Cucumber Chef
Our fiscal years consist of 52 or 53 weeks ending on the Sunday closest to
introduction
We are a holding company and conduct all of our operations through our direct and indirect wholly-owned subsidiariesCarrols Corporation andNew CFH, LLC and their wholly-owned subsidiaries, and have no assets other than the shares of capital stock ofCarrols Holdco, Inc. andNew CFH, LLC , our direct wholly-owned subsidiaries. The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K. The overview provides our perspective on the individual sections of MD&A, which include the following:
Company Overview – a general description of our business and key financial metrics.
Recent and Future Events Affecting Our Results of Operations-a description of recent events that affect, and future events that may affect, our results of operations. Results of Operations-an analysis of our consolidated results of operations for the years endedJanuary 2, 2022 , andJanuary 3, 2021 , including a review of the material items and known trends and uncertainties. See Item 7 of our 2020 Annual Report on Form 10-K for an analysis of our consolidated results of operations for the years endedJanuary 3, 2021 andDecember 29, 2019 .
Liquidity and capital resources – an analysis of our cash flows, including capital expenditures, changes in capital resources and known trends that may affect liquidity.
Application of critical accounting policies – an overview of accounting policies requiring critical judgments and estimates.
New accounting pronouncements-a discussion of new accounting pronouncements, dates of implementation, and the impact on our consolidated financial position or results of operations, if any.
Company presentation
Carrols Restaurant Group, Inc. and its consolidated subsidiaries (collectively, "Carrols Restaurant Group ", the "Company", "we", "our" or "us") is one of the largest restaurant companies inthe United States and has been operating restaurants for more than 60 years. We are the largest Burger King franchisee inthe United States , based on number of restaurants, and have operated Burger King restaurants since 1976. As ofJanuary 2, 2022 we operated, as a franchisee, a total of 1,091 restaurants in 23 states under the trade names of Burger King andPopeyes . This included 1,026 Burger King restaurants in 23 Northeastern, Midwestern, Southcentral and Southeastern states and 65Popeyes restaurants in seven Southeastern states. During the year endedJanuary 2, 2022 , we acquired 19 Burger King restaurants in two separate transactions, which we refer to as the "2021 acquired restaurants". During the year endedDecember 29, 2019 we acquired 179 Burger King restaurants and 55Popeyes restaurants in three separate transactions which we refer to as the "2019 acquired restaurants". Any reference to "BKC" refers toBurger King Corporation and its indirect parent company, Restaurant Brands International Inc. ("RBI"). Any reference to "PLK" refers toPopeyes Louisiana Kitchen, Inc. and its indirect parent company, RBI.
Here is an overview of the key financial measures discussed in our results of operations:
•Restaurant sales consists of food and beverage sales at our restaurants, net of sales discounts and refunds and excluding sales tax. Restaurant sales are influenced by changes in comparable restaurant sales, menu price increases, new restaurant development, acquisitions of restaurants, franchisor promotions and closures of restaurants. Comparable restaurant sales reflect the change in year-over-year sales for a comparable restaurant base. Restaurants we acquire are included in comparable restaurant sales after they have been 36 -------------------------------------------------------------------------------- owned for 12 months and newly developed restaurants are included in comparable restaurant sales after they have been open for 15 months. Restaurants are excluded from comparable restaurant sales during extended periods of closure, which primarily occur due to restaurant remodeling activity. For comparative purposes, where applicable, the calculation of the changes in comparable restaurant sales is based either on a 53-week or 52-week year and compares against the respective 52-week prior period. •Other revenue consists of fuel sales, food sales and sales of other convenience merchandise and services from the six convenience stores acquired as part of the Cambridge Acquisition (as defined in this MD&A). The six convenience stores were closed in the fourth quarter of 2019. •Food, beverage and packaging costs consists of food, beverage and packaging costs and delivery commissions, less purchase discounts and vendor rebates. Food, beverage and packaging costs are generally influenced by changes in commodity costs, the mix of items sold, the level of promotional discounting, the effectiveness of our restaurant-level controls to manage food and paper costs and the relative contribution of delivery sales. In 2019, food, beverage and packaging costs also included fuel costs for the six convenience stores acquired as part of the Cambridge Acquisition, which contributed lower margins relative to our food, beverage and packaging costs. •Restaurant wages and related expenses include all restaurant management and hourly productive labor costs and related benefits, employer payroll taxes and restaurant-level bonuses. Payroll and related benefits are subject to inflation, including minimum wage increases as well as competitive wage increase required to adequately staff our restaurants and increased costs for health insurance, workers' compensation insurance and federal and state unemployment insurance.
•Rental expenses for restaurants include straight-line rental expenses and variable rents for our restaurant leases qualified as operating leases.
•Other restaurant operating expenses include all other restaurant-level
operating costs, the major components of which are royalty expenses paid to BKC
and PLK, utilities, repairs and maintenance, operating supplies, real estate
taxes and credit card fees.
•Advertising expense includes advertising payments to BKC and PLK based on a
percentage of sales as required under our franchise and operating agreements and
additional local marketing and promotional expenses.
•General and administrative expenses are comprised primarily of salaries and
expenses associated with corporate and administrative functions that support the
development and operations of our restaurants, legal, auditing and other
professional fees, acquisition costs and stock-based compensation expense.
•EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net
Income (Loss) are non-GAAP financial measures. EBITDA represents net income
(loss) before income taxes, interest expense and depreciation and amortization.
Adjusted EBITDA represents EBITDA adjusted to exclude impairment and other lease
charges, acquisition and integration costs, stock-based compensation expense,
certain abandoned development costs, pre-opening costs, non-recurring litigation
and other professional expenses, loss on extinguishment of debt and other income
or expense. Adjusted Restaurant-Level EBITDA represents income (loss) from
operations as adjusted to exclude general and administrative expenses,
depreciation and amortization, impairment and other lease charges, pre-opening
costs and other income and expense. Adjusted Net Income (Loss) represents net
income (loss) as adjusted, net of tax, to exclude impairment and other lease
charges, acquisition costs, certain abandoned development costs, restaurant
pre-opening costs, non-recurring litigation and other professional expenses,
other income and expense, loss on extinguishment of debt and the valuation
allowance charge on our deferred tax assets.
•We are presenting Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and
Adjusted Net Income (loss) because we believe that they provide a more
meaningful comparison than EBITDA and net income (loss) of our core business
operating results, as well as with those of other similar companies.
Additionally, we present Adjusted Restaurant-Level EBITDA because it excludes
restaurant pre-opening costs, other income and expense, and the impact of
general and administrative expenses, such as salaries and expenses associated
with corporate and administrative functions that support the development and
operations of our restaurants, legal, auditing and other professional fees.
Although these costs are not directly related to
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restaurant-level operations, these costs are necessary for the profitability of
our restaurants. Management believes that Adjusted EBITDA, Adjusted
Restaurant-Level EBITDA, and Adjusted Net Income (Loss), when viewed with our
results of operations in accordance with U.S. GAAP and the accompanying
reconciliations on page 49, provide useful information about operating
performance and period-over-period growth, and provide additional information
that is useful for evaluating the operating performance of our core business
without regard to potential distortions. Additionally, management believes that
Adjusted EBITDA and Adjusted Restaurant-Level EBITDA permit investors to gain an
understanding of the factors and trends affecting our ongoing cash earnings,
from which capital investments are made and debt is serviced.
However, EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted
Net Income (Loss) are not measures of financial performance or liquidity under
U.S. GAAP and, accordingly, should not be considered as alternatives to net
income, income from operations or cash flow from operating activities as
indicators of operating performance or liquidity. Also, these measures may not
be comparable to similarly titled captions of other companies. For the
reconciliation between Net Income (Loss) to EBITDA, Adjusted EBITDA and Adjusted
Net Income (Loss) and the reconciliation of income from operations to Adjusted
Restaurant-Level EBITDA, see page 49.
EBITDA, Adjusted EBITDA, Restaurant-level Adjusted EBITDA, and Adjusted Net Income (Net Loss) have significant limitations as analytical tools. These limitations include the following:
•EBITDA, Adjusted EBITDA and Adjusted EBITDA at the restaurant level do not reflect our capital expenditures, future capital expenditure requirements or contractual commitments to purchase equipment;
•EBITDA, Adjusted EBITDA and Restaurant Adjusted EBITDA do not reflect interest expense or cash requirements to service principal or interest payments on our debt;
•Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and EBITDA, Adjusted EBITDA and Adjusted Restaurant-Level EBITDA do not reflect the cash required to fund such replacements; and •EBITDA, Adjusted EBITDA, Adjusted Restaurant-Level EBITDA and Adjusted Net Income (Loss) do not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges (such as impairment and other lease charges, acquisition costs and litigation costs) have recurred and may reoccur. •Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements utilized in our restaurants, the amortization of franchise rights from our acquisitions of restaurants and the amortization of franchise fees paid to BKC and PLK. •Impairment and other lease charges are determined through our assessment of the recoverability of property and equipment and intangible assets by determining whether the carrying value of these assets can be recovered over their respective remaining lives through undiscounted future operating cash flows. A potential impairment charge is evaluated whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Lease charges are recorded for our obligations under the related leases for closed locations net of estimated sublease recoveries. •Interest expense consists of interest expense associated with the following: our Term B and Term B-1 Loans under our Senior Credit Facilities, our 5.875% Senior Notes Due 2029 (the "Notes"), our revolving credit borrowings under our Senior Credit Facilities, finance lease liabilities, amortization of deferred financing costs, amortization of original issue discount, payments required under our interest rate swap arrangement, and, throughApril 30, 2019 , interest on the$275.0 million of 8% Senior Secured Second Lien Notes due 2022 (the "8% Notes") and unamortized bond premium. 38 --------------------------------------------------------------------------------
Recent and Future Events Affecting Our Results of Operations
Takeover of restaurants
From the beginning of 2019 throughJanuary 2, 2022 , we acquired 253 restaurants from other Burger King andPopeyes franchisees in the following transactions ($ in thousands): Number of Fee-Owned Closing Date Number of Restaurants Purchase Price Restaurants Market Location 2019 Acquisitions: Southeastern states, primarily TN, April 30, 2019 (2) 220$ 259,083 14 MS, LA June 11, 2019 13 15,788 - Baltimore, Maryland August 20, 2019 (1) 1 1,108 - Pennsylvania 234 275,979 14 2021 Acquisitions: June 17, 2021 14 27,603 12 Fort Wayne, Indiana June 23, 2021 5 3,216 1 Battle Creek, Michigan 19 30,819 13 Total 253$ 306,798 27 (1)Acquisitions resulting from the exercise of our right of first refusal on acquisitions in certain markets. (2)The Cambridge Acquisition included 165 Burger King restaurants and 55Popeyes restaurants.
2021 acquisitions included the purchase of 13 wholly-owned restaurants, 12 of which were sold through sale-leaseback transactions during the year ended
The 2019 acquired restaurants included 14 fee-owned properties, of which six were subsequently sold in sale-leaseback transactions in 2019 for net proceeds of$8.3 million and two were subsequently sold in sale leaseback transactions in 2020 for net proceeds of$3.4 million . 39 -------------------------------------------------------------------------------- The 2019 acquisitions include ourApril 30, 2019 merger withNew CFH, LLC , a former subsidiary ofCambridge Franchise Holdings, LLC ("Cambridge") and acquisition of 165 Burger King restaurants, 55Popeyes restaurants and six convenience stores (the "Cambridge Acquisition"). Cambridge received a total of approximately 14.8 million shares of our common stock after conversion of all preferred stock initially issued to Cambridge in the Cambridge Acquisition. The unaudited pro forma impact on the results of operations for the 2021 acquisitions is included below. The unaudited results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of any future consolidated operating results. This pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings or any transaction costs related to the 2021 acquired restaurants. The following table summarizes certain pro forma financial information related to our operating results for the year endedJanuary 2, 2022 (in thousands): Year Ended January 2, 2022 Restaurant sales$ 1,663,860 Loss from operations (9,215) Pro Forma Adjusted EBITDA 82,983
The Company,Carrols Corporation ,Carrols LLC , and BKC entered into an Area Development Agreement (the "ADA") which commenced onApril 30, 2019 and was set to end onSeptember 30, 2024 and which superseded the Operating Agreement dated as ofMay 30, 2012 , as amended, betweenCarrols LLC and BKC. TheADA was amended and restated by all parties onJanuary 4, 2021 (the "Amended ADA"). Pursuant to theADA and for a cost of$3.0 million , BKC had assigned toCarrols LLC the right of first refusal on the sale of franchisee-operated restaurants in 16 states and a limited number of counties in four additional states ("ADA ROFR"). The ADA ROFR was terminated in connection with the Amended ADA. Under the Amended ADA,Carrols LLC has agreed to open, build and operate a total of 50 new Burger King restaurants, 80% of which must be inKentucky ,Tennessee andIndiana . This includes four Burger King restaurants bySeptember 30, 2021 , 10 additional Burger King restaurants bySeptember 30, 2022 , 12 additional Burger King restaurants bySeptember 30, 2023 , 12 additional Burger King restaurants bySeptember 30, 2024 and 12 additional Burger King restaurants bySeptember 30, 2025 . There is a 90-day cure period to meet the required restaurant development each development year. In addition, pursuant to the Amended ADA, BKC grantedCarrols LLC franchise pre-approval to build new Burger King restaurants or acquire Burger King restaurants from Burger King franchisees with respect to 500 Burger King restaurants in the aggregate in (i)Kentucky ,Tennessee andIndiana (excluding certain geographic areas inIndiana ) and (ii) (a) 16 states, which includeArkansas ,Indiana ,Kentucky ,Louisiana ,Maine ,Maryland ,Michigan ,Mississippi ,North Carolina ,Ohio ,Pennsylvania ,Rhode Island ,South Carolina ,Tennessee ,Vermont andVirginia (subject to certain exceptions for certain limited geographic areas within certain states) and (b) any other geographic locations thatCarrols LLC enters after the commencement date of the Amended ADA pursuant to BKC procedures subject to certain limitations. In connection with an acquisition of restaurants in 2019 we assumed a development agreement forPopeyes , which included an assignment by PLK of its right of first refusal under its franchise agreements with its franchisees for acquisitions in two southern states, as well as a development commitment to open, build and operate approximately 80 newPopeyes restaurants over six years. This development agreement with PLK was terminated onMarch 17, 2021 , with certain covenants applicable to us surviving the termination. PLK reserved the right to charge us a$0.6 million fee if the parties to the termination agreement are not able to come to a mutually agreeable solution with respect to such fee within a six-month period. 40 --------------------------------------------------------------------------------
Impact of the COVID-19 pandemic
In response to the impact that the COVID-19 pandemic has had on our business operations and the continuing uncertainty in the economy in general, we have taken steps to adapt our business and strengthen and preserve our liquidity, including the following: •InMarch 2020 , we closed the dining rooms in all our restaurants and modified operating hours in line with local ordinances and day-part sales trends. These closures were in effect through most of the second quarter of 2020, with each restaurant operating according to their respective local governmental guidelines as well as safety procedures developed by BKC and PLK. In 2020, we re-opened dining rooms as individual states and local governments have rolled back restrictions. By the end of the second quarter of 2021, most of our dining rooms had reopened. However, in most cases, guests have continued to rely on our drive-thru, carry-out and delivery service modes. During the fourth quarter of 2021, we saw take-out and dine-in representing approximately 14% of net sales as compared with 11% in the fourth quarter of 2020 and a pre-COVID 30% for all of 2019. •We launched delivery services in March of 2020 at approximately 800 of our restaurants. Since then, we have added additional third-party delivery partners as well as expanded the number of restaurants where delivery service is offered as new locations were covered by our delivery partners. For the fourth quarter of 2021, delivery comprised approximately 5.2% of total restaurant sales. For all of 2021 and 2020 delivery was approximately 4.8% and 2.4% of net sales, respectively. •We temporarily closed 46 restaurants in lateMarch 2020 and earlyApril 2020 that were geographically close to one of our other restaurants. These closures were in effect for most of the second quarter of 2020. By the end of 2020, we had reopened all of these restaurants with the exception of two Burger King restaurants we permanently closed in the third quarter of 2020. •We remain committed to active management of our expenditures and for the second quarter of 2020 limited spending mainly to necessary restaurant maintenance issues. For the full year of 2020, we reduced operating capital expenditures from$134.9 million in 2019 to$56.9 million . Capital expenditures in 2021 were$51.8 million . •In the second quarter of 2020, we reduced regional and corporate overhead through reductions in travel and training as well as a 10% temporary reduction in all non-restaurant wages for the second quarter of 2020. This reduction in wages was restored as ofJuly 1, 2020 . •As allowed under the Coronavirus Aid, Relief and Economic Security Act, as amended (the "CARES Act"), we deferred payment of the employer portion ofSocial Security taxes through the end of 2020. The amount of the cumulative deferral at the end of 2020 was approximately$21.6 million , with 50% of the deferred amount dueDecember 31, 2021 (which was subsequently deferred toJanuary 3, 2022 ) and the remaining 50% dueDecember 31, 2022 (which was subsequently deferred toJanuary 3, 2023 ). As ofJanuary 2 , 2022,$21.2 million of this deferral remained to be repaid, of which$10.4 million was recorded in accrued payroll, related taxes and benefits and$10.8 million was recorded in other liabilities, long-term in the accompanying consolidated balance sheets. •We negotiated with our landlords other than BKC to secure$5.8 million in deferral or abatement of 2020 cash rent obligations, of which$4.8 million was or is expected to be repaid over various periods which began in the third quarter of 2020. We had repaid$4.6 million related to these deferrals by the end of 2021. •During the second quarter of 2020, we extended payment terms with our key vendors and suppliers and utilized deferral opportunities with our utility vendors. These reverted to normal payment terms in July of 2020. During 2020 and 2021, we have experienced a number of minor and/or temporary supply chain issues which we continue to monitor as the communities we operate in reopen. •In 2021, we have experienced inflationary cost pressures in labor and commodity costs given challenges in the overall labor force impacting our restaurants and our supply chains. The COVID-19 pandemic has increased the difficulty and cost of maintaining adequate staffing levels for us and our supply chain.
While significant uncertainty remains as to when or how the adverse effects of the COVID-19 pandemic will change, including but not limited to stock price volatility, commodity inflation raw materials, competitive wage pressures, declining customer traffic, government restrictions on catering businesses and the
41 -------------------------------------------------------------------------------- unpredictable economic environment, we believe our business model and world-class brands are well positioned to serve value and convenience-seeking customers as the communities we operate in are reopening and customers are returning to pre-pandemic behaviors and activities. With our 60-year history of operating restaurants, we also believe that we are well positioned to navigate these challenges as illustrated by the fact that our comparable sales in 2021 outpaced the overall US BKC system by 440 basis points.
Capital expenditure
We expect that our capital expenditures in 2022 will remain at levels similar to our capital expenditures in 2021 and 2020. We continue to review on an ongoing basis our future development and remodel plans in relation to our available capital resources, supply chain availability and our return on investment.
Issuance of notes and amendments to our senior credit facilities
OnApril 30, 2019 , we entered into a senior secured credit facility which provided for senior secured credit facilities in an aggregate principal amount of$550.0 million (as amended, the "Senior Credit Facilities"), consisting of (i) a term loan B facility in an aggregate principal amount of$425.0 million (the "Term Loan B Facility"), the entire amount of which was borrowed by us onApril 30, 2019 and (ii) a revolving credit facility (including a sub-facility of$35.0 million for standby letters of credit) in an aggregate principal amount of$125.0 million (the "Revolving Credit Facility"). Prior to the entry into the amendments described below, borrowings under the Term Loan B Facility and the Revolving Credit Facility bore interest at a rate per annum, at our option, of (i) the Alternate Base Rate (such definition and all other definitions used herein and otherwise not defined herein shall have the meanings set forth in the Senior Credit Facilities) plus the applicable margin of 2.25% or (ii) the LIBOR Rate plus a margin of 3.25% (as defined in the Senior Credit Facilities). The Term Loan B Facility matures onApril 30, 2026 and the Revolving Credit Facility originally matured onApril 30, 2024 . OnDecember 13, 2019 , we entered into the First Amendment to our Senior Credit Facilities (the "First Amendment") which amended a financial covenant under the Senior Credit Facilities applicable solely with respect to the Revolving Credit Facility that previously required the Company to maintain quarterly a Total Net Leverage Ratio of not greater than 4.75 to 1.00 (measured on a most recent four quarter basis), to now require that the Company maintain only a First Lien Leverage Ratio of not greater than 5.75 to 1.00 (as measured on a most recent four quarter basis) if, and only if, on the last day of any fiscal quarter (beginning with the fiscal quarter endedDecember 29, 2019 ), the sum of the aggregate principal amount of outstanding revolving credit borrowings under the Revolving Credit Facility and the aggregate face amount of letters of credit issued under the Revolving Credit Facility (excluding undrawn letters of credit in an aggregate face amount up to$12.0 million ) exceeds 35% of the aggregate amount of the maximum revolving credit borrowings under the Revolving Credit Facility. The First Amendment also reduced the aggregate maximum revolving credit borrowings under the Revolving Credit Facility by$10.0 million to a total of$115.0 million . OnMarch 25, 2020 , we entered into the Second Amendment to our Senior Credit Facilities (the "Second Amendment"). The Second Amendment, among other things, (i) increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility (the "Revolving Committed Amount") by$15.4 million to a total of$130.4 million , (ii) amended the definition of Applicable Margin (such definition and all other definitions used herein and otherwise not defined herein shall be the meanings set forth in the Senior Credit Facilities), (iii) provided for a commitment fee (the "Ticking Fee") beginning on the 180th day after the Second Amendment Effective Date and for so long as the Revolving Committed Amount remained greater than$115.0 million , and (iv) provided that the Company shall use the proceeds of an Extension of Credit which results in the sum of the aggregate principal amount of outstanding Revolving Loans plus the aggregate amount of LOC Obligations equaling an amount in excess of$115.0 million solely for ongoing operations of the Company and its subsidiaries and shall not be held as cash on the balance sheet. The terms outlined as (ii), (iii) and (iv) were modified in the Sixth Amendment described below. OnApril 8, 2020 , the Company entered into the Third Amendment to its Senior Credit Facilities which increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under the Revolving Credit Facility by$15.4 million to a total of$145.8 million . 42 -------------------------------------------------------------------------------- OnApril 16, 2020 , we entered into the Fourth Amendment to our Senior Credit Facilities (the "Fourth Amendment"). The Fourth Amendment permits us to incur and, if necessary, repay indebtedness incurred pursuant to the Paycheck Protection Program (the "PPP") under the CARES Act. Subsequent to the Fourth Amendment, we withdrew our application for relief under the PPP and returned the funds upon receipt. OnJune 23, 2020 (the "Fifth Amendment Effective Date"), we entered into the Fifth Amendment to our Senior Credit Facilities (the "Fifth Amendment"). The Fifth Amendment increased the Term Loan (as defined in the Senior Credit Facilities) borrowings in the aggregate principal amount of$75 million of Incremental Term B-1 Loans (as defined in the Senior Credit Facilities). The Incremental Term B-1 Loans constituted a new tranche of Term Loans ranking pari passu in right of payment and security with the Initial Term Loans (as defined in the Senior Credit Facilities) for all purposes under the Senior Credit Facilities. The Incremental Term B-1 Loans had the same terms as outstanding borrowings under the Company's existing Term Loan B facility pursuant to and in accordance with the Senior Credit Facilities, provided that (i) borrowings under the Incremental Term B-1 Loans bore interest at a rate per annum, at our option, of (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus the applicable margin of 5.25% or (b) the LIBOR Rate (as defined in the Senior Credit Facilities) (which shall not be less than 1% for Incremental Term B-1 Loans) plus the applicable margin of 6.25% and (ii) certain prepayments of the Incremental Term B-1 Loans by us prior to the first anniversary of the Fifth Amendment Effective Date would be subject to a premium to the Administrative Agent (as defined in the Senior Credit Facilities), for the ratable account of each applicable Term Loan Lender (as defined in the Senior Credit Facilities) holding Incremental Term B-1 Loans on the date of such prepayment equal to the Applicable Make-Whole Amount (as defined in the Senior Credit Facilities) with respect to the principal amount of the Incremental Term B-1 Loans so prepaid. The principal amount of the Incremental Term B-1 Loans amortized in an aggregate annual amount equal to 1% of the original principal amount of the Incremental Term B-1 Loans and were repayable in consecutive quarterly installments on the last day of our fiscal quarters beginning on the third fiscal quarter of 2020. The remaining outstanding principal amount of the Incremental Term B-1 Loan and all accrued but unpaid interest and other amounts payable with respect to the Incremental Term B-1 Loan would have been due onApril 30, 2026 , which was the Term Loan Maturity Date (as defined in the Senior Credit Facilities). The net proceeds of the Incremental Term B-1 Loans were$71.3 million after original issue discount and were used for general corporate purposes, including repayment of the outstanding balance of the Revolving Credit Facility. The Term B-1 Loans were repaid in full onJune 28, 2021 . OnApril 6, 2021 , we entered into the Sixth Amendment to our Senior Credit Facilities (the "Sixth Amendment") which increased the aggregate maximum commitments available for revolving credit borrowings (including standby letters of credit) under our Revolving Credit Facility by$29.2 million to a total of$175.0 million . The Sixth Amendment also amended the definitions in the Senior Credit Facilities of (i) Applicable Margin, to provide that the Applicable Margin for borrowings under the Revolving Credit Facility (including Letter of Credit Fees) shall be at a rate per annum equal to 3.25% for LIBOR Rate Loans and 2.25% for Alternate Base Rate Loans, and (ii) Revolving Maturity Date, to provide that the Revolving Maturity Date is extended toJanuary 29, 2026 . In addition, the Sixth Amendment amended the Senior Credit Facilities to remove our obligation to (i) pay a Ticking Fee pursuant to the TickingFee Rate and (ii) use the proceeds of an Extension of Credit which results in the sum of the aggregate principal amount of outstanding Revolving Loans plus the aggregate amount of LOC Obligations equaling an amount in excess of$115.0 million solely for our ongoing operations and not to hold as cash on the balance sheet. OnJune 28, 2021 , we entered into the Seventh Amendment to our Senior Credit Facilities (the "Seventh Amendment"). The Seventh Amendment revised (a) the initial amount for calculating the Available Amount (as defined in the Senior Credit Facilities) from$27.0 million to$50.0 million which is utilized, among other items, in determining the amount of Restricted Payments (as defined in the Senior Credit Facilities) and Permitted Investments (as defined in the Senior Credit Facilities), (b) the calculation of the Company's ability to incur an Incremental Term Loan (as defined in the Senior Credit Facilities) or an increase to the Revolving Committed Amount from$135.0 million to$180.0 million , and (c) the general basket for Restricted Payments, Permitted Investments and Restricted Junior Debt Payment (as defined in the Senior Credit Facilities) from an aggregate amount not to exceed the greater of (i)$27.0 million and (ii) 20% of Consolidated EBITDA (as defined in the Senior Credit Facilities) as of the most recently completed Reference Period (as defined in the Senior Credit Facilities) to (i)$50.0 million and (ii) 40% of Consolidated EBITDA as of the most recently completed Reference Period. In addition, the Seventh Amendment revises the Total Net Leverage Ratio required for the Company to 43 -------------------------------------------------------------------------------- make Restricted Payments or prepay Junior Debt (as defined in the Senior Credit Facilities) with unutilized Available Amount from 3.00 to 1.00 to 4.00 to 1.00. The Seventh Amendment also provided for affiliates of the Company to acquire up to 20% of the outstanding term loans pursuant to certain transactions. OnJune 28, 2021 , we issued$300.0 million principal amount of Notes in a private placement. The proceeds of the offering, together with$46.0 million of revolving credit borrowings under our Senior Credit Facilities, were used to (i) repay$74.4 million of outstanding term B-1 loans and$243.6 million of outstanding term B loans under our Senior Credit Facilities (which included scheduled principal payments), (ii) to pay fees and expenses related to the offering of the Notes and the Seventh Amendment and (iii) for working capital and general corporate purposes, including for possible future repurchases of its common stock and/or a dividend payment and/or payments on its common stock.Carrols Restaurant Group and certain of its subsidiaries (the "Guarantors") entered into the Indenture (the "Indenture") dated as ofJune 28, 2021 with theBank of New York Mellon Trust Company governing the Notes. The Indenture provides that the Notes will mature onJuly 1, 2029 and will bear interest at the rate of 5.875% per annum, payable semi-annually onJuly 1 andJanuary 1 of each year, beginning onJanuary 1, 2022 . The entire principal amount of the Notes will be due and payable in full on the maturity date. The Indenture further provides that we (i) may redeem some or all of the Notes at any time afterJuly 1, 2024 at the redemption prices described therein, (ii) may redeem up to 40% of the Notes using the proceeds of certain equity offerings completed beforeJuly 1, 2024 and (iii) must offer to purchase the Notes if it sells certain of its assets or if specific kinds of changes in control occur, all as set forth in the Indenture. The Notes are senior unsecured obligations ofCarrols Restaurant Group and are guaranteed on an unsecured basis by the Guarantors. The Indenture contains certain covenants that limit the ability ofCarrols Restaurant Group and the Guarantors to, among other things: incur indebtedness or issue preferred stock; incur liens; pay dividends or make distributions in respect of capital stock or make certain other restricted payments or investments; sell assets; agree to payment restrictions affecting Restricted Subsidiaries (as defined in the Indenture); enter into transactions with affiliates; or merge, consolidate or sell substantially all of the assets. Such restrictions are subject to certain exceptions and qualifications all as set forth in the Indenture. OnSeptember 30, 2021 , we entered into the Eighth Amendment to our Senior Credit Facilities (the "Eighth Amendment"). The Eighth Amendment increased the aggregate maximum commitments available for revolving credit borrowings under the revolving credit facility by$40.0 million to a total of$215.0 million . As ofJanuary 2, 2022 , there were no revolving credit borrowings outstanding and$9.0 million of letters of credit issued under the Revolving Credit Facility. After reserving for issued letters of credit and outstanding revolving credit borrowings,$206.0 million was available for revolving credit borrowings under the Revolving Credit Facility atJanuary 2, 2022 . As ofMarch 9, 2022 , after reserving for issued letters of credit and$20.0 million in revolving credit borrowings,$186.0 million was available for revolving credit borrowings.
Interest rate swap contract
We entered into a five year interest rate swap agreement commencingMarch 3, 2020 and endingFebruary 28, 2025 with a notional amount of$220.0 million to swap variable rate interest payments (one-month LIBOR plus the applicable margin) under our Senior Credit Facilities for fixed interest payments bearing an interest rate of 0.915% plus the applicable margin in our Senior Credit Facilities. OnNovember 12, 2021 , we partially terminated this interest rate swap to reduce the notional amount hedged from$220.0 million to$120.0 million . which settled with net proceeds to us of$0.2 million , leaves the fixed rate and other terms of the swap arrangement unchanged and provides the flexibility to repay borrowings under the Senior Credit Facilities which previously needed to be maintained at the hedged$220.0 million notional amount. 44 --------------------------------------------------------------------------------
Share buyback program
OnAugust 2, 2019 , our Board of Directors approved a stock repurchase plan (the "Repurchase Program") under which we may repurchase up to$25 million of our outstanding common stock. The authorization became effectiveAugust 2, 2019 . OnAugust 10, 2021 , the Company's Board of Directors approved an extension of the Company's Repurchase Program with approximately$11.0 million of its original$25 million in capacity remaining. The authorization will expire onAugust 2, 2023 , unless terminated earlier by the Board of Directors. Purchases under the Repurchase Program may be made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions (including, without limitation, the use of Rule 10b5-1 plans) in compliance with applicable federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The Company has no obligation to repurchase stock under the Repurchase Program, and the timing, actual number and value of shares purchased will depend on the Company's stock price, trading volume, general market and economic conditions, and other factors. During the year endedJanuary 3, 2021 , we repurchased 1,534,304 shares in open market transactions of our common stock at an average share price of$6.52 for a total cost of$10.0 million under the Repurchase Program. During the year endedDecember 29, 2019 , we repurchased 553,112 shares in open market transactions at an average share price of$7.26 for a total cost of$4.0 million under the Repurchase Program.
We have no obligation to repurchase additional shares under the repurchase program, and the timing, actual number and value of shares purchased will depend on our share price, trading volume, general market conditions and economics and other factors.
Future restaurant closures
We evaluate the performance of our restaurants on an ongoing basis including an assessment of the current and future operating results of each restaurant in relation to its cash flow and future occupancy costs and, with regard to franchise agreement renewals, the cost of required capital improvements. We may elect to close restaurants based on these evaluations. In 2021, we closed five restaurants, excluding one restaurant relocated within its trade area. We currently anticipate less than five restaurant closures in 2022 outside of any restaurants being relocated within their trade area at the end of their respective lease term. Our determination of whether to close restaurants in the future is subject to further evaluation and may change. We may incur lease charges in the future from closures of underperforming restaurants prior to the expiration of their contractual lease term. We do not believe that the future impact on our results of operations due to restaurant closures will be material, although there can be no assurance in this regard.
Effect of minimum wage increases
Certain of the states and municipalities in which we operate have increased their minimum wage rates for 2021 and in many cases have also approved additional increases for future periods. Most notably,New York State has increased the minimum wage applicable to our business to$15.00 an hour onJuly 1, 2021 , from$14.50 an hour as ofJanuary 1, 2021 ,$13.75 an hour in 2020 and$12.75 per hour in 2019.New York State has anUrban Youth Credit through 2022 from which we have been receiving approximately$500,000 per year since 2016. We had 125 restaurants inNew York State as ofJanuary 2, 2022 . As of such date, we also had one restaurant inMassachusetts that has annual minimum wage increases reaching$15.00 per hour in 2023, 10 restaurants inNew Jersey that have annual minimum wage increases reaching$15.00 per hour in 2024, and 45 total restaurants inIllinois andMaryland that also have annual minimum wage increases reaching$15.00 per hour in 2025. In the current labor market we have seen competitive pressure on wage rates that well outpaces statutory minimums as the re-opening of the economy from COVID-19 pandemic restrictions has increased demand for labor at all levels in the workforce. We typically attempt to offset the effects of wage inflation, at least in part, through periodic menu price increases. However, no assurance can be given that we will be able to offset these wage increases in the future. 45 --------------------------------------------------------------------------------
Operating results
Fiscal 2021 vs. Fiscal 2020
The following table highlights the key components of sales and the number of restaurants in operation for the years endedJanuary 2, 2022 andJanuary 3, 2021 : Year ended January 2, 2022 January 3, 2021 (52 weeks) (53 weeks) (in thousands of dollars) Burger King restaurant sales$ 1,568,431 $ 1,459,016 Popeyes restaurant sales 83,939 88,486 Total restaurant sales$ 1,652,370 $ 1,547,502 Change in comparable Burger King restaurant sales % 9.1 % (2.8) % Change in comparablePopeyes restaurant sales % (1.9) % (0.1) % Burger King restaurants operating at beginning of year 1,009 1,036 New restaurants opened, including relocations (1) 4 7 Restaurants acquired 19 - Restaurants closed, including relocations (1) (6) (34) Restaurants operating at end of year 1,026 1,009 Restaurants operating at beginning and end of year 65 65
(1) New restaurants opened in 2021 and 2020 each included one restaurant that was closed and relocated to its market areas.
Restaurant Sales. Total restaurant sales in 2021 increased 6.8% to$1,652.4 million from$1,547.5 million in 2020. Comparable restaurant sales increased 8.5% due to an increase in average check of 7.4% and an increase in customer traffic of 1.0%. The effect of menu price increases in 2021 was approximately 4.1%. Restaurant sales in fiscal 2020 included$28.4 million in the 53rd week. Restaurant sales overall increased$104.9 million , which included the impact of comparable sales increases partially offset by the prior year including sales from its extra 53rd week of$28.4 million .
Operating costs and expenses (percentages expressed as a percentage of total restaurant sales, unless otherwise stated).
The following table presents certain results of operations for the years ended
Year Ended
January 2, 2022 January 3, 2021
(52 weeks) (53 weeks)
Costs and expenses (all restaurants):
Food, beverage and packaging costs 30.2 % 29.3 %
Restaurant wages and related expenses 33.3 % 32.2 %
Restaurant rent expense 7.4 % 7.7 %
Other restaurant operating expenses 15.6 % 15.3 %
Advertising expense 4.0 % 3.9 %
General and administrative expenses 5.1 % 5.4 %
46
-------------------------------------------------------------------------------- Food, beverage and packaging costs increased as a percentage of restaurant sales to 30.2% in 2021 from 29.3% in 2020. This increase reflected increased commodity costs at our Burger King restaurants (2.1%, including a 9.7% increase in ground beef prices compared to 2020), increased commodity costs at ourPopeyes restaurants (0.1%) and higher delivery sales in 2021 (0.4%). These cost increases were offset in part by the impact of menu price increases taken since the end of 2020 at our Burger King restaurants (1.3%) and the impact of lower promotional discounting in 2021 (0.7%). Food, beverage and packaging costs at ourPopeyes restaurants increased approximately 180 basis points in fiscal 2021 from fiscal 2020 due to primarily to commodity cost increases (0.1%). Restaurant wages and related expenses increased to 33.3% in 2021 from 32.2% in 2020. We benefited in 2020 from labor adjustments we made at the onset of the COVID-19 pandemic to restrict overtime and reduce staffing levels. The efficiencies we gained due to labor adjustments we made during the second quarter of 2020 in response to the COVID-19 environment benefited the year-over-year comparison in the first quarter of 2021, and partially offset the year-over-year increase we saw in the beginning late in the second quarter of 2021 from restoring labor hours and competitive labor rate pressures. The impact of hourly labor rate increases in 2021, inclusive of minimum wage increases, was 11.0% when compared to the prior year period.
Restaurant rental expenses decreased to 7.4% in 2021 from 7.7% in 2020 due to the impact of higher sales volumes on fixed rental costs.
Other restaurant operating expenses increased to 15.6% in 2021 from 15.3% in 2020. The second and third quarters of 2020 reflected cost savings realized from the constrained pandemic operating environment. As our dining rooms have reopened and restaurants have resumed pre-pandemic operations, we saw higher spending on security costs (0.2%, including investments in smart safe technology), repair and maintenance (0.1%) and equipment rental (0.1%).
Advertising spending fell from 3.9% in 2020 to 4.0% in 2021 due to the expiration of advertising incentives received for certain renovated Burger King restaurants.
Adjusted Restaurant-Level EBITDA. As a result of the factors above, as well as the impact of the 53rd week in fiscal 2020 of$6.3 million , Adjusted Restaurant-Level EBITDA decreased$24.6 million to$157.0 million in 2021 from$181.6 million in 2020. For a reconciliation between Adjusted Restaurant-Level EBITDA and income from operations see page 49. General and Administrative Expenses. General and administrative expenses decreased to$83.7 million in 2021 from$84.1 million in 2020, and, as a percentage of total revenue, to 5.1% from 5.4%. The decrease was driven by$3.5 million lower incentive compensation accruals in 2021 and a reduction in abandoned site development costs of$2.8 million . These reductions were partially offset by 2020 including short-term salary and travel reductions ($2.4 million ) as well as executive severance costs incurred in 2021 ($0.7 million ) and higher stock-based compensation expense in 2021 ($1.0 million ). We incurred$1.7 million and$1.4 million in 2021 and 2020, respectively, in administrative costs pertaining to non-recurring litigation and professional fees. In connection with our pause on new development in 2020, we recorded$3.5 million in expense for abandoned site development costs, including$0.6 million related to forfeiting prepaid franchise fees in connection with the Amended ADA. General and administrative expenses excluding the non-recurring costs described above decreased as a percentage of total revenues to 5.3% in 2021 from 5.4% in 2020.
Adjusted EBITDA. Due to the above factors, as well as an impact from the 53rd week of fiscal 2020 of
For a reconciliation between net income and EBITDA and adjusted EBITDA, see page 49.
Depreciation and Amortization. The decrease in depreciation and amortization expense to$80.8 million in 2021 from$81.7 million in 2020 was primarily due to lower remodeling and restaurant development activity.
Depreciation and other rental charges. We recorded impairment losses and other rental costs for
47 -------------------------------------------------------------------------------- million of capital expenditures at previously impaired restaurants, other lease charges of$0.6 million and$1.9 million related to impairment of certain owned non-operating properties. We recorded impairment and other lease charges of$12.8 million in 2020 consisting of$2.0 million related to the impairment of the remaining unamortized value of our right of first refusal under ourADA with BKC,$5.0 million related to initial impairment charges for fifteen underperforming restaurants,$1.2 million of capital expenditures at previously impaired restaurants, and other lease charges of$4.6 million primarily related to the closure of 23 of our underperforming restaurant locations during 2020. Other Income, net. In 2021, we recorded other income, net, of$1.2 million which consisted of a$1.1 million gain from the sale of a litigation claim, gains related to insurance recoveries from property damage at two of our restaurants of$1.3 million and a loss on disposal of assets of$1.2 million . In 2020, we recorded other income, net, of$1.3 million which consisted of gains related to insurance recoveries from property damage at four of our restaurants of$2.1 million , a net gain on 12 sale-leaseback transactions of$0.2 million and a loss on disposal of assets of$1.0 million .
Interest charges. Interest expense increased to
Loss on Extinguishment of Debt. We recognized a loss on extinguishment of debt of$8.5 million in 2021 in connection with the early extinguishment of our term B-1 loans and partial extinguishment of our term B loans under our Senior Credit Facilities. The loss consisted of the proportional write-off of unamortized debt issuance costs and unamortized original issuance discount. Provision (Benefit) for Income Taxes. In 2021, we recorded income tax benefit of$5.2 million and our effective income tax rate was 32% prior to the impact of a tax valuation allowance charge. The difference to the Federal statutory rate for 2021 of 21% is primarily due to the tax benefit of employment tax credits which are not directly related to the amount of pre-tax loss and the tax benefit of state income taxes. There was a charge in the period of$11.3 million to establish additional valuation allowance reserves against our deferred income tax assets for general business tax credits that may expire unused. In 2020, we recorded income tax expense of$6.3 million and our effective income tax rate was 27.2% prior to the impact of a tax valuation allowance charge. The difference to the Federal statutory rate for 2020 of 21% is primarily due to the tax benefit of employment tax credits which are not directly related to the amount of pre-tax loss and the tax benefit of state income taxes. We incurred a charge in 2020 of$13.1 million to establish an incremental tax valuation allowance for certain general business tax credits as they may expire prior to utilization. Net Income (Loss). As a result of the above, our net loss was$43.0 million in 2021, or$0.86 per diluted share, compared to net loss of$29.5 million in 2020, or$0.58 per diluted share. 48
-------------------------------------------------------------------------------- Reconciliations of net loss to EBITDA, Adjusted EBITDA and Adjusted net loss and income (loss) from operations to Adjusted Restaurant-Level EBITDA for the years endedJanuary 2, 2022 andJanuary 3, 2021 are as follows (in thousands):
Year ended
January 2, 2022 January 3, 2021 Reconciliation of EBITDA and Adjusted EBITDA: Net loss$ (43,029) $ (29,463) Provision (benefit) for income taxes (5,159) 6,294 Interest expense 28,791 27,283 Depreciation and amortization 80,798 81,727 EBITDA 61,401 85,841 Impairment and other lease charges 4,470 12,778 Acquisition costs (1) 398 273 Abandoned development costs (2) - 3,464 Pre-opening costs (3) 75 163 Litigation costs and other professional expenses (4) 1,678 1,384 Other income, net (5)(6) (1,186) (1,271) Stock compensation expense 6,234 5,223 Loss on extinguishment of debt 8,538 - Adjusted EBITDA $ 81,608$ 107,855 Year Ended January 2, 2022 January 3, 2021
Restaurant Adjusted EBITDA Reconciliation: Operating Income (Loss)
$ (10,859) $ 4,114 Add: General and administrative expenses 83,660 84,051 Pre-opening costs (3) 75 163 Depreciation and amortization 80,798 81,727 Impairment and other lease charges 4,470 12,778 Other income, net (5)(6) (1,186) (1,271) Adjusted Restaurant-Level EBITDA $
156,958
49 --------------------------------------------------------------------------------
Year ended
January 2, 2022 January 3, 2021 Reconciliation of Adjusted net loss: Net loss$ (43,029) $ (29,463) Add: Impairment and other lease charges 4,470 12,778 Acquisition costs (1) 398 273 Abandoned development costs (2) - 3,464 Pre-opening costs (3) 75 163 Litigation and other professional expenses (4) 1,678 1,384 Other income, net (5)(6) (1,186) (1,271) Loss on extinguishment of debt 8,538 - Income tax effect on above adjustments (7) (3,494) (4,199) Valuation allowance for deferred taxes (8) 11,272 13,138 Adjusted net loss$ (21,278) $ (3,733) Adjusted diluted net loss per share (9) $ (0.43) $ (0.07) Diluted weighted average common shares outstanding 49,899 50,751 (1)Acquisition costs for twelve months endedJanuary 2, 2022 mostly include integration, travel, legal and professional fees incurred in connection with restaurants acquired during the second quarter of 2021, which were included in general and administrative expenses. Acquisition costs for the twelve months endedJanuary 3, 2021 mostly include legal and professional fees incurred in connection with the acquisition of 165 Burger King and 55Popeyes restaurants fromCambridge Franchise Holdings, LLC in 2019, which were included in general and administrative expense.
(2) Forfeited development costs for the twelve months ended
represents the write-off of capitalized costs due to revisions to our development plans in 2020.
(3) Pre-opening costs for the twelve months ended
(4) Litigation and other professional charges for the twelve months ended
(5)Other income, net for the twelve months endedJanuary 2, 2022 included a gain of$1.1 million from the sale of a litigation claim during the period, a gain from insurance recoveries of$1.3 million from property damage at two of our restaurants and a loss on disposal of assets of$1.2 million . (6)Other income, net for the twelve months endedJanuary 3, 2021 included a included a gain of$2.1 million related to insurance recoveries from property damage at four of our restaurants, a net gain on sale-leaseback transactions of$0.2 million , and loss on disposal of assets of$1.0 million . (7)The income tax effect related to the adjustments to Adjusted Net Loss during the periods presented was calculated using an incremental income tax rate of 25.0% for the twelve months endedJanuary 2, 2022 andJanuary 3, 2021 , respectively. (8)Reflects the removal of the income tax provision recorded during the years endedJanuary 2, 2022 andJanuary 3, 2021 for the establishment of a valuation allowance on certain federal income tax credits that may expire prior to their utilization. (9)Adjusted diluted net loss per share is calculated based on Adjusted net loss and the diluted weighted average common shares outstanding for the respective periods, where applicable. 50 --------------------------------------------------------------------------------
Cash and capital resources
As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories and receive trade credit based upon negotiated terms for purchasing food products and other supplies. As a result, we may at times maintain current liabilities in excess of current assets, which results in a working capital deficit. We are able to operate with a substantial working capital deficit because:
•catering activities are mainly carried out in cash;
•fast turnover translates into limited investment in inventory; and
•Cash from sales is generally received before related debts for food, supplies and payroll become due.
Interest payments under our debt obligations, capital expenditures including for our remodeling initiatives, payments of royalties and advertising to BKC andPopeyes and payments related to our lease obligations represent significant liquidity requirements for us, not including any discretionary expenditures for the acquisition or development of additional Burger King andPopeyes restaurants. We believe our cash balances, cash generated from our operations and availability of revolving credit borrowings under our Senior Credit Facilities provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months. Operating activities. Net cash provided from operating activities for the years endedJanuary 2, 2022 andJanuary 3, 2021 was$70.9 million and$103.9 million , respectively. Net cash provided by operating activities in 2021 decreased by$33.1 million compared to 2020 due primarily to a decrease of Adjusted EBITDA of$26.2 million and a change in working capital components of$9.9 million . Our changes in working capital components in 2021 included favorable timing of required interest payments as well as 2020 including our deferral of the employer portion of social security taxes through the end of 2020 of$21.6 million (which did not recur in 2021). Net cash provided from operating activities in 2020 increased by$55.2 million compared to 2019 due primarily to an increase in Adjusted EBITDA of$21.5 million and a change in working capital of$19.0 million , primarily related to our deferral of the employer portion of social security taxes through the end of 2020 of$21.6 million . Investing activities. Net cash used for investing activities for the years endedJanuary 2, 2022 andJanuary 3, 2021 was$58.6 million and$47.9 million , respectively. In 2021, in addition to our capital expenditures of$51.8 million , we acquired 19 Burger King restaurants from other franchisees for$30.8 million , received net proceeds of$22.3 million from sale-leaseback transactions (including$20.2 million from properties purchased in the 2021 acquisitions), and received$1.5 million from property insurance recoveries. In 2020, in addition to our capital expenditures of$56.9 million , we received net proceeds of$7.0 million from sale-leaseback transactions, including properties purchased for sale-leaseback, and received$2.1 million from property insurance recoveries. Capital expenditures are a large component of our investing activities and include: (1) new restaurant development, which may include the purchase of real estate; (2) restaurant remodeling, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants including expenses associated with our franchise agreement renewals and certain restaurants that we acquire; (3) other restaurant capital expenditures, which include capital maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants, and from time to time, to support BKC's initiatives; and (4) corporate and restaurant information systems, including expenditures for our point-of-sale software for restaurants that we acquire. 51 --------------------------------------------------------------------------------
The following table presents our capital expenditures for the periods presented (amounts in thousands of dollars):
Year ended
New restaurant development $
9,000
Restaurant remodeling
16,712
Other restaurant capital expenditures
17,045
Corporate and restaurant information systems
9,006
Total capital expenditures $
51,763
Number of new restaurant openings including relocations
4
Year ended
New restaurant development $
17,824
Restaurant remodeling
15,317
Other restaurant capital expenditures
13,064
Corporate and restaurant information systems
10,685
Total capital expenditures $
56,890
Number of new restaurant openings including relocations
7
Financing activities. Net cash provided by financing activities in 2021 was$48.1 million and included issuance of$300.0 million principal amount of the Notes, principal payments of$321.4 million of outstanding term B and B-1 loans under our Senior Credit Facilities, payment of a special dividend of$24.9 million ,$5.4 million in financing costs paid in connection with the debt issuance and amendments to our Senior Credit Facilities, and proceeds from lease financing obligations of$4.6 million . We also made principal payments on finance leases of$1.0 million . Net cash provided by financing activities in 2020 was$5.9 million and included$71.3 million in net proceeds from issuance of the Incremental Term B-1 Loans, net repayments of our revolving credit borrowings of$45.8 million , and purchases of treasury shares of$10.1 million . We also incurred$3.3 million of costs associated with the financing long-term debt, made principal payments on term loan facilities of$4.6 million , and made principal payments on finance leases of$1.6 million . Senior Notes due 2029. OnJune 28, 2021 , we issued$300.0 million principal amount of the Notes in a private placement as described above under "-Recent and Future Events Affecting our Results of Operations-Issuance of Notes and Amendments to our Senior Credit Facilities". The proceeds of the offering, together with$46.0 million of revolving credit borrowings under our Senior Credit Facilities, were used to (i) repay$74.4 million of outstanding term B-1 loans and$243.6 million of outstanding term B loans under our Senior Credit Facilities (which included scheduled principal payments), (ii) to pay fees and expenses related to the offering of the Notes and the Seventh Amendment and (iii) for working capital and general corporate purposes, including for possible future repurchases of its common stock and/or a dividend payment and/or payments on its common stock. Senior Credit Facilities. As described above under "-Recent and Future Events Affecting Our Results of Operations-Issuance of Notes and Amendments to our Senior Credit Facilities", we entered into the Senior Credit Facilities and subsequent amendments to the Senior Credit Facilities. Our obligations under the Senior Credit Facilities are guaranteed by our subsidiaries and are secured by first priority liens on substantially all of our assets and our subsidiaries, including a pledge of all of the capital stock and equity interests of our subsidiaries. Under the Senior Credit Facilities, we are required to make mandatory prepayments of borrowings following dispositions of assets, debt issuances and the receipt of insurance and condemnation proceeds (all subject to certain exceptions).
AT
(i) Revolving Credit Facility: at a rate per annum equal to (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus 2.50% or (b) LIBOR Rate (as defined in the Senior Credit Facilities) plus 3.50%. (ii) Term loan B borrowings: at a rate per annum equal to (a) the Alternate Base Rate (as defined in the Senior Credit Facilities) plus 2.25% or (b) LIBOR Rate (as defined in the Senior Credit Facilities) plus 3.25%.
The weighted average interest rate on borrowings on long-term debt balances was 4.8% and 4.6% for the years ended
52 -------------------------------------------------------------------------------- The Term loan B borrowings are due and payable in quarterly installments, which began onSeptember 30, 2019 . Amounts outstanding atJanuary 2, 2022 are due and payable as follows:
(i) seventeen quarterly installments of
(ii) a final payment of
The Revolving Credit Facility matures onJanuary 29, 2026 . As ofJanuary 2, 2022 , there were no revolving credit borrowings outstanding and$9.0 million of letters of credit issued under the Revolving Credit Facility. After reserving for issued letters of credit and outstanding revolving credit borrowings,$206.0 million was available for revolving credit borrowings atJanuary 2, 2022 under the Revolving Credit Facility. As ofMarch 9, 2022 , after reserving for issued letters of credit and$20.0 million in revolving credit borrowings,$186.0 million was available for revolving credit borrowings. The Senior Credit Facilities contain certain covenants, including without limitation, those limiting our and our subsidiaries' ability to, among other things, incur indebtedness, incur liens, sell or acquire assets or businesses, change the character of its business in any material respect, engage in transactions with related parties, make certain investments, make certain restricted payments or pay dividends. In addition, the Senior Credit Facilities require us to meet a First Lien Leverage Ratio (as defined in the Senior Credit Facilities) of not greater than 5.75 to 1.00 (as measured on a most recent four quarter basis) if, and only if, on the last day of any fiscal quarter, the sum of the aggregate principal amount of outstanding revolving credit borrowings under the Revolving Credit Facility and the aggregate face amount of letters of credit issued under the Revolving Credit Facility (excluding undrawn letters of credit in an aggregate face amount up to$12.0 million ) exceeds 35% of the aggregate amount of the maximum revolving credit borrowings under the Revolving Credit Facility. As there were no borrowings under the Revolving Credit Facility atJanuary 2, 2022 , no First Lien Leverage Ratio calculation was required. However, if the Company had been subject to the First Lien Leverage Ratio, the Company's First Lien Leverage Ratio was 1.67 to 1.00 as ofJanuary 2, 2022 which was below the required First Lien Leverage Ratio of 5.75 to 1.00. As a result, the Company does not expect to have to reduce its term loan borrowings mandatorily with Excess Cash Flow (as defined in the Senior Credit Facilities). We were in compliance with the financial covenants under our Senior Credit Facilities atJanuary 2, 2022 . The Senior Credit Facilities contain customary default provisions, including that the lenders may terminate their obligation to advance and may declare the unpaid balance of borrowings, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary events of default which include, without limitation, payment default, covenant default, bankruptcy default, cross-default on other indebtedness, judgment default and the occurrence of a change of control. InMarch 2020 , we entered into an interest rate swap agreement certain of our lenders under the Senior Credit Facilities to mitigate the risk of increases in the variable interest rate related to term loan borrowings under the Term Loan B Facility. The interest rate swap fixed the interest rate on$220.0 million of outstanding borrowings under the Senior Credit Facilities at 0.915% plus the applicable margin in its Senior Credit Facilities. The agreement matures onFebruary 28, 2025 . OnNovember 12, 2021 , we partially terminated this interest rate swap to reduce the notional amount hedged from$220.0 million to$120.0 million . which settled with net proceeds to us of$0.2 million , leaves the fixed rate and other terms of the swap arrangement unchanged and provides the flexibility to repay borrowings under the Senior Credit Facilities which previously needed to be maintained at the hedged$220.0 million notional amount. The differences between the variable LIBOR rate and the interest rate swap rate of 0.915% are settled monthly. We made payments of$1.7 million and$1.0 million to settle the interest rate swap during the twelve months endedJanuary 2, 2022 andJanuary 3, 2021 , respectively. The fair value of our interest rate swap agreement was an asset of$0.6 million as ofJanuary 2, 2022 which is included in other assets in the accompanying consolidated balance sheets. Changes in the valuation of our interest rate swap were included as a component of other comprehensive income, and will be reclassified to earnings as the losses are realized. We expect to reclassify net losses totaling$0.9 million into earnings in the next twelve months. 53
--------------------------------------------------------------------------------
Contractual obligations
The following table summarizes our contractual obligations and commitments as of
Payments due by period
Less than 1 - 3 3 - 5 More than Contractual Obligations Total 1 Year Years Years 5 Years Long-term debt obligations, including interest (1)$ 647,436 $
32,070
Finance lease obligations, including interest (2)
7,114 1,840 2,969 2,252 53 Operating lease obligations (3) 1,336,100 101,758 200,981 194,203 839,158 Lease financing obligations, including interest (4) 6,150 4,919 1,231 - - Total contractual obligations$ 1,996,800 $ 140,587 $ 268,601 $ 403,604 $ 1,184,008 (1)Our long term debt atJanuary 2, 2022 included$171.9 million of term B loans under our Senior Credit Facilities and$300.0 million of Notes. Total interest payments on our Notes of$134.3 million for all years presented are included at the coupon rate of 5.875% per annum. Interest on our term B loans under our Senior Credit Facilities of$124.8 million for all years presented are included at a rate of 5.74% per annum. (2)Includes total interest of$0.8 million for all years presented. (3)Includes total interest of$488.5 million for all years presented. (4)Includes total interest of$0.2 million for all years presented. We have not included obligations under our postretirement medical benefit plans in the contractual obligations table as our postretirement plan is not required to be funded in advance, but is funded as retiree medical claims are paid. Also excluded from the contractual obligations table are payments we may make for workers' compensation, general liability and employee healthcare claims for which we pay all claims, subject to annual stop-loss limitations both for individual claims and claims in the aggregate. The majority of our recorded liabilities related to self-insured employee health and insurance plans represent estimated reserves for incurred claims that have yet to be filed or settled. The total of these liabilities was$9.3 million atJanuary 2, 2022 .
Future restaurant renovation obligations to BKC have also been excluded from the table above as well as contractual obligations related to royalties and advertising payable to BKC.
Long-term debt securities. Refer to note 9 of our consolidated financial statements for more details on our long-term debt.
Lease Guarantees. Fiesta Restaurant Group, Inc. ("Fiesta"), our former
wholly-owned subsidiary, was spun-off in 2012 to our stockholders. As of
January 2, 2022 , we are a guarantor under 17 Fiesta restaurant property leases,
of which all except for one are still operating, with lease terms expiring on
various dates through 2030. Eight of these guarantees are for leases with Pollo
Operations, Inc , a wholly owned subsidiary of Fiesta, and nine of these
guarantees are for leases with Texas Taco Cabana, L.P. , an indirect subsidiary
of Taco Cabana, Inc. (together with all direct and indirect subsidiaries,
"Taco"). Taco was a wholly owned subsidiary of Fiesta until August 17, 2021 when
Fiesta sold all of its outstanding capital stock of Taco Cabana, Inc. to YTC
Enterprises, LLC , an affiliate of Yadav Enterprises, Inc. We are fully liable
for all obligations under the terms of the leases in the event that a tenant
fails to pay any sums due under the lease, subject to indemnification provisions
of the separation and distribution agreement entered into in connection with the
spin-off.
The maximum potential liability for future rental payments we could be required
to make under these leases at January 2, 2022 was $9.0 million . The obligations
under these leases will generally continue to decrease over time as these
operating leases expire. No payments have been made to date and none are
expected to be required to be made in the future. We have not recorded a
liability for those guarantees in accordance with ASC 460 - Guarantees as Fiesta
has indemnified us for all such obligations and we did not believe it was
probable we would be required to perform under any of the guarantees or direct
obligations.
Off-balance sheet arrangements
We have no off-balance sheet arrangements.
54 --------------------------------------------------------------------------------
Inflation
The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses, the cost of providing medical and prescription drug insurance to our employees and energy costs. Wages paid in our restaurants are impacted by changes in the federal and state hourly minimum wage rates and the Fair Labor Standards Act. Accordingly, changes in the federal and state hourly minimum wage rates directly affect our labor costs. In the current labor market, we have seen competitive pressure on wage rates that have significantly outpaced statutory minimums as the re-opening of the economy has increased demand for labor at all levels in the workforce. In 2021, we have experienced inflationary cost pressures in labor and commodity costs as a result of challenges in the overall labor force impacting our restaurants and our supply chains. The COVID-19 pandemic has increased the difficulty and cost of maintaining adequate staffing levels at our restaurants as well as for businesses in our supply chain that we depend on for commodities. At this point, there is no indication as to when these pressures will abate.
We generally try to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, there can be no assurance that we will be able to offset these inflationary cost increases in the future.
Application of critical accounting policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America . Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in the "Significant Accounting Policies" footnote in the notes to our consolidated financial statements. Critical accounting estimates are those that require application of management's most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Sales recognition at our restaurants is straightforward as customers pay for products at the time of sale and inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 30 days. The earnings reporting process is covered by our system of internal controls and generally does not require significant management estimates and judgments. However, critical accounting estimates and judgments, as noted below, are inherent in the assessment and recording of the fair market values of acquired restaurant assets and liabilities, insurance liabilities, assessing impairment of long-lived assets, lease accounting matters and the valuation of deferred income tax assets. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. Acquisition Accounting. We account for business combinations under the acquisition method of accounting in accordance with ASC 805, "Business Combinations" ("ASC 805"). As required by ASC 805, assets acquired and liabilities assumed in a business combination are recorded at their respective fair values as of the business combination date. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment, favorable and unfavorable leases and intangible assets. We use available information to make these fair value determinations and, when necessary, engage an independent valuation specialist to assist in the fair value determination of favorable or unfavorable leases and intangible assets. Insurance Liabilities. The amount of liability we record for claims related to insurance requires us to make judgments about the amount of expenses that will ultimately be incurred. We are insured for certain losses related to workers' compensation, general liability and medical insurance claims under policies where we pay all claims, subject to annual stop-loss insurance limitations both for individual claims and claims in the aggregate. We record insurance liabilities based on historical trends, which are continually monitored, and adjust accruals as warranted by changing circumstances. Since there are estimates and assumptions inherent in recording these insurance liabilities, including the ability to estimate the future development of incurred claims based on historical claims experience and loss reserves, current claim data, and the severity of the claims, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities. As ofJanuary 2, 2022 , we had$9.3 million accrued for these insurance claims. 55 -------------------------------------------------------------------------------- Franchise Rights. To determine the fair value attributable to franchise rights of restaurant acquisitions, we estimate the acquired restaurants' future earnings, discount those earnings using an appropriate market discount rate and subtract a contributory charge for net working capital, property and equipment and assembled workforce. Amounts allocated to franchise rights for each acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements plus one twenty-year renewal period. We assess the potential impairment of franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable, which include consideration of the impact of a decline in the Company's market value. If an indicator of impairment exists, an estimate of the aggregate undiscounted cash flows from the acquired restaurants is compared to the respective carrying value of franchise rights for each acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value.Goodwill .Goodwill represents the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets of the businesses acquired.Goodwill is not amortized, but is tested for impairment annually, or more frequently when events and circumstances indicate that the carrying amount may be impaired. As part of our goodwill impairment analysis, we consider certain qualitative factors, such as performance, business forecasts and expansion plans. Using both the income approach and the market approach, we compare the fair value of each of our reporting units to carrying value. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is recognized. We determined the initial decline in market value below net asset value during the third quarter of 2021 was a sufficient indicator to trigger an interim goodwill impairment analysis as of the end of the eighth month of our fiscal year. Based on the results of our goodwill impairment analysis, the fair value of each reporting unit exceeded carrying value and goodwill was not impaired. In addition, due to the proximity of the third quarter 2021 interim goodwill impairment analysis date to the annual assessment date, and to allow for a greater amount of time to analyze the assessment of goodwill in advance of our annual report filing deadline in future years, we updated our accounting policy to shift the annual impairment test from the last day of the fiscal year to the last day of the eighth month of the fiscal year in 2021 and future fiscal years. This change in date of the annual impairment test is not deemed material as the new measurement date of the eighth month of the fiscal year is in relative close proximity to the previous measurement date and the year-end balance sheet date, is not expected to materially impact the goodwill analysis, and allows for more timely financial reporting on these estimates. Impairment of Long-lived Assets. We assess the potential impairment of long-lived assets, principally property and equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators at the restaurant level include low operating cash flows, declining sales, if the ratio of trailing twelve months cash flows extended over the remaining lease term does not exceed the net book value of the asset group and consideration of the impact of a decline in the Company's market value. We determine if there is an impairment by comparing the carrying amount of the asset to the future undiscounted cash flows expected to be generated by our restaurants. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset's carrying amount exceeds its fair value. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions which can be impacted by changes in the business or economic conditions. Our fair value estimates are also subject to a high degree of judgment, including our ability to sell the related assets and changing market conditions. Should actual cash flows and our future estimates vary from those estimates used, we may be required to record impairment charges for these assets in the future. Lease Accounting. We adopted Accounting Standards Codification ("ASC") 842, Leases, as ofDecember 31, 2018 , coinciding with the standard's effective date. We have operating and finance leases related to our restaurants. In accordance with ASC 842, we determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets and current and long term operating lease liabilities on our consolidated balance sheets. Finance leases are included in property and equipment and other current and long term liabilities on our consolidated balance sheets. Lease liabilities are calculated using the effective interest method and recognized at the commencement date based on the present value of lease payments over the reasonably certain lease term, regardless of classification, while the amortization of ROU assets varies depending upon classification. As our leases generally do not provide an implicit rate, we use a collateralized incremental borrowing rate ("IBR") 56
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to determine the present value of lease payments. This analysis considers qualitative and quantitative factors. We adjust our selected IBR quarterly with a company-specific yield curve that approximates our market risk profile. The collateralized IBR is also based upon the estimated impact that the collateral has on the IBR. Valuation of Deferred Income Tax Assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the years in which those differences are expected to be recovered or settled. Deferred tax assets are recognized to the extent we believe these assets will more likely than not be realized. In evaluating the realizability of our net deferred tax assets, we perform an assessment of positive and negative evidence, as required by ASC 740. ASC 740 prescribes that objective historical evidence, in particular our three-year cumulative loss position atJanuary 2, 2022 , be given a greater weight than subjective evidence, including our forecast of future taxable income, which include assumptions that cannot be objectively verified. In determining the likelihood of future realization of the deferred income tax assets as ofJanuary 2, 2022 andJanuary 3, 2021 we considered both positive and negative evidence and weighted the effect of such evidence based upon its objectivity. Based on the required weight of evidence under ASC 740, as ofJanuary 2, 2022 we determined that a valuation allowance was needed for certain income tax credits in the amount of$24.4 million as they may expire prior to their utilization. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as projections for growth. We will continue to monitor and evaluate the positive and negative evidence considered in arriving at the above conclusion, in order to assess whether such conclusion remains appropriate in future periods. We must also make estimates of certain items that relate to current and deferred tax liabilities. These estimates include employer tax credits for items such as the Work Opportunity Tax Credit, as well as estimates of tax depreciation based on methods anticipated to be used on our tax returns. These estimates are made based on the best available information at the time of the estimate and historical experience.
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