UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________
FORM 10-Q
_________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2014
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
(Registrant’s 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
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
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
Non-accelerated filer
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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common shares
Outstanding at November 3, 2014
132,576,171 shares
No
TIM HORTONS INC. AND SUBSIDIARIES
INDEX
Pages
PART I: Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statement of Operations for the third quarters and year-to-date periods
ended September 28, 2014 and September 29, 2013
Condensed Consolidated Statement of Comprehensive Income for the third quarters and year-todate periods ended September 28, 2014 and September 29, 2013
Condensed Consolidated Balance Sheet as at September 28, 2014 and December 29, 2013
Condensed Consolidated Statement of Cash Flows for the year-to-date periods ended September 28,
2014 and September 29, 2013
Condensed Consolidated Statement of Equity for the year-to-date periods ended September 28,
2014 and December 29, 2013
Notes to the Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II: Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Mine Safety Disclosure
Item 5. Other Information
Item 6. Exhibits
Signature
Index to Exhibits
3
4
5
6
7
8
18
31
31
31
31
32
33
33
33
33
34
35
On November 3, 2014, 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$0.8872 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”). All references to our websites contained
herein do not constitute incorporation by reference of the information contained on the websites and such information should
not be considered part of this document.
Reporting Currency
The majority of the Company’s operations, restaurants and cash flows are based in Canada, and the Company is primarily
managed in Canadian dollars. As a result, the Company’s reporting currency is the Canadian dollar. All amounts are expressed
in Canadian dollars unless otherwise noted.
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands of Canadian dollars, except share and per share data)
Third quarter ended
September 28,
2014
Year-to-date period ended
September 29,
2013
September 28,
2014
September 29,
2013
Revenues
Sales (note 13)
Franchise revenues
Rents and royalties
Franchise fees
$
634,786
575,780
$
1,789,645
$
1,668,229
230,383
43,986
274,369
909,155
212,114
37,459
249,573
825,353
654,845
105,414
760,259
2,549,904
608,857
79,943
688,800
2,357,029
545,050
86,306
43,577
41,681
(4,038)
501,856
78,307
37,865
38,787
(4,075)
1,545,765
251,975
106,166
121,141
(11,359)
1,452,302
231,026
83,743
115,493
(11,340)
27,289
—
—
484
740,349
—
953
2,889
(57)
656,525
27,289
—
—
2,467
2,043,444
—
11,032
2,889
(1,440)
1,883,705
168,806
(18,518)
168,828
(9,406)
506,460
(53,842)
473,324
(26,991)
879
151,167
51,434
99,733
919
160,341
45,386
114,955
2,994
455,612
138,092
317,520
2,638
448,971
122,531
326,440
$
1,602
98,131
$
1,092
113,863
$
4,730
312,790
$
2,670
323,770
$
0.74
$
0.76
$
2.32
$
2.12
$
0.74
$
0.75
$
2.31
$
2.12
Total revenues
Costs and expenses
Cost of sales
Operating expenses
Franchise fee costs
General and administrative expenses
Equity (income)
Transaction costs (note 15)
Corporate reorganization expenses
Asset impairment (note 13)
Other expense (income), net
Total costs and expenses, net
Operating income
Interest (expense)
Interest income
Income before income taxes
Income taxes (note 2)
Net income
Net income attributable to noncontrolling interests
(note 12)
Net income attributable to Tim Hortons Inc.
Basic earnings per common share attributable to Tim
Hortons Inc. (note 3)
Diluted earnings per common share attributable to
Tim Hortons Inc. (note 3)
Weighted average number of common shares
outstanding (in thousands) – Basic (note 3)
Weighted average number of common shares
outstanding (in thousands) – Diluted (note 3)
Dividends per common share
$
132,439
132,934
0.32
$
150,342
$
150,864
0.26
134,817
$
135,292
0.96
See accompanying Notes to the Condensed Consolidated Financial Statements.
3
152,379
$
152,919
0.78
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands of Canadian dollars)
Third quarter ended
September 28,
2014
Net income
Other comprehensive income
Translation adjustments gain (loss)
Unrealized gains (losses) from cash flow hedges (note 9)
Gain (loss) from change in fair value of derivatives
Amount of net loss (gain) reclassified to earnings
during the period
Tax (expense) recovery (note 9)
Other comprehensive income (loss)
Comprehensive income
Comprehensive income attributable to noncontrolling
interests
Comprehensive income attributable to Tim Hortons
Inc.
$
99,733
$
114,955
September 28,
2014
$
317,520
$
326,440
(9,133)
5,356
(10,686)
(553)
(2,607)
47
(1,260)
(2,068)
(3,654)
(1,027)
(816)
123,575
18,471
1,509
(20,378)
1,602
$
14,250
94,577
216
14,480
332,000
9,800
336,240
1,092
4,730
2,670
93,485
$
327,270
See accompanying Notes to the Condensed Consolidated Financial Statements.
4
September 29,
2013
21,301
25,444
125,177
$
Year-to-date period ended
September 29,
2013
$
333,570
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands of Canadian dollars, except share and per share data)
As at
September 28,
2014
Assets
Current assets
Cash and cash equivalents
Restricted cash and cash equivalents (note 6)
Accounts receivable, net
Notes receivable, net (note 4)
Deferred income taxes
Inventories and other, net (note 5)
Advertising fund restricted assets (note 12)
Total current assets
Property and equipment, net
Notes receivable, net (note 4)
Deferred income taxes
Equity investments
Other assets
Total assets
Liabilities and equity
Current liabilities
Accounts payable (note 6)
Tim Card obligation (note 6)
Accrued liabilities (note 6)
Advertising fund liabilities (note 12)
Short-term borrowings
Current portion of long-term obligations
Total current liabilities
Long-term obligations
Long-term debt (note 7)
Capital leases
Deferred income taxes
Other long-term liabilities
Total long-term obligations
Commitments and contingencies (note 10)
Equity
Equity of Tim Hortons Inc.
Common shares ($2.84 stated value per share), Authorized: unlimited shares.
Issued: 132,576,171 and 141,329,010 shares, respectively
Common shares held in Trust, at cost: 315,932 and 293,816 shares, respectively
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
Total equity of Tim Hortons Inc.
Noncontrolling interests (note 12)
Total equity
Total liabilities and equity
$
$
$
$
109,085
64,572
215,570
6,482
8,448
141,133
57,230
602,520
1,718,192
572
13,067
40,253
129,850
2,504,454
$
215,215
112,458
110,757
49,211
—
18,243
505,884
$
$
50,414
155,006
210,664
4,631
10,165
104,326
39,783
574,989
1,685,043
4,483
11,018
40,738
117,552
2,433,823
204,514
184,443
89,565
59,912
30,000
17,782
586,216
1,294,880
125,468
7,377
139,769
1,567,494
843,020
121,049
9,929
112,090
1,086,088
375,880
(14,806)
12,148
154,569
(97,622)
430,169
907
431,076
2,504,454 $
400,738
(12,924)
11,033
474,409
(112,102)
761,154
365
761,519
2,433,823
See accompanying Notes to the Condensed Consolidated Financial Statements.
5
December 29,
2013
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands of Canadian dollars)
Year-to-date period ended
September 28,
2014
September 29,
2013
Cash flows provided from (used in) operating activities
Net income
Adjustments to reconcile net income to net cash provided from operating activities
Depreciation and amortization
Total return swaps (gain)
Stock-based compensation expense (note 11)
Deferred income taxes
Changes in operating assets and liabilities
Restricted cash and cash equivalents
Accounts receivable
Inventories and other
Accounts payable and accrued liabilities
Taxes
Settlement of interest rate forwards
Deposit with tax authorities
Other
Net cash provided from operating activities
Cash flows (used in) provided from investing activities
$
317,520
$
326,440
121,163
(26,509)
110,447
(11,037)
34,967
224
17,132
(2,458)
90,992
(8,506)
50,020
(11,010)
(18,666)
(35,516)
(7,913)
(58,213)
4,164
(4,851)
(1,721)
(25,626)
447,635
7,183
—
—
17,561
438,152
Capital expenditures
Capital expenditures – Advertising fund
Other investing activities
Net cash (used in) investing activities
Cash flows (used in) provided from financing activities
(138,950)
(5,237)
(132,726)
(9,554)
10,955
(133,232)
6,709
(135,571)
Repurchase of common shares
Dividend payments to common shareholders
Net proceeds from issuance of debt
Short-term (repayments) borrowings, net
Principal payments on long-term debt obligations
Other financing activities
Net cash (used in) financing activities
Effect of exchange rate changes on cash
(Decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
(527,640)
(129,367)
(242,222)
(118,579)
448,299
(30,000)
(12,139)
(6,269)
(257,116)
1,384
58,671
50,414
109,085 $
—
—
(12,901)
(5,601)
(379,303)
1,460
(75,262)
120,139
44,877
$
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
Non-cash investing and financing activities:
Capital lease obligations incurred
$
37,096
$
23,259
$
144,297
$
117,418
$
23,238
$
25,217
See accompanying Notes to the Condensed Consolidated Financial Statements.
6
TIM HORTONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
(in thousands of Canadian dollars or thousands of common shares)
Common Shares Held
in the Trust
Common Shares
Number
$
Balance as at December 30, 2012
153,405
Repurchase of common shares(3)
(12,076)
$
Number
AOCI(1)
Contributed
Surplus
Retained
Earnings
Translation
Adjustment
Cash Flow
Hedges
Total Equity
THI
NCI(2)
$
$
$
$
$
$
$
435,033
(317)
(34,295)
$
(13,356)
$
10,970
$
893,619
$
$
(3,590)
$
1,187,238
$
$
2,853
$
1,190,091
(43)
(2,453)
—
—
—
Disbursed or sold from the Trust(4)
—
—
66
2,885
—
—
—
—
Stock-based compensation
—
—
—
—
63
(712)
—
—
Other comprehensive income (loss)
before reclassifications(5)
—
—
—
—
—
—
31,333
(2,407)
28,926
—
28,926
Amounts reclassified from AOCI(5)
—
—
—
—
—
—
—
(2,000)
(2,000)
—
(2,000)
NCI transactions
—
—
—
—
—
(483)
—
—
(483)
483
—
Net income
—
—
—
—
—
—
—
4,280
428,649
Dividends and distributions, net
Balance as at December 29, 2013
Repurchase of common shares(3)(6)
—
141,329
—
$
(8,753)
—
—
400,738
(294)
(24,858)
(59)
(3,549)
$
(12,924)
(686,243)
(135,438)
Total Equity
424,369
(156,141)
—
$
11,033
$
474,409
—
$
(502,781)
—
(104,105)
(722,991)
(7,997)
(156,141)
761,154
(649)
—
424,369
$
2,885
—
(649)
—
$
(722,991)
—
2,885
(163,392)
(7,251)
$
(531,188)
365
$
761,519
(531,188)
—
—
—
—
—
—
1,667
—
1,667
(214)
—
—
901
—
901
Disbursed or sold from the Trust(4)
—
—
37
1,667
—
Stock-based compensation
—
—
—
—
1,115
Other comprehensive income (loss)
before reclassifications(5)
—
—
—
—
—
—
18,471
(1,771)
16,700
—
16,700
Amounts reclassified from AOCI(5)
—
—
—
—
—
—
—
(2,220)
(2,220)
—
(2,220)
NCI transactions
—
—
—
—
—
(268)
—
—
(268)
268
—
Net income
—
—
—
—
—
—
—
4,730
317,520
Dividends and distributions, net
Balance as at September 28, 2014
—
132,576
—
$
375,880
—
(316)
—
$
(14,806)
312,790
(129,367)
—
$
12,148
$
154,569
—
$
(85,634)
312,790
(129,367)
—
$
(11,988)
$
430,169
(133,823)
(4,456)
$
907
$
431,076
________________
(1)
(2)
(3)
(4)
(5)
(6)
Accumulated other comprehensive income (“AOCI”).
Noncontrolling interests (“NCI”).
Amounts reflected in Retained earnings represent consideration in excess of the stated value.
Amounts are net of tax.
Amounts are net of tax (see note 9).
The 2014 share repurchase program, as described in the Company’s Annual Report on Form 10-K for the year ended December 29, 2013 (“Annual Report”), filed with the SEC and the CSA on February 25,
2014, commenced on February 28, 2014 and was due to terminate on February 27, 2015, or earlier if the $440.0 million or 10.0% share maximum was reached, or upon the occurrence of certain other
termination events. Following the announcement on August 24, 2014 that the Company was in discussions with Burger King Worldwide, Inc. regarding a potential strategic transaction, the 2014 Program
was terminated.
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)
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
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 Company’s
financial position as at September 28, 2014, and the results of operations, comprehensive income and cash flows for the third
quarters ended September 28, 2014 and September 29, 2013. These Condensed Consolidated Financial Statements should be
read in conjunction with the audited 2013 Consolidated Financial Statements which are contained in our most recent Annual
Report. The December 29, 2013 Condensed Consolidated Balance Sheet included herein was derived from the audited 2013
Consolidated Financial Statements, but does not include all of the year-end disclosures required by U.S. GAAP.
Stock-based compensation - performance stock units
In May 2014, the Company granted performance stock units ("PSUs") to certain of its employees. PSU payout levels will
be based on two forward looking performance measures: return on assets and total shareholder return (see Note 15). PSUs are
expensed on a straight-line basis over the relevant vesting period.
Proposed transaction with Burger King Worldwide, Inc.
On August 26, 2014, the Company announced that it had entered into a definitive agreement (the “Arrangement
Agreement”) with Burger King Worldwide, Inc. (“Burger King”) and certain of its affiliates (see Note 15 for further
information).
NOTE 2
INCOME TAXES
The effective income tax rate was 34.0% for the third quarter ended September 28, 2014 (third quarter fiscal 2013:
28.3%) and 30.3% for the year-to-date period ended September 28, 2014 (year-to-date period fiscal 2013: 27.3%). The increase
in the effective tax rate for the 2014 quarter-to-date and year-to-date periods as compared to the respective 2013 periods is
primarily due to Transaction-related costs (see Note 15), and to a lesser degree an increase in costs in 2014 related to the
Company’s new long-term debt, for both of which a full tax benefit cannot be recognized.
NOTE 3
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO TIM HORTONS INC.
Third quarter ended
September 28,
2014
Net income attributable to Tim Hortons Inc.
$
Weighted average shares outstanding for computation of
basic earnings per common share attributable to Tim Hortons
Inc. (in thousands)
Dilutive impact of restricted stock units (“RSUs”) and PSUs
(in thousands)
Dilutive impact of stock options with tandem stock
appreciation rights (“SARs”) (in thousands)
Weighted average shares outstanding for computation of
diluted earnings per common share attributable to Tim
Hortons Inc. (in thousands)
Basic earnings per common share attributable to Tim
Hortons Inc.
Diluted earnings per common share attributable to Tim
Hortons Inc.
98,131
Year-to-date period ended
September 29,
2013
$
113,863
September 28,
2014
$
312,790
September 29,
2013
$
323,770
132,439
150,342
134,817
152,379
219
264
243
285
276
258
232
255
132,934
150,864
135,292
152,919
$
0.74
$
0.76
$
2.32
$
2.12
$
0.74
$
0.75
$
2.31
$
2.12
8
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 4
NOTES RECEIVABLE, NET
As at
September 28, 2014
Franchise Incentive Program (“FIP”)
notes(1)
Other notes receivable(3)
Notes receivable
Allowance
Notes receivable, net
$
$
15,404
6,173
21,577
December 29, 2013
VIEs(2)
Gross
$
$
Total
(12,392) $
(594)
(12,986)
$
Current portion, net
Long-term portion, net
$
$
VIEs(2)
Gross
3,012 $
5,579
8,591 $
(1,537)
7,054
16,677
8,256
24,933
$
$
Total
(13,668) $
(649)
(14,317)
6,482
572
$
3,009
7,607
10,616
(1,502)
9,114
$
$
4,631
4,483
As at
September 28, 2014
Class and Aging
Current status (FIP notes and other)
Past-due status < 90 days (FIP notes)
Past-due status > 90 days (FIP notes)
Notes receivable
Allowance
Notes receivable, net
Gross
$
$
6,974
—
14,603
21,577
VIEs
$
$
December 29, 2013
(2)
Total
(1,271) $
—
(11,715)
(12,986) $
$
5,703 $
—
2,888
8,591 $
(1,537)
VIEs(2)
Gross
9,688
328
14,917
24,933
$
$
Total
(2,081) $
—
(12,236)
(14,317) $
7,054
$
7,607
328
2,681
10,616
(1,502)
9,114
________________
(1)
(2)
(3)
The Company has outstanding FIP arrangements with certain U.S. restaurant owners, which generally provided interest-free financing for the purchase of
certain restaurant equipment, furniture, trade fixtures and signage.
The notes payable to the Company by VIEs are eliminated on consolidation, which reduces the Notes receivable, net recognized on the Condensed
Consolidated Balance Sheet (see note 12).
Relates primarily to notes issued to vendors in conjunction with the financing of property sales, and on various equipment and other financing programs.
NOTE 5
INVENTORIES AND OTHER, NET
As at
September 28,
2014
Raw materials
Finished goods
$
Inventory obsolescence provision
Inventories, net
Prepaids and other(1)
Total Inventories and other, net
$
(1)
December 29,
2013
21,784 $
91,346
113,130
(2,057)
111,073
30,060
141,133
$
22,789
69,348
92,137
(1,754)
90,383
13,943
104,326
Includes fair value of the Total Return Swaps of $10.6 million (December 29, 2013: nil) and bearer deposit notes of $7.6 million (December 29, 2013: nil)
(see Note 9). Amounts have been reclassified from Other assets since December 29, 2013.
9
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 6
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable
As at
September 28,
2014
Accounts payable
Construction holdbacks and accruals
Transaction costs (note 15)
Corporate reorganization accrual
Total Accounts payable
$
$
December 29,
2013
143,383
46,772
24,572
488
215,215
$
$
142,131
57,527
—
4,856
204,514
Tim Card obligation
The decrease in our Tim Card obligation, and resulting decrease in Restricted cash and cash equivalents, is primarily
driven by Tim Card redemptions, which can be seasonal, and to a much lesser extent, the recognition of breakage income. In
addition, Restricted cash and cash equivalents decreased due to additional borrowings by the Tim Hortons Advertising and
Promotion Fund (Canada) Inc. (“Ad Fund”) (see note 12).
Accrued liabilities
As at
September 28,
2014
Salaries and wages
$
Taxes payable
(1)
De-branding accruals
(2)
Other accrued liabilities
Total Accrued liabilities
________________
(1)
(2)
$
26,312
December 29,
2013
$
22,553
18,730
14,542
1,376
9,538
64,339
42,932
110,757
$
89,565
®
Accruals related to Cold Stone Creamery de-branding activity in Tim Hortons locations in Canada.
Includes accruals for contingent rent, current portion of the Maidstone Bakeries supply contract, deferred revenues, deposits, the current portion of
deferred income taxes, and various equipment and other accruals.
NOTE 7
LONG-TERM DEBT
The Company offered Senior Unsecured Notes, Series 3, due April 1, 2019 (“Series 3 Notes”) on a private placement
basis in the first quarter of 2014 for total net proceeds of $449.9 million, which included a discount of $0.1 million. A portion of
the proceeds from the Series 3 Notes were used to retire the balance of our 364-day $400.0 million revolving bank facility.
Please refer to Note 7, Long-term debt, in the interim financial statements for the quarter ended March 30, 2014, filed on Form
10-Q with the SEC and CSA on May 7, 2014, for further information.
10
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 8
FAIR VALUES
Financial assets and liabilities measured at fair value
As at
September 28, 2014
Fair value
hierarchy
December 29, 2013
Fair value
asset (liability)(1)
Fair value
hierarchy
Fair value
asset (liability)(1)
Derivatives
Forward currency contracts(2)
Interest rate swap(3)
Interest rate forwards(4)
Total return swaps (“TRS”)(5)
Total Derivatives
Level 2
Level 2
n/a
Level 2
$
$
4,264
(163)
—
47,902
52,003
Level 2
Level 2
Level 2
Level 2
$
$
4,181
(49)
285
21,393
25,810
________________
(1)
(2)
(3)
(4)
(5)
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 is determined using prevailing exchange rates.
The fair value is estimated using discounted cash flows and market-based observable inputs, including interest rate yield curves and discount rates.
The interest rate forwards were settled as part of the issuance of the Series 3 Notes (see note 7).
The fair value of the TRS is determined using the Company’s common share closing price on the last business day of the fiscal period, as quoted on the
Toronto Stock Exchange.
Other financial assets and liabilities not measured at fair value
As at September 28, 2014 and December 29, 2013, the carrying values of Cash and cash equivalents and Restricted cash
and cash equivalents approximated their fair values due to the short-term nature of these investments. The following table
summarizes the fair value and carrying value of other financial assets and liabilities that are not recognized at fair value on a
recurring basis on the Condensed Consolidated Balance Sheet:
As at
September 28, 2014
Bearer deposit notes(1)
Notes receivable, net(2)
Series 1 Notes(3)
Series 2 Notes(3)
Series 3 Notes(3)
Advertising fund term debt(4)
Other debt(5)
Fair value
hierarchy
Fair value
asset (liability)
Level 2
Level 3
Level 2
Level 2
Level 2
Level 3
Level 3
$
$
$
$
$
$
$
42,520
7,054
(306,768)
(458,325)
(452,435)
(26,415)
(141,995)
December 29, 2013
Carrying
value
Fair value
hierarchy
Fair value
asset (liability)
Carrying
value
$
42,520
$
7,054
$ (300,934)
$ (449,901)
$ (449,887)
$ (26,415)
$ (75,651)
Level 2
Level 3
Level 2
Level 2
n/a
Level 3
Level 3
$
41,403 $
41,403
$
9,114 $
9,114
$ (315,519) $ (301,196)
$ (445,419) $ (449,892)
$
— $
—
$ (30,189) $ (30,189)
$ (126,548) $ (69,794)
________________
(1)
(2)
(3)
(4)
(5)
The Company holds these notes as collateral to reduce the carrying costs of the TRS. The interest rate on these notes resets every 90 days; therefore, the
fair value of these notes, using a market approach, approximates the carrying value.
Management generally estimates the current value of notes receivable, using a cost approach, based primarily on the estimated depreciated replacement
cost of the underlying equipment held as collateral.
The fair value of the senior unsecured notes, using a market approach, is based on publicly disclosed trades between arm’s length institutions as
documented on Bloomberg L.P.
Management estimates the fair value of this variable rate debt using a market approach, based on prevailing interest rates plus an applicable margin.
Management estimates the fair value of its Other debt, primarily consisting of contributions received related to the construction costs of certain
restaurants, using an income approach, by discounting future cash flows using a Company risk-adjusted rate over the remaining term of the debt.
11
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 9
DERIVATIVES
As at
September 28, 2014
Asset
Net
asset
(liability)
Liability
Derivatives designated as
cash flow hedging
instruments
Forward currency
$ 3,480
contracts(1)
$
Interest rate swap(2)
$
—
$
Interest rate forwards(3)
$
—
$
—
$
$10,609
$37,293
$
$
—
—
$ 10,609
$ 37,293
—
Accounts
receivable, net
$ 3,480
(163) $
December 29, 2013
Classification on
Condensed
Consolidated
Balance Sheet
Liability
$
—
$
$
285
$
—
$
$
$
—
—
$
—
$ 21,393
n/a
Other assets
$
—
$21,393
Accounts
receivable, net
$
$
—
$
n/a
n/a
$ 4,181
Accounts
receivable, net
$
Other long-term
—
Classification on
Condensed
Consolidated
Balance Sheet
$ 4,181
(163) liabilities
—
Asset
Net
asset
(liability)
(49) $
Other long-term
(49) liabilities
285
Accounts
receivable, net
Derivatives not
designated as
hedging instruments
TRS (current)(4)
(4)
TRS (long-term)
Forward currency
contracts(1)
$
784
$
—
$
Inventories and
other, net
784
—
—
Other assets
________________
(1)
(2)
(3)
(4)
Notional value as at September 28, 2014 of $158.6 million (December 29, 2013: $154.0 million), with maturities ranging between October 2014 and April
2015; no associated cash collateral.
Notional value as at September 28, 2014 of $26.3 million (December 29, 2013: $30.0 million), with maturities through fiscal 2019; no associated cash
collateral.
The interest rate forwards were settled in the first quarter of 2014 (notional amount at December 29, 2013: $90.0 million).
The notional value and associated cash collateral, in the form of bearer deposit notes (see note 8), was $42.3 million as at September 28, 2014
(December 29, 2013: $41.4 million). The TRS have maturities annually, in May, between fiscal 2015 and fiscal 2021.
Third quarter ended September 28, 2014
Derivatives designated as
cash flow
hedging instruments(1)
Forward currency
contracts
(3)
Classification on
Condensed
Consolidated
Statement of
Operations
Cost of sales
Interest rate swap
Interest (expense)
Interest rate forwards(4)
Interest (expense)
Amount of
gain (loss)
recognized
in OCI(2)
$
Total
Income tax effect
Net of income taxes
Income taxes
$
Amount of net
(gain) loss
reclassified
to earnings
Total effect
on OCI(2)
(659) $
47
659
47
162
209 $
5,362 $
(6)
—
5,356
(1,422)
3,934 $
12
Third quarter ended September 29, 2013
Amount of
gain (loss)
recognized
in OCI(2)
Amount of net
(gain) loss
reclassified
to earnings
4,703 $ (3,368) $
(83)
41
(7,235)
659
(10,686)
5,403
(1,260)
915
4,143 $ (9,771) $
Total effect
on OCI(2)
(2,300) $ (5,668)
(24)
59
(7,062)
173
(2,068)
(12,754)
594
1,509
(1,474) $ (11,245)
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
Year-to-date period ended September 28, 2014
Classification on
Condensed
Consolidated
Statement of
Operations
Derivatives designated as
cash flow
hedging instruments(1)
Forward currency
contracts
(3)
Cost of sales
Interest rate swap
Interest (expense)
Interest rate forwards(4)
Interest (expense)
Amount of
gain (loss)
recognized
in OCI(2)
$
Total
Income tax effect
Income taxes
$
Net of income taxes
Amount of net
(gain) loss
reclassified
to earnings
4,847 $
(264)
(5,136)
(553)
(1,218)
(1,771) $
Year-to-date period ended September 29, 2013
Amount of
gain (loss)
recognized
in OCI(2)
Total effect
on OCI(2)
(5,548) $
150
1,744
(3,654)
(701) $
(114)
(3,392)
(4,207)
1,434
(2,220) $
216
(3,991) $
Amount of net
(gain) loss
reclassified
to earnings
4,756 $
(128)
(7,235)
(2,607)
(1,226)
(3,833) $
Total effect
on OCI(2)
(1,685) $
139
519
(1,027)
410
(617) $
3,071
11
(6,716)
(3,634)
(816)
(4,450)
_______________
(1)
(2)
(3)
(4)
Excludes amounts related to ineffectiveness, as they were not significant.
Other comprehensive income (“OCI”).
The Ad Fund entered into an amortizing interest rate swap to fix a portion of the interest expense on its term debt.
The Company entered into and settled interest rate forwards relating to the issuance of its long-term debt.
Third quarter ended
Derivatives not designated as
cash flow hedging instruments
Classification on Condensed Consolidated
Statement of Operations
September 28,
2014
TRS
General and administrative expenses
$
Forward currency contracts
Cost of sales
Forward currency contracts
Other (income) expense
$
Total loss (gain), net
NOTE 10
Year-to-date period ended
September 29,
2013
(30,756) $
(741)
(1,175)
(32,672) $
September 28,
2014
(2,802) $
85
—
(2,717) $
September 29,
2013
(26,509) $
(574)
(535)
(27,618) $
(11,037)
(264)
—
(11,301)
COMMITMENTS AND CONTINGENCIES
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
Company’s financial condition and earnings.
NOTE 11
STOCK-BASED COMPENSATION
Third quarter ended
September 28,
2014
RSUs and PSUs
Stock options and tandem SARs
Deferred share units (“DSUs”)
Total stock-based compensation expense(1)
(2)
TRS (gain)
$
1,551
27,490
5,040
34,081
$
$
$
(30,756) $
$
Year-to-date period ended
September 29,
2013
1,510
2,573
514
4,597
September 28,
2014
$
$
(2,802) $
4,207
25,626
5,134
34,967
September 29,
2013
$
$
(26,509) $
5,090
9,912
2,130
17,132
(11,037)
________________
(1)
(2)
Primarily included in General and administrative expenses in the Condensed Consolidated Statement of Operations.
The Company has entered into TRS contracts as economic hedges, covering 1,027,000 of the Company’s underlying common shares (September 29,
2013: 1,008,000), which represents a portion of its outstanding stock options with tandem SARs, and substantially all of its cash obligation related to
DSUs. See note 9 for the revaluation of the TRS contracts.
13
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 12
VARIABLE INTEREST ENTITIES
VIEs for which the Company is the primary beneficiary
The revenues and expenses associated with the Company’s consolidated Non-owned restaurants and advertising funds
presented on a gross basis, prior to consolidation adjustments, are as follows:
Third quarter ended
September 28, 2014
Restaurant
VIEs(1)
Sales
Advertising
fund VIEs(2)
Total
VIEs
Restaurant
VIEs(1)
Advertising
fund VIEs(2)
Total
VIEs
$
94,129
—
94,129
92,183
—
—
1,946
—
1,946
344
$
—
2,979
2,979
—
2,761
—
218
218
—
—
$
94,129
2,979
97,108
92,183
2,761
—
2,164
218
1,946
344
$
96,049
—
96,049
94,302
—
441
1,306
—
1,306
214
$
—
2,865
2,865
—
2,379
—
486
486
—
—
$
96,049
2,865
98,914
94,302
2,379
441
1,792
486
1,306
214
$
1,602
$
—
$
1,602
$
1,092
$
—
$
1,092
Advertising levies
Total revenues
Cost of sales
Operating expenses
Asset impairment(3)
Operating income
Interest expense
Income before taxes
Income taxes
Net income attributable to
noncontrolling interests
September 29, 2013
Year-to-date period ended
September 28, 2014
Restaurant
VIEs(1)
Sales
Total
VIEs
Restaurant
VIEs(1)
Advertising
fund VIEs(2)
Total
VIEs
$
271,838
—
271,838
266,038
—
—
5,800
33
5,767
1,037
$
—
8,877
8,877
—
8,227
—
650
650
—
—
$
271,838
8,877
280,715
266,038
8,227
—
6,450
683
5,767
1,037
$
276,273
—
276,273
272,648
—
441
3,184
—
3,184
514
$
—
7,965
7,965
—
6,771
—
1,194
1,194
—
—
$
276,273
7,965
284,238
272,648
6,771
441
4,378
1,194
3,184
514
$
4,730
$
—
$
4,730
$
2,670
$
—
$
2,670
Advertising levies
Total revenues
Cost of sales
Operating expenses
Asset impairment(3)
Operating income
Interest expense
Income before taxes
Income taxes
Net income attributable to
noncontrolling interests
September 29, 2013
Advertising
fund VIEs(2)
______________
(1)
(2)
(3)
Includes rents, royalties, advertising expenses and product purchases from the Company which are eliminated upon the consolidation of these VIEs.
The advertising levies, depreciation, interest costs, capital expenditures and financing associated with the Ad Fund’s program to acquire and install LCD
screens, media engines, drive-thru menu boards and ancillary equipment for our restaurants (the “Expanded Menu Board Program”) are presented on a
gross basis. 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.
The Company recognized an impairment charge in the third quarter of 2013 related to certain underperforming markets in the U.S.
14
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
The assets and liabilities associated with the Company’s consolidated Non-owned restaurants and advertising funds
presented on a gross basis, prior to consolidation adjustments, are as follows:
As at
September 28, 2014
Restaurant
VIEs(1)
Cash and cash equivalents
Advertising fund restricted assets – current
Other current assets
Property and equipment, net
Other long-term assets
Total assets
$
(2)(3)
Notes payable to Tim Hortons Inc. – current
Advertising fund liabilities – current
$
$
7,717
—
6,892
15,134
91
29,834
$
12,492
$
—
10,509
494
—
5,432
28,927
907
29,834
Other current liabilities(4)
Notes payable to Tim Hortons Inc. – long-term(2)(3)
Long-term debt(4)
Other long-term liabilities
Total liabilities
Equity of VIEs
Total liabilities and equity
December 29, 2013
Advertising
fund VIEs
Restaurant
VIEs(1)
$
$
—
57,230
—
62,877
746
120,853
$
8,222
$
49,211
5,254
34,943
21,384
1,839
120,853
—
120,853
Advertising
fund VIEs
$
$
7,773
—
7,155
20,471
370
35,769
$
—
39,783
—
70,485
1,271
111,539
$
13,689
$
3,040
$
—
11,706
628
—
9,381
35,404
365
35,769
$
59,913
5,253
15,200
25,157
2,976
111,539
—
111,539
______________
(1)
(2)
(3)
(4)
The Company consolidated 317 Non-owned restaurants as at September 28, 2014 (December 29, 2013: 331).
Various assets and liabilities are eliminated upon the consolidation of the Restaurant 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 (see note 4).
The Notes payable to the Company by the Advertising Fund VIEs, which are funded by the Restricted cash and cash equivalents related to our Tim Card
program, are eliminated upon consolidation of the Ad Fund.
Includes $26.4 million of Advertising fund VIEs debt with a Canadian financial institution relating to the Expanded Menu Board Program (December 29,
2013: $30.2 million), of which $5.0 million is recognized in Other current liabilities (December 29, 2013: $5.0 million) with the remainder recognized as
Long-term debt.
The liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on the
Company’s 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
Company’s creditors as they are not legally included within the Company’s general assets.
NOTE 13
SEGMENT REPORTING
The Company operates exclusively in the quick service restaurant industry. The chief decision maker views and evaluates
the Company’s reportable segments as follows:
Canadian and U.S. business units.The results of each of the Canadian and U.S. business units includes substantially all
restaurant-facing activities, such as: (i) rents and royalties; (ii) product sales through our supply chain, as well as an allocation
of supply chain income, driven primarily by the business units’ respective systemwide sales; (iii) franchise fees; (iv) corporate
restaurants; (v) equity income related to restaurant operating ventures; and (vi) business-unit-related general and administrative
expenses. The business units exclude the effect of consolidating VIEs, consistent with how the chief decision maker views and
evaluates the respective business unit’s results.
15
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
Corporate services. Corporate services comprises services to support the Canadian and U.S. business units, including:
(i) general and administrative expenses; (ii) manufacturing income, and to a much lesser extent, manufacturing sales to third
parties; and (iii) income related to our distribution services, including the timing of variances arising primarily from commodity
costs and the related effect on pricing, which generally reverse within a year, associated with our supply chain management.
Our supply chain management involves securing a stable source of supply, which is intended to provide our restaurant owners
with consistent and predictable pricing. 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. Corporate services also includes the results of our international
operations, which are currently not significant.
Third quarter ended
Revenues(1)
Canada
U.S.
Corporate services
Total reportable segments
VIEs
Total
Operating Income (Loss)
Canada
U.S.(2)
Corporate services
Total reportable segments
VIEs(2)
Transaction costs (note 15)
Corporate reorganization expenses
Consolidated Operating Income
Interest, Net
Income before income taxes
September 28,
2014
$
747,692
60,099
4,256
812,047
97,108
909,155
$
$
$
$
676,006
47,019
3,414
726,439
98,914
825,353
September 28,
2014
$
$
2,092,476
163,152
13,561
2,269,189
280,715
2,549,904
September 29,
2013
$
$
1,927,361
132,687
12,743
2,072,791
284,238
2,357,029
196,204 $
7,436
(9,709)
179,597 $
2,717
(14,325)
538,536 $
21,047
(32,284)
500,178
6,214
(26,414)
193,931
2,164
(27,289)
167,989
1,792
—
(953)
527,299
6,450
(27,289)
479,978
4,378
—
(11,032)
—
168,806
(17,639)
151,167 $
$
Year-to-date period ended
September 29,
2013
168,828
(8,487)
160,341 $
—
506,460
(50,848)
455,612 $
473,324
(24,353)
448,971
________________
(1)
(2)
There are no inter-segment revenues included in the above table.
In fiscal 2013, the Company recognized an asset impairment charge in the U.S. related to certain non-core and non-priority markets, of which $2.5 million
was recognized in the U.S. segment and $0.4 million related to consolidated VIEs.
Consolidated Sales comprise the following:
Third quarter ended
September 28,
2014
Sales
Distribution sales
Company-operated restaurant sales
Sales from VIEs
Total Sales
$
534,456
6,201
94,129
634,786
$
16
Year-to-date period ended
September 29,
2013
$
$
473,641
6,090
96,049
575,780
September 28,
2014
$
$
1,498,571
19,236
271,838
1,789,645
September 29,
2013
$
$
1,373,389
18,567
276,273
1,668,229
TIM HORTONS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(in thousands of Canadian dollars)
NOTE 14
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 Revenue from Contracts with
Customers. The amendments in this ASU are intended to provide a more robust framework for addressing revenue issues;
improve comparability of revenue recognition practices across entities, industries, jurisdictions and markets; and provide more
useful information to financial statement users through improved disclosure requirements. The amendments in this ASU are
effective for fiscal years and interim periods beginning on or after December 15, 2016, and should be applied retrospectively
using one of two acceptable application methods as noted in the ASU. The Company is currently assessing the potential impact
that the adoption and transition to this ASU may have on its Consolidated Financial Statements and related disclosures.
NOTE 15
PROPOSED TRANSACTION WITH BURGER KING
On August 26, 2014, the Company announced that it had entered into the Arrangement Agreement with Burger King and
certain of its affiliates. Pursuant to and subject to the terms and conditions of the Arrangement Agreement, the transaction
(“Transaction”) will result in Burger King and Tim Hortons being indirect subsidiaries of a newly formed Canadian company,
9060669 Canada Inc. (“Holdings”, formerly known as 1011773 B.C. Unlimited Liability Company). The Transaction has been
unanimously approved by the Board of Directors of the Company as well as the Board of Directors of Burger King.
Company shareholders will receive, for each Company common share held, at the election of such holder: (a) C$65.50 in
cash and 0.8025 common shares of Holdings (the “Arrangement Mixed Consideration”); (b) C$88.50 in cash (the
“Arrangement Cash Consideration”); or (c) 3.0879 common shares of Holdings (the “Arrangement Share Consideration”).
Common shares of the Corporation with respect to which no election is made will receive the Arrangement Mixed
Consideration. Shareholders who elect to receive the Arrangement Cash Consideration or the Arrangement Share Consideration
will be subject to proration in accordance with the Arrangement Agreement so that the total amount of cash paid and the total
number of common shares of Holdings issued to the Corporation’s shareholders as a whole are equal to the total amount of cash
and number of common shares of Holdings that would have been paid and issued if all of the Corporation’s shareholders
received the Arrangement Mixed Consideration.
For a Company shareholder electing the Arrangement Mixed Consideration, the value of the consideration received will
depend on the price per share of Burger King’s common shares at the time the Transaction is completed. Based on Burger
King’s unaffected closing stock price as of August 22, 2014, this represented total value per Company share of $89.39 and
based on Burger King’s closing stock price as of August 25, 2014, this represented total value per Company share of $94.05.
The Transaction is subject to customary closing conditions, including, among others, approval by the Company’s
shareholders, approval by the Ontario Superior Court of Justice and regulatory approvals. An interim order of the Ontario
Superior Court of Justice with respect to the Transaction was issued on November 3, 2014. The approval of Tim Hortons
shareholders will be sought at a special meeting of shareholders, for shareholders of record on November 3, 2014. The special
meeting is scheduled to be held on December 9, 2014 at the Tim Hortons Innovation Centre, 226 Wyecroft Road in Oakville,
Ontario. As 3G Capital currently owns approximately 70.0% of the shares of Burger King and has committed to vote in favour
of the Transaction, no stockholder vote is required of Burger King stockholders. The closing of the Transaction is currently
anticipated to occur in late 2014 or early 2015.
Upon termination of the Transaction under certain circumstances, the Company may be required to pay Burger King a
termination fee of $345.0 million, or Burger King may be required to pay the Company a termination fee of $500.0 million. In
addition, if the Company’s shareholders do not approve the Transaction, the Company may be required to pay Burger King a
reimbursement fee of $40.0 million.
Certain of the Company’s arrangements and agreements will be impacted by the proposed Transaction, including the
Senior Notes included in our Long-term debt, certain agreements with executives, and our outstanding equity awards. For a full
description of the impact of the Transaction on the Company, please refer to Amendment No. 4 to the Registration Statement on
Form S-4, filed with the SEC on November 3, 2014, by New Red Canada Limited Partnership (“Partnership”, formerly known
as New Red Canada Partnership) and Holdings, which is available on the SEC’s EDGAR filing system. The Form S-4 as
amended, was declared effective by the SEC on November 5, 2014. Final versions of all documents for use in connection with a
special meeting of shareholders of the Company to seek shareholder approval of the Transaction will be filed by the Company
on SEDAR and on EDGAR, including the draft management proxy circular, in accordance with applicable corporate and
securities laws in Canada and the United States.
The Company has incurred Transaction-related costs of $27.3 million in the year-to-date period ended September 28,
2014, primarily comprised of professional fees to financial and legal advisors.
17
TIM HORTONS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S 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 2013 Consolidated Financial Statements and accompanying Notes included in our Annual Report on
Form 10-K for the year ended December 29, 2013 (“Annual Report”) filed with the U.S. Securities and Exchange Commission
(“SEC”) and the Canadian Securities Administrators (“CSA”) on February 25, 2014, and the Condensed Consolidated
Financial Statements and accompanying Notes included in our Interim Report on Form 10-Q for the quarter ended
September 28, 2014 filed with the SEC and the CSA on November 6, 2014. 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. These forward-looking statements include information regarding our future
economic and sales performance, strategic plan, operating results and outlook based on current expectations, including the
Transaction (as defined below), assumptions and information, including information about our restaurant development plans,
same-store sales expectations, earnings performance, capitalization alternatives, targets and operational initiatives. 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 Item 1A. “Risk Factors” in Part I of our Annual Report
and set forth in our Safe Harbor Statement and attached hereto, as well as additional risks described herein under Item 1A and
elsewhere, 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 Companyoperated restaurants, and franchisee-owned restaurants and restaurants run by independent operators (collectively, we
hereunder refer to both franchisee-owned and franchisee-operated restaurants as “franchised restaurants”). 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 our system, and the strength of our brand and restaurant owner base,
which ultimately impacts our consolidated and segmented financial performance. Please refer to “Executive Overview” and
“Selected Operating and Financial Highlights” 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”). However, this Management’s Discussion and Analysis of Financial Condition and Results of
Operations also contains certain non-GAAP financial measures to assist readers in understanding the Company’s performance.
Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable
measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided
the most directly comparable measures calculated and presented in accordance with U.S. GAAP and a reconciliation to GAAP
measures.
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
The Company’s principal business is the franchising of Tim Hortons restaurants, primarily in Canada and the U.S. As the
franchisor, Tim Hortons collects royalty revenue from franchised restaurant sales. Our business generates additional revenues
by controlling the underlying real estate of our franchised restaurants; real estate that is not controlled by us is generally for our
non-standard restaurants. We warehouse and distribute coffee and other beverages, non-perishable food, supplies, packaging
and equipment to most system restaurants in Canada, and frozen, refrigerated and shelf-stable products to certain markets in
Canada. Where we are not able to leverage our scale or create warehousing or transportation efficiencies, such as in the U.S.
and in certain Canadian markets, we typically manage and control the supply chain, but use third-party warehousing and
transportation. In addition, the Company has vertically integrated manufacturing operations which include two coffee roasting
plants and a fondant and fills manufacturing facility.
Executive Overview
Both the Canadian and U.S. economies showed positive progress in the third quarter of 2014, and we achieved significant
sales progression in the third quarter of 2014, as our systemwide sales grew by 7.5% on a constant currency basis, driven by
same-store sales growth and new restaurant development.
In the third quarter of 2014, same-store sales growth of 3.5% in Canada and 6.8% in the U.S. was driven primarily by
increases in average cheque, with the U.S. also benefiting from an increase in transactions. In the year-to-date period of 2014,
same-store sales growth of 2.6% in Canada, and 4.8% in the U.S., was driven by increases in average cheque.
18
On August 26, 2014, the Company announced that it had entered into a definitive agreement (the “Arrangement
Agreement”) with Burger King Worldwide, Inc. (“Burger King”) and certain of its affiliates. Pursuant to and subject to the
terms and conditions of the Arrangement Agreement, the proposed transaction (“Transaction”) will result in Burger King and
Tim Hortons being indirect subsidiaries of a newly formed Canadian company. As a result of the proposed Transaction, the
Company has recognized transaction costs of $27.3 million in the year-to-date period ending September 28, 2014, comprised
primarily of professional fees paid to financial and legal advisors. Please refer to Item 1. Financial Statements—Note 15
Proposed Transaction with Burger King for more information.
Operating income in the third quarter of 2014 was flat compared to the third quarter of 2013, while adjusted operating
income (refer to non-GAAP table on page 20) increased 15.5%. Growth in adjusted operating income was primarily driven by
systemwide sales growth, resulting in an increase in supply chain and rents and royalties income. Year-to-date in 2014,
operating income increased 7.0%, while adjusted operating income (refer to non-GAAP table on page 20) increased 10.2%,
compared to the year-to-date period of 2013. Similar to the quarter, year-to-date systemwide sales growth drove an increase in
both rents and royalties and supply chain income. Partially offsetting these growth factors were increased general and
administrative expenses, and the timing of expenses related to our CIBC Visa co-branded loyalty rewards credit card (the
“Double DoubleTM Card”). We continue to expect the launch of our Double Double Card to be cost-neutral on operating income
over fiscal 2014.
Net income attributable to Tim Hortons Inc. (“net income”) decreased 13.8% in the third quarter of 2014, which was
significantly impacted by Transaction costs, for which a full tax benefit cannot be recognized, compared to the third quarter of
2013. In the year-to-date period of 2014, net income decreased 3.4%, which again was significantly impacted by Transaction
costs, for which a full tax benefit cannot be recognized, compared to the year-to-date period of 2013, which was impacted by
Corporate reorganization costs. Aside from the items noted, the change in both periods was due primarily to higher operating
income, as discussed above, partially offset by the effect of our recapitalization, which generated higher interest expense and a
higher effective tax rate.
Diluted earnings per share attributable to Tim Hortons Inc. (“EPS”) was $0.74 in the third quarter of 2014, which was
negatively impacted by approximately $0.21 due to Transaction costs, compared to $0.75 in the third quarter of 2013. Adjusted
EPS (refer to non-GAAP table on page 20) was $0.95, an increase of 25.2% compared to the third quarter of 2013. EPS was
$2.31 in the year-to-date period of 2014, which was negatively impacted by approximately $0.21 due to Transaction costs,
compared to $2.12 in the year-to-date period of 2013, which was negatively impacted by approximately $0.06 due to Corporate
reorganization costs. Adjusted EPS (refer to non-GAAP table on page 20) increased 16.0% in the year-to-date period of 2014
compared to the year-to-date period of 2013. Adjusted EPS growth in both periods was driven by strong operating performance,
as well as the impact of our recapitalization, the proceeds of which were primarily used for our expanded share repurchase
program, which resulted in a lower number of shares outstanding.
Selected Operating and Financial Highlights
Third quarter ended
September 28,
2014
($ in millions, except per share data)
Systemwide sales growth(1)
Same-store sales growth(2)
Canada
U.S.
Systemwide restaurants
Revenues
Operating income
Adjusted operating income(3)
Net income attributable to Tim Hortons Inc.
Diluted EPS
Adjusted Diluted EPS(3)
Weighted average number of common shares outstanding
– Diluted (in millions)
$
$
$
$
$
$
Year-to-date ended
September 29,
2013
September 28,
2014
September 29,
2013
7.5%
5.3%
6.4%
4.5%
3.5%
6.8%
4,590
909.2
168.8
196.1
98.1
0.74
0.95
1.7%
3.0%
4,350
825.4
168.8
169.8
113.9
0.75
0.76
2.6%
4.8%
4,590
2,549.9
506.5
533.7
312.8
2.31
2.52
0.9%
1.3%
4,350
2,357.0
473.3
484.4
323.8
2.12
2.17
132.9
$
$
$
$
$
$
150.9
$
$
$
$
$
$
135.3
$
$
$
$
$
$
152.9
________________
(1)
Total 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. Systemwide sales growth excludes
19
(2)
(3)
sales from our Republic of Ireland and United Kingdom licensed locations. Systemwide sales growth in Canadian dollars, including the effects of foreign
currency translation, was 7.9% and 5.7% for the third quarters of 2014 and 2013, respectively, and 7.0% and 4.7% for the year-to-date periods of 2014
and 2013, respectively.
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 13 or more months.
Adjusted operating income and adjusted diluted EPS (“adjusted EPS”) are non-GAAP measures. See below for reconciliation of adjusting items used to
calculate adjusted operating income and adjusted EPS. Management uses adjusted operating income and adjusted EPS to assist in the evaluation of yearover-year performance and believes that it will be helpful to investors to better evaluate underlying operational growth rates. These non-GAAP measures
are not intended to replace the presentation of our financial results in accordance with GAAP. The Company’s use of the term adjusted operating income
and adjusted EPS may differ from similar measures reported by other companies. Adjusted operating income and adjusted EPS should not be considered a
measure of income generated by our business. The reconciliations of operating income and diluted EPS, which are GAAP measures, to adjusted operating
income and adjusted diluted EPS, which are non-GAAP measures, are set forth in the table below:
Third quarter ended
September 28,
2014
Year-to-date periods ended
Change
September 29,
2013
$
September 28,
2014
%
Change
September 29,
2013
$
%
($ in millions)
Operating income
$
Add: Transaction costs
Add: Corporate reorganization expenses
Adjusted operating income
$
168.8
$
168.8
$
—
—% $
506.5
$
473.3
27.3
—
27.3
n/m
27.3
—
—
1.0
(1.0)
n/m
—
11.0
196.1
$
169.8
$
26.3
15.5 % $
533.7
Third quarter ended
September 28,
2014
484.4
$
33.1
7.0%
27.3
n/m
(11.0)
n/m
49.4
10.2%
Year-to-date periods ended
Change
September 29,
2013
$
$
$
September 28,
2014
%
Change
September 29,
2013
$
%
($ per share)
Diluted EPS
0.74
0.75
(0.02)
Add: Transaction costs
0.21
—
0.21
Add: Corporate reorganization expenses
Adjusted diluted EPS
—
$
0.95
0.01
$
0.76
(0.01)
$
0.19
(2.2)% $
n/m
n/m
25.2 %
2.31
$
2.12
$
0.19
9.2%
0.21
n/m
0.21
—
—
0.06
(0.06)
n/m
2.52
2.17
0.35
16.0%
________________
All numbers rounded
n/m
Not meaningful
Temporary Foreign Worker Program
A substantial portion of our earnings come from royalties, rents, and other amounts paid by restaurant owners, who
operate substantially all of our restaurants. In April 2014, the Federal Government of Canada imposed a moratorium on the food
service sector’s access to the Temporary Foreign Workers Program (“TFWP”). On June 20, 2014, the Federal Government of
Canada lifted the moratorium but announced reforms that are expected to have the net effect of restricting or reducing access to
the TFWP in most markets where it existed previously. Access to labour through use of the TFWP, in some markets, particularly
in parts of western Canada, has been an important tool to help our restaurant owners fill labour shortages where Canadian
citizen and permanent resident employees are not sufficient. While the Company and our restaurant owners continue to pursue
strategies to address the government’s TFWP policy changes, the reforms may result in less restaurant development and
reduced hours of operation in certain markets, and increases in labour or other costs to our owners. For further information,
please refer to Item 1A. Risk Factors of our Annual Report.
20
New Restaurant Development
The opening of restaurants in new and existing markets in Canada and the U.S. has been a significant contributor to our
growth. Set forth in the table below is a summary of restaurant openings and closures:
Third quarter ended September 28, 2014
Full-serve
Standard
and
Nonstandard
Canada
Restaurants opened
Restaurants closed
Net change
U.S.
Restaurants opened
Restaurants closed
Net change
International (GCC)
Restaurants opened
Total Company
Restaurants opened
Restaurants closed
Net change
Self-serve
Kiosks
Third quarter ended September 29, 2013
Full-serve
Standard
and
Nonstandard
Total
30
(6)
24
11
—
11
41
(6)
30
(2)
35
10
(7)
3
—
—
—
6
46
(13)
33
Full-serve
Standard
and
Nonstandard
Total
34
(2)
28
4
—
4
10
(7)
12
(2)
1
(1)
13
(3)
3
10
—
10
—
6
4
—
4
11
—
11
57
(13)
46
(4)
5
(1)
51
(5)
44
42
4
46
Year-to-date period ended September 28, 2014
Canada
Restaurants opened
Restaurants closed
Net change
U.S.
Restaurants opened
Restaurants closed
Net change
International (GCC)
Restaurants opened
Total Company
Restaurants opened
Restaurants closed
Net change
Self-serve
Kiosks
Self-serve
Kiosks
Year-to-date period ended September 29, 2013
Full-serve
Standard
and
Nonstandard
Total
32
Self-serve
Kiosks
Total
75
(16)
59
18
—
18
93
(16)
77
71
(14)
57
8
(1)
7
79
(15)
64
22
(12)
10
—
—
—
22
(12)
24
(9)
26
(13)
10
15
2
(4)
(2)
18
—
18
9
—
9
115
(28)
87
18
—
18
133
(28)
104
(23)
10
(5)
114
(28)
105
81
5
86
21
13
Systemwide Restaurant Count
As at
September 28, 2014
Canada
Company-operated
Franchised – standard and non-standard
Franchised – self-serve kiosk
Total
% Franchised
U.S.
Company-operated
Franchised – standard and non-standard
Franchised – self-serve kiosks
Total
% Franchised
International (GCC)
Franchised – standard and non-standard
% Franchised
Total system
Company-operated
Franchised – standard and non-standard
Franchised – self-serve kiosks
Total
% Franchised
December 29, 2013
September 29, 2013
15
3,498
152
3,665
99.6%
14
3,440
134
3,588
99.6%
15
3,354
131
3,500
99.6%
3
685
181
869
99.7%
2
676
181
859
99.8%
3
637
177
817
99.6%
56
100.0%
38
100.0%
33
100.0%
18
4,239
333
4,590
99.6%
16
4,154
315
4,485
99.6%
18
4,024
308
4,350
99.6%
Segment Operating Income
Our segments consist of the Canadian and U.S. business units, and Corporate Services (see Item 1. Financial Statements
—Note 13 Segment Reporting for further information). Set forth in the table below is the operating income (loss) of our
reportable segments:
Third quarter ended
September
28, 2014
Canada
U.S.
Corporate services
$
$
$
196.2 $
7.4 $
(9.7) $
Year-to-date period ended
Change
September
29, 2013
$
179.6 $ 16.6
2.7 $ 4.7
(14.3) $ 4.6
September
28, 2014
%
($ in millions)
9.2% $
n/m $
n/m $
September
29, 2013
538.5 $
21.0 $
(32.3) $
Change
$
500.2 $ 38.4
6.2 $ 14.8
(26.4) $ (5.9)
%
7.7%
n/m
n/m
________________
All numbers rounded
n/m
Not meaningful
Canada
Operating income increased 9.2% in the third quarter of 2014 compared to the third quarter of 2013. Systemwide sales
growth of 6.9%, driven by same-store sales growth of 3.5% and the incremental sales from new restaurants year-over-year,
resulted in higher rents and royalties income and a higher allocation of supply chain income, including favourable product
margin variability. Canada also benefited from lower general and administrative expenses, as breakage income recognized
related to our Tim Card obligation (refer to Results of Operations—General and administrative expenses) and lower Cold Stone
Creamery promotional expenses, were partially offset by Tim Card program costs, increased salaries and benefits driven by
higher performance-related accruals and fewer vacancies in the organization, as well as expenses related to our 50th anniversary
22
restaurant owner convention. We expect the expenses related to our 50th anniversary restaurant owner convention to be
primarily offset by lower franchisee meeting costs in the fourth quarter of 2014.
Same-store sales growth in the third quarter of 2014 was driven by an increase in average cheque, resulting from pricing
and favourable product mix, partially offset by a modest decline in same-store transactions. We continued to grow total
systemwide transactions. In Canada, the gain in average cheque was driven by increased sales in both our breakfast and lunch
dayparts, aided in part by the introduction of our Spicy Crispy Chicken Sandwich, as well as sales of baked goods, which
benefited from sales of specialty donuts. Our Dark Roast coffee blend, which was introduced systemwide towards the end of
the third quarter of 2014, also proved popular amongst our guests.
For the year-to-date period of 2014, operating income increased 7.7% compared to the year-to-date period of 2013.
Operating income growth was driven primarily by systemwide sales growth of 5.8% in the year-to-date period of 2014,
resulting from the net addition of new restaurants and same-store sales growth of 2.6%. Same-store sales growth in the year-todate period of 2014 was driven by an increase in average cheque, resulting from favourable product mix and pricing, partially
offset by a decline in same-store transactions. Systemwide sales growth resulted in higher rents and royalties income and a
higher allocation of supply chain income. Canada also benefited from lower general and administrative expenses, due to the
same factors impacting the quarter.
U.S.
Operating income was $7.4 million in the third quarter of 2014, a significant increase of $4.7 million compared to the
third quarter of 2013. The third quarter of 2013 included the recognition of an asset impairment charge of $2.5 million.
Systemwide sales growth of 12.8% was driven by same-store sales growth of 6.8%, and the incremental sales from the net
addition of new restaurants. Systemwide sales growth led to growth in rents and royalties revenues, and same-store sales
growth continued to drive a significant reduction in relief from restaurants open 13 months or more. We continued to note lower
relief due to specific relief reduction measures, which began in the second half of 2013, and the closure of certain
underperforming restaurants in the fourth quarter of 2013. Partially offsetting the growth in rents and royalties income were
higher general and administrative expenses, due to increased salaries and benefits as a result of increased performance-related
accruals, and the timing of expenses related to our 50th anniversary restaurant owner convention. Foreign currency translation
increased U.S. operating income by approximately $0.2 million year-over-year.
In the third quarter of 2014, same-store sales growth was driven by gains in average cheque resulting from favourable
product mix and pricing, and to a lesser extent, an increase in same-store transactions. We continued to grow total systemwide
transactions. Our same-store sales growth in the third quarter of 2014 continued to benefit from increased sales in our breakfast
daypart and cold beverage category, as a result of continued product innovation. Increased sales of coffee and hot beverages in
the U.S., also contributed to same-store sales growth in the third quarter of 2014. Our Dark Roast coffee blend, which was
introduced systemwide towards the end of the third quarter of 2014, also proved popular amongst our guests.
For the year-to-date period of 2014, operating income was $21.0 million, an increase of $14.8 million compared to the
year-to-date period of 2013. The year-to-date period of 2013 included the recognition of an asset impairment charge of $2.5
million. Systemwide sales growth of 11.1% was driven by incremental sales from the net addition of new restaurants and samestore sales growth of 4.8%, due to an increase in average cheque resulting from favourable product mix and pricing, partially
offset by a decrease in same-store transactions. Similar to the third quarter of 2014, systemwide sales growth led to growth in
rents and royalties revenues, and same-store sales growth led to a significant reduction in relief from restaurants open 13
months or more, due in part to specific relief reduction measures and certain limited restaurant closures. Rents and royalties
income also benefited slightly from favourable lease termination settlements in connection with such restaurant closures. This
growth was partially offset by higher operating expenses, due to an overall increase in the number of properties owned or
leased. A higher supply chain allocation, driven primarily by systemwide sales growth, also contributed to U.S. operating
income growth. Foreign currency translation increased U.S. operating income by approximately $1.3 million year-over-year.
In October 2014, consistent with our strategic plan, we signed an additional area development agreement to develop
approximately 10 restaurants in New Jersey over a five-year term. Since the fourth quarter of 2013, we have signed a total of
seven agreements to develop approximately 145 standard and non-standard restaurants over the next 10 years in different U.S.
markets.
Corporate services
Our Corporate services segment had an operating loss of $9.7 million in the third quarter of 2014, compared to an
operating loss of $14.3 million in the third quarter of 2013. The improvement in our Corporate services segment was driven by
our supply chain, due to the reversal of unfavourable product margins in the third quarter of 2014 recognized in the first half of
2014, compared to unfavourable product margins recognized in the third quarter of 2013. This was partially offset by increased
23
corporate costs as a result of higher salaries and benefits, primarily driven by increased performance-related accruals, and
higher professional fees related to strategic initiatives in the third quarter of 2014 compared to the third quarter of 2013.
Year-to-date in 2014, our Corporate services segment had an operating loss of $32.3 million, compared to an operating
loss of $26.4 million in the year-to-date period of 2013. The increase was primarily driven by increased corporate costs as a
result of higher salaries and benefits, driven by both increased performance-related accruals and fewer vacancies in the
organization, as well as higher professional fees related to strategic initiatives.
Results of Operations
Third quarter ended
September
28, 2014
September
29, 2013
Change
$
Year-to-date period ended
(1)
%
September
28, 2014
September
29, 2013
Change
$
(1)
%
($ in millions)
Revenues
Sales
Franchise revenues:
$ 634.8
$ 575.8
$ 59.0
Rents and royalties(2)
Franchise fees
Total revenues
Costs and expenses
230.4
44.0
212.1
37.5
18.3
6.5
8.6 %
17.4 %
909.2
825.4
83.8
Cost of sales
Operating expenses
Franchise fee costs
General and administrative
expenses
Equity (income)
Transaction costs
Corporate reorganization
expenses
Asset impairment
Other expense (income), net
Total costs and expenses
Operating income
Operating income %
545.1
86.3
43.6
501.9
78.3
37.9
Interest (expense)
Income tax rate
41.7
(4.0)
27.3
38.8
(4.1)
—
$1,668.2
$ 121.4
7.3%
654.8
105.4
608.9
79.9
46.0
25.5
7.6%
31.9%
10.2 %
2,549.9
2,357.0
192.9
8.2%
43.2
8.0
5.7
8.6 %
10.2 %
15.1 %
1,545.8
252.0
106.2
1,452.3
231.0
83.7
93.5
20.9
22.4
6.4%
9.1%
26.8%
2.9
—
27.3
7.5 %
(0.9)%
n/m
5.6
—
27.3
4.9%
0.2%
n/m
(1.0)
—
1.0
(2.9)
—
2.9
0.5
(0.1)
0.5
740.3
656.5
83.8
$ 168.8
$ 168.8
$
—
18.6%
20.5%
(18.5)
34.0%
(9.1)
(9.4)
28.3%
10.2 % $1,789.6
121.1
(11.4)
27.3
115.5
(11.3)
—
(11.0)
n/m
—
11.0
(2.9)
n/m
—
2.9
(1.4)
n/m
2.5
3.9
12.8 % 2,043.4
1,883.7
159.7
— % $ 506.5
$ 473.3
$ 33.1
19.9%
20.1%
n/m
(53.8)
30.3%
(27.0)
(26.9)
n/m
n/m
n/m
8.5%
7.0%
n/m
27.3%
_____________
All numbers rounded
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. While
foreign currency translation, primarily related to the Canadian dollar relative to the U.S. dollar, impacted individual revenue and expense items in the third
quarter of 2014 and the year-to-date period of 2014, it did not have a significant impact on operating income.
(2)
Rents and royalties revenues includes rents and royalties derived from our franchised restaurant sales, and certain advertising levies primarily associated
with the Tim Hortons Advertising and Promotion Fund (Canada) Inc.’s (“Ad Fund”) program to acquire LCD screens, media engines, drive-thru menu
boards and ancillary equipment for our restaurants (“Expanded Menu Board Program”) (see Item 1. Financial Statements—Note 12 Variable Interest
Entities). Franchised restaurant sales are reported to us by our restaurant owners, and are not included in our Condensed Consolidated Financial
Statements, other than consolidated Non-owned restaurants. Franchised restaurant sales do, however, result in royalties and rental revenues, which are
included in our franchise revenues, as well as distribution sales. The reported franchised restaurant sales (including consolidated Non-owned restaurants)
were:
24
Third quarter ended
September 28, 2014
Franchised restaurant sales
Canada (Canadian dollars)
U.S. (U.S. dollars)
Year-to-date period ended
September 29, 2013
September 28, 2014
September 29, 2013
(in millions)
$
$
1,702.1
165.5
$
$
1,591.8
146.5
$
$
4,836.3
477.5
$
$
4,571.1
429.2
Revenues
Sales
In the third quarter and year-to-date period of 2014, the growth in sales compared to the respective 2013 periods was
driven primarily by increased distribution sales, partially offset by a decrease in sales from variable interest entities (“VIEs”).
Distribution sales. Distribution sales were $534.5 million in the third quarter of 2014, compared to $473.6 million in the
third quarter of 2013. The increase of $60.8 million, or 12.8%, was driven by systemwide sales growth, which contributed
approximately 6.0% of the increase. Favorable product mix and, to a lesser extent, commodity-related pricing, contributed
substantially all of the remaining increase. Sales of our single-serve products through to the grocery channel also contributed to
the growth in distribution sales. Foreign currency translation increased distribution sales by approximately 0.3%.
For the year-to-date period of 2014, distribution sales were $1,498.6 million, an increase of $125.2 million, or 9.1%,
compared to the year-to-date period of 2013. Similar to the quarter, the increase was driven primarily by systemwide sales
growth, which contributed approximately 5.5% of the increase, with favourable product mix contributing substantially all of the
remaining increase. Foreign currency translation increased distribution sales by approximately 0.6%.
Our distribution sales are subject to changes related to underlying costs of key commodities, such as coffee, wheat, edible
oils and sugar, and other products. Changes in underlying costs are largely passed through to restaurant owners, but will
typically occur after changes in spot 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 a six-month period 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 changes. 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 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.
The current market price of coffee, a key commodity for the Company, has recently experienced increases. Our purchase
commitments to the end of fiscal 2014 reflect previous lower market coffee pricing, however, beginning in fiscal 2015, our
purchase commitments are reflective of the elevated market price of coffee. As noted above, changes in underlying costs are
largely passed through to restaurant owners, and we and our restaurant owners have some ability to increase product pricing to
offset any rises in commodity prices, subject to restaurant owner and guest acceptance. Notwithstanding the foregoing, while it
is not our current practice, we may choose not to pass along all price increases to our restaurant owners, which could have a
more significant effect on our business and results of operations than if we pass along all, or a large portion of, increases to our
restaurant owners. For a full description of the related risk factors, please refer to Item 1A. Risk Factors of our Annual Report.
Variable interest entities’ sales. VIEs’ sales were $94.1 million in the third quarter of 2014, a decrease of 2.0% compared
to the third quarter of 2013. In the year-to-date period of 2014, VIEs’ sales were $271.8 million, a decrease of 1.6% compared
to the year-to-date period of 2013. The decrease in both periods was driven primarily by the decrease, on average, of 27 fewer
VIEs in the third quarter of 2014 and 24 fewer in the year-to-date period of 2014 compared to the respective 2013 periods. The
decrease was partially offset by higher sales at consolidated restaurants, and foreign currency translation, which increased VIEs’
sales by 1.4% in the third quarter of 2014 and 2.9% in the year-to-date period of 2014.
The number of consolidated Non-owned restaurants has decreased slightly since the end of fiscal 2013. The following
table outlines the number of consolidated Non-owned restaurants, on average, and at the end of each respective period:
Third quarter ended
September 28,
2014
Year-to-date period ended
September 29,
2013
Average
Canada
U.S.
Total
106
212
318
September 28,
2014
September 29,
2013
As at
September 28,
2014
December 29,
2013
109
208
317
106
225
331
Average
117
228
345
25
106
220
326
117
233
350
Franchise Revenues
Rents and Royalties. Revenue from rents and royalties increased 8.6% in the third quarter of 2014 compared to the third
quarter of 2013, and in the year-to-date period of 2014, revenue from rents and royalties increased 7.6% compared to the yearto-date period of 2013. The increase in both periods was driven by systemwide sales growth, including a reduction in relief,
primarily in the U.S., which collectively contributed approximately 8.2% in the third quarter of 2014 and 6.8% in the year-todate period of 2014. Foreign currency translation increased rents and royalties revenues by approximately 0.2% and 0.5% in
each respective period.
Franchise Fees. Franchise fees increased $6.5 million in the third quarter of 2014 compared to the third quarter of 2013,
and in the year-to-date period of 2014, franchise fees increased $25.5 million compared to the year-to-date period of 2013. The
increase in both periods was driven primarily by an increase in restaurant development, as well as an increase in renovations in
Canada.
Total Costs and Expenses
Cost of Sales
In both the third quarter and year-to-date period of 2014, the growth in cost of sales compared to the respective 2013
periods was driven primarily by growth in distribution cost of sales, partially offset by a decrease in VIEs’ cost of sales.
Distribution cost of sales. Distribution cost of sales was $457.8 million in the third quarter of 2014, compared to $411.3
million in the third quarter of 2013. The increase of $46.5 million, or 11.3%, was primarily driven by systemwide sales growth,
which contributed approximately 6.0% of the increase. The remaining increase was substantially all driven by increased cost of
sales due to product mix. Foreign currency translation increased distribution cost of sales by approximately 0.3%.
In the year-to-date period of 2014, distribution cost of sales was $1,290.2 million compared to $1,185.9 million in the
year-to-date period of 2013. Similar to the quarter, the increase of $104.3 million, or 8.8%, was driven primarily by systemwide
sales growth, which contributed approximately 5.6% of the increase, while product mix drove substantially all of the remaining
increase. Foreign currency translation increased distribution cost of sales by approximately 0.6%.
Our distribution costs are subject to changes related to the underlying costs of key commodities, such as coffee, wheat,
edible oils, sugar, and other product costs (see Revenues—Sales—Distribution Sales above for further information).
Variable interest entities’ cost of sales. VIEs’ cost of sales was $80.9 million in the third quarter of 2014, a decrease of
$3.5 million, or 4.1%, compared to the third quarter of 2013. The decrease was primarily due to the decrease in average number
of VIEs, partially offset by higher sales at consolidated restaurants and foreign currency translation, which increased VIEs’ cost
of sales by approximately 1.5%.
In the year-to-date period of 2014, VIEs’ cost of sales was $236.3 million, a decrease of $10.3 million, or 4.2%, compared
to the year-to-date period of 2013, driven primarily by the decrease in the average number of VIEs, partially offset by foreign
currency translation, which increased VIEs’ cost of sales by approximately 3.2%.
Operating Expenses
Total operating expenses increased $8.0 million, or 10.2% in the third quarter of 2014 compared to the third quarter of
2013. Rent expense increased by $4.2 million year-over-year, primarily due to additional properties that were leased and then
subleased to restaurant owners, while property-related depreciation expense increased by $3.3 million, due to both an increase
in the number of properties either owned or leased, and then subleased to restaurant owners, and renovations to existing
restaurants. Foreign currency translation increased operating expenses by approximately 0.4%.
In the year-to-date period of 2014, operating expenses increased $20.9 million, or 9.1%, compared to the year-to-date
period of 2013. Similar to the quarter, the increase was primarily due to increased rent expense of $10.7 million and
depreciation expense of $10.3 million. Foreign currency translation increased operating expenses by approximately 0.8%.
Franchise Fee Costs
Franchise fee costs increased $5.7 million in the third quarter of 2014 compared to the third quarter of 2013, due
primarily to increased restaurant development, higher costs to support restaurant development initiatives, and an increase in
renovations in Canada. In the year-to-date period of 2014, franchise fee costs increased $22.4 million compared to the year-todate period of 2013, due primarily to an increase in restaurant development and renovations in Canada.
26
General and Administrative Expenses
General and administrative expenses increased 7.5% in the third quarter of 2014 compared to the third quarter of 2013,
due primarily to increased salaries and benefits as a result of increased performance-related accruals and fewer vacancies in the
organization, as well as expenses related to our 50th anniversary restaurant owner convention and professional fees related to
strategic initiatives unrelated to the Transaction. We expect convention costs to be primarily offset by lower franchisee meeting
expenses in the fourth quarter of 2014. In the third quarter of 2014, we recognized breakage income related to our Tim Card
obligation for dormant card balances determined based on long periods of inactivity, partially offset by Tim Card program costs.
The recognition of breakage income, as well as lower Cold Stone Creamery promotional expenses, partially offset the increases
noted above. Foreign currency translation increased general and administrative expenses by approximately 0.7%.
In the year-to-date period of 2014, general and administrative expenses increased 4.9% compared to the year-to-date
period of 2013. Similar to the quarter, this was driven by increased salaries and benefits resulting primarily from fewer
vacancies in the organization, increased performance-related accruals, and higher stock-based compensation expense, as well as
expenses related to our 50th anniversary convention and professional fees related to strategic initiatives. Partially offsetting
these factors was the recognition of Tim Card breakage income, as noted above, and lower promotional expenses, related
primarily to Cold Stone Creamery in Canada. Foreign currency translation increased general and administrative expenses by
approximately 1.1%.
Transaction Costs
As a result of the Transaction, the Company has recognized transaction costs of $27.3 million in the year-to-date period
ending September 28, 2014 comprised primarily of financial and legal professional fees and, prior to, and on the completion of
the Transaction, expects to recognize, total Transaction costs of approximately $80.0 to $90.0 million, comprised primarily of
financial and legal professional fees. The proposed Transaction is expected to close in late 2014 or early 2015. Please refer to
Item 1. Financial Statements—Note 15 Proposed Transaction with Burger King for more information.
Corporate Reorganization Expenses
We completed the realignment of roles and responsibilities into our corporate centre and business unit design at the end of
the first quarter of 2013, and incurred additional Chief Executive Officer transition costs to the end of fiscal 2013 (please refer
to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report for a
full description).
Other Expense (Income), net
Other expense recognized in the third quarter of 2014 and in the year-to-date period of 2014 is primarily related to the
launch of our Double Double Credit Card, which occurred in July 2014. We continue to expect the launch of the Double Double
Credit Card to be cost-neutral over fiscal 2014. In comparison, other income recognized in the year-to-date period of 2013 was
primarily due to the gain on a corporate property sale, as well as favourable foreign exchange.
Interest Expense
The increase in interest expense in both the third quarter of 2014 and year-to-date period of 2014, compared to the
respective 2013 periods, was primarily due to the increase in our long-term debt (see Liquidity and Capital Resources for
further information).
Income Taxes
The increase in the effective income tax rate for the 2014 quarter-to-date and year-to-date periods as compared to the
respective 2013 periods is primarily due to Transaction-related costs, and to a lesser degree an increase in costs in 2014 related
to our new long-term debt, for both of which a full tax benefit cannot be recognized.
A Notice of Appeal to the Tax Court of Canada was filed in July 2012 in respect of a dispute with the CRA related to the
deductibility of approximately $10.0 million of interest expense for the 2002 taxation year. The court date for this matter has
been adjourned from the second half of 2014 to the first half of 2015. The Company continues to believe it will ultimately
prevail in sustaining the tax benefit of the interest deduction, and, accordingly, has not made a provision for this matter.
There have been no other significant developments related to the Canada Revenue Agency matters discussed in our
Annual Report.
27
Liquidity and Capital Resources
The following reflects the Company’s current liquidity and capital resources, and does not reflect any considerations
related to the proposed Transaction with Burger King. Please refer to Item 1. Financial Statements—Note 15 Proposed
Transaction with Burger King for more information.
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. In fiscal 2014, our U.S. operations have, and are expected to continue
to, contribute positively to our cash flow. Our $250.0 million revolving bank facility provides an additional source of liquidity
(see Credit Facilities below for additional information). We believe that we will continue to generate adequate operating cash
flows over the next 12 months.
In March 2014, Tim Hortons Inc. raised $450.0 million in long-term debt through the issuance of Senior Unsecured
Notes, Series 3, due April 1, 2019 (“Series 3 Notes”), a portion of which was utilized to settle our $400.0 million revolving
bank facility, which is now fully retired. Please refer to Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations in the Company’s First Quarter Report for the quarter ended March 30, 2014, filed on Form 10-Q
with the SEC and CSA on May 7, 2014 for a full description.
We regularly assess capital structure, and seek to identify opportunities to generate value for shareholders. Since the third
quarter of 2013, our outstanding long-term debt increased by $900.0 million, which was used for the retirement of the 2013
Revolving Bank Facility, and general corporate purposes, including share repurchases. The accretive benefits to EPS of our
expanded share repurchase program more than offset the after-tax cost of our interest expense that resulted from increasing the
amount of our debt to fund those repurchases.
If additional funds are needed for strategic initiatives or other corporate purposes beyond those currently available, we
believe that, with the strength of our balance sheet and our strong capital structure, we could borrow additional funds. Our
ability to incur additional indebtedness will also be limited by our financial and other covenants under our $250.0 million
revolving bank facility (see Credit Facilities below for additional information). Our Senior Unsecured Notes, Series 1, due June
1, 2017, Senior Unsecured Notes, Series 2, due December 1, 2023, and Series 3 Notes are not subject to any financial
covenants; however, certain other covenants apply. Any additional 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. As at September 28, 2014, we had approximately $1.4 billion in long-term debt
and capital leases (excluding current portion) on our balance sheet, excluding Ad Fund debt related to the Expanded Menu
Board Program.
Credit Facilities
We have a $250.0 million unsecured senior revolving facility credit agreement (the “Revolving Bank Facility”), which we
may use for general corporate purposes, including potential acquisitions and other business purposes. The Revolving Bank
Facility includes a $25.0 million overdraft availability and a $25.0 million letter of credit facility. At September 28, 2014, we
had utilized $5.9 million of the Revolving Bank Facility to support standby letters of credit. The Revolving Bank Facility
requires the maintenance of two 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 September 28, 2014.
Common Shares
On February 19, 2014, we obtained regulatory approval from the Toronto Stock Exchange (“TSX”) to commence a new
share repurchase program (“2014 Program”), authorizing the repurchase of $440.0 million in common shares, not to exceed the
regulatory maximum of 13,726,219 shares, representing 10% of our public float as defined under the TSX Company Manual.
The 2014 Program commenced February 28, 2014 and was due to terminate on February 27, 2015, or earlier if the $440.0
million or 10% share maximum was reached, or upon the occurrence of certain other termination events. Following the
announcement on August 24, 2014 that the Company was in discussions with Burger King regarding a potential strategic
Transaction, the 2014 Program was terminated. In total, we repurchased 5.6 million common shares pursuant to the 2014
Program, which have subsequently been cancelled.
28
Our outstanding share capital is comprised solely of common shares. An unlimited number of common shares, without
par value, is authorized, and as at September 28, 2014, we had 132,576,171 common shares outstanding, and outstanding stock
options with tandem stock appreciation rights held by current and former officers and employees to acquire 1,604,848 of our
common shares pursuant to our 2006 Stock Incentive Plan and 2012 Stock Incentive Plan, of which 706,848 were exercisable.
Comparative Cash Flows
Operating Activities. Net cash provided from operating activities in the year-to-date period of 2014 was $447.6 million
compared to $438.2 million in the year-to-date period of 2013, an increase of $9.5 million in the year-to-date period of 2014
compared to the year-to-date period of 2013, primarily due to strong earnings, as there were offsetting changes within operating
assets and liabilities.
Investing Activities. Net cash used in investing activities was $133.2 million in the year-to-date period of 2014 compared
to $135.6 million in the year-to-date period of 2013, a decrease of $2.3 million. Decreases in capital expenditures of the Ad
Fund, as the Expanded Menu Board Program nears completion, and increases in other investing activities, were partially offset
by increased capital expenditures at existing restaurants, due to both an increase in the number of renovations year-over-year
and timing of renovations completed in the fourth quarter of 2013, and new restaurant development. Below is a summary of our
capital expenditures:
Year-to-date periods ended
September 28, 2014
September 29, 2013
(in millions)
Capital expenditures(1)
New restaurants
$
Existing restaurants(2)
Other capital expenditures(3)
Total capital expenditures
$
53.5
73.1
12.4
139.0
$
$
59.7
59.3
13.8
132.7
________________
(1)
(2)
(3)
All numbers rounded.
Reflected on a cash basis, which can be impacted by the timing of payments compared to the actual date of acquisition.
The increase in capital expenditures related to existing restaurants was primarily driven by an increase in renovations completed in the fourth quarter of
2013, but paid in the first quarter of 2014.
Related primarily to our distribution facilities, and other corporate needs.
Capital expenditures for each of our reportable segments was as follows:
Year-to-date periods ended
September 28, 2014
September 29, 2013
(in millions)
Canada
U.S.
$
Corporate Services
Total capital expenditures
$
111.6
18.1
9.4
139.0
$
$
90.7
32.1
10.0
132.7
Financing Activities. Financing activities used cash of $257.1 million in the year-to-date period of 2014 compared to
using cash of $379.3 million in the year-to-date period of 2013, a decrease of $122.2 million. Net proceeds from the issuance of
our Series 3 Notes were offset by an additional $296.2 million returned to shareholders in the form of common share
repurchases and dividends paid in the year-to-date period of 2014 compared to the year-to-date period of 2013.
Off-Balance Sheet Arrangements
We did not have “off-balance sheet” arrangements as at September 28, 2014 or December 29, 2013.
Contractual Obligations
In the first quarter of 2014, we issued Series 3 Notes of $450.0 million, and also entered into an agreement with one of
our suppliers requiring minimum purchase obligations, within the normal course of operations, of U.S. $115.8 million over the
six-year term of the agreement. Other than these developments, our contractual obligations have not changed materially since
December 29, 2013.
29
Recent Accounting Pronouncements
See Item 1. Financial Statements—Note 14 Recent Accounting Pronouncements.
30
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other than as noted above, there are no material changes to our exposure to various foreign exchange, commodity,
interest rate, and inflationary risks as reported in our Annual Report.
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 Company’s 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 Company’s management as
appropriate to allow timely decisions regarding disclosure. Based on that evaluation, the Company’s 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 has been no change in our internal control over financial reporting during the last fiscal quarter which has been
identified in connection with Management’s evaluation required by Rules 13a-15(d) or 15d-15(d) under the Exchange
Act, as amended, that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II: OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
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
Company’s financial condition and earnings.
ITEM 1A.
RISK FACTORS
In addition to the other information set forth in this Form 10-Q and the risk factors below, you should carefully consider
the factors discussed under the heading “Risk Factors” in our Annual Report, 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 2013 Form 10-K, and the additional risk factors and information provided
in this Form 10-Q may not describe every risk facing our Company. For a full description of the risks relating to the
Transaction, please refer to the amended registration statement on Form S-4 filed with the SEC on November 3, 2014 by
Partnership and Holdings. Additional risks and uncertainties not currently known to us or that we currently believe to be
immaterial also may materially adversely affect our business, financial condition and/or operating results.
Risk Factors Relating to the Transaction
The Arrangement Agreement may be terminated in accordance with its terms and the Transaction may not be
completed.
The Arrangement Agreement contains a number of conditions that must be fulfilled to complete the Transaction. Those
conditions include, among other customary conditions, the approval of the arrangement resolution by Tim Hortons
shareholders, the approval of the arrangement by the Ontario court, receipt of requisite regulatory approvals, absence of orders
prohibiting consummation of the Transaction, effectiveness of the registration statement that has been filed by Holdings and
Partnership to register the shares of Holdings common stock and Partnership exchangeable units that will be issued as
consideration in the Transaction, approval of the Holdings common shares for listing on the NYSE and conditional approval for
listing on the TSX and conditional approval of the Partnership exchangeable units for listing on the TSX. These conditions to
the closing of the Transaction may not be fulfilled and, accordingly, the Transaction may not be completed. In addition, if the
Transaction is not completed by March 31, 2015 (subject to extension to April 30, 2015, if the only conditions not satisfied or
waived (other than those conditions that by their nature are to be satisfied at the closing, which conditions shall be capable of
being satisfied) are conditions relating to regulatory approvals and the absence of any orders relating to regulatory approvals),
either Tim Hortons or Burger King may choose to terminate the Arrangement Agreement. In addition, Tim Hortons or Burger
King may elect to terminate the Arrangement Agreement in certain other circumstances, and the parties can mutually decide to
terminate the Arrangement Agreement at any time prior to the closing, before or after the approval of Tim Hortons shareholders
or Burger King’s stockholders, as applicable.
31
Failure to complete the Transaction could negatively impact our share price and our future business and financial
results.
If the Transaction is not completed, the ongoing business of Tim Hortons may be adversely affected. Additionally, if the
Transaction is not completed and the Arrangement Agreement is terminated, in certain circumstances, we may be required to
pay to Burger King a termination fee of up to C$345 million. In addition, we may incur significant transaction expenses in
connection with the Transaction regardless of whether the Transaction is completed. The foregoing risks, or other risks arising
in connection with the failure of the Transaction, including the diversion of management attention from conducting the business
of the Company and pursuing other opportunities during the pendency of the Transaction, may have a material adverse effect on
our business, operations, financial results and share price. In addition, we could be subject to litigation related to any failure to
consummate the Transaction or any related action that could be brought to enforce a party’s obligation under the Arrangement
Agreement.
While the Transaction is pending, we are restricted from taking certain actions. In addition to affecting our business
operations, this may also affect relationships with employees.
The Arrangement Agreement restricts us from taking specified actions until the Transaction occurs without the consent of
the other party. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the
completion of the Transaction. In addition, employee retention may be challenging during the pendency of the Transaction, as
certain employees may experience uncertainty about their future roles.
Our business relationships, including relationships with franchisees and customer relationships, may be subject to
disruption due to uncertainty associated with the Transaction.
Parties with which we currently do business or may do business in the future, including franchisees, customers and
suppliers, may experience uncertainty associated with the Transaction, including with respect to current or future business
relationships with us, Partnership or Holdings. As a result, our business relationships may be subject to disruptions if
franchisees, customers, suppliers and others attempt to negotiate changes in existing business relationships or consider entering
into business relationships with parties other than Tim Hortons as a result of the Transaction. These disruptions could have a
material and adverse effect on the businesses, financial condition, results of operations or prospects of Holdings and Partnership
following the closing. The effect of such disruptions could be exacerbated by a delay in the consummation of the Transaction or
termination of the Arrangement Agreement.
We may be named in legal proceedings in connection with the Transaction, the outcomes of which are uncertain, and
which could delay or prevent the completion of the Transaction.
We and our directors may be named as defendants in shareholder class actions challenging the proposed Transaction.
Among other remedies, the plaintiffs in such actions, if they do arise, may seek to enjoin the Transaction. Such legal
proceedings could delay or prevent the Transaction from becoming effective within the agreed upon timeframe.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a)
Total Number
of Shares
Purchased(1)
Monthly Period #7 (June 30, 2014 – August 3, 2014)
Monthly Period #8 (August 4, 2014 – August 31, 2014)
Monthly Period #9 (September 1, 2014 – September 28,
2014)
Total
________________
32
(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
2014 Program
(Cdn) (3)
308,187
60.95
308,187
$ 120,346,565
241,700
65.91
241,700
—
—
549,887
—
62.13
—
549,887
$
—
—
(1)
(2)
(3)
Based on settlement date.
Inclusive of commissions paid to the broker to repurchase the common shares.
On February 19, 2014, we obtained regulatory approval from the Toronto Stock Exchange (“TSX”) to commence a new share repurchase program (“2014
Program”), authorizing the repurchase of $440.0 million in common shares, not to exceed the regulatory maximum of 13,726,219 shares, representing
10% of our public float as defined under the TSX Company Manual. The 2014 Program commenced February 28, 2014 and was due to terminate on
February 27, 2015, or earlier if the $440.0 million or 10% share maximum was reached, or upon the occurrence of certain other termination events.
Following the announcement on August 24, 2014 that the Company was in discussions with Burger King Worldwide, Inc. regarding a potential strategic
transaction, the 2014 Program was terminated. Common shares purchased pursuant to the 2014 Program have been cancelled.
Dividend Restrictions with Respect to Part II, Item 2 Matters
The Company’s 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 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURE
None.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
See Index to Exhibits following the signature page to this Form 10-Q, which is incorporated by reference herein.
33
SIGNATURE
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: November 6, 2014
/s/ CYNTHIA J. DEVINE
Cynthia J. Devine
Chief Financial Officer
34
TIM HORTONS INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Description
Where found
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.
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.
99
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.”
35
Exhibit 31(a)
CERTIFICATION OF PERIODIC REPORT
UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Marc Caira, 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 registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.
Date: November 6, 2014
/s/ MARC CAIRA
Name: Marc Caira
Title: Chief Executive Officer
Exhibit 31(b)
CERTIFICATION OF PERIODIC REPORT
UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
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 registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.
Date: November 6, 2014
/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 September 28, 2014
of Tim Hortons Inc. (the “Issuer”).
I, Marc Caira, 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: November 6, 2014
/s/ MARC CAIRA
Name: Marc Caira
*
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 September 28, 2014
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: November 6, 2014
/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” or "Tim Hortons") desires to take advantage of these “safe harbor” provisions.
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,” “target,” “aspiration,” “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-totime include, but are not limited to, statements concerning management’s expectations relating to possible or assumed future
results, our strategic goals, our aspirations, our strategic 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 25,
2014 (“Form 10-K”), as updated in the Quarterly Report on Form 10-Q filed on November 6, 2014, 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 Company’s business, revenue, share 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 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) experience a decline and/or increased volatility in the
market price of its stock, (v) have insufficient cash to engage in or fund expansion activities, dividends, or share repurchase
programs, or (vi) increase costs at the corporate or 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: (i) prospects and execution risks concerning our growth strategy; (ii) the absence of an adverse
event or condition that damages our strong brand position and reputation; (iii) the absence of a material increase in competition or
in volume or type of competitive activity within the quick service restaurant segment of the food service industry; (iv) cost and
availability of commodities; (v) the absence of an adverse event or condition that disrupts our distribution operations or impacts
our supply chain; (vi) continuing positive working relationships with the majority of the Company’s restaurant owners; (vii) the
absence of any material adverse effects arising as a result of litigation; (viii) there being no significant change in the Company’s
ability to comply with current or future regulatory requirements; (ix) the ability to retain our senior management team or the
inability to attract and retain new qualified personnel; (x) the Company’s ability to maintain investment grade credit ratings; (xi)
the Company’s ability to obtain financing on favorable terms; and (xii) general worldwide economic conditions. We are presenting
this information for the purpose of informing you of management’s current expectations regarding these matters, and this
information may not be appropriate for any other purposes.
Factors Affecting Growth and Other Important Strategic Initiatives. The Company’s growth strategy and other strategic
initiatives may not be successful and may expose the Company to certain risks, including the following:
•
•
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 negatively impact the same-store sales growth and
profitability of existing restaurants in the market. When the Company enters new markets, it may be necessary to extend
or provide relief and support programs for restaurant owners which could increase costs and thus decrease net income.
The Company may enter markets where its brand is not well known and where it has little or no operating experience.
New markets may have different competitive conditions, consumer tastes or discretionary spending patterns than existing
markets and/or higher construction, occupancy, and operating costs for restaurants. As a result, new restaurants in those
•
•
•
•
•
•
markets may have lower average restaurant sales than restaurants in existing markets and may take longer than expected
to reach target sales and profit levels or may never do so, thereby affecting overall financial condition and/or financial
results. The Company will need to build brand awareness in those markets it enters through advertising and promotional
activity which may not be as effective as intended.
The Company may rationalize and close underperforming restaurants in order to improve overall profitability. Such
closures may be accompanied by impairment charges, closure costs, and/or valuation allowances that may have a negative
impact on 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 the Company cannot obtain
desirable locations for restaurants at reasonable prices, then the Company’s ability to affect its growth strategy will be
adversely affected.
The Company has vertically integrated manufacturing, warehouse and distribution capabilities which may, at times, result
in delays or difficulties.
The Company 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. There can be no assurance that the Company will be able to complete desirable transactions.
The Company may continue to pursue strategic alliances (including co-branding) with third parties but there can be no
assurance that new strategic partners can be found, that current strategic alliances can be maintained or that significant
value will be recognized through such strategic alliances. Furthermore, such relationships as well as the expansion of the
Company’s current business through other similar initiatives may expose it to additional risks that may adversely affect
the Company’s brand and business.
The Company’s financial outlook and long-range targets are based on the successful implementation, execution and guest
acceptance of the Company’s strategic plans and initiatives. Accordingly, the failure of any of these criteria could cause
the Company to fall short of achieving its financial objectives and long-range aspirational goals.
The Importance of Canadian Segment Performance and Brand Reputation. The Company’s success is largely dependent
upon its ability to maintain and enhance the value of its brand, guests’ connection to and perception of the brand, and a positive
relationship with restaurant owners. Brand value can be severely damaged even by isolated incidents, particularly if the incidents
receive considerable negative publicity or result in litigation. Some of these incidents may arise from events that are beyond the
Company’s control and may damage the brand, such as: actions taken (or not taken) by one or more restaurant owners or their
employees relating to health, safety, quality assurance, environmental, welfare, labor matters, public policy or social issues, or
otherwise; litigation and claims; failure of, or security breaches or other fraudulent activities associated with, the Company’s
networks and systems; illegal activity targeted at the Company; negative incidents occurring at or affecting business partners,
suppliers, affiliates, or corporate social responsibility programs of the Company; the quality of products from vertically integrated
manufacturing facilities or the Company’s other suppliers; negative comments about us or improper disclosure of proprietary or
personal information on social media; and negative publicity, whether true or not.
The Tim Hortons brand is synonymous with the delivery of quality food products at value prices. If the Company is unable to
maintain in Canada, or unable to maintain and/or achieve in other markets, an appropriate price-to-value relationship for its products
in the minds of guests, its ability to increase or maintain same-store sales may be affected. The ability of the Company to maintain or
achieve the appropriate price-to-value relationship also may be affected by discounting or other promotional activity of competitors,
which can be very aggressive. Furthermore, the Company’s financial performance is highly dependent on its Canadian business unit
and any substantial or sustained decline in its Canadian business would materially and adversely affect the overall financial performance
of the Company.
Competition. The quick service restaurant segment of the food service industry is intensely competitive. The Company
competes with international, regional, and local organizations primarily through the quality, variety, and value perception of food
and beverage products offered. Other key competitive factors include: the number and location of restaurants; quality and speed of
service; attractiveness of facilities; effectiveness and magnitude of advertising, marketing, promotional, and operational programs;
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/or perceptions; and, new product development. If the Company is unable to maintain its competitive position there could be a
lower demand for products, downward pressure on prices, reduced margins, an inability to take advantage of new business
opportunities, a loss of market share, and an inability to attract qualified restaurant owners in the future.
Innovation. The success of the Company’s same-store sales growth strategy is dependent partly on its ability to extend
product offerings, introduce innovative new products, adapt to consumer trends and desires, achieve the hospitality and speed of
service standards expected by guests and provide a distinctive and overall quality guest experience. The Company’s ability to
develop commercially successful new products will depend on its ability to gather sufficient data and effectively gauge the
direction of trends and identify, develop, manufacture, market and sell new or improved products in response to such trends. The
speed of service and capacity in Tim Hortons restaurants may be impacted by new product offerings which could have an adverse
effect on financial conditions or results of operations.
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 oils 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 cost increases, price volatility for commodities it purchases has increased due to conditions beyond its
control, including economic and political conditions, currency fluctuations, availability of supply, weather conditions, pest damage
and changing 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. The Company may choose not to pass along all commodity
cost increases to its restaurant owners which could have a significant effect on the business and results of operations of the
Company. Price fluctuations may also impact margins as many of these commodities are typically priced based on a fixed-dollar
mark-up. Although the Company generally secures commitments for most of its key commodities that generally extend over a sixmonth period, these may be at higher prices than its previous commitments. If the supply or quality of commodities, including
coffee, fails to meet demand or quality standards, the Company’s restaurant owners may experience reduced sales which would
reduce rents and royalty income as well as distribution income of the Company. Such a reduction in the Company’s income may
adversely impact the Company’s business and financial results.
Food Safety and Health Concerns. Incidents or reports, whether true or not, of: unclean water; food-borne illness; food
tampering, food contamination, product recall, hygiene and cleanliness failures or impropriety at Tim Hortons, or other quick
service restaurants unrelated to Tim Hortons, or potential health impacts of consuming certain of the Company’s products,
including its core products, could result in negative publicity, damage to the Company’s brand value and, potentially, product
liability or other claims. Any decrease in guest traffic or temporary closure of any of the Company’s restaurants as a result of such
incidents or negative publicity may have a material adverse effect on the business, results of operations and financial condition of
the Company.
Distribution Operations and Supply Chain. The Company’s distribution operations and supply chain may be impacted by
various factors, some of which are beyond its control, that could injure its brand and negatively affect results of operations and/or
increase costs, including: increased transportation, shipping, food and other supply costs; inclement weather or extreme weather
events; risks of having a single source of supply for certain food and beverage products; shortages or interruptions in the
availability or supply of high-quality coffee beans, perishable food products and/or their ingredients; variations in the quality of the
Company’s food and beverage products and/or their ingredients; potential cost and disruption of a product recall; potential negative
impacts on the Company’s relationship with restaurant owners associated with an increase of required purchases, or prices, of
products purchased from its distribution business; and political, physical, environmental, labor, or technological disruptions in
manufacturing and/or warehousing plants, facilities, or equipment.
Importance of Restaurant Owners. A substantial portion of the Company’s earnings come from royalties and other amounts
paid by restaurant owners, who operate substantially all of the Tim Hortons restaurants. Accordingly, the Company’s financial
results are, to a large extent, dependent upon the operational and financial success of Tim Hortons restaurant owners. There can be
no assurance that the Company will be able to maintain positive relationships with existing restaurant owners or attract sufficient
numbers of qualified restaurant owners, either of which could materially and adversely affect its business and operating results.
Furthermore, success of the Company’s same-store sales growth strategy and brand reputation is dependent on, among other
things, achievement of hospitality, operational standards, and a positive overall guest experience. There can be no assurance that
the Company and restaurant team members will be able to continue to attract, retain and motivate sufficient numbers of qualified
restaurant employees who will be able and willing to achieve the hospitality and operational restaurant-level standards of the
Company. Restaurant owners are independent contractors and some restaurant owners may not successfully operate restaurants in a
manner consistent with the Company’s standards and requirements or comply with federal, provincial or state labor laws (including
minimum wage requirements, overtime, working and safety conditions, employment eligibility and temporary foreign worker
requirements). Furthermore, some restaurant owners may not be able to hire, train and retain qualified managers and other
restaurant personnel. Any operational shortcoming of a franchised restaurant is likely to be attributed by guests to the Company,
thus damaging its brand reputation and potentially affecting revenues and profitability. Competitors that have a significantly
higher percentage of company-operated restaurants than Tim Hortons may have greater control over their respective restaurant
systems and have greater flexibility to implement operational initiatives and business strategies. Since the Company receive
revenues in the form of rents, royalties, and franchise fees from restaurant owners, its revenues and profits would decline and its
brand reputation could also be harmed if a significant number of restaurant owners were to: experience operational failures,
including health, safety and quality assurance issues; experience financial difficulty; be unwilling or unable to pay for food and
supplies, or for royalties, rent or other fees; fail to enter into renewals of franchise, operating or license agreements; or experience
labor shortages, including due to changes in employment eligibility requirements, the cessation or limitation of access to federal or
provincial labor programs, including the temporary foreign worker program, or significant increases in labor or other costs of
running their businesses.
Litigation. From time to time, the Company is subject to claims incidental to its business, such as “slip and fall” accidents
at franchised or Company-operated restaurants, claims and disputes in connection with site development and restaurant
construction as well as employment claims. In addition, class action lawsuits have been filed in the past, and may continue to be
filed, against quick service restaurants alleging that quick service restaurants have failed to disclose the health risks associated with
their products or that certain food products contribute to obesity. The Company may also be subject to claims from employees,
guests, and others relating to health and safety risks and conditions of Tim Hortons restaurants associated with design, operation,
construction, site location and development, indoor or airborne contaminants and/or certain equipment utilized in operations. In
addition, the Company may face claims from: (a) employees relating to employment or labor matters, including, potentially, class
action suits regarding wages, discrimination, unfair or unequal treatment, harassment, wrongful termination, or overtime
compensation; (b) restaurant owners and/or operators regarding their profitability, wrongful termination of their franchise or
operating (license) agreement, as the case may be, or other restaurant-owner relationship matters; (c) taxation authorities regarding
tax disputes or tax positions taken by the Company; and/or (d) business partners, stakeholders or other third parties relating to
intellectual property infringement claims. In certain agreements, the Company may agree to indemnify its business partners against
any losses or costs incurred in connection with claims by a third party alleging that the Company’s services infringe the intellectual
property rights of the third party. Companies have increasingly become subject to infringement threats from non-practicing
organizations (sometimes referred to as “patent trolls”) filing lawsuits for patent infringement. The Company, or its partners, may
become subject to claims for infringement and it may be required to indemnify or defend its business partners from such claims.
All of these types of matters have the potential to unduly distract management’s attention and increase costs, including costs
associated with defending such claims. The Company’s current exposure with respect to pending legal matters could change if
determinations by judges and other finders of fact are not in accordance with management’s evaluation of such claims. Should
management’s evaluations prove incorrect and such claims are successful, the Company’s exposure could exceed expectations and
have a material adverse effect on its business, financial condition and results of operations. Although some losses may be covered
by insurance, if there are significant losses that are not covered, or there is a delay in receiving insurance proceeds, or the proceeds
are insufficient to offset our losses fully, our consolidated financial condition or results of operations may be adversely affected.
Tax Authorities. A taxation authority may disagree with certain views of the Company, including, for example, the
allocation of profits by tax jurisdiction, the deductibility of interest expenses, or the tax aspects of reorganizations, initiatives or
transactions that the Company has undertaken and such tax authority may take the position that material income tax liabilities,
interests, penalties, or other amounts are payable by the Company. The Company expects it would contest such an assessment, but
this may be lengthy and costly and, if unsuccessful, the implications could be materially adverse to the Company and affect its
effective tax rate or operating income. Under the Company’s current corporate structure, an increase in debt levels beyond the
current target of $900.0 million could result in further increases in the effective tax rate resulting from incurring additional interest
expense for which it may not receive a tax benefit, and/or increases in income or withholding taxes on distributions from the
Canadian operating company to its parent corporation. Addressing constraints in the Company’s corporate structure is an important
consideration to maintaining its effective tax rate over the longer term, although there can be no assurance that the Company will
be able to address these constraints in a timely or tax efficient manner. The Company’s inability to address these constraints in a
timely or efficient manner could negatively affect its projected results, future operations, and financial condition.
Regulation. The Company is subject to various laws and regulations, including laws and regulations relating to: zoning,
land use (including the development and/or operation of drive-thru windows), transportation and traffic; health, food, sanitation
and safety; taxes; privacy laws, including the collection, retention, sharing and security of data; immigration, employment and
labor laws (such as the U.S. Fair Labor Standards Act and similar Canadian legislation), including some increases in minimum
wage requirements that were implemented in certain provinces in Canada and states in the U.S. in 2013 and other increases in such
jurisdictions that may occur in the future, that have increased, or will increase, the Company’s and restaurant owners’ labor costs in
those provinces and states; preventing discrimination and harassment in the workplace and providing certain civil rights to
individuals with disabilities; laws affecting the design of facilities and accessibility (such as the Americans with Disabilities Act of
1990 and similar Canadian legislation); taxes; environmental matters; product safety; nutritional disclosure and regulations
regarding nutritional content, including menu labeling and TFA content; advertising and marketing; record keeping and document
retention procedures; new and/or additional franchise legislation; and anti-corruption laws. The Company is also subject to
applicable accounting and reporting requirements and regulations, including those imposed by Canadian and U.S. securities
regulatory authorities, the NYSE and the TSX. The complexity of the regulatory environment in which the Company operates and
the related costs of compliance are increasing. Changes in such laws and regulations and/or failure to comply with existing or
future laws and regulations could adversely affect the Company and expose it to litigation or sanction, damage its brand reputation
and/or lower profits. Compliance with these laws and regulations and planning initiatives undertaken in connection with such laws
and regulations could increase the Company’s cost of doing business; reduce operational efficiencies; and, damage its reputation.
Increases in costs could impact profitability of the Company and restaurant owners. Failure to comply with such laws or
regulations on a timely basis may lead to civil and criminal liability, cancellation of licenses, fines, and other corrective action, any
of which could adversely affect the business and future financial results of the Company and have an adverse impact on its brand.
Senior Management Team. The Company’s success will continue to depend to a significant extent on its executive
management team and the ability of other key management personnel to replace executives who retire or resign. The Company
may not be able to retain its executive officers and key personnel or attract additional qualified management personnel to replace
executives who retire or resign. Failure to retain the leadership team of the Company and attract and retain other important
personnel could lead to ineffective management and operations, which could decrease profitability. Effective July 2, 2013, the
board of directors of the Company appointed Mr. Marc Caira to the position of President and Chief Executive Officer. With the
change in leadership, there is a risk to retention of other members of senior management, even with the existing retention program
in place.
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 Company’s manufacturing and distribution facilities, and at its office locations are
damaged or interrupted from power outages, computer and telecommunications failures, computer worms, viruses, phishing 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. The introduction of new modules for inventory
replenishment, sustainability, and business reporting and analysis will be implemented. There may be risks associated with
adjusting to and supporting the new modules which may impact the Company’s 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 Company’s reputation could be damaged and result in lost sales, fines,
lawsuits and diversion of management attention. The use of electronic payment systems and the Company’s 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 Company’s actual results to differ from its
expectations: (i) fluctuations in the U.S. and Canadian dollar exchange rates; (ii) an inability to adequately protect the Company’s
intellectual property and trade secrets from infringement actions or unauthorized use by others; (iii) potential liabilities and losses
associated with owning and leasing significant amounts of real estate; (iv) changes in its debt levels and a downgrade of its credit
ratings; (v) challenging economic conditions; (vi) uncertain international expansion; (vii) catastrophic events; and (viii) certain
anti-takeover provisions that may have the effect of delaying or preventing a change in control.
Risk Factors related to the Proposed Transaction with Burger King Worldwide, Inc.
On August 26, 2014, the Company announced that it had entered into a definitive agreement (the “Arrangement
Agreement”) with Burger King Worldwide, Inc. (“Burger King”) and certain of its affiliates. Pursuant to and subject to the terms
and conditions of the Arrangement Agreement, Burger King has agreed to acquire the Company in a transaction (“Transaction”)
that will result in Burger King and Tim Hortons being indirect subsidiaries of 9060669 Canada Inc. (“Holdings”) as further
described in an amended registration statement on Form S-4 (the “Form S-4”) filed with the SEC on November 3, 2014 by
Holdings and New Red Canada Limited Partnership (the “Partnership”). In addition to the risks described above, readers should
also be aware of certain risks relating to the Transaction. For a full description of the risks relating to the Transaction, please refer
to the Form S-4. Risks relating to the Transaction include the following:
Terminations. The Arrangement Agreement contains a number of conditions that must be fulfilled to complete the
Transaction. Those conditions include, among other customary conditions, the approval of the arrangement resolution by Tim
Hortons shareholders, the approval of the arrangement by the Ontario court, receipt of requisite regulatory approvals, absence of
orders prohibiting consummation of the Transaction, effectiveness of the registration statement that has been filed by Holdings and
Partnership to register the shares of Holdings common stock and Partnership exchangeable units that will be issued as
consideration in the Transaction, approval of the Holdings common shares for listing on the NYSE and conditional approval for
listing on the TSX and conditional approval of the Partnership exchangeable units for listing on the TSX. These conditions to the
closing of the Transaction may not be fulfilled and, accordingly, the Transaction may not be completed. In addition, if the
Transaction is not completed by March 31, 2015 (subject to extension to April 30, 2015, if the only conditions not satisfied or
waived (other than those conditions that by their nature are to be satisfied at the closing, which conditions shall be capable of being
satisfied) are conditions relating to regulatory approvals and the absence of any orders relating to regulatory approvals), either Tim
Hortons or Burger King may choose to terminate the Arrangement Agreement. In addition, Tim Hortons or Burger King may elect
to terminate the Arrangement Agreement in certain other circumstances, and the parties can mutually decide to terminate the
Arrangement Agreement at any time prior to the closing, before or after the approval of Tim Hortons shareholders or Burger King’s
stockholders, as applicable.
Failure to Complete. If the Transaction is not completed, the ongoing business of Tim Hortons may be adversely affected.
Additionally, if the Transaction is not completed and the Arrangement Agreement is terminated, in certain circumstances, we may
be required to pay to Burger King a termination fee of up to C$345 million. In addition, we may incur significant transaction
expenses in connection with the Transaction regardless of whether the Transaction is completed. The foregoing risks, or other risks
arising in connection with the failure of the Transaction, including the diversion of management attention from conducting the
business of the Company and pursuing other opportunities during the pendency of the Transaction, may have a material adverse
effect on our business, operations, financial results and share price. In addition, we could be subject to litigation related to any
failure to consummate the Transaction or any related action that could be brought to enforce a party’s obligation under the
Arrangement Agreement.
Restrictions. The Arrangement Agreement restricts us from taking specified actions until the Transaction occurs without the
consent of the other party. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to
the completion of the Transaction. In addition, employee retention may be challenging during the pendency of the Transaction, as
certain employees may experience uncertainty about their future roles.
Business Disruption. Parties with which we currently do business or may do business in the future, including franchisees,
customers and suppliers, may experience uncertainty associated with the Transaction, including with respect to current or future
business relationships with us, Partnership or Holdings. As a result, our business relationships may be subject to disruptions if
franchisees, customers, suppliers and others attempt to negotiate changes in existing business relationships or consider entering
into business relationships with parties other than Tim Hortons as a result of the Transaction. These disruptions could have a
material and adverse effect on the businesses, financial condition, results of operations or prospects of Holdings and Partnership
following the closing. The effect of such disruptions could be exacerbated by a delay in the consummation of the Transaction or
termination of the Arrangement Agreement.
Litigation. We and our directors may be named as defendants in shareholder class actions challenging the proposed
Transaction. Among other remedies, the plaintiffs in such actions, if they do arise, may seek to enjoin the Transaction. Such legal
proceedings could delay or prevent the Transaction from becoming effective within the agreed upon timeframe.
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 forwardlooking statements are made, or to reflect the occurrence of unanticipated events.