Restaurant Brands International Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. RBI operates Tim Hortons and Burger King, with 19,735 restaurants in more than 100 countries and U.S. territories; approximately 100% of system restaurants were franchised.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $1,075.7 million | $1,019.7 million | $3,034.4 million | $2,995.2 million |
| Operating income | $420.5 million | $344.0 million | $1,175.1 million | $870.2 million |
| Net income | $238.6 million | $182.9 million | $654.5 million | $327.2 million |
| Net income attributable to common shareholders | $86.3 million | $49.6 million | $227.2 million | $52.2 million |
| Diluted EPS | $0.36 | $0.24 | $0.96 | $0.25 |
| Adjusted EBITDA | $488.9 million | $440.7 million | $1,375.8 million | $1,223.6 million |
| Operating cash flow | Not separately provided for the quarter | $919.0 million | $950.4 million |
- Revenue increased 5.5% in Q3 and 1.3% year to date. Operating income rose 22.2% and 35.0%, respectively; net income rose 30.5% and 100.0%.
- Calculated operating margin was approximately 39.1% in Q3 versus 33.7% in 2015, and 38.7% year to date versus 29.0%. Adjusted EBITDA margin was approximately 45.4% in Q3 versus 43.2%.
- Comparable sales growth eased to 2.0% at Tim Hortons and 1.7% at Burger King in Q3, from 5.3% and 6.2%, respectively, a year earlier. Q3 system-wide sales growth was 4.8% for Tim Hortons and 7.0% for Burger King.
- Cash and cash equivalents were $1,274.4 million at September 30, up from $757.8 million at year-end 2015. Working capital was $687.3 million.
- Debt: $8,496.7 million total debt, net, plus $213.9 million of noncurrent capital leases; the company also had $3,297.0 million of redeemable preferred shares. Revolving-credit availability was $498.5 million, with no borrowings outstanding.
Material changes and drivers
- Q3 growth in operating income reflected higher sales and franchise/property revenues and lower SG&A. For the first nine months, lower SG&A, cost of sales, franchise/property expenses and other operating expenses also contributed.
- Year-to-date common-shareholder earnings benefited from the absence of the $40.0 million 2015 debt-extinguishment loss and $79.7 million of 2015 Tim Hortons transaction and restructuring costs. Current-period integration costs were $10.4 million year to date.
- Foreign exchange reduced reported revenue by $112.8 million and Adjusted EBITDA by $49.1 million for the first nine months, according to management’s FX-impact analysis.
- Operating cash flow declined by $31.4 million year over year, which the company attributed to prior-year restricted-cash reclassification and working-capital changes, partly offset by higher net income excluding noncash adjustments.
Liquidity, outlook and risks
- Management said operating cash flow, cash on hand and available revolver capacity should be sufficient for obligations, preferred dividends, debt service and capital spending over the next 12 months. The company described itself as highly leveraged.
- Term loans carried a 3.75% rate at September 30; weighted-average interest rate on long-term debt was 5.2% for the nine-month period. Management estimated approximately $192.1 million of term-loan interest and $34.3 million of principal payments over the next 12 months, plus estimated net swap cash settlements of $19.3 million.
- The 9% cumulative preferred shares require quarterly dividends of approximately $67.5 million. Common dividends are subject to preferred-share terms and debt-agreement restrictions. The board authorized up to $300 million of common-share repurchases over five years; the filing does not provide a formal earnings or sales forecast.
- Management identified substantial indebtedness, interest-rate and currency volatility, hedge effectiveness, counterparty performance, tax-law changes, competition and consumer-spending conditions as risks. RBI reported compliance with debt covenants and effective disclosure controls as of September 30, 2016.
- RBI uses interest-rate, foreign-currency and cross-currency hedges. Foreign-currency translation and hedge fair-value movements materially affected comprehensive income; these accounting effects should be distinguished from operating results.
Important facts for investors to verify
- Whether the slowdown in comparable-sales growth persists and how new products, promotions and restaurant openings affect system-wide sales.
- Cash generation after dividends, debt service and capital spending, and the company’s ability to manage its substantial debt and preferred-dividend obligations.
- The extent to which reported earnings growth depends on prior-year one-time costs, foreign exchange, refranchising and non-GAAP adjustments.
- Potential dilution and ownership changes: diluted weighted-average shares were 470.6 million versus 233.9 million basic in Q3, reflecting exchangeable partnership units and other dilutive securities.
- The execution and funding of the share-repurchase authorization, alongside common and preferred dividends.