Restaurant Brands International Inc. — Q3 2017 Form 10-Q
Period: Quarter and nine months ended September 30, 2017. Unless noted, amounts are US$ millions. RBI franchises and operates Tim Hortons, Burger King and Popeyes; approximately 100% of system restaurants were franchised. Popeyes has been included since its acquisition closed March 27, 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,208.6 | $1,075.7 | $3,341.9 | $3,034.4 |
| Income from operations | $479.3 | $420.5 | $1,229.9 | $1,175.1 |
| Net income | $246.8 | $238.6 | $656.9 | $654.5 |
| Net income attributable to common shareholders | $91.4 | $86.3 | $231.1 | $227.2 |
| Diluted EPS | $0.37 | $0.36 | $0.95 | $0.96 |
| Adjusted EBITDA (non-GAAP) | $565.1 | $488.9 | $1,539.5 | $1,375.8 |
Quarterly revenue increased 12.4%; reported net income rose 3.4%, while nine-month net income was nearly flat. Operating margin was approximately 39.7% in Q3 versus 39.1% a year earlier. Net margin was approximately 20.4% versus 22.2%. Adjusted EBITDA increased 15.6% for the quarter and 11.9% year to date; it is a company-defined non-GAAP measure.
Growth included acquired Popeyes results and currency effects. For Q3, total revenue grew $132.9, including $68.0 from Popeyes and a $30.4 favorable foreign-exchange impact. Excluding FX, reported revenue growth was $102.5. By brand, Q3 revenue was Tim Hortons $827.0, Burger King $313.6 and Popeyes $68.0. Comparable sales were 0.3% at Tim Hortons, 3.6% at Burger King and -1.8% at Popeyes. System-wide sales growth was 3.0%, 11.2% and 4.5%, respectively.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $813.5, down from $919.0. Management cited higher tax and interest payments, Popeyes transaction costs and working-capital use, partly offset by acquired and improved segment income.
- Investing cash outflow was $851.9, including $1,635.9 net cash paid for Popeyes and $771.8 net proceeds from derivative settlement/sale. Financing cash inflow was $2,162.4, principally reflecting new borrowings and note issuances.
- Cash and cash equivalents were $3,607.1 at September 30, up from $1,460.4 at year-end. Working capital was $3,082.1; the $500.0 revolving facility was undrawn, with $498.4 available after letters of credit.
- Total debt, net, was $11,360.3, compared with $8,485.0 at December 31, 2016; term debt, net of current portion, was $11,303.6. Nine-month net interest expense increased to $375.4 from $349.6. Weighted-average debt interest rate was 4.9% versus 5.2%.
- Management stated that cash from operations and revolving availability were expected to cover current obligations, debt service, capital spending and the planned preferred-share redemption for the next 12 months. RBI reported compliance with debt covenants at quarter end.
Material changes, outlook and risks
- Popeyes acquisition: Consideration was $1,654.7, funded with approximately $354.7 cash and $1,300.0 incremental term borrowing. Purchase accounting remained preliminary; acquired assets included a $1,354.9 indefinite-lived brand and $845.8 goodwill. Management expected additional integration costs through 2018.
- Debt refinancing and unusual charges: RBI extended and repriced its term loan facility, issued $1,500.0 of 4.25% first-lien notes and $1,300.0 of 5.00% second-lien notes, and redeemed $1,250.0 of 6.00% notes during Q3. Early debt extinguishment losses were $58.2 in Q3 and $78.6 year to date, weighing on GAAP earnings. Interest expense also rose with higher debt balances.
- Preferred shares: After quarter end, the board approved redemption of all 68.5 million 9% preferred shares on December 12, 2017. The stated redemption price is $48.109657 per share, plus/minus applicable accrued, make-whole and additional dividends. The filing anticipated financing the redemption with available cash and proceeds from the 2017 notes.
- Post-quarter debt action: RBI issued an additional $1,500.0 of 5.00% second-lien notes on October 4 and used proceeds in part to redeem the remaining $1,000.0 of 6.00% notes on October 18. The revolving facility maturity was extended to October 2022, subject to an earlier-maturity condition tied to the 2015 notes.
- Other notable items: Effective tax rates declined to 13.4% for Q3 and 15.3% year to date, partly due to share-based-compensation tax benefits. Foreign-exchange losses in other operating expenses were $17.7 for Q3 and $64.9 year to date. A large translation gain affected other comprehensive income; it is distinct from operating earnings.
- Contingencies and risks: Tim Hortons franchisees filed proposed class actions relating to advertising-fund use and alleged treatment of franchisees associated with a franchisee association. RBI said it considered the claims without merit, but could not predict outcomes or estimate possible losses. Key stated risks include substantial leverage, consumer and competitive conditions, franchisee relationships, interest-rate and currency movements, international growth, hedging counterparties and tax-law changes.
- Guidance: The filing provides no quantified revenue, earnings or comparable-sales forecast. Management’s stated near-term outlook is its liquidity assessment; results for interim periods may not indicate full-year performance.
Important facts for investors to verify
- How Popeyes integration, preliminary purchase accounting and expected costs affect subsequent results.
- Cash available and total funding required for the preferred-share redemption, including the final redemption amount and make-whole calculation.
- Debt balances, interest-rate exposure, refinancing terms and capacity to meet debt service while funding dividends and repurchases.
- Underlying brand trends, especially Tim Hortons’ modest comparable sales and Popeyes’ negative comparable sales, and the extent to which growth reflects acquisition, FX or organic performance.
- Developments in the Tim Hortons franchisee litigation and any resulting financial or operating impact.