Restaurant Brands International Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Amounts are in U.S. dollars. RBI acquired Tim Hortons on December 12, 2014, so Q1 2015 includes Tim Hortons while the comparable 2014 period does not; reported year-over-year changes are therefore substantially acquisition-driven.
Business context
RBI operated the Tim Hortons and Burger King brands, with 19,111 restaurants in approximately 100 countries and U.S. territories at quarter-end. Approximately 100% of each brand’s system-wide restaurants were franchised. Following an internal reorganization, the company reported two segments: Tim Hortons and Burger King.
Financial performance and position
- Revenue: $932.0 million, up 286.9% from $240.9 million. Tim Hortons contributed $682.4 million; the increase is not an organic growth comparison.
- Profit and margins: Operating income was $221.8 million, or a calculated 23.8% of revenue. Consolidated net income was $50.9 million, versus $60.4 million. After $68.7 million of preferred dividends and the reported noncontrolling-interest allocation, net loss attributable to common shareholders was $8.1 million, or $0.04 per share. The prior-year operating margin is not meaningfully comparable given the acquisition.
- Adjusted EBITDA: $354.6 million versus $159.7 million; this non-GAAP measure reflects the acquired Tim Hortons business and excludes specified items. Burger King segment income was $170.7 million, up 6.9%; Tim Hortons segment income was $183.9 million.
- Comparable sales: Tim Hortons 5.3% and Burger King 4.6%. System-wide sales growth was 8.1% and 9.6%, respectively, on a constant-currency basis.
- Cash flow: Operating cash flow was $261.7 million versus $125.3 million. It included a $79.2 million reclassification of previously restricted cash. Investing activities provided $32.7 million, including $52.1 million from derivative settlements; capital expenditures were $29.4 million. Financing activities used $1,016.7 million, primarily for debt repayments. Cash ended the quarter at $1,021.9 million.
- Debt and liquidity: Total debt was $8,979.5 million, excluding capital leases; cash was $1,021.9 million. Working capital was $783.5 million. The company had $495.2 million available on its revolving credit facility and no revolver borrowings. Management reported compliance with debt covenants.
- Preferred securities: Redeemable preferred shares were carried at $3,297.0 million and carry a 9% annual cumulative dividend. The quarter included $68.7 million of preferred dividends.
Changes and unusual items
- Interest expense rose to $123.9 million from $50.0 million, primarily because of acquisition-related debt. The reported weighted-average interest rate on long-term debt declined to 5.2% from 6.7%.
- The effective tax rate was 48.2%, compared with 25.7%. Management attributed the increase mainly to foreign-exchange revaluation of monetary assets and liabilities, which added approximately 19 percentage points, and to nondeductible transaction costs.
- Other operating expenses increased to $35.5 million, including $15.0 million of derivative losses and $15.8 million of foreign-exchange losses. Q1 also included $28.0 million of Tim Hortons transaction and restructuring costs and $4.7 million of noncash inventory step-up amortization.
- Other comprehensive loss was $758.1 million, principally reflecting a $1,091.8 million foreign-currency translation loss, partly offset by gains on net-investment hedges. This reduced total shareholders’ equity to $3,516.7 million from $4,323.2 million at year-end.
- During the quarter, the company repurchased most outstanding Tim Hortons notes through tender offers and made a $42.7 million mandatory term-loan prepayment. A $10.9 million noncash gain arose from dilution of its Brazil joint-venture interest.
Outlook, risks and contingencies
No specific full-year revenue or earnings guidance is provided in the filing. Management expected operating cash flow and revolving-credit availability to be sufficient for obligations, preferred dividends, debt service and capital spending over the next 12 months. It also described ongoing Tim Hortons restructuring and cost-reduction efforts, with anticipated efficiencies to be reinvested in the business.
Key risks cited include substantial leverage and debt service, consumer spending and food-safety conditions, franchisee performance, execution of international growth and restructuring, interest-rate and foreign-exchange volatility, and the effectiveness of hedging and counterparties. The filing notes a putative fax-advertising class action settlement of $8.5 million, which received final court approval on April 15, 2015. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate acquisition-driven results from underlying performance; Q1 2014 did not include Tim Hortons, while 2015 includes it from December 12, 2014 onward.
- Review debt-service requirements, interest-rate exposure, and the cash demands of the 9% preferred dividend alongside available liquidity.
- Assess the sustainability and cash quality of operating cash flow, including the restricted-cash reclassification and derivative-settlement proceeds.
- Track Tim Hortons restructuring costs, expected savings, and whether comparable-sales momentum continues at both brands.
- Monitor foreign-exchange effects on earnings, taxes, hedges and reported equity, as well as the still-preliminary acquisition purchase-price allocation.