Restaurant Brands International Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are U.S. dollars unless noted. RBI operated 26,311 Tim Hortons, Burger King and Popeyes restaurants in more than 100 countries and territories; approximately 100% of system-wide restaurants were franchised.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $1.458B | $1.375B | $4.124B | $3.972B |
| Operating income | $571M | $478M | $1.496B | $1.401B |
| Net income | $351M | $250M | $854M | $843M |
| Net income attributable to common shareholders | $201M | $134M | $478M | $449M |
| Diluted EPS | $0.75 | $0.53 | $1.82 | $1.78 |
| Adjusted EBITDA (non-GAAP) | $602M | $571M | $1.682B | $1.631B |
- Q3 revenue increased 6.0% reported and 7.0% excluding foreign-exchange impact; nine-month revenue rose 3.8% reported and 6.2% excluding FX. ASC 842 lease accounting added gross presentation of reimbursed property costs to revenue and expenses—$32M in Q3 and $99M year to date—with no net operating-income effect.
- Q3 operating margin was approximately 39.2%, versus 34.8% a year earlier; net margin was approximately 24.1%, versus 18.2%. Nine-month operating margin was approximately 36.3%, versus 35.3%; net margin was approximately 20.7%, versus 21.2%.
- Q3 system-wide sales growth: TH (0.1)%, BK 10.7%, PLK 15.6%; comparable sales: TH (1.4)%, BK 4.8%, PLK 9.7%. Nine-month comparable sales were TH (0.5)%, BK 3.6%, PLK 4.5%. Consolidated system-wide sales grew 8.9% in Q3 and 7.8% year to date.
- Q3 net income growth reflected stronger segment income, a $56M favorable year-over-year change in other operating expenses (income), lower tax expense, and an $11M non-cash equity-method dilution gain. The foreign-exchange gain included in other operating income was $35M. Nine-month net income increased only $11M as higher tax expense and other offsets tempered operating gains.
Cash, debt and liquidity
- Cash and equivalents were $1.732B at September 30, up from $913M at year-end 2018. Working capital was $196M; unused revolving-credit availability was $498M. Current assets were $2.373B and current liabilities $2.177B.
- Nine-month operating cash flow was $911M, versus $673M; investing activities provided $7M, versus using $28M; financing activities used $106M, versus $589M. Capital expenditures were $32M. Cash flow from operations less capital expenditures was approximately $879M.
- Debt, net of issuance costs, was $12.317B at quarter-end, excluding finance and operating lease liabilities; cash was $1.732B. Management described RBI as highly leveraged and debt service as a significant liquidity requirement. Operating lease liabilities were $1.177B and finance lease liabilities $306M.
- In September RBI issued $750M of 3.875% senior notes and prepaid $235M of Term Loan B. After quarter-end, on October 7, proceeds from those notes and a new $750M Term Loan A were used to redeem $1.250B of 4.625% notes due 2022. The revolving facility commitment rose to $1.000B and its maturity was extended to October 2024. No revolver borrowings were outstanding at quarter-end; RBI reported compliance with debt covenants.
- Interest expense was $137M in Q3 and $406M year to date. The nine-month weighted-average long-term debt interest rate was 5.1%. The company declared a $0.50-per-share dividend for January 2020.
Outlook, commentary and risks
- No numeric full-year revenue or earnings guidance is provided in the filing. Management stated that operating cash flow and revolving-credit availability should be sufficient for obligations, debt service and capital spending over the next 12 months, based on current operations and available cash.
- Management expected to continue incurring Tax Act-related restructuring and advisory fees in 2019. It did not expect further separately disclosed office-relocation costs.
- Key stated risks include substantial indebtedness and debt-service demands; franchisee performance and support; consumer spending and food-safety or health perceptions; competition; interest- and foreign-exchange-rate volatility; international growth and reliance on master franchisees; counterparty performance; and tax-law uncertainty.
- Class actions in the U.S. and Canada challenge no-solicitation/no-hiring provisions in Burger King and Tim Hortons franchise agreements. RBI said it believes the claims are without merit but could not predict outcomes or estimate possible losses. A separate Canadian Tim Hortons settlement required C$6M for advertising over two years and C$6M for legal and related expenses; the amounts had been accrued in 2018.
- ASC 842 adoption on January 1, 2019 increased reported lease assets and liabilities and changed revenue and expense presentation. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether TH’s negative comparable sales persist, and whether BK and PLK sales momentum translates into sustained segment earnings growth.
- Debt maturities, refinancing execution and cash interest requirements following the October 2019 transactions; assess leverage alongside the company’s liquidity assertion.
- How much reported revenue growth reflects underlying royalties and business activity versus ASC 842 gross presentation and foreign-exchange movements.
- The sustainability of earnings after adjusting for the Q3 foreign-exchange gain, non-cash equity-method gain, and other excluded or unusual items; also monitor tax-rate volatility and the $37M year-to-date increase in uncertain-tax-benefit provision.
- Potential outcomes and financial exposure from the franchise-agreement class actions, which the filing does not quantify.