restaurants to these differing market conditions. The Companys failure to successfully implement growth and various other strategies and initiatives related to international development may have a negative impact on the overall operation of its business and may result in increased costs or inefficiencies that it cannot currently anticipate. The Company may also continue to selectively close restaurants that are not achieving acceptable levels of profitability or change its growth strategies over time, where appropriate. Such closures may be accompanied by impairment charges that may have a negative impact on the Companys earnings. The success of any restaurant depends in substantial part on its location. There can be no assurance that current locations will continue to be attractive as demographic patterns or economic conditions change. If we cannot obtain desirable locations for restaurants at reasonable prices, the Companys ability to affect its growth strategy will be adversely affected. The Company also intends to evaluate potential mergers, acquisitions, joint venture investments, alliances, vertical integration opportunities and divestitures, which are subject to many of the same risks that also affect new store development as well as various other risks. In addition, there can be no assurance that the Company will be able to complete the desirable transactions, for reasons including restrictive covenants in debt instruments or other agreements with third parties. The Company may continue to pursue strategic alliances (including co-branding) with third parties for
different types of development models and products and there can be no assurance that: significant value will be recognized through such strategic alliances; the Company will be able to maintain its strategic alliances; or, the Company will be able to enter into new strategic relationships in the future. Entry into such relationships as well as the expansion of the Companys current business through such initiatives may expose it to additional risks that may adversely affect the Companys brand and business. The Companys financial outlook and long-range targets are based on the successful implementation, execution and guest acceptance of the Companys strategic plans and initiatives; accordingly, the failure of any of these criteria could cause the Company to fall short of achievement of its financial objectives and long-range aspirational goals.
The Importance of Canadian Segment Performance and Brand Reputation. The Companys financial performance is highly dependent upon its Canadian operating segment, which accounted for approximately 93.9% of our reportable segment revenues, and 97.6% of our reportable segment operating income in 2011. Any substantial or sustained decline in the Companys Canadian business would materially and adversely affect its financial performance. The Companys success is also dependent on its ability to maintain and enhance the value of its brand, its guests connection to and perception of its brand, and a positive relationship with its restaurant owners. Brand value can be severely damaged, even by isolated incidents, including those that may be beyond the Companys control such as: actions taken or not taken by its restaurant owners relating to health, safety, environmental, welfare, labour, public policy or social issues; contaminated food; litigation and claims (including litigation by, other disputes with, or negative relationship with restaurant owners); failure of security breaches or other fraudulent activities associated with its networks and systems; illegal activity targeted at the Company; and negative incidents occurring at or affecting its strategic business partners (including in connection with co-branding initiatives, international licensing arrangements and its self-serve kiosk model), affiliates, and corporate social responsibility programs. The Companys brand could also be damaged by falsified claims or the quality of products from its vertically integrated manufacturing plants, and potentially negative publicity from various sources, including social media sites on a variety of topics and issues, whether true or not, which are beyond its control.
Competition. The quick service restaurant industry is intensely competitive with respect to price, service, location, personnel, qualified restaurant owners, real estate sites and type and quality of food. The Company and its restaurant owners compete with international, regional and local organizations, primarily through the quality, variety, and value perception of food products offered. The number and location of units, quality and speed of service, attractiveness of facilities, effectiveness of advertising/marketing, promotional and operational programs, discounting activities, price, changing demographic patterns and trends, changing consumer preferences and spending patterns, including weaker consumer spending in difficult economic times, or a desire for a more diversified menu, changing health or dietary preferences and perceptions, and new product development by the Company and its competitors are also important factors. Certain of the Companys competitors, most notably in the U.S., have greater financial and other resources than it does, including substantially larger marketing budgets and greater leverage from their marketing spend. In addition, the Companys major competitors continue to engage in discounting, free sampling and other promotional activities.
Product Innovation and Extensions. Achievement of the Companys same-store sales strategy is dependent, among other things, on its ability to extend the product offerings of its existing brands and introduce innovative new products. Although it devotes significant focus to the development of new products, the Company may not be successful in developing innovative new products or its new products may not be commercially successful. The Companys financial results and its ability to maintain or improve its competitive position will depend on its ability to effectively gauge the direction of the market and consumer trends and initiatives and successfully identify, develop, manufacture, market and sell new or improved products in response to such trends.
Commodities. The Company is exposed to price volatility in connection with certain key commodities that it purchases in the ordinary course of business such as coffee, wheat, edible oil and sugar, which can impact revenues, costs and margins. Although the Company monitors its exposure to commodity prices and its forward hedging program partially mitigates the negative impact of any costs increases, price volatility for commodities it purchases has increased due to conditions beyond its control, including recent economic and political conditions, currency fluctuations, availability of supply, weather conditions, pest damage and consumer demand and consumption patterns. Increases and decreases in commodity costs are largely passed through to restaurant owners and the Company and its restaurant owners have some ability to increase product pricing to offset a rise in commodity prices, subject to restaurant owner and guest acceptance, respectively. A number of commodities have recently experienced elevated prices relative to historic prices. Although the Company generally secures commitments for most of its key commodities that generally extend over a six-month period, these may be at higher prices than its previous commitments. In addition, if escalation in prices continues, the Company may be forced to purchase commodities at higher prices at the end of the respective terms of its current commitments. If the supply of commodities, including coffee, fails to meet demand, the Companys restaurant owners may experience reduced sales which in turn, would reduce our rents and royalty income as well as distribution income. Such a reduction in the Companys income may adversely impact the Companys business and financial results.
Food Safety and Health Concerns. Incidents or reports, whether true or not, of food-borne illness and injuries caused by or claims of food tampering, employee hygiene and cleanliness failures or impropriety at Tim Hortons, and the potential health impacts of consuming certain of the Companys products or other quick service restaurants unrelated to Tim Hortons, could result in negative publicity, damage the Companys brand value and potentially lead to product liability or other claims. Any decrease in guest traffic or temporary closure of any of the Companys restaurants as a result of such incidents or negative publicity may have a material adverse effect on its business and results of operations.
Distribution Operations and Supply Chain. The occurrence of any of the following factors is likely to result in increased operating costs and decreased profitability of the Companys distribution operations and supply chain and may also injure its brand, negatively affect its results of operations and its ability to generate expected earnings and/or increase costs, and/or negatively impact the Companys relationship with its restaurant owners: higher transportation or shipping costs; inclement weather; increased food and other supply costs; having a single source of supply for certain of its food products; shortages or interruptions in the availability or supply of perishable food products and/or their ingredients; potential negative impacts on our relationship with our restaurant owners associated with an increase of required purchases, or prices, of products purchased from the Companys distribution business; and political, physical, environmental or technological disruptions in the Companys or its suppliers manufacturing and/or warehouse plants, facilities or equipment.
Importance of Restaurant Owners. A substantial portion of the Companys earnings come from royalties and other amounts paid by restaurant owners, who operated 99.6% of the Tim Hortons restaurants as of January 1, 2012. The Companys revenues and profits would decline and its brand reputation could also be harmed if a significant number of restaurant owners were to experience, among other things, operational or financial difficulties or labour shortages or significant increases in labour costs. Although the Company generally enjoys a positive working relationship with the vast majority of its restaurant owners, active and/or potential disputes with restaurant owners could damage its reputation and/or its relationships with the broader restaurant owner group. The Companys restaurant owners are independent contractors and, as a result, the quality of their operations may be diminished by factors beyond the Companys control. Any operational shortcoming of a franchise restaurant is likely to be attributed by consumers to the Companys entire system, thus damaging its brand reputation and potentially affecting revenues and profitability. There can be no assurance that the Company will be able to continue to attract, retain and motivate higher performing restaurant owners.
Litigation. The Company is or may be subject to claims incidental to the business, including: obesity litigation; health and safety risks or conditions of the Companys restaurants associated with design, construction, site location and development, indoor or airborne contaminants and/or certain equipment utilized in operations; employee claims for employment or labour matters, including potentially, class action suits regarding wages, discrimination, unfair or unequal treatment, harassment, wrongful termination, or overtime compensation claims; claims from restaurant owners and/or operators regarding profitability or wrongful termination of their franchise or operating (license) agreement(s); taxation authorities regarding certain tax disputes; and falsified claims. The Companys current exposure with respect to pending legal matters could change if determinations by judges and other finders of fact are not in accordance with managements evaluation of these claims and the Companys exposure could exceed expectations and have a material adverse effect on its financial condition and results of operations.
Government Regulation. The Company and its restaurant owners are subject to various international, federal, state, provincial, and local (governmental) laws and regulations. The development and operation of restaurants depend to a significant extent on the selection, acquisition, and development of suitable sites, which are subject to laws and regulations regarding zoning, land use, environmental matters (including limitation of vehicle emissions in drive-thrus; anti-idling bylaws; regulation of litter, packaging and recycling requirements; regulation relating to discharge, storage, handling, release and/or disposal of hazardous or toxic substances; and other governmental laws and regulations), traffic, franchise, design and other matters. Additional governmental laws and regulations affecting the Company and its restaurant owners include: business licensing; franchise laws and regulations; health, food preparation, sanitation and safety; privacy; immigration, employment and labour (including applicable minimum wage requirements, benefits, overtime, working and safety conditions, family leave and other employment matters, and citizenship requirements); advertising and marketing; product safety and regulations regarding nutritional content, including menu labeling; existing, new or future regulations, laws, treaties or the interpretation or enforcement thereof relating to tax matters that may affect the Companys ongoing tax disputes, realization of the Companys tax assets, disclosure of tax-related matters, and expansion of the Companys business into new territories through its strategic initiatives, joint ventures, or other types of programs, projects or activities; tax laws affecting restaurant owners business; accounting and reporting requirements and regulations; and anti-corruption. Compliance with these laws and regulations and planning initiatives undertaken in connection therewith could increase the cost of doing business and, depending upon the nature of the Companys and its restaurant owners responsive actions thereto, could damage the Companys reputation. Changes in these laws and regulations, or the implementation of additional regulatory requirements, particularly increases in applicable minimum wages, tax law, planning or other matters may, among other things, adversely affect the Companys financial results; anticipated effective tax rate, tax liabilities, and/or tax reserves; business planning within its corporate structure; its strategic initiatives and/or the types of projects it may undertake in furtherance of its business; or franchise requirements.
In addition, a taxation authority may disagree with certain views of the Company with respect to the interpretation of tax treaties, laws and regulations and take the position that material income tax liabilities, interests, penalties or amounts are payable by the Company, including in connection with certain of its public or internal company reorganizations. Contesting such disagreements or assessments may be lengthy and costly and, if the Company were unsuccessful in disputing the same, the implications could be materially adverse to it and affect its anticipated effective tax rate, projected results, future operations and financial condition, where applicable.
International Operations. The Companys international operations are and will continue to be subject to various factors of uncertainty, and there is no assurance that international operations will achieve or maintain profitability or meet planned growth rates. The implementation of the Companys international strategic plan may require considerable management time as well as start-up expenses for market development before any significant revenues and earnings are generated. Expansion into new international markets carries risks similar to those risks described above and more fully in the Form 10-K relative to expansion into new markets in the U.S.; however, some or all of these factors may be more pronounced in markets outside Canada and the U.S. due to cultural, political, legal, economic, regulatory and other conditions and differences. Additionally, the Company may also have difficulty exporting its proprietary products into international markets or finding suppliers and distributors to provide it with adequate supplies of ingredients meeting its standards in a cost-effective manner.
Economic, Market and Other Conditions. The quick service restaurant industry is affected by changes in international, national, regional, and local economic and political conditions, consumer preferences and perceptions (including food safety, health or dietary preferences and perceptions), discretionary spending patterns, consumer confidence, demographic trends, seasonality, weather events and other calamities, traffic patterns, the type, number and location of competing restaurants, enhanced governmental regulation, changes in capital market conditions that affect valuations of restaurant companies in general or the value of the Companys stock in particular, and litigation relating to food quality, handling or nutritional content. Factors such as inflation, higher energy and/or fuel costs, food costs, the cost and/or availability of a qualified workforce and other labour issues, benefit costs, legal claims, legal and regulatory compliance (including environmental regulations), new or additional sales tax on the Companys products, disruptions in its supply chain or changes in the price, availability and shipping costs of supplies, and utility and other operating costs, also affect restaurant operations and expenses and impact same-store sales and growth opportunities. The ability of the Company and its restaurant owners to finance new restaurant development, improvements and additions to existing restaurants, acquire and sell restaurants, and pursue other strategic initiatives (such as acquisitions and joint ventures), are affected by economic conditions, including interest rates and other government policies impacting land and construction costs and the cost and availability of borrowed funds. In addition, unforeseen catastrophic or widespread events affecting the health and/or welfare of large numbers of people in the markets in which the Companys restaurants are located and/or which otherwise cause a catastrophic loss or interruption in the Companys ability to conduct its business, would affect its ability to maintain and/or increase sales and build new restaurants. Unforeseen events, including war, armed conflict, terrorism and other international, regional or local instability or conflicts (including labour issues), embargos, trade barriers, public health issues (including tainted food, food-borne illness, food tampering and water supply or widespread/pandemic illness such as the avian or H1N1 flu), and natural disasters such as flooding, earthquakes, hurricanes, or other adverse weather and climate conditions could disrupt the Companys operations, disrupt the operations of its restaurant owners, suppliers, or guests, or result in political or economic instability.
Reliance on Systems. If the network and information systems and other technology systems that are integral to retail operations at system restaurants and at the Companys manufacturing facilities, and at its office locations are damaged or interrupted from power outages, computer and telecommunications failures, computer worms, viruses and other destructive or disruptive software, security breaches, catastrophic events and improper or personal usage by employees, such an event could have an adverse impact on the Company and its guests, restaurant owners and employees, including a disruption of its operations, guest dissatisfaction or a loss of guests or revenues. The Company relies on third-party vendors to retain data, process transactions and provide certain services. In the event of failure in such third party vendors systems and processes, the Company could experience business interruptions or privacy and/or security breaches surrounding its data. The Company continues to enhance its integrated enterprise resource planning system through the implementation of new modules. There may be risks associated with adjusting to and supporting the new modules which may impact the Companys relations with its restaurant owners, vendors and suppliers and the conduct of its business generally. If the Company fails to comply with new and/or increasingly demanding laws and regulations regarding the protection of guest, supplier, vendor, restaurant owner, employee and/or business data, or if the Company (or a third party with which it has entered into a strategic alliance) experiences a significant breach of guest, supplier, vendor, restaurant owner, employee or Company data, the Companys reputation could be damaged and result in lost sales, fines, lawsuits and diversion of management attention. The use of electronic payment systems and the Companys reloadable cash card makes it more susceptible to a risk of loss in connection with these issues, particularly with respect to an external security breach of guest information that the Company, or third parties under arrangement(s) with it, control.
Other Significant Risk Factors. The following factors could also cause the Companys actual results to differ from its expectations: fluctuations in the U.S. and Canadian dollar exchange rates; an inability to adequately protect the Companys intellectual property and trade secrets from infringement actions or unauthorized use by others (including in certain international markets that have uncertain or inconsistent laws and/or application with respect to intellectual property and contract rights); liabilities and losses associated with owning and leasing significant amounts of real estate; changes in its debt levels and a downgrade on its credit ratings; the failure to retain executive officers and other key personnel or attract additional qualified management personnel to meet business needs; and certain anti-takeover provisions that may have the effect of delaying or preventing a change in control.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date and time made. Except as required by federal or provincial securities laws, the Company undertakes no obligation to publicly release any revisions to forward-looking statements, or to update them to reflect events or circumstances occurring after the date forward-looking statements are made, or to reflect the occurrence of unanticipated events.