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Tim Hortons Inc. Reports Operating Results (10-Q)

August 12, 2010 | About:
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10qk

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Tim Hortons Inc. (THI) filed Quarterly Report for the period ended 2010-07-04.

Tim Hortons Inc. has a market cap of $5.94 billion; its shares were traded at around $33.92 with a P/E ratio of 20.2 and P/S ratio of 2.6. The dividend yield of Tim Hortons Inc. stocks is 1.5%. Tim Hortons Inc. had an annual average earning growth of 13.3% over the past 5 years.THI is in the portfolios of Bruce Kovner of Caxton Associates, Jim Simons of Renaissance Technologies LLC, George Soros of Soros Fund Management LLC, Steven Cohen of SAC Capital Advisors.

Highlight of Business Operations:

Operating income increased $20.8 million, or 16.1%, in the second quarter of 2010 compared to the second quarter of 2009. Operating income increased $37.3 million, or 15.5%, in the year-to-date period of 2010. Higher systemwide sales from continued same-store sales growth at existing locations and from additional restaurants in the system drove operating income in both the quarter and year-to-date periods and were significant contributors to higher revenues, and higher distribution income. Partially offsetting this growth was higher general and administrative expenses. In addition, the adoption of a new accounting standard relating to the consolidation of certain variable interest entities at the beginning of 2010, and retroactively applied to prior periods, positively impacted our second quarter 2010 operating income growth rate by 0.4% and negatively impacted our 2010 year-to-date operating income performance by 0.2% (see below for the reconciliation of Operating income attributable to Tim Hortons Inc. to Operating income).

Net income attributable to Tim Hortons Inc. increased $16.4 million, or 21.0%, in the second quarter of 2010 as compared to the second quarter of 2009, resulting primarily from higher operating income and a lower effective tax rate, offset, in part by higher interest expense. Our effective tax rate was 29.5% in the second quarter of 2010, which is lower than the 32.8% effective tax rate in the second quarter 2009, primarily as a result of the lower tax rates in Canada which we now benefit from as a result of our reorganization as a Canadian public company in September 2009 and the favourable settlements of tax audits in the second quarter of 2010. Interest expense was higher resulting primarily from the early settlement of one outstanding interest rate swap associated with the partial prepayment of $200 million of our term debt and the write-off of deferred financing costs associated with the portion of the term debt that was prepaid. These items increased interest expense by $1.1 million in both the quarter and the year-to-date periods of 2010. Diluted earnings per share attributable to Tim Hortons Inc. (EPS) increased to $0.54 in the second quarter of 2010 from $0.43 in the second quarter of 2009. The diluted weighted average number of shares outstanding in the second quarter of 2010 was 174.9 million, or 3.3% lower than the diluted weighted average share count in the second quarter of 2009, due primarily to our 2009 and 2010 share repurchase programs.

Net income attributable to Tim Hortons Inc. increased $28.8 million, or 20.0%, in the year-to-date period of 2010 as compared to the year-to-date period of 2009. This increase is driven by substantially the same factors contributing to the second quarter 2010 increase, namely higher operating income, a lower effective tax rate, offset in part due to higher interest expense. Diluted earnings per share for the year-to-date period were $0.99 as compared to $0.80 per share in the year-to-date period of 2009. The diluted weighted average number of shares outstanding was 3.1% lower in the year-to-date period of 2010 as a result of our share repurchase programs.

In late April 2010, we received notice from IAWS Group Ltd., a subsidiary of Aryzta AG, our 50-50 partner under the Maidstone Bakeries joint venture, invoking the buy/sell provisions of the joint venture. The Company has decided to sell its 50% interest in the joint venture for gross proceeds of $475 million. Due to Aryztas ability to potentially leverage available surplus capacity for other channels and the international nature of their tax structure, this facility represents greater economic value to Aryzta than to Tim Hortons. The all-cash transaction is subject to receipt of regulatory approvals, and is expected to close before year-end 2010. We had a net investment of approximately $75 million in this joint venture as of the end of the second quarter of 2010. The financial impact of this transaction is subject to the finalization of income tax, accounting and other considerations. The Maidstone Bakeries joint venture is currently consolidated in our financial results in accordance with SFAS No. 167, now codified within ASC 810. After the closing of the transaction, we will no longer be required to consolidate this entity. In fiscal 2009, the joint venture contributed approximately $26 million to our operating income attributable to Tim Hortons Inc. and $22 million to our net income, or $0.12 per share, representing our 50% share of earnings. Upon closing, the Companys supply obligations for products extend for donuts and TimbitsTM until early 2016, and we have supply rights until late 2017, at our option, allowing us sufficient flexibility to secure alternative means of supply, if necessary. In addition, the existing agreements also have protections regarding intellectual property rights and dealing with competitors, as well as terms relating to price determination, that remain in effect after closing of the transaction.

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