Restaurant Brands International Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with the three months ended March 31, 2015. Tim Hortons’ 2015 comparison period ended March 29; the filing says the calendar-quarter alignment had no material impact. Amounts are U.S. dollars unless noted. RBI operated and franchised Tim Hortons and Burger King, with 19,446 restaurants in about 100 countries and territories at quarter-end; approximately 100% of each brand’s system restaurants were franchised.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Total revenue | $918.5 million | $933.3 million | Down 1.6%; unfavorable currency translation was a major factor. |
| Income from operations | $330.6 million | $224.1 million | Up 47.5%; operating margin was approximately 36.0%, versus 24.0%. |
| Net income | $168.3 million | $50.6 million | Up 232.6%. |
| Net income attributable to common shareholders | $50.0 million | Loss of $8.3 million | Basic/diluted EPS: $0.22/$0.21, versus loss of $0.04 per share. |
| Adjusted EBITDA (non-GAAP) | $407.8 million | $355.1 million | Up 14.8%; TH $227.8 million and BK $180.0 million. |
| Operating cash flow | $183.3 million | $261.7 million | Lower mainly because the prior-year period included a reclassification of restricted cash. |
| Cash and cash equivalents | $825.9 million | $757.8 million at Dec. 31, 2015 | Quarter-end cash increased $68.1 million from year-end. |
| Total debt, net | $8,504.9 million | $8,501.3 million at Dec. 31, 2015 | Term debt; capital leases were additional obligations. |
Capital spending was $5.6 million. Investing activities provided $6.8 million; financing activities used $135.9 million, including $128.3 million of common and preferred dividends paid. Quarter-end working capital was $363.3 million. RBI reported $495.8 million available under its revolving credit facility, with no borrowings outstanding and $4.2 million of letters of credit. The current ratio was approximately 1.33, based on reported current assets and current liabilities.
Net interest expense was $115.1 million, down from $123.1 million; the weighted-average interest rate on long-term debt was 5.1%. Quarter-end total liabilities were $12.32 billion. The company also had $213.6 million of noncurrent capital leases and $57.6 million of current debt and capital-lease obligations.
Material changes and operating drivers
- System-wide comparable sales grew 5.6% at TH and 4.6% at BK. System-wide sales growth was 7.9% and 10.0%, respectively; these system-wide sales are not RBI revenue.
- TH revenue was $657.8 million, down from $683.7 million; BK revenue was $260.7 million, up from $249.6 million. TH segment income rose 23.5% to $227.8 million and BK segment income rose 5.4% to $180.0 million.
- Quarter-end restaurant count rose to 19,446 from 18,686 a year earlier. Net restaurant growth during the quarter was 25 at TH and 5 at BK.
- Total revenue declined despite higher BK revenue, as TH revenue fell and foreign exchange reduced reported results. Management cited a $70.5 million unfavorable FX impact on total revenue; the impact on adjusted EBITDA was unfavorable by $28.7 million.
- Operating income improved in part because cost of sales, franchise and property expenses, and SG&A declined. Prior-year SG&A included $28.0 million of TH transaction and restructuring costs, which did not recur; current-year integration costs were $2.2 million.
- Equity-method investment income was $18.5 million, including a $11.6 million noncash dilution gain related to the France joint venture. Other operating expenses were $40.8 million, including $24.1 million of foreign-exchange losses and $15.3 million of losses on disposals, closures and refranchisings.
- Other comprehensive income was $366.0 million, including a $649.4 million favorable currency translation adjustment and a $238.6 million after-tax loss on net-investment hedges. These valuation and translation movements should not be confused with operating earnings.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue, earnings or comparable-sales guidance. Management said existing cash, operating cash flow and revolving-credit availability should be sufficient for obligations, preferred dividends, debt service and capital spending over the next 12 months.
- Management emphasized substantial indebtedness and significant liquidity needs, particularly debt service and preferred dividends. The company reported compliance with debt covenants and no restrictions on drawing the revolving facility at March 31.
- The $3.0 billion Berkshire-related investment included 9.0% cumulative compounding perpetual preferred shares. The quarterly preferred dividend was $67.5 million; unpaid dividends accrue, and common dividends cannot be paid unless preferred dividends are declared or paid. The board declared a common dividend of $0.15 per share for July 2016, up from the $0.14 paid for the prior quarter.
- Risks identified include high leverage, interest-rate and currency volatility, hedge effectiveness and counterparty performance, restructuring and integration, tax-law changes, competition and possible weakness in consumer spending. The filing reports no material change in market-risk disclosures from the 2015 Form 10-K.
- RBI used interest-rate and currency derivatives, including cross-currency net-investment hedges. The company stated that the forthcoming lease accounting standard was expected to have a material financial-statement impact because of its significant lessee and lessor arrangements.
- Disclosure controls were judged effective at March 31, 2016; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether growth in comparable sales and franchise royalties can continue, and how FX movements affect reported revenue, earnings and hedge values.
- How much of the reported earnings improvement reflects sustainable operating performance versus the nonrecurrence of prior-year transaction costs, currency effects and noncash equity-method gains.
- Debt-service capacity, refinancing exposure, covenant headroom and the ongoing cash burden of the 9.0% preferred dividends alongside common-share dividends.
- The cash-flow trend: operating cash flow fell year over year, while the prior-year comparison included a restricted-cash reclassification.
- Potential future balance-sheet and expense effects of lease accounting changes, and developments in the risks described in the company’s 2015 Form 10-K.