Restaurant Brands International Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. All amounts are U.S. dollars. RBI operates Tim Hortons and Burger King, with 19,304 restaurants in approximately 100 countries and territories at quarter-end; approximately 100% of both systems’ restaurants were franchised.
Financial performance
- Revenue: Q2 revenue was $1.041 billion, versus $261.2 million in Q2 2014; first-half revenue was $1.973 billion, versus $502.1 million. The increase mainly reflects Tim Hortons, acquired December 12, 2014, and these periods are not directly comparable: 2014 results largely represent Burger King alone.
- Profit: Q2 operating income was $298.3 million and net income was $90.8 million; net income attributable to common shareholders was $9.6 million, or $0.05 per diluted share. First-half operating income was $523.0 million and net income was $143.8 million; common-shareholder income was $2.4 million, or $0.01 per diluted share. Preferred dividends were $67.5 million for Q2 and $136.2 million for the first half.
- Margins: Operating margin was approximately 28.6% in Q2 and 26.5% for the first half. The 2014 comparison is distorted by the acquisition and differing revenue mix. Adjusted EBITDA, a non-GAAP measure, was $427.2 million for Q2 and $781.8 million for the first half; BK segment income was $192.9 million and $363.6 million, respectively.
- Cash flow: First-half operating cash flow was $508.2 million, investing cash use was $24.5 million, and financing cash use was $1.545 billion. Cash declined from $1.803 billion at year-end to $688.9 million. Operating cash flow included a $79.2 million reclassification of restricted cash, so it is not wholly comparable with the prior period.
- Debt and liquidity: Debt was $8.681 billion at June 30, excluding $207.7 million of capital leases. Cash was $688.9 million; working capital was $401.7 million, and $495.2 million was available on the revolving facility. Current assets were $1.404 billion and current liabilities $1.003 billion. Redeemable preferred shares were $3.297 billion, with a 9% cumulative dividend.
- Business metrics: Q2 comparable sales growth was 5.5% at Tim Hortons and 6.7% at Burger King; system-wide sales growth was 8.4% and 11.6%, respectively. The company reported 436 openings and 175 closures in the first half, for net restaurant growth of 261.
Changes, outlook and notable items
- Management attributed year-over-year consolidated growth principally to including Tim Hortons. At Burger King, Q2 segment income increased 5.5% to $192.9 million; management cited higher royalties from restaurant growth and comparable-sales gains, partly offset by foreign exchange effects.
- Q2 interest expense was $123.8 million, up from $50.6 million, reflecting higher debt after the acquisition, partly offset by lower average interest rates. RBI issued $1.25 billion of 4.625% first-lien notes and used proceeds and cash to repay $1.55 billion of term loans; the refinancing generated a $39.9 million early-extinguishment loss. The term-loan rate was 3.75% at quarter-end.
- Management said cash, operating cash flow and revolver availability were expected to fund obligations, preferred dividends, debt service and capital spending for the next 12 months. No specific full-year revenue or earnings guidance was provided. The company was in compliance with debt covenants at quarter-end.
- Tim Hortons transaction and restructuring costs were $27.4 million in Q2 and $55.4 million in the first half. Other operating expense included derivative and foreign-exchange losses; the company also recorded a $10.9 million noncash dilution gain on its Brazil joint-venture investment.
- Risks highlighted include substantial indebtedness and debt service, interest-rate and currency movements, consumer spending and food-safety conditions, franchisee performance, competition, and execution of integration, restructuring and growth plans. The Tim Hortons acquisition purchase-price allocation remained preliminary. A Burger King fax-advertising class action settlement of $8.5 million received final court approval in April 2015.
- After quarter-end, RBI paid the Q2 preferred dividend of $67.5 million and declared a common dividend of $0.12 per share and a preferred dividend of $67.5 million, payable in October 2015.
Investor verification priorities
- Separate Tim Hortons’ post-acquisition contribution from underlying Burger King performance; do not treat headline consolidated growth as like-for-like.
- Review the quality and sustainability of operating cash flow, including the restricted-cash reclassification and working-capital movements.
- Assess debt-service capacity, variable-rate exposure, swap settlements, preferred-dividend commitments and the terms of exchangeable partnership units.
- Track comparable sales, system-wide sales, net restaurant growth, and the costs and realized benefits of restructuring and integration.
- Monitor foreign-exchange and derivative effects, and any final purchase-accounting adjustments or material legal developments.