Popeye's 2014 Annual Report Download - page 41

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Operating Profit
Operating profit in 2013 was $58.2 million, a $6.9 million increase compared to 2012. Fluctuations in the components of
revenue and expense giving rise to this change are discussed above. The following is an analysis of the fluctuations in operating
profit by business segment. Operating profit for each reportable segment includes operating results directly attributable to each
segment.
(Dollars in millions) 2013 2012 Fluctuation
As a
Percent
Franchise operations $ 54.7 $ 47.8 $ 6.9 14.4 %
Company-operated restaurants 10.5 7.6 2.9 38.2 %
Operating profit before unallocated expenses 65.2 55.4 9.8 17.7 %
Less unallocated expenses:
Depreciation and amortization 6.7 4.6 2.1 45.7 %
Other expenses (income), net 0.3 (0.5) 0.8 (160.0)%
Total $ 58.2 $ 51.3 $ 6.9 13.5 %
The $6.9 million growth in franchise operations was primarily due to the $11.4 million increase in franchise revenue partially
offset by increases in general and administrative expenses related to international franchise development and marketing support
expenses, domestic new restaurant development expenses, marketing and menu development expenses, stock-based compensation
expense, leadership development, global supply chain, domestic franchisee restaurant support and other expenses, net.
Company-operated restaurants segment operating profit was $10.5 million, a $2.9 million or 38.2% increase from 2012. The
increase is segment operating profit was primarily due to a $3.6 million, or 32.4%, increase in company-operated restaurant
operating profit partially offset by increases in general and administrative expenses primarily related to the multi-unit management
expenses in the new Indianapolis and Charlotte company-operated restaurant markets.
Income Tax Expense
Income tax expense was $20.4 million, yielding an effective tax rate of 37.4%, compared to an effective tax rate of 36.3% in
2012. The higher effective tax rate in 2013 is primarily due to higher state income taxes and favorable adjustments to estimated
foreign income tax credit reserves in 2012 partially offset by higher worker opportunity and research and development tax credits
in 2013. The effective rates differ from statutory rates due to adjustments in estimated tax reserves, tax credits and permanent
differences between reported income and taxable income for tax purposes. See Note 18 to our Consolidated Financial Statements
included in this Form 10-K for the reconciliation of the statutory rates to the Company's effective tax rates.
Liquidity and Capital Resources
We finance our business activities primarily with cash flows generated from our operating activities and borrowings under
our 2013 Credit Facility.
Based primarily upon our generation of cash flows from operations, coupled with its existing cash reserves of $8.4 million
and $28.9 million available borrowings under its 2013 Credit Facility as of December 28, 2014, the Company believes that it will
have adequate cash flow (primarily from operating cash flows) to meet its anticipated future requirements for working capital,
various contractual obligations and expected capital expenditures for 2015. Furthermore, the Company can request incremental
revolving credit commitments up to an additional $115 million.
Our franchise model provides strong, diverse and reliable cash flows. Net cash provided by operating activities of the Company
was $59.6 million and $44.3 million for 2014 and 2013, respectively. The $15.3 million increase in cash flows from operating
activities was primarily due to a $4.3 million increase in net income after non-cash adjustments and a $11.0 million change in
operating assets and liabilities primarily due to the timing of income tax payments. See our Company’s Consolidated Statements
of Cash Flows in our Consolidated Financial Statements included in this Form 10-K.
Our cash flows and available borrowings allow us to pursue our growth strategies. Our priorities in the use of available cash
are:
• reinvestment in core business activities that promote the Company’s strategic initiatives,
• repurchase of shares of our common stock, and
• reduction of long-term debt.