Restaurant Brands International Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures are also provided. Unless stated otherwise, amounts are U.S. dollars.
Business context
RBI operates the Tim Hortons and Burger King quick-service restaurant brands through two reportable segments. At year-end, the system had 19,416 restaurants in about 100 countries and U.S. territories; approximately 100% were franchised. RBI’s acquisition of Tim Hortons closed on December 12, 2014, so 2015 includes a full year of Tim Hortons results while reported 2014 includes only a short post-acquisition period. As a result, reported year-over-year consolidated comparisons are substantially affected by the acquisition.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $4,052.2 million | $1,198.8 million |
| Income from operations | $1,192.2 million | $181.1 million |
| Net income (loss) | $511.7 million | ($269.3 million) |
| Net income (loss) attributable to common shareholders | $103.9 million | ($398.8 million) |
| Basic / diluted EPS | $0.51 / $0.50 | ($1.16) / ($2.32) |
| Operating cash flow | $1,204.8 million | $259.3 million |
| Capital expenditures | $115.3 million | $30.9 million |
| Cash and cash equivalents at year-end | $757.8 million | $1,803.2 million |
- Calculated 2015 operating margin was approximately 29.4% and net margin approximately 12.6%. These consolidated margins reflect the full-year inclusion of Tim Hortons and should not be read as like-for-like growth against reported 2014.
- Management-defined Adjusted EBITDA was $1,666.2 million, versus $760.9 million in 2014; 2015 included $906.7 million from Tim Hortons and $759.5 million from Burger King. Adjusted EBITDA is a non-GAAP measure and excludes specified items.
- Constant-currency system-wide comparable sales grew 5.6% at Tim Hortons and 5.4% at Burger King. System-wide sales growth was 9.3% and 10.3%, respectively. Net restaurant growth was 155 Tim Hortons restaurants and 631 Burger King restaurants.
- At year-end, RBI reported $8,725.6 million of debt principal outstanding and $8,721.8 million of total debt and capital lease obligations in selected balance-sheet data. Cash was $757.8 million. Working capital was $248.5 million; $496.2 million remained available under the $500 million revolving facility, with no revolving borrowings outstanding. RBI said available cash, operating cash flow and revolver availability were expected to fund obligations, preferred dividends, debt service and capital spending for the next 12 months.
- Net interest expense was $478.3 million, up from $279.7 million; the weighted-average long-term debt interest rate was 5.2%. The company reported $8,462.3 million of term debt, net of current portion, and $3,297.0 million of redeemable preferred shares on the balance sheet.
- Quarter ended December 31, 2015: revenue of $1,057.0 million, operating income of $321.8 million, net income of $184.5 million, and basic and diluted EPS of $0.25.
Material changes and unusual items
- Reported revenue rose sharply from 2014, primarily because Tim Hortons contributed a full year in 2015 rather than only the period after the December 2014 acquisition. Unaudited pro forma revenue was $4,221.6 million for 2014, but this is not the reported GAAP comparison.
- 2015 included $116.7 million of Tim Hortons transaction and restructuring costs, $105.5 million of other operating expenses (including $37.3 million of derivative losses and $46.7 million of foreign-exchange losses), and a $40.0 million loss on early extinguishment of debt. In 2014, other operating expenses were $327.4 million, including $290.9 million of derivative losses, and the debt-extinguishment loss was $155.4 million.
- Operating cash flow increased substantially, but included working-capital movements, notably increases in accounts payable, and reclassification of restricted cash to cash equivalents. Cash declined by $1,045.4 million during 2015, principally reflecting debt repayment, preferred and common dividends, and repurchases of Partnership exchangeable units.
- In May 2015, 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 term-loan rate was reduced. The company stated it was in compliance with debt covenants at year-end.
Outlook, commentary and risks
- Management’s stated strategy emphasizes restaurant growth, guest experience, sales and franchisee profitability, cost control through zero-based budgeting and shared services, and maintaining each brand’s distinct identity. The filing provides no specific consolidated revenue or earnings guidance for 2016.
- Management expected 2016 capital expenditures to be immaterial to financial position and planned to fund them from cash and operating cash flow. U.S. Burger King remodel incentives were expected to continue in 2016; the associated reduced royalty rates were expected to affect effective royalty rates through 2021.
- Key risks include substantial leverage and debt-service requirements; variable interest rates and foreign-currency exposure; reliance on franchisee performance and support; commodity and food-supply volatility; competition, consumer preferences and food safety; international partner and execution risks; and tax uncertainty, including potential U.S. tax treatment of the Canadian entities.
- Preferred shares carry a cumulative 9% dividend. RBI expected regular preferred dividends of approximately $270 million annually. The filing also discloses $665.7 million of purchase commitments, including a Tim Hortons minimum-purchase obligation of about $92 million over four years, and potential payments of approximately $530 million if specified long-term U.S. Burger King soft-drink supply agreements were terminated.
- RBI reported $119.1 million of Burger King franchisee loans outstanding under guarantee programs; maximum guarantee exposure under those programs was $42.5 million assuming full use of remaining borrowing capacity. Management reported no significant guarantee payments through year-end.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2015.
Important facts for investors to verify
- Assess underlying growth using segment results, comparable sales and the unaudited pro forma comparison—not reported consolidated revenue growth alone, given the acquisition timing.
- Reconcile Adjusted EBITDA to GAAP results and evaluate the recurrence and cash impact of transaction, restructuring, derivative and foreign-exchange items.
- Review debt maturities, interest-rate exposure, covenant terms, and the effect of the 9% cumulative preferred dividend on cash available to common shareholders.
- Monitor liquidity and cash-flow quality, including working-capital contributions, required debt service, lease obligations, and the planned use of revolving-credit availability.
- Verify franchisee health, restaurant development and remodel progress, and exposure to the disclosed supply, guarantee, vendor and tax contingencies.