Restaurant Brands International Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context
RBI operates Tim Hortons, Burger King and Popeyes, with 24,407 restaurants in more than 100 countries and U.S. territories at year-end. Approximately 100% of system restaurants were franchised. RBI acquired Popeyes on March 27, 2017; consequently, 2017 results include Popeyes from the acquisition date, unlike 2016.
Financial results and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $4,576.1 million | $4,145.8 million |
| Operating income | $1,735.9 million | $1,666.7 million |
| Net income | $1,235.3 million | $955.9 million |
| Net income attributable to common shareholders | $626.1 million | $345.6 million |
| Basic / diluted EPS | $2.64 / $2.54 | $1.48 / $1.45 |
| Operating cash flow | $1,382.0 million | $1,269.0 million |
| Adjusted EBITDA (non-GAAP) | $2,145.8 million | $1,888.2 million |
Revenue rose 10.4%, operating income 4.2%, net income 29.2%, operating cash flow 8.9%, and Adjusted EBITDA 13.6%. Reported operating margin was approximately 37.9%, versus 40.2% in 2016; Adjusted EBITDA was approximately 46.9% of revenue, versus 45.6%. These comparisons are affected by Popeyes’ inclusion and unusual items.
Fourth-quarter 2017 revenue was $1,234.2 million, operating income $506.0 million, net income $578.4 million, and basic/diluted EPS $1.64/$1.59. The substantial year-over-year net-income increase in the quarter warrants review of tax and other discrete items.
Cash and cash equivalents were $1,073.4 million at year-end, down from $1,460.4 million. Working capital was $94.6 million. RBI had $495.4 million available under its $500 million revolving facility and no revolving borrowings outstanding. Investing activities used $857.8 million, principally reflecting the Popeyes acquisition; financing activities used $935.2 million.
Outstanding debt principal was $12,027.8 million, excluding capital leases; debt and capital lease obligations totaled $12,122.9 million. Net interest expense was $512.2 million, and the weighted-average interest rate on long-term debt was 4.8%. RBI reported compliance with debt covenants. It stated that cash, operating cash flow and revolver availability should cover obligations, debt service and capital spending for the next 12 months.
Material changes and unusual items
- 2017 system-wide sales growth was 3.0% at Tim Hortons, 10.1% at Burger King and 5.1% at Popeyes. Comparable sales were -0.1%, 3.1% and -1.5%, respectively. Popeyes’ 2017 comparable-sales and system-sales periods differ from its prior-year fiscal calendar.
- Net restaurant growth was 2.9% for Tim Hortons, 6.5% for Burger King and 6.1% for Popeyes. Burger King’s U.S. comparable sales were 2.5%; Tim Hortons’ Canada comparable sales were 0.2%, while Popeyes’ U.S. comparable sales were -2.2%.
- Popeyes contributed $202.3 million of revenue and $106.9 million of segment income for the included 2017 period. The $1,654.7 million acquisition was funded with cash and $1,300.0 million of incremental term borrowing.
- The U.S. Tax Act generated a provisional net tax benefit of approximately $197.9 million: a $419.9 million deferred-tax remeasurement benefit, offset by $102.6 million of provisional charges and a $119.4 million estimated transition tax. The accounting was incomplete and subject to adjustment through December 22, 2018. The resulting reported effective tax rate was -12.1%.
- RBI redeemed its 9% preferred shares for aggregate consideration of $3,115.6 million and recorded a $233.8 million gain attributable to common shareholders. It issued new debt and refinanced existing obligations; a $122.0 million loss on early debt extinguishment reduced 2017 results.
- Other notable 2017 costs included $61.7 million of Popeyes transaction costs and $1.9 million of tax-related restructuring and advisory fees. Foreign-exchange losses included in other operating expenses were $77.3 million.
- Beginning in 2018, new revenue-recognition rules were expected to defer initial and renewal franchise fees over franchise terms and present managed advertising-fund contributions and expenditures gross. RBI estimated a $230–$290 million transition reduction to retained earnings and said gross presentation would raise reported revenue and expense, without a material net income effect.
Outlook, risks and contingencies
Management emphasized restaurant growth, guest experience, sales and franchisee profitability, digital initiatives, cost management, and international development through master franchisees and joint ventures. The filing provides no specific revenue or earnings guidance. RBI targeted $1.80 of declared dividends per common share and Partnership exchangeable unit for 2018; the board retains discretion and debt agreements may constrain distributions. U.S. franchise remodel incentives were expected to continue for Burger King in 2018 and begin for Tim Hortons; most Popeyes development incentives were not expected to continue.
Key risks include substantial leverage and variable-rate exposure, dependence on franchisee performance and financing, intense competition and changing consumer preferences, commodity and supply-chain volatility, foreign exchange, food safety, cybersecurity and privacy, international partner execution, and tax-law uncertainty. A 1% increase in LIBOR was estimated to raise annual interest expense by approximately $38.9 million. Two proposed Tim Hortons franchisee class actions in Ontario concern advertising-fund use and alleged adverse treatment of franchisees; RBI disputes the claims and cannot estimate any loss. RBI also disclosed $497.9 million of gross unrecognized tax benefits, for which settlement timing could not be reliably estimated, and a $119.4 million provisional transition-tax estimate.
Most important facts for investors to verify
- How much of the 2017 earnings increase reflects recurring operations versus Popeyes’ partial-year contribution, Tax Act estimates and the preferred-share redemption gain.
- Comparable-sales, traffic and franchisee profitability trends, especially Tim Hortons and Popeyes, and whether reported sales growth translates into sustained royalty growth.
- Debt maturities, refinancing terms, variable-rate exposure, covenant headroom and the sustainability of dividends against cash generation.
- Final Tax Act accounting, transition-tax payment schedule, unrecognized tax positions and the 2018 impact of tax changes.
- Progress integrating Popeyes and implementing the new revenue standard, including transition adjustments and gross advertising-fund reporting.
- Developments in the Tim Hortons franchisee litigation and any resulting financial or franchise-relationship impact.