Restaurant Brands International Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Amounts are U.S. dollars unless noted.
Business context and reporting period
RBI operates the Tim Hortons and Burger King brands, primarily through franchised restaurants. At September 30, 2015, it franchised or owned 19,514 restaurants across approximately 100 countries and U.S. territories. RBI acquired Tim Hortons on December 12, 2014; therefore, 2015 consolidated results include Tim Hortons, while 2014 comparative results do not. Reportable segments are Tim Hortons (TH) and Burger King (BK).
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $1,019.7 million | $278.9 million | $2,995.2 million | $781.0 million |
| Operating income | $344.0 million | $0.9 million | $870.2 million | $283.7 million |
| Net income (loss) | $182.9 million | $(23.5) million | $327.2 million | $112.0 million |
| Net income attributable to common shareholders | $49.6 million | $(23.5) million | $52.2 million | $112.0 million |
| Basic / diluted EPS | $0.25 / $0.24 | $(0.07) / $(0.07) | $0.26 / $0.25 | $0.32 / $0.31 |
| Adjusted EBITDA | $440.7 million | $194.4 million | $1,223.6 million | $536.9 million |
Reported revenue and profit comparisons are substantially affected by the Tim Hortons acquisition and are not like-for-like. RBI reported Q3 operating margin of approximately 33.7% (operating income divided by revenue); the filing does not present a directly comparable margin measure. Adjusted EBITDA is a non-GAAP measure.
- Brand and restaurant trends: Q3 system-wide sales growth was 8.2% for TH and 11.2% for BK; comparable sales growth was 5.3% and 6.2%, respectively. For the first nine months, comparable sales growth was 5.3% for TH and 5.9% for BK. Management cited TH beverage strength and breakfast/lunch wraps, and BK product launches and promotions.
- Cash flow: Nine-month operating cash flow was $950.4 million, versus $375.6 million; investing cash use was $40.0 million versus $9.8 million; financing cash use was $1,680.9 million versus $134.4 million. Cash and cash equivalents ended at $975.5 million, down from $1,803.2 million at year-end 2014. Operating cash flow benefited from the acquisition and working-capital changes; the cash flow statement includes a $79.2 million source from reclassifying restricted cash.
- Liquidity: Working capital was $425.9 million. RBI had $496.1 million available under its $500 million revolving facility and reported no revolver borrowings. Management said available cash, operating cash flow and revolver capacity should fund obligations, preferred dividends, debt service and capital spending for the next 12 months.
- Debt and obligations: Debt, net of financing costs, was $8.51 billion, plus $207.9 million of long-term capital leases. The $5.14 billion term loan facility carried a 3.75% rate at quarter-end; $2.25 billion of 6.00% notes and $1.25 billion of 4.625% notes were also outstanding. RBI reported covenant compliance. Redeemable preferred shares totaled $3.297 billion and carry a 9% annual cash dividend; common dividends are subject to preferred dividend and debt agreement restrictions.
Material changes, outlook and risks
- In May 2015, RBI issued $1.25 billion of 4.625% secured notes and used proceeds plus cash to repay $1.55 billion of term loans. The refinancing reduced the term-loan rate but contributed to a $40.0 million nine-month loss on early debt extinguishment. Nine-month net interest expense rose to $362.3 million from $151.9 million, largely reflecting acquisition-related debt, despite a lower weighted-average debt rate.
- TH added $737.7 million of Q3 revenue and $244.0 million of segment income; for nine months it contributed $2,185.4 million revenue and $663.3 million segment income. BK segment income increased 1.2% in Q3 and 4.4% for nine months.
- TH transaction and restructuring costs were $24.3 million in Q3 and $79.7 million for nine months. The filing describes ongoing restructuring and cost-reduction efforts, with savings intended to be reinvested in TH; it provides no quantified forward guidance.
- Currency movements were significant: nine-month foreign currency translation reduced other comprehensive income, while hedging gains partly offset translation effects. RBI reported $1.54 billion of foreign-currency translation losses in other comprehensive income for the nine-month period. These were not equivalent to an operating-period cash loss.
- Purchase price allocation for the Tim Hortons acquisition remained preliminary. Updated estimates reduced goodwill by $623.2 million, largely reflecting a reduction in estimated intangible assets; further measurement-period adjustments were possible.
- Key disclosed risks include substantial indebtedness and debt service, franchisee performance, competition and consumer spending, interest-rate and currency volatility, effectiveness of hedges, international growth execution, and delivery of acquisition synergies and restructuring benefits. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying TH and BK trends; confirm brand comparable-sales, system-sales and restaurant-growth measures.
- Track cash generation against debt service, the $3.297 billion preferred-share obligation and recurring preferred dividends.
- Review the term-loan and note balances, interest-rate exposure, hedge settlements, covenant headroom and revolver availability.
- Assess the effect of Partnership exchangeable units: holders controlled an approximately 56.7% economic interest and could begin exchanging units for RBI shares or cash after December 12, 2015.
- Monitor final acquisition accounting, ongoing restructuring costs and whether management’s expected efficiencies materialize.