Restaurant Brands International Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. RBI operates Tim Hortons (TH), Burger King (BK) and Popeyes (PLK); it reported 24,559 restaurants in more than 100 countries and territories, with approximately 100% of system-wide restaurants franchised.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Total revenue, reported | $1,253.8 million | $1,000.6 million | Up 25.3%; affected by the new revenue standard’s gross presentation of advertising contributions and expenses, and PLK’s inclusion in 2018. |
| Revenue under prior accounting standard | $1,071.8 million | $1,000.6 million | Up 7.1% on this basis; 2018 comparison is provided by the filing for comparability. |
| Operating income | $420.6 million | $336.2 million | Up $84.4 million reported; 2018 would have been $429.3 million under the prior standard. |
| Net income | $278.8 million | $166.6 million | Up $112.2 million. Net income attributable to common shareholders was $147.8 million, or $0.60 basic and $0.59 diluted EPS. |
| Adjusted EBITDA | $497.8 million | $443.3 million | Up 12.3% reported; 2018 would have been $506.3 million under the prior standard. |
| Operating cash flow | $(111.0) million | $288.9 million | Cash use reflected working-capital outflows, higher interest and income-tax payments, and lower TH segment income. |
| Cash and liquidity | $852.4 million cash; $243.3 million working capital | $1,097.4 million cash at Dec. 31, 2017 | $495.4 million available on revolving credit facility; no revolver borrowings. |
| Debt | $11,844.7 million total debt, net; $315.4 million capital leases | $11,857.7 million total debt, net, at Dec. 31, 2017 | Highly leveraged; company reported covenant compliance. |
Performance and material changes
- System-wide sales growth was 2.1% for TH, 11.3% for BK and 10.9% for PLK. Comparable sales were (0.3)%, 3.8% and 3.2%, respectively. PLK’s prior-year figures are not fully comparable because it was acquired in March 2017 and had a different fiscal calendar.
- Segment income (Adjusted EBITDA) was $245.2 million for TH, $214.1 million for BK and $38.5 million for PLK. TH segment income fell $11.0 million; BK increased $27.0 million. PLK contributed a full quarter in 2018.
- Reported revenue and expense comparisons are distorted by ASC 606, adopted January 1, 2018. Among other effects, advertising fund contributions and expenses are now presented gross. Adoption reduced opening equity by $249.8 million; it had no net effect on Q1 operating cash flow.
- Interest expense increased to $140.1 million from $111.4 million, primarily reflecting debt raised in 2017. A $20.4 million prior-year debt-extinguishment loss did not recur.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow and revolver availability should be sufficient for obligations, debt service and capital spending over the next 12 months. No specific revenue or earnings guidance was provided.
- Required debt service for the next 12 months was estimated at approximately $276.8 million of term-loan interest and $51.1 million of term-loan principal, plus approximately $261.6 million of senior-note interest. The company expects ongoing interest-rate swap settlement payments, estimated at $7.8 million over the next 12 months.
- Management expected additional PLK integration costs and Tax Act advisory and restructuring costs in 2018. Q1 included $5.1 million of PLK transaction costs and $7.1 million of Tax Act-related costs.
- The effective tax rate was 0.6%, benefiting from stock-option exercises and audit-settlement reserve releases. Income-tax payments were $304.0 million, primarily due to payment of accrued taxes related to the 2017 preferred-share redemption.
- Two proposed Tim Hortons franchisee class actions concern advertising-fund use and alleged adverse treatment of franchisees. RBI said it intends to defend the claims but could not predict outcomes or estimate potential losses.
- Key stated risks include substantial indebtedness, consumer and competitive conditions, franchisee relationships, execution of growth and integration plans, foreign exchange and interest-rate movements, and tax-law changes. The company expects 2019 lease accounting adoption to materially increase reported assets and liabilities, but does not expect a material effect on cash flows or liquidity.
- Foreign-currency translation reduced Q1 comprehensive income, with a $215.6 million translation loss. A $20.4 million non-cash dilution gain on an equity-method investee supported reported results.
Important facts for investors to verify
- Use the filing’s prior-standard revenue and Adjusted EBITDA comparisons when assessing underlying year-over-year trends; reported revenue growth includes a major presentation change.
- Monitor operating cash flow and working capital, including the large Q1 cash use and tax payments, alongside cash balances and dividend commitments.
- Assess debt service capacity, variable-rate exposure, refinancing needs and the company’s ability to sustain dividends while highly leveraged.
- Track TH comparable sales and franchisee relations, and verify whether BK and PLK sales momentum and restaurant growth persist.
- Follow outcomes and potential exposure from the Tim Hortons litigation, PLK integration costs, and final accounting and tax impacts of ASC 606 and the Tax Act.