Restaurant Brands International Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 22, 2019. Unless noted, amounts are U.S. dollars. The filing covers the full year, with fourth-quarter figures also shown below.
Business context
RBI operates Tim Hortons, Burger King and Popeyes, with 25,744 system-wide restaurants across more than 100 countries and U.S. territories at year-end. Approximately 100% of each brand’s restaurants were franchised. The company earns royalties, franchise and property revenues, and sales from a small number of company-operated restaurants; Tim Hortons also has supply-chain operations.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue, reported | $5.357 billion | $4.576 billion |
| Income from operations | $1.917 billion | $1.735 billion |
| Net income | $1.144 billion | $1.235 billion |
| Net income attributable to common shareholders | $612 million | $626 million |
| Basic / diluted EPS | $2.46 / $2.42 | $2.64 / $2.54 |
| Net cash from operating activities | $1.165 billion | $1.391 billion |
| Adjusted EBITDA, non-GAAP | $2.212 billion | $2.146 billion |
Fourth-quarter 2018 revenue was $1.385 billion, operating income $516 million, net income $301 million, and diluted EPS $0.64. Fourth-quarter 2017 net income was $578 million and diluted EPS was $1.59.
Reported operating margin was approximately 35.8% in 2018 versus 37.9% in 2017; year-over-year comparisons are affected by the accounting change described below. Revenue under the prior accounting standards would have been $4.607 billion in 2018, rather than the reported $5.357 billion. On that basis, the year-over-year revenue increase was modest. Adjusted EBITDA rose about 3.1%; it is a company-defined non-GAAP measure.
System-wide sales grew 6.3% to $32.225 billion. Comparable sales were 0.6% at Tim Hortons, 2.0% at Burger King and 1.6% at Popeyes. System-wide sales growth was 2.4%, 8.9% and 8.9%, respectively; restaurant counts grew 2.1%, 6.1% and 7.3%.
Material changes and financial position
- ASC 606 adoption, effective January 1, 2018, brought advertising-fund contributions and expenses onto the income statement gross, deferred initial and renewal franchise fees over contract terms, and changed gift-card breakage timing. The transition reduced opening equity by $250 million. Reported 2018 revenue and SG&A are therefore not directly comparable with prior years; the filing provides prior-standard comparisons.
- Revenue rose $781 million as reported, but this includes the gross presentation of advertising funds, a full year of Popeyes results versus nine months in 2017, and growth in royalties. Sales declined $35 million, largely reflecting Tim Hortons’ conversion of company-operated/VIE restaurants to franchised operations and prior Burger King refranchising.
- Net income fell $91 million. Higher income tax expense (up $372 million versus 2017, which included a substantial Tax Act benefit) and higher interest and certain restructuring and relocation costs were partly offset by the absence of 2017’s $122 million debt-extinguishment loss, lower foreign-exchange losses and higher Burger King and Popeyes segment income.
- Cash and equivalents were $913 million, down from $1.097 billion; working capital was $92 million. The company reported $480 million of undrawn revolver availability and said cash flows and availability should cover obligations, debt service and capital spending for the next 12 months.
- Debt principal was approximately $12.038 billion; balance-sheet debt and capital lease obligations totaled $12.140 billion. Net interest expense was $535 million, and the weighted-average rate on long-term debt was 4.8%. The company was in compliance with debt covenants at year-end.
- Total assets were $20.141 billion and total equity $3.618 billion. Goodwill and intangible assets together were about $15.949 billion. Operating cash flow was $1.165 billion; investing cash outflow was $44 million and financing cash outflow was $1.285 billion. Capital expenditures were $86 million.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. RBI targeted $2.00 of declared dividends per common share and exchangeable unit for 2019; future dividends remain subject to board discretion and debt restrictions. The board declared a $0.50 first-quarter 2019 dividend.
- Management’s stated priorities include restaurant growth, guest experience, digital and technology initiatives, cost management and international expansion through master franchises and joint ventures. Two new Western Canada warehouses and an Eastern Canada warehouse renovation were planned for completion in 2020.
- Major risks include substantial leverage and variable-rate debt, franchisee financial health and execution, intense competition and changing consumer preferences, commodity and supply-chain volatility, food safety, foreign-exchange exposure, regulation and tax uncertainty, cybersecurity, and reliance on master franchisees and joint ventures. A hypothetical 1% LIBOR increase was estimated to raise annual interest expense by about $28 million.
- Litigation includes Tim Hortons franchisee disputes and U.S. Burger King class actions alleging antitrust violations related to no-solicitation/no-hiring terms in franchise agreements. The company said it believed the claims were without merit but could not predict outcomes or estimate possible losses for the Burger King cases.
- Unusual and comparability items included $25 million of corporate restructuring and tax advisory fees, $20 million of office centralization and relocation costs, and $10 million of Popeyes transaction costs in 2018. A $20 million non-cash dilution gain at an equity-method investee and a $60 million interest benefit from hedge-accounting changes also affected results. No goodwill or brand impairment was recorded.
- Management assessed internal control over financial reporting as effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile reported revenue growth and margins with the ASC 606 prior-standard figures, particularly the gross advertising-fund presentation and deferred franchise fees.
- Review comparable-sales trends and franchisee economics by brand, especially Tim Hortons’ low positive comparable-sales growth and the gap between system-wide sales growth and same-store performance.
- Assess debt maturities, interest-rate sensitivity, covenant flexibility, and the sustainability of dividends and exchangeable-unit repurchases relative to operating cash flow.
- Track tax audits, unrecognized tax benefits, and evolving Tax Act interpretations; year-end unrecognized tax benefits were $441 million, with additional accrued interest and penalties.
- Monitor the outcomes and potential financial or franchise-relationship effects of the Tim Hortons and Burger King litigation.