Business context and reporting period
Restaurant Brands International Inc. (RBI) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. RBI franchises and operates Tim Hortons, Burger King and Popeyes; it reported 27,027 restaurants in more than 100 countries and territories, approximately 100% franchised.
Financial performance and liquidity
Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $1,337 | $1,458 | $3,610 | $4,124 |
| Income from operations | $417 | $571 | $1,049 | $1,496 |
| Net income attributable to common shareholders | $145 | $201 | $395 | $478 |
| Diluted earnings per share | $0.47 | $0.75 | $1.30 | $1.82 |
| Adjusted EBITDA (non-GAAP) | $561 | $602 | $1,363 | $1,682 |
- Revenue fell 8.3% in Q3 and 12.5% year to date. Operating margin was 31.2% versus 39.2% in Q3 2019.
- Operating cash flow was $608 million for the first nine months, down from $911 million. Investing activities used $33 million; financing activities used $182 million. Cash increased to $1,919 million from $1,533 million at year-end 2019.
- At September 30, total debt, net of financing costs, was $12,378 million; cash was $1,919 million. Working capital was $1,059 million, and revolving-credit availability was $998 million. RBI said it was compliant with applicable debt covenants.
- Interest expense was $129 million in Q3 and $376 million year to date. The weighted average interest rate on long-term debt was 4.5% in Q3, compared with 5.1% a year earlier.
Material changes versus prior comparable periods
- Q3 system-wide sales declined 5.4%; comparable sales fell 12.5% at Tim Hortons and 7.0% at Burger King, while Popeyes comparable sales increased 17.4%. Nine-month system-wide sales declined 8.9%.
- Q3 Adjusted EBITDA declined 6.6%; year-to-date Adjusted EBITDA declined 18.9%. Tim Hortons and Burger King segment income decreased, partly offset by growth at Popeyes.
- Q3 net income declined $128 million. The filing attributes the decrease mainly to foreign-exchange losses, weaker equity-method investment results, and lower Tim Hortons and Burger King segment income.
- Nine-month operating cash flow decreased $303 million, reflecting weaker Tim Hortons and Burger King results and greater cash use from working capital, partly offset by lower interest and tax payments.
Outlook, commentary, risks and unusual items
- COVID-19 materially affected restaurant operations and franchisee liquidity; recovery timing was uncertain. By September-end, 96% of RBI restaurants were open worldwide, with some still operating under restrictions. Management expected COVID-related effects to continue into Q4 2020 and did not provide a quantified earnings or revenue forecast.
- RBI supported eligible franchisees through rent relief, loans or cash advances, extended payment terms, and deferral of certain capital-investment commitments. These measures reduced property revenue and were expected to weigh on cash flow and results at least through Q4. Bad-debt expense was $27 million for the first nine months, versus $3 million in 2019.
- RBI described itself as highly leveraged, with significant debt-service requirements. An amendment allowed the borrowers, for specified periods, to use a $1 billion minimum-liquidity covenant instead of the 6.50:1.00 first-lien leverage covenant.
- After quarter-end, RBI issued $1.4 billion of 4.00% second-lien notes and redeemed $1.35 billion of 5.00% notes. Further note offerings and redemptions were planned, subject to closing conditions; RBI expected an early-extinguishment loss in Q4.
- Other notable items included a $64 million deferred-tax benefit in the nine-month period and $54 million of Q3 net foreign-exchange losses in other operating expenses. A $0.52-per-share dividend was declared for payment in January 2021.
- Legal matters include class actions concerning employee no-hire clauses, mobile-app geolocation data and, after quarter-end, a securities offering. RBI said it intended to defend the claims; it could not estimate possible losses.
Important facts for investors to verify
- Whether comparable sales, franchisee liquidity and collections recover, and how long COVID-related operating restrictions and assistance programs persist.
- Debt balances, refinancing closings and costs, required interest and principal payments, and compliance with amended covenant terms.
- Whether the $64 million tax benefit and other unusual items affect the comparability of reported earnings and the effective tax rate.
- The financial and operational exposure from franchisee distress, rent concessions, bad debts, and outstanding litigation.