Restaurant Brands International Inc. annual report, FY2014

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Restaurant Brands International Inc. — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results. All amounts are U.S. dollars unless stated otherwise.

Business context and reporting period

RBI was formed in 2014 and completed its acquisition of Tim Hortons on December 12, 2014, combining Tim Hortons and Burger King under one parent. At year-end, the system had 19,043 restaurants in approximately 100 countries and territories; 18,978 were franchised. The company consolidates Tim Hortons only from the acquisition date through its December 28 fiscal year-end, so reported 2014 results are not directly comparable with 2013, which primarily reflects Burger King.

The businesses remain separately managed and rely principally on franchise royalties and fees, property income, and—at Tim Hortons—supply-chain distribution sales. Management’s stated priorities include international restaurant growth, improved guest experience and sales, cost control, and sharing selected functions and practices across the brands.

Financial performance and key metrics

  • Revenue: $1,197.3 million, up 4.4% from $1,146.3 million in 2013. Franchise and property revenue rose 11.5% to $1,029.9 million. Sales fell to $167.4 million from $222.7 million, mainly reflecting Burger King refranchising, partly offset by Tim Hortons distribution and restaurant sales included after closing.
  • Profitability: Operating income was $182.4 million versus $522.2 million; net loss was $277.4 million versus net income of $233.7 million. Net loss attributable to RBI common shareholders was $402.2 million, or $1.17 per basic share, including $546.4 million of preferred-share accretion to redemption value.
  • Adjusted EBITDA: Management’s non-GAAP measure was $761.1 million, up from $665.6 million. It excludes specified items; reported EBITDA was $255.3 million versus $587.8 million.
  • Margins: The filing reports company-restaurant margin percentages by segment, but the predominantly franchised model and acquisition-related changes limit the usefulness of a single consolidated margin comparison. Consolidated operating margin was approximately 15.2% in 2014 versus 45.6% in 2013.
  • Cash flow and investment: Operating cash flow was $259.3 million, down from $325.2 million. Investing activities used $7,790.8 million, principally reflecting the Tim Hortons acquisition and derivative settlements. Capital expenditures were $30.9 million; management expected approximately $180 million in 2015.
  • Liquidity: Year-end cash and cash equivalents were $1,803.2 million, working capital was $735.9 million, and unused capacity under the revolving facility was $495.4 million. Management said cash, operating cash flow and revolver availability were expected to cover obligations and planned spending for the next 12 months.
  • Debt and preferred shares: Total debt was approximately $10,042.9 million, including the $6.75 billion term facility and $2.25 billion of second-lien notes. The balance sheet reported $9,192.5 million of debt and capital leases, with Tim Hortons notes separately classified as current liabilities. The company also issued $3.0 billion of 9% cumulative, compounding preferred shares; expected regular preferred dividends were $270 million annually.
  • Restaurant trends: Burger King system-wide sales growth was 6.8% and comparable sales growth was 2.1% in 2014; net restaurant growth was 705. Tim Hortons’ informational 2014 figures were 6.6% system-wide sales growth, 3.1% comparable sales growth and 186 net new restaurants. These Tim Hortons annual metrics are not equivalent to the brief period consolidated by RBI.

Material changes versus the prior period

  • The Tim Hortons transaction substantially expanded RBI’s assets, footprint and financing needs. Total assets rose to $21,164.0 million from $5,828.5 million, while year-end cash increased to $1,803.2 million from $786.9 million.
  • Franchise and property revenue increased, but reported operating income and net income declined sharply amid transaction-related costs, derivative losses, increased interest expense and debt-extinguishment costs. The acquisition also makes year-over-year revenue and earnings comparisons incomplete.
  • Adjusted EBITDA increased 14.3%, with higher segment income across Burger King regions and Tim Hortons’ post-acquisition contribution; this non-GAAP increase contrasts with the GAAP operating and net-income declines.
  • Cash provided by operations decreased, while borrowing and preferred-share proceeds funded the acquisition and refinancing. The company refinanced legacy debt and redeemed most Burger King notes; Tim Hortons notes were subsequently tendered, with small balances remaining after the reported offers.

Outlook, risks, contingencies and unusual items

  • Management outlined global expansion, franchisee sales and profitability, restaurant image and service improvements, and efficiency initiatives, including planned Zero Based Budgeting at Tim Hortons and shared services. It provided no specific consolidated revenue or earnings guidance in the supplied filing text.
  • Management expected about $180 million of 2015 capital expenditures, approximately $8.5 million of additional 2015 G&A costs associated with transaction-related initiatives, and total costs of approximately $24.8 million for the Tim Hortons restructuring plan.
  • 2014 included $290.9 million of net derivative losses, $125.0 million of Tim Hortons transaction and restructuring costs, $155.4 million of loss on early extinguishment of debt, and $7.4 million of acquisition-related inventory step-up amortization. The derivative impact included substantial currency and interest-rate movements related to the transaction and hedging arrangements.
  • Key risks include substantial leverage, variable-rate debt, restrictive covenants and significant debt and preferred-dividend service; exposure to foreign exchange and commodity prices; reliance on franchisees and master franchisees; competition; and food safety, labor, regulatory, tax and supply-chain risks. Management reported covenant compliance at year-end.
  • Commitments include operating lease obligations of $1,734.6 million and purchase commitments of $725.1 million in the contractual-obligations table. Separately, early termination of Burger King’s long-term soft-drink purchase commitments could trigger an estimated payment of about $545 million. The company also disclosed franchisee loan guarantees and an $8.5 million fax-advertising settlement awaiting final court approval, as well as an estimated $13.3 million liability for pending litigation.
  • The annual audit found internal control over financial reporting effective, but management’s assessment and the auditor’s control audit excluded Tim Hortons’ acquired operations, which represented $14,485.3 million of reported assets and $142.1 million of 2014 revenue. RBI said it was integrating Tim Hortons into its controls.

Important facts for investors to verify

  • Review pro forma and subsequent-period results to assess the combined company’s normalized revenue, earnings and cash generation; reported 2014 includes only a short period of Tim Hortons operations.
  • Reconcile total debt, remaining Tim Hortons notes, refinancing and tender-offer payments, maturities, interest costs, covenant headroom and the effect of rate hedges.
  • Assess whether operating cash flow can support debt service, the $270 million annual preferred dividend, common-share distributions and planned capital spending.
  • Track acquisition-accounting finalization, restructuring and integration costs, expected synergies, and the expansion of internal controls to Tim Hortons.
  • Monitor derivative volatility, foreign-currency exposure, commodity and supply risks, franchisee health, and the disclosed legal matters and long-term purchase commitments.