Burger King Worldwide Annual Report

Su Bin Baek BUS 210 Financial Accounting Summer 2013

http://investor.bk.com/conteudo_en.asp?idioma=1&conta=44&tipo=43575

Introduction

• Chief executive officer: Bernardo Hees

• Location of home office: 5505 Blue Lagoon Drive, Miami, FL, 33126

• Ending date of latest fiscal year: December 31, 2012

• Principal product and service: fast food hamburger restaurant

• Main geographic area of activity: over 12,6000 restaurants in the U.S and more than 80 countries worldwide

Audit Report

• Independent auditor: KPMG LLP

• What did the auditors say about the company?

– Financial statement fairly reflect.

– the financial position and operations of the company and internal control system is reasonably effective

– Information in the statements are credible

Stock Market Information

• Stock Price of May 30, 2013: $18.65

• 52 weeks trading range: $12.91-$20.20

• Dividend per share: $0.06 per year

• Date of the above information: April 29, 2013

• BUY/SELL/HOLD?: Hold its stock price is expected to rise because of the investors’ high expectations of growth in the compnay

Income Statement Values in 000’s

Income statement: comments

• Multi-step format

• Net income in 2012 increased by $29,600 to prior year

• The company had increased its net income in 2012 because it performed lower operation expense and higher operation income to these of prior year

Balance Sheet

Assets= Liability + Shareholder’s Equity

Year Assets Liability Shareholder’s Equity

Liability + Shareholder’s equity

2011 5608.4 4559.2 1049.2 5608.4

2012 5564.0 4389.0 1175.0 5564.0

In million dollars

Balance Sheet (in detail)

Balance Sheet: comments

• Liability account has changed the most • Long-term debt in 2012 has decreased by

$112200. lower liability improves credibility and makes the borrowing cost lower.

• Since in 2012 it holds a lot of cash equivalent asset it will be able to pay more of its long term debt, improve its credibility even better so that it can burrow more long-term bonds to operate its business

• Retained earnings in 2012 has increased by $103700, which indicates financial growth of the company in 2012

Statement of Cash Flow

Statement of Cash Flow • Cash flow from (provided) operating activities > Net Income for two years

• Net cash provided from operating activities decreased about in half because in year 2012

– the company paid off more debt, expensed more on advertisement, and has higher liabilities

• Shows significant increase in cash flow from other investing activities .Proceeds from refranchising, disposition of asset and restaurant closure increased 29.9 million in 2011 to 104.9 million dollars

– Burger King Worldwide merged with Burger King Holdings and Delaware Corp on April 2012

– it consolidates the assets, liabilities and shareholder’s equity of the subsidiaries. Thus it appears that there has been significant increase from investing and other investing activities

• Primary source of financing is from operating activities since it is a service sector business entity

• Overall net cash flow increased from 459 million to 546.7 million dollars

Accounting Policies

• Important notes to the Financial Statements:

– Change in Fiscal year from June 30 to December 31 effective from December 31, 2010

– October 19, 2010 (“3G Acquisition Date”)

– “Acquisition accounting involves the allocation of purchase price to the estimated fair values of the assets acquired and liabilities assumed and requires judgments to be made that could materially affect our financial position and results of operations”

Important Notes on Financial Statements

• 2012 Highlights • The 2010 Transaction

– Change in Fiscal Year June 30 to December 31 – Global Restructuring and Related Professional Fees

• Field Optimization Project in 2011 ($10.6 million cost) • Global Portfolio Realignment Project

– $7.6 million and $30.2 million general administrative expense in 2011 and 2012

• Merger with Justice on April 3, 2012 (Burger King Worldwide Holdings, Inc., Delaware Corp., and indirect parent company of Holdings(“Worldwide”= Burger King Worldwide)

• 2012 Debt Refinancing • New Accounting Pronouncements in 2012

Topics of the notes to the financial statements

• Basis of Presentation and Consolidation

• Concentrations of Risk • Use of Estimates • Foreign Currency Translation,

Transaction • Cash and Cash Equivalents • Allowance for Doubtful Accounts • Inventories • Property and Equipment, net • Assets Held For Sale • Leases • Goodwill and Intangible Assets

Not Subject to Amortization

• Long-lived Assets, Other Assets, Other Comprehensive Income (loss)

• Derivative Financial Instruments • Disclosure About Fair Value • Revenue Recognition • Advertising and Promotional

Costs • Insurance Reserves • Litigation accruals • Guarantees • Income Taxes • Share-based Compensation • Retirement Plans

Significant Accounting Policies

• Inventories are stated at FIFO (lower of the cost) • Long-lived assets are tested for impairment whenever events or changes

indicate that the carrying amount of an asset may not be recoverable • Foreign currency transaction gain (loss): re-measurement of foreign

denominated assets and liabilities or when earnings of subsidiaries reflected when the exchange rate changed

• Insurance Reserves • Currency Exchange Risk, Interest Rate Risk, Commodity Price Risk • Revenue recognition

– Franchise revenues • Royalties:% of sales reported by franchised restaurant) : when collectability is assured • Initial franchise fee: when related restaurant begins operation • Renewal franchise fee: upon receipt of the non-refundable fee and execution of a new

franchise agreement

– rental income on operating leases and direct financing lease: when collectability is assured

– Retail sales at Company restaurants: at the point of sale

Financial Analysis Liquidity Ratio

Ratios Calculation (million $)

2012 (million $)

Calculation (million $)

2011 (million $)

Working Capital 890.5-397.8 492.7 742.1-472 270.1

Current Ratio 890.5 / 397.8 2.24 742.1 / 472 1.57

Receivable turnover

1966.3/ (178+152.8 /2)

11.89 2335.7/ (152.8+153.5 /2)

15.25

Average day’s sales uncollected

365 days /11.89 30.70 365 days /15.25 23.93

Inventory turnover

1037.2/ (6.7+13.7/2)

101.69 1447.4/(13.7+15.6/2)

98.80

Average day’s inventory on hand

365 days/ 101.69 3.59 365 days/ 98.80 3.69

Operating cycle 3.59+30.70 34.29 3.69+23.93 27.62

Comments on Liquidity Ratio

• Positive Working capital and Current Ratio above 1. • Current ratio shows that the company has a strong solvency and its

ability to pay current liabilities on time. • Lower Receivable turnover in 2012 indicates that its credit-granting

and collection activities have been less efficient than in 2011. • Inventory turnover is accelerating in 2012 the company had better

performance of inventory management. Sold its inventory more quickly, which means its profit is increased as well

• It is costly to hold inventory and both year 2012 and 2011 show low level of inventory on hand which means that is has a good inventory turnover and has strong management

• Overall, liquidity ratio of the company is strong yet there is slight decrease in efficiency of receivable collection.

Financial Analysis Profitability Ratio

Ratio Calculation 2012 2011

Profit Margin (Net Income/ Sales)

117.7/1996.3 5.90 % 88.1/2335.7 3.77%

Asset Turnover (Sales/ avg Total Asset)

1996.3/5586.2 0.35 2335.7/5647.3 0.41

Return on Assets (Net Income/ Total Assets)

117.7/5586.2 2.11% 88.1/5647.3 1.56%

Return on Equity (Net Income / Shareholder’s equity)

117.7/1112.1 10.58% 88.1/1248.2 7.06%

Comments on Profitability Ratio

• Increased Profit margin ratio tells that the company is

generating more market profitable products and has good control of its costs

• Lower receivable turnover is reflected on asset turnover and it also shows that company is expending a lot on investment.

• Increased return on equity ratio shows that the shareholders’ investment in the company is being efficiently managed

• The company is in slow transition of improving its business by massive refranchising, expending internationally and changing its image. They have been heavily investing and it seems business is going better after operational changes.

Financial Analysis Market Strength Ratio

Ratio Calculation 2012 Calculation 2011

P/E ratio (market value per share/ Earnings per share)

16.44/0.34 48.35 No data/ 25 No data

Dividend yield (dividend/ stock price of year end)

0.04/16.44 0.0024 1.13/No data No data

Comments on Market Strength Ratio

• No data found on stock market price of end of the year for 2011

• P/E ratio of 2012 is high, which indicates the stockholders are expecting growth in the future

Financial Analysis Solvency Ratio

Ratio Calculation 2012 (million$) Calculation 2011 (million$)

Debt to equity (total liability/ shareholder’s equity)

4389/1175 3.74 4559.2/1049.2 4.35

Financing Gap (Operating cycle- Days payable)

34.29-12.66 Financing gap Operating cycle > Days payable

27.62-15.32 Financing gap Operating cycle > Days payable

Comments on Solvency Ratio

• creditors are in control of the company (debt to equity ratio > 1 in both years)

• The assets are financed by debt and the company is at financial risk but it is not alarming because the ratio is going down and its profitability is improving

• The company has financing gap in both years because it is heavily investing. Company needs to borrow money to generate revenue.

Industry Situation & Company Plans

• The fast food hamburger restaurant industry is very competitive. McDonald is the leading company, followed by Burger King Worldwide and Wendy’s and many other local restaurants.

• Burger King Worldwide plans to accelerate international development for principal drivers of long-term growth of the business and value of its shareholders

• Burger King Worldwide plans to continue to implement refranchising initiative aiming for nearly 100 % franchised business. This will enhance cash flow

• Continue Re-imaging of franchises, strengthening, broadening the menu,

• Foodcentric marketing “Taste is King” refocus consumers on food • Drive corporate-level G&A efficiencies at current levels through

“Zero Based Budgeting” program to build strong ownership culture

Executive Summary

• Burger King Worldwide is a newly merged company. It is going through a major changes in its accounting, operating and financing strategies to stabilize and enhance the growth of the business.

• It has been spending heavily on refranchising, changing images of the restaurants, expanding internationally, and advertisements. Due to its efficient operation strategies, in 2012 it refinanced huge some of debt.

• It has been generating enough revenue to pay debts and dividends in 2012 and even in March 2013 to its shareholders and shareholder’s expectation of the company is high thus its stock price is expected to rise.

• Burger King Worldwide is rapidly chasing after the McDonalds and making other fast food restaurants anxious through its new operation strategies and improved profitability and solvency yet it is not yet fully ready to catch up with the McDonalds and should be still be aware of Wendy’s and other companies because its company (after the merging) and the management team are relatively still new and in a process of adopting to the new environment.

Work Cited

– http://www.nasdaq.com/symbol/bkw/financials?query=balance-sheet

– Stock price, dividend per share of May 30 taken from NASDAQ

– http://www.nasdaq.com/aspx/infoquotes.aspx?symbol=BKW&selected=BKW

• Images – http://www.fatwallet.com/static/attachments/235618_wh

opper.jpg – http://htmlgiant.com/wp-

content/uploads/2012/10/18846_01868976-photo-logo-burger-king.png

– http://images.mstarz.com/data/images/full/12501/burger-king.jpg