Restaurant Brands International Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results. Amounts are U.S. dollars unless otherwise noted.
Business context
RBI operates Tim Hortons and Burger King through two independently managed, predominantly franchised brands. At year-end, the system had 20,351 restaurants in more than 100 countries and territories, up from 19,416 in 2015. The company reported over $24 billion in system-wide sales; system-wide restaurant sales are not recorded as RBI revenue. The business earns franchise royalties and fees, property income, Tim Hortons supply-chain sales, and sales from company restaurants.
Financial results and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $4,145.8 million | $4,052.2 million | Up $93.6 million, or 2.3% |
| Operating income | $1,666.7 million | $1,192.2 million | Up $474.5 million |
| Net income | $955.9 million | $511.7 million | Up $444.2 million |
| Diluted EPS | $1.45 | $0.50 | Up $0.95 |
| Adjusted EBITDA (non-GAAP) | $1,888.2 million | $1,666.2 million | Up $222.0 million |
| Operating cash flow | $1,269.0 million | $1,204.8 million | Up $64.2 million |
| Capital expenditures | $33.7 million | $115.3 million | Down $81.6 million |
Operating margin was approximately 40.2% and net margin approximately 23.1%, calculated from reported revenue and income. Adjusted EBITDA was approximately 45.6% of revenue; it is a non-GAAP measure and excludes items management considers non-operating or not relevant to its performance assessment.
Fourth quarter: Revenue was $1,111.4 million versus $1,057.0 million in Q4 2015; operating income was $491.6 million versus $322.0 million; net income was $301.4 million versus $184.4 million. Diluted EPS was $0.50 versus $0.25.
Brand and growth measures: Comparable sales growth was 2.5% at Tim Hortons and 2.3% at Burger King, both below 2015. System-wide sales growth was 5.2% and 7.8%, respectively. Net restaurant growth was 200 Tim Hortons locations and 735 Burger King locations. Segment income was $1,072.3 million for Tim Hortons and $815.9 million for Burger King.
Cash, debt and liquidity
- Cash and cash equivalents were $1,460.4 million at year-end, versus $757.8 million a year earlier; working capital was $886.3 million.
- RBI had $498.5 million available under its $500 million revolving credit facility, with no borrowings outstanding and $1.5 million of letters of credit drawn against availability.
- Aggregate debt principal was $8,672.1 million; balance-sheet debt and capital lease obligations totaled $8,722.5 million. Net interest expense was $466.9 million, and the weighted-average interest rate on long-term debt was 5.1%.
- Cash used in financing was $590.9 million, including $538.1 million of common and preferred dividends and partnership distributions. Common dividends declared were $0.62 per share for 2016. Preferred dividends were $270 million for the year.
- Management stated that operating cash flow and revolver availability were expected to fund obligations, preferred dividends, debt service and capital spending for the next 12 months.
Material changes versus 2015
- Revenue increased modestly, while income from operations and net income rose substantially. The improvement reflected lower SG&A, lower other operating expenses, increased revenue, and reduced costs of sales and franchise/property expenses.
- SG&A declined to $318.6 million from $437.7 million, including the absence of $116.7 million of Tim Hortons transaction and restructuring costs recorded in 2015. 2016 included $16.4 million of integration costs.
- Other operating expenses shifted from $105.5 million of expense in 2015 to $0.7 million of net income in 2016. 2015 included $37.3 million of derivative losses; 2016 included a $20.1 million foreign-exchange gain.
- Interest expense declined by $11.4 million, and the $40.0 million 2015 loss on early debt extinguishment did not recur.
- Cash from operations increased, while capital spending fell. The company attributed the reduction in capital expenditures primarily to lower Tim Hortons spending.
Outlook, risks and unusual items
- Management’s strategy emphasizes international restaurant growth, guest experience, sales and franchisee profitability, cost discipline, and sharing operating practices across brands. The filing gives no quantified revenue, earnings or cash-flow guidance.
- RBI planned to continue Burger King U.S. remodel incentives in 2017; the incentives are expected to weigh on the effective royalty rate through 2024, partly offset by new franchise agreements at a 4.5% royalty rate.
- On February 17, 2017, after year-end, RBI amended its term loan: principal was reduced by $146.1 million to $4.9 billion, pricing margins were lowered, and maturity was extended from 2021 to 2024. RBI incurred approximately $14.1 million in fees and expected to record debt-extinguishment costs in Q1 2017.
- Key risks include substantial leverage and debt-service needs; variable interest rates and foreign-exchange exposure; dependence on franchisee performance and support; competition and changing consumer preferences; commodity costs and supply interruptions; food safety, data security, litigation and regulatory matters; and tax uncertainty. 3G held 42.6% of combined voting power.
- The 68.5 million preferred shares carry a 9% cumulative dividend, about $270 million annually, and may require additional make-whole dividends beginning with fiscal 2017. Covenants restrict dividends, debt incurrence, investments and other actions.
- Contractual obligations totaled $18.6 billion, including debt service, preferred dividends and redemption, leases, and purchase commitments. Separately, U.S. beverage purchase agreements had an estimated $480 million termination amount as of year-end. RBI also guaranteed certain Burger King franchisee loans; maximum guarantee exposure was $41.8 million under the disclosed programs.
- Goodwill and brand impairment tests resulted in no impairment in 2016, though one reporting unit representing about 3% of consolidated goodwill had fair value not substantially above carrying value. The filing also identifies $240.6 million of unrecognized tax benefits and approximately $267.9 million of gross unrecognized-tax-benefit liabilities whose settlement timing could not be estimated.
Important facts for investors to verify
- Reconcile reported net-income growth with the nonrecurrence of 2015 transaction, restructuring, derivative and debt-extinguishment items; review the company’s non-GAAP Adjusted EBITDA reconciliation.
- Assess whether slower comparable-sales growth, particularly the disclosed regional softness at Burger King, affects franchisee health, royalty growth and planned restaurant expansion.
- Review the post-year-end term-loan refinancing, its fee and extinguishment effects, and the resulting interest savings and revised maturity profile.
- Evaluate cash generation against debt service, the preferred-share dividend burden and any future make-whole payments, while considering covenant restrictions and lease obligations.
- Monitor tax audits and the U.S. tax treatment of the Canadian entities, as well as commodity, supplier, currency and food-safety exposures.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting as of December 31, 2016.