Restaurant Brands International Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. RBI franchises and operates Tim Hortons, Burger King and, following its March 27 acquisition, Popeyes. At quarter-end, it reported 23,155 restaurants across more than 100 countries and territories; approximately 100% of system restaurants were franchised.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Total revenue | $1,000.6 million | $918.5 million | Up 8.9%; up $60.9 million excluding currency impact |
| Operating income | $336.2 million | $330.6 million | Up 1.7%; operating margin was 33.6%, versus 36.0% |
| Net income | $166.6 million | $168.3 million | Down 1.0%; net margin was 16.6%, versus 18.3% |
| Net income attributable to common shareholders | $50.2 million | $50.0 million | Basic EPS $0.21; diluted EPS $0.21 |
| Adjusted EBITDA | $443.3 million | $407.8 million | Up 8.7%; non-GAAP measure |
| Operating cash flow | $275.6 million | $183.3 million | Increase attributed to working capital, segment income and lower tax payments |
Revenue growth reflected higher Tim Hortons supply-chain sales and growth in franchise and property revenues. Tim Hortons and Burger King comparable sales each declined 0.1%; management said the prior-year leap day reduced the comparison by approximately one percentage point. System-wide sales growth was 3.3% for Tim Hortons and 6.2% for Burger King. Adjusted EBITDA increased at both segments.
Selling, general and administrative expense rose to $121.9 million from $73.2 million, including $34.4 million of Popeyes transaction costs and higher share-based compensation. A $20.4 million debt-extinguishment loss also weighed on pretax income. Lower interest expense, lower tax expense and higher operating income partly offset these costs. The effective tax rate was 18.5%, compared with 21.9%.
Cash, debt and liquidity
- Cash and cash equivalents were $923.9 million at March 31, down from $1,460.4 million at year-end. Working capital was $302.2 million.
- Net cash used in investing was $1,624.7 million, primarily reflecting the Popeyes acquisition. Financing provided $809.3 million, including $1.3 billion of incremental term-loan proceeds.
- Long-term debt, net of current maturities, was $9.532 billion; total debt, net, was $9.622 billion. Capital leases totaled $336.6 million. RBI described itself as highly leveraged.
- The Popeyes acquisition was funded with approximately $354.7 million of cash and $1.3 billion of incremental borrowing. RBI also repaid $155.5 million of debt assumed with Popeyes.
- The term-loan facility was extended to February 2024 and its interest-rate margin reduced to 1.25% over base rate or 2.25% over Eurocurrency rate, at RBI’s option. At quarter-end, the revolving facility had no borrowings and $498.4 million available; RBI reported compliance with debt covenants.
- Management believed operating cash flow and revolver availability would cover obligations, preferred dividends, debt service and capital spending for the next 12 months. Preferred-share dividends were $67.5 million for the quarter; common dividends declared were $0.18 per share.
Acquisition, outlook and risks
- RBI completed its acquisition of Popeyes on March 27 for stated consideration of $1.6547 billion. The preliminary allocation included a $1.020 billion indefinite-lived brand intangible and $1.078 billion of goodwill. The valuation remained subject to revision during the measurement period. Popeyes results from the acquisition date through quarter-end were not material and were not included in Q1 consolidated operations; management said they would be included beginning in Q2.
- RBI expected additional Popeyes transaction costs through the remainder of 2017. The filing gives no specific company-wide earnings or revenue guidance.
- Management identified substantial indebtedness, consumer and economic conditions, franchisee performance, competition, international growth, interest-rate and currency movements, hedging effectiveness, counterparty performance and tax changes as risks.
- RBI expected adoption of the new lease standard in 2019 to materially increase reported assets and liabilities, with no material cash-flow or liquidity impact expected. The revenue standard, effective in 2018, was expected to change the timing of initial franchise-fee revenue, advertising fund presentation and gift-card breakage recognition; the company had not selected a transition method.
- Disclosure controls were assessed as effective at March 31, 2017, and management reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How the final Popeyes purchase-price allocation, integration costs and acquired-brand performance compare with the preliminary accounting and management’s expectations.
- Whether comparable-sales trends improve after the prior-year leap-day effect, and whether restaurant growth translates into sustained system-wide sales and franchise revenue.
- Debt service, variable-rate exposure and refinancing terms following the acquisition borrowing; also confirm covenant headroom and continued revolver availability.
- The quality and sustainability of operating cash flow, given working-capital effects and substantial acquisition-related investing outflows.
- Preferred-share dividend obligations and their priority over common dividends, alongside the company’s highly leveraged position.
- How non-GAAP Adjusted EBITDA reconciles to GAAP results and how one-time transaction costs and other exclusions affect comparisons.