Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-36786
RESTAURANT BRANDS INTERNATIONAL INC.
(Exact Name of Registrant as Specified in its Charter)
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Canada | | 98-1202754 |
(State or Other Jurisdiction of | | (I.R.S. Employer |
Incorporation or Organization) | | Identification No.) |
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226 Wyecroft Road Oakville, Ontario | | L6K 3X7 |
(Address of Principal Executive Offices) | | (Zip Code) |
(905) 845-6511
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one);
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Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
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Non-accelerated filer | | ☐ (Do not check if a smaller reporting company) | | Smaller reporting company | | ☐ |
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Emerging growth company ☐ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
As of July 21, 2017, there were 236,263,566 common shares of the Registrant outstanding.
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 5. | | |
Item 6. | | |
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PART I — Financial Information
Item 1. Financial Statements
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions of U.S. dollars, except share data)
(Unaudited)
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| | | | | | | |
| As of |
| June 30, 2017 | | December 31, 2016 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 3,435.5 |
| | $ | 1,460.4 |
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Accounts and notes receivable, net of allowance of $15.9 million and $14.3 million, respectively | 388.8 |
| | 403.5 |
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Inventories, net | 89.5 |
| | 71.8 |
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Advertising fund restricted assets | 92.8 |
| | 57.7 |
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Prepaids and other current assets | 106.9 |
| | 103.6 |
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Total current assets | 4,113.5 |
| | 2,097.0 |
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Property and equipment, net of accumulated depreciation and amortization of $545.0 million and $474.5 million, respectively | 2,153.5 |
| | 2,054.7 |
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Intangible assets, net | 10,841.6 |
| | 9,228.0 |
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Goodwill | 5,683.7 |
| | 4,675.1 |
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Net investment in property leased to franchisees | 81.5 |
| | 91.9 |
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Derivative assets | — |
| | 717.9 |
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Other assets, net | 363.1 |
| | 260.3 |
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Total assets | $ | 23,236.9 |
| | $ | 19,124.9 |
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LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts and drafts payable | $ | 376.1 |
| | $ | 369.8 |
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Other accrued liabilities | 492.1 |
| | 469.3 |
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Gift card liability | 139.5 |
| | 194.4 |
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Advertising fund liabilities | 120.7 |
| | 83.3 |
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Current portion of long term debt and capital leases | 76.3 |
| | 93.9 |
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Total current liabilities | 1,204.7 |
| | 1,210.7 |
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Term debt, net of current portion | 11,252.9 |
| | 8,410.2 |
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Capital leases, net of current portion | 231.2 |
| | 218.4 |
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Other liabilities, net | 1,178.9 |
| | 784.9 |
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Deferred income taxes, net | 2,198.0 |
| | 1,715.1 |
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Total liabilities | 16,065.7 |
| | 12,339.3 |
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Redeemable preferred shares; no par value; 68,530,939 shares authorized, issued and outstanding at June 30, 2017 and December 31, 2016 | 3,297.0 |
| | 3,297.0 |
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Shareholders’ equity: | | | |
Common shares, no par value; unlimited shares authorized at June 30, 2017 and December 31, 2016; 236,247,377 shares issued and outstanding at June 30, 2017; 234,236,678 shares issued and outstanding at December 31, 2016 | 2,003.0 |
| | 1,955.1 |
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Retained earnings | 497.6 |
| | 445.7 |
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Accumulated other comprehensive income (loss) | (578.1 | ) | | (698.3 | ) |
Total Restaurant Brands International Inc. shareholders’ equity | 1,922.5 |
| | 1,702.5 |
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Noncontrolling interests | 1,951.7 |
| | 1,786.1 |
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Total shareholders’ equity | 3,874.2 |
| | 3,488.6 |
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Total liabilities, redeemable preferred shares and shareholders’ equity | $ | 23,236.9 |
| | $ | 19,124.9 |
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See accompanying notes to condensed consolidated financial statements.
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In millions of U.S. dollars, except per share data)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues: | | | | | | | |
Sales | $ | 602.1 |
| | $ | 558.6 |
| | $ | 1,152.5 |
| | $ | 1,049.1 |
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Franchise and property revenues | 530.6 |
| | 481.6 |
| | 980.8 |
| | 909.6 |
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Total revenues | 1,132.7 |
| | 1,040.2 |
| | 2,133.3 |
| | 1,958.7 |
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Operating costs and expenses: | | | | | | | |
Cost of sales | 460.2 |
| | 438.0 |
| | 883.6 |
| | 828.6 |
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Franchise and property expenses | 113.7 |
| | 111.9 |
| | 224.7 |
| | 213.7 |
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Selling, general and administrative expenses | 96.7 |
| | 73.1 |
| | 218.6 |
| | 146.3 |
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(Income) loss from equity method investments | 0.9 |
| | 4.5 |
| | (4.8 | ) | | (14.0 | ) |
Other operating expenses (income), net | 46.8 |
| | (11.3 | ) | | 60.6 |
| | 29.5 |
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Total operating costs and expenses | 718.3 |
| | 616.2 |
| | 1,382.7 |
| | 1,204.1 |
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Income from operations | 414.4 |
| | 424.0 |
| | 750.6 |
| | 754.6 |
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Interest expense, net | 128.0 |
| | 117.2 |
| | 239.4 |
| | 232.3 |
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Loss on early extinguishment of debt | — |
| | — |
| | 20.4 |
| | — |
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Income before income taxes | 286.4 |
| | 306.8 |
| | 490.8 |
| | 522.3 |
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Income tax expense | 42.9 |
| | 59.2 |
| | 80.7 |
| | 106.4 |
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Net income | 243.5 |
| | 247.6 |
| | 410.1 |
| | 415.9 |
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Net income attributable to noncontrolling interests (Note 11) | 86.5 |
| | 89.2 |
| | 135.4 |
| | 140.0 |
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Preferred share dividends | 67.5 |
| | 67.5 |
| | 135.0 |
| | 135.0 |
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Net income attributable to common shareholders | $ | 89.5 |
| | $ | 90.9 |
| | $ | 139.7 |
| | $ | 140.9 |
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Earnings per common share | | | | | | | |
Basic | $ | 0.38 |
| | $ | 0.39 |
| | $ | 0.59 |
| | $ | 0.61 |
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Diluted | $ | 0.37 |
| | $ | 0.38 |
| | $ | 0.57 |
| | $ | 0.59 |
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Weighted average shares outstanding | | | | | | | |
Basic | 235.8 |
| | 233.5 |
| | 235.2 |
| | 231.8 |
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Diluted | 478.0 |
| | 470.1 |
| | 477.3 |
| | 469.2 |
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Cash dividends declared per common share | $ | 0.19 |
| | $ | 0.15 |
| | $ | 0.37 |
| | $ | 0.29 |
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See accompanying notes to condensed consolidated financial statements.
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In millions of U.S. dollars)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 243.5 |
| | $ | 247.6 |
| | $ | 410.1 |
| | $ | 415.9 |
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Foreign currency translation adjustment | 355.4 |
| | 21.1 |
| | 461.2 |
| | 670.5 |
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Net change in fair value of net investment hedges, net of tax of $(48.8), $(6.9), $(38.1) and $28.6 | (172.9 | ) | | 47.5 |
| | (216.4 | ) | | (191.1 | ) |
Net change in fair value of cash flow hedges, net of tax of $5.9, $5.7, $6.8 and $21.4 | (16.5 | ) | | (16.6 | ) | | (19.1 | ) | | (61.0 | ) |
Amounts reclassified to earnings of cash flow hedges, net of tax of $(2.5), $(1.8), $(3.8) and $(1.8) | 7.3 |
| | 5.2 |
| | 11.0 |
| | 5.1 |
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Pension and post-retirement benefit plans, net of tax of $0, $0, $0.1 and $0 | — |
| | — |
| | (0.1 | ) | | — |
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Amortization of prior service (credits) costs, net of tax of $0.3, $0.3, $0.6 and $0.6 | (0.4 | ) | | (0.5 | ) | | (0.8 | ) | | (0.9 | ) |
Amortization of actuarial (gains) losses, net of tax of $0.8, $(0.1), $0.7 and $(0.1) | 1.0 |
| | — |
| | 1.2 |
| | 0.1 |
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Other comprehensive income (loss) | 173.9 |
| | 56.7 |
| | 237.0 |
| | 422.7 |
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Comprehensive income (loss) | 417.4 |
| | 304.3 |
| | 647.1 |
| | 838.6 |
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Comprehensive income (loss) attributable to noncontrolling interests | 171.8 |
| | 117.2 |
| | 251.7 |
| | 351.0 |
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Comprehensive income attributable to preferred shareholders | 67.5 |
| | 67.5 |
| | 135.0 |
| | 135.0 |
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Comprehensive income (loss) attributable to common shareholders | $ | 178.1 |
| | $ | 119.6 |
| | $ | 260.4 |
| | $ | 352.6 |
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See accompanying notes to condensed consolidated financial statements.
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(In millions of U.S. dollars, except shares)
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | |
| Issued Common Shares | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Noncontrolling
Interest | | Total |
| Shares | | Amount | | | | |
Balances at December 31, 2016 | 234,236,678 |
| | $ | 1,955.1 |
| | $ | 445.7 |
| | $ | (698.3 | ) | | $ | 1,786.1 |
| | $ | 3,488.6 |
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Stock option exercises | 1,710,286 |
| | 12.3 |
| | — |
| | — |
| | — |
| | 12.3 |
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Share-based compensation | — |
| | 24.9 |
| | — |
| | — |
| | — |
| | 24.9 |
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Issuance of shares | 153,683 |
| | 8.5 |
| | — |
| | — |
| | — |
| | 8.5 |
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Dividends declared on common shares | — |
| | — |
| | (87.1 | ) | | — |
| | — |
| | (87.1 | ) |
Dividend equivalents declared on restricted stock units | — |
| | 0.7 |
| | (0.7 | ) | | — |
| | — |
| | — |
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Distributions declared by Partnership on Partnership exchangeable units (Note 11) | — |
| | — |
| | — |
| | — |
| | (83.9 | ) | | (83.9 | ) |
Preferred share dividends | — |
| | — |
| | (135.0 | ) | | — |
| | — |
| | (135.0 | ) |
Exchange of Partnership exchangeable units for RBI common shares | 146,730 |
| | 1.5 |
| | — |
| | (0.5 | ) | | (1.0 | ) | | — |
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Restaurant VIE contributions (distributions) | — |
| | — |
| | — |
| | — |
| | (1.2 | ) | | (1.2 | ) |
Net income | — |
| | — |
| | 274.7 |
| | — |
| | 135.4 |
| | 410.1 |
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Other comprehensive income (loss) | — |
| | — |
| | — |
| | 120.7 |
| | 116.3 |
| | 237.0 |
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Balances at June 30, 2017 | 236,247,377 |
| | $ | 2,003.0 |
| | $ | 497.6 |
| | $ | (578.1 | ) | | $ | 1,951.7 |
| | $ | 3,874.2 |
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See accompanying notes to condensed consolidated financial statements.
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
(Unaudited)
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| | | | | | | |
| Six Months Ended June 30, |
| 2017 | | 2016 |
Cash flows from operating activities: | | | |
Net income | $ | 410.1 |
| | $ | 415.9 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 88.7 |
| | 85.7 |
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Non-cash loss on early extinguishment of debt | 17.9 |
| | — |
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Amortization of deferred financing costs and debt issuance discount | 16.7 |
| | 19.3 |
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(Income) loss from equity method investments | (4.8 | ) | | (14.0 | ) |
Loss (gain) on remeasurement of foreign denominated transactions | 47.1 |
| | 19.0 |
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Net losses on derivatives | 14.9 |
| | 9.4 |
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Share-based compensation expense | 27.2 |
| | 16.1 |
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Deferred income taxes | 22.4 |
| | 10.5 |
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Other | 9.8 |
| | 7.1 |
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Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | |
Accounts and notes receivable | 27.4 |
| | 21.4 |
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Inventories and prepaids and other current assets | (11.1 | ) | | (69.4 | ) |
Accounts and drafts payable | (9.5 | ) | | 7.4 |
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Advertising fund restricted assets and fund liabilities | 1.3 |
| | (15.8 | ) |
Other accrued liabilities and gift card liability | (164.2 | ) | | (17.5 | ) |
Other long-term assets and liabilities | (12.9 | ) | | 10.2 |
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Net cash provided by operating activities | 481.0 |
| | 505.3 |
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Cash flows from investing activities: | | | |
Payments for property and equipment | (11.7 | ) | | (12.8 | ) |
Proceeds from disposal of assets, restaurant closures, and refranchisings | 9.6 |
| | 13.2 |
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Net payment for purchase of Popeyes, net of cash acquired | (1,635.9 | ) | | — |
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Return of investment on direct financing leases | 7.8 |
| | 8.1 |
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Settlement/sale of derivatives, net | 772.0 |
| | 1.5 |
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Other investing activities, net | 0.3 |
| | 1.8 |
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Net cash provided by (used for) investing activities | (857.9 | ) | | 11.8 |
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Cash flows from financing activities: | | | |
Proceeds from issuance of long-term debt | 3,050.0 |
| | — |
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Repayments of long-term debt and capital leases | (377.7 | ) | | (34.6 | ) |
Payment of financing costs | (47.0 | ) | | — |
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Payment of dividends on common and preferred shares and distributions on Partnership exchangeable units | (296.6 | ) | | (260.2 | ) |
Proceeds from stock option exercises | 12.3 |
| | 10.7 |
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Other financing activities, net | (2.3 | ) | | 1.1 |
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Net cash provided by (used for) financing activities | 2,338.7 |
| | (283.0 | ) |
Effect of exchange rates on cash and cash equivalents | 13.3 |
| | 6.2 |
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Increase (decrease) in cash and cash equivalents | 1,975.1 |
| | 240.3 |
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Cash and cash equivalents at beginning of period | 1,460.4 |
| | 757.8 |
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Cash and cash equivalents at end of period | $ | 3,435.5 |
| | $ | 998.1 |
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Supplemental cashflow disclosures: | | | |
Interest paid | $ | 205.6 |
| | $ | 199.7 |
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Income taxes paid | $ | 116.9 |
| | $ | 76.6 |
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Non-cash investing and financing activities: | | | |
Acquisition of property with capital lease obligations | $ | 17.7 |
| | $ | 8.3 |
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See accompanying notes to condensed consolidated financial statements.
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Description of Business and Organization
Restaurant Brands International Inc. (the “Company,” “RBI,” “we,” “us” or “our”) was formed on August 25, 2014 and continued under the laws of Canada. The Company serves as the sole general partner of Restaurant Brands International Limited Partnership (the “Partnership”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons® brand (“Tim Hortons”), fast food hamburger restaurants principally under the Burger King® brand (“Burger King”), and chicken quick service restaurants under the Popeyes® brand (“Popeyes”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of June 30, 2017, we franchised or owned 4,655 Tim Hortons restaurants, 16,000 Burger King restaurants, and 2,768 Popeyes restaurants, for a total of 23,423 restaurants, and operate in more than 100 countries and U.S. territories. Approximately 100% of current system-wide restaurants are franchised.
All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to Canadian dollars or C$ are to the currency of Canada unless otherwise indicated.
Note 2. Popeyes Acquisition
On March 27, 2017, we completed the acquisition of all of the outstanding shares of common stock of Popeyes Louisiana Kitchen, Inc. (the “Popeyes Acquisition”). Popeyes Louisiana Kitchen Inc. is one of the world’s largest chicken quick service restaurant companies and its global footprint complements RBI’s existing portfolio. Like RBI’s other brands, the Popeyes brand is managed independently, while benefitting from the global scale and resources of RBI. The Popeyes Acquisition was accounted for as a business combination using the acquisition method of accounting.
Total consideration in connection with the Popeyes Acquisition was $1,654.7 million, which includes $32.6 million for the settlement of equity awards. The consideration was funded through (1) cash on hand of approximately $354.7 million, and (2) $1,300.0 million from incremental borrowings under our Term Loan Facility – see Note 9, Long-Term Debt.
Fees and expenses related to the Popeyes Acquisition and related financings totaled $34.4 million consisting primarily of professional fees and compensation related expenses, all of which are classified as selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. These fees and expenses were funded through cash on hand.
During three months ended June 30, 2017, we adjusted our preliminary estimate of the fair value of net assets acquired. The preliminary allocation of consideration to the net tangible and intangible assets acquired is presented in the table below (in millions):
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| March 27, 2017 |
Total current assets | $ | 80.0 |
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Property and equipment | 114.4 |
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Intangible assets | 1,372.9 |
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Other assets | 0.7 |
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Total current liabilities | (74.7 | ) |
Total debt and capital lease obligations | (159.0 | ) |
Deferred income taxes | (524.2 | ) |
Other liabilities | (23.2 | ) |
Total identifiable net assets | 786.9 |
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Goodwill | 867.8 |
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Total consideration | $ | 1,654.7 |
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The adjustments to the preliminary estimate of net assets acquired resulted in a corresponding $210.5 million decrease in estimated goodwill due to the following changes to preliminary estimates of fair values and allocation of purchase price (in millions):
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| | | |
| Increase (Decrease) in Goodwill |
Change in: | |
Total current assets | $ | (15.6 | ) |
Property and equipment | (17.9 | ) |
Intangible assets | (352.9 | ) |
Deferred income taxes | 165.9 |
|
Other liabilities | 10.0 |
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Total decrease in goodwill | $ | (210.5 | ) |
The purchase price allocation reflects preliminary fair value estimates based on management’s analysis, including preliminary work performed by third-party valuation specialists. We will continue to obtain information to assist in determining the fair value of net assets acquired during the measurement period.
Intangible assets include $1,319.0 million related to the Popeyes brand, $44.0 million related to franchise agreements and $9.9 million related to favorable leases. The Popeyes brand has been assigned an indefinite life and, therefore, will not be amortized, but rather tested annually for impairment. Franchise agreements have a weighted average amortization period of 17 years. Favorable leases have a weighted average amortization period of 14 years.
Goodwill attributable to the Popeyes Acquisition will not be amortizable or deductible for tax purposes. Goodwill is considered to represent the value associated with the workforce and synergies anticipated to be realized as a combined company. We have not yet allocated goodwill related to the Popeyes Acquisition to reporting units for goodwill impairment testing purposes. Goodwill will be allocated to reporting units when the purchase price allocation is finalized during the measurement period.
The Popeyes Acquisition is not material to our consolidated financial statements, and therefore, supplemental pro forma financial information related to the acquisition is not included herein.
Note 3. Basis of Presentation and Consolidation
We have prepared the accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC and Canadian securities regulatory authorities on February 17, 2017.
The Financial Statements include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All material intercompany balances and transactions have been eliminated in consolidation. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method.
We are the sole general partner of Partnership and, as such we have the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership, subject to the terms of the amended and restated limited partnership agreement of Partnership (the “partnership agreement”) and applicable laws. As a result, we consolidate the results of Partnership and record a noncontrolling interest in our consolidated balance sheets and statements of operations with respect to the remaining economic interest in Partnership we do not hold.
We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary.
Tim Hortons has historically entered into certain arrangements in which an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. We perform an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of June 30, 2017 and December 31, 2016, we determined that we are the primary beneficiary of 41 and 96 Restaurant VIEs, respectively. As Tim Hortons, Burger King, and Popeyes franchise and master franchise arrangements provide the franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE.
In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year.
The preparation of consolidated financial statements in conformity with U.S. GAAP and related rules and regulations of the SEC requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Certain prior year amounts in the accompanying Financial Statements and notes to the Financial Statements have been reclassified in order to be comparable with the current year classifications. These reclassifications had no effect on previously reported net income.
Note 4. New Accounting Pronouncements
Revenue Recognition – In May 2014, the Financial Accounting Standards Board (the “FASB”) issued a new single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. In August 2015, the FASB deferred adoption of the new standard by one year. Several updates have been issued since to clarify the implementation guidance. The new guidance supersedes most current revenue recognition guidance, including industry-specific guidance, enhances revenue recognition disclosures, and is now effective commencing in 2018. The guidance allows for either a full retrospective or modified retrospective transition method. We currently expect to apply the modified retrospective transition method.
We have performed a preliminary analysis of the impact of the new revenue recognition guidance and developed a comprehensive plan for the implementation. The project plan includes analyzing the impact on our current revenue streams, comparing our historical accounting policies to the new guidance, and identifying potential differences from applying the requirements of the new guidance to our contracts. Under current accounting guidance, we recognize initial franchise fees when we have performed all material obligations and services, which generally occurs when the franchised restaurant opens. Under the new guidance, we anticipate deferring the initial franchise fees and recognizing revenue over the term of the related franchise agreement. We anticipate that the new guidance will also change our reporting of advertising fund contributions from franchisees and the related advertising expenditures, which are currently reported on a net basis in our consolidated balance sheet. Under the current guidance, as of the balance sheet date, advertising fund contributions received may not equal advertising expenditures for the period due to the timing of promotions. To the extent that contributions received exceeded advertising expenditures, the excess contributions are treated as a deferred liability. To the extent that advertising expenditures temporarily exceeded advertising fund contributions, the difference is recorded as a receivable from the fund. Under the new guidance, we anticipate advertising fund contributions from franchisees and advertising fund expenditures will be reported on a gross basis and the related advertising fund revenues and expenses may be reported in different periods.
We anticipate that estimated breakage income on gift cards will be recognized as gift cards are utilized instead of our current policy of deferring the breakage income until it is deemed remote that the unused gift card balance will be redeemed. We do not believe this guidance will materially impact our recognition of revenue from Company restaurant sales, our recognition of royalty revenues from franchisees, or our recognition of revenues from property rentals.
Lease Accounting – In February 2016, the FASB issued new guidance on leases. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases with lease terms of more than 12 months, as well as enhanced disclosures. The amendment requires the recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective approach and is effective commencing in 2019. We expect this new guidance to cause a material increase to our assets and liabilities on our consolidated balance sheet since we have a significant number of operating lease arrangements for which we are the lessee. We are currently evaluating the impact that adoption of this guidance will have on our consolidated statements of operations. The impact of this
accounting standards update is non-cash in nature. As such, we do not expect the adoption of this new guidance to have a material impact on our cash flows and liquidity.
Derivative Contract Novations on Existing Hedges – In March 2016, the FASB issued an accounting standards update that clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under existing accounting guidance does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. We adopted this new guidance on a prospective basis on January 1, 2017. Adoption did not have an impact on our consolidated financial statements.
Equity Method Accounting – In March 2016, the FASB issued an accounting standards update which eliminates the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in level of ownership interest or degree of influence. We adopted this new guidance on a prospective basis on January 1, 2017. Adoption did not have an impact on our consolidated financial statements.
Employee Share-Based Payment Accounting – In March 2016, the FASB issued an accounting standards update to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory withholding requirements, as well as statement of cash flows presentation. The transition requirement is mostly modified retrospective, with the exception of recognition of excess tax benefits and tax deficiencies which requires prospective adoption. We adopted this new guidance on January 1, 2017. The adoption of this new guidance resulted in an increase to our diluted weighted average shares outstanding, as well as recognition of excess tax benefits as a reduction in the provision for income taxes rather than an addition to common shares, as required by previous accounting guidance. We will continue to estimate forfeitures instead of accounting for them as they occur as permitted by the new standard. The adoption of the other provisions of this new guidance did not have an impact on our consolidated financial statements.
Classification of Certain Cash Receipts and Cash Payments – In August 2016, the FASB issued an accounting standards update to reduce the existing diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for 2018. We do not expect the adoption of this new guidance to have a material impact on our consolidated financial statements.
Intra-Entity Transfers of Assets Other Than Inventory – In October 2016, the FASB issued guidance amending the accounting for income taxes. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The amendment is effective for 2018. We are currently evaluating the impact that the adoption of this new guidance will have on our consolidated financial statements.
Goodwill Impairment – In January 2017, the FASB issued guidance to simplify how an entity measures goodwill impairment by removing the second step of the two-step quantitative goodwill impairment test. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured at the amount by which the carrying value exceeds the fair value of a reporting unit; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. The amendment requires prospective adoption and is effective commencing in 2020 with early adoption permitted. We do not expect the adoption of this guidance to have an impact on our consolidated financial statements.
Note 5. Earnings per Share
An economic interest in Partnership common equity is held by the holders of Class B exchangeable limited partnership units (the “Partnership exchangeable units”), which is reflected as a noncontrolling interest in our equity. See Note 11, Shareholders’ Equity.
Basic and diluted earnings per share is computed using the weighted average number of shares outstanding for the period. We apply the treasury stock method to determine the dilutive weighted average common shares represented by Partnership exchangeable units and outstanding stock options, unless the effect of their inclusion is anti-dilutive. The diluted earnings per share calculation assumes conversion of 100% of the Partnership exchangeable units under the “if converted” method. Accordingly, the numerator is also adjusted to include the earnings allocated to the holders of noncontrolling interests.
The following table summarizes the basic and diluted earnings per share calculations (in millions, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Numerator: | | | | | | | |
Net income attributable to common shareholders - basic | $ | 89.5 |
| | $ | 90.9 |
| | $ | 139.7 |
| | $ | 140.9 |
|
Add: Net income attributable to noncontrolling interests | 86.1 |
| | 88.3 |
| | 134.6 |
| | 138.2 |
|
Net income available to common shareholders and noncontrolling interests - diluted | $ | 175.6 |
| | $ | 179.2 |
| | $ | 274.3 |
| | $ | 279.1 |
|
| | | | | | | |
Denominator: | | | | | | | |
Weighted average common shares - basic | 235.8 |
| | 233.5 |
| | 235.2 |
| | 231.8 |
|
Exchange of noncontrolling interests for common shares (Note 11) | 226.9 |
| | 227.2 |
| | 226.9 |
| | 228.5 |
|
Effect of other dilutive securities | 15.3 |
| | 9.4 |
| | 15.2 |
| | 8.9 |
|
Weighted average common shares - diluted | 478.0 |
| | 470.1 |
| | 477.3 |
| | 469.2 |
|
| | | | | | | |
Basic earnings per share | $ | 0.38 |
| | $ | 0.39 |
| | $ | 0.59 |
| | $ | 0.61 |
|
Diluted earnings per share | $ | 0.37 |
| | $ | 0.38 |
| | $ | 0.57 |
| | $ | 0.59 |
|
Anti-dilutive securities outstanding | 4.2 |
| | 6.4 |
| | 4.2 |
| | 6.4 |
|
Note 6. Intangible Assets, net and Goodwill
Intangible assets, net and goodwill consist of the following (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| June 30, 2017 | | December 31, 2016 |
| Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
Identifiable assets subject to amortization: | | | | | | | | | | | |
Franchise agreements | $ | 716.3 |
| | $ | (150.6 | ) | | $ | 565.7 |
| | $ | 655.1 |
| | $ | (132.4 | ) | | $ | 522.7 |
|
Favorable leases | 452.4 |
| | (172.0 | ) | | 280.4 |
| | 436.0 |
| | (149.7 | ) | | 286.3 |
|
Subtotal | 1,168.7 |
| | (322.6 | ) | | 846.1 |
| | 1,091.1 |
| | (282.1 | ) | | 809.0 |
|
Indefinite lived intangible assets: | | | | | | | | | | | |
Tim Hortons brand | $ | 6,547.7 |
| | $ | — |
| | $ | 6,547.7 |
| | $ | 6,341.6 |
| | $ | — |
| | $ | 6,341.6 |
|
Burger King brand | 2,128.8 |
| | — |
| | 2,128.8 |
| | 2,077.4 |
| | — |
| | 2,077.4 |
|
Popeyes brand | 1,319.0 |
| | — |
| | 1,319.0 |
| | — |
| | — |
| | — |
|
Subtotal | 9,995.5 |
| | — |
| | 9,995.5 |
| | 8,419.0 |
| | — |
| | 8,419.0 |
|
Intangible assets, net | | | | | $ | 10,841.6 |
| | | | | | $ | 9,228.0 |
|
| | | | | | | | | | | |
Goodwill | | | | | | | | | | | |
Tim Hortons segment | $ | 4,214.4 |
| | | | | | $ | 4,087.8 |
| | | | |
Burger King segment | 601.5 |
| | | | | | 587.3 |
| | | | |
Popeyes segment | 867.8 |
| | | | | | — |
| | | | |
Total | $ | 5,683.7 |
| | | | | | $ | 4,675.1 |
| | | | |
Amortization expense on intangible assets totaled $18.0 million for the three months ended June 30, 2017 and $17.8 million for the same period in the prior year. Amortization expense on intangible assets totaled $35.5 million for the six months ended June 30, 2017 and $36.1 million for the same period in the prior year. The change in the brands and goodwill balances during the six months ended June 30, 2017 was due principally to the addition of goodwill and the Popeyes brand from the Popeyes Acquisition, and to a lesser extent, the impact of foreign currency translation.
Note 7. Equity Method Investments
The aggregate carrying amount of our equity method investments was $152.7 million and $151.1 million as of June 30, 2017 and December 31, 2016, respectively, and is included as a component of other assets, net in our accompanying condensed consolidated balance sheets. Our Tim Hortons (“TH”) business and Burger King (“BK”) business both have equity method investments. Our Popeyes Louisiana Kitchen (“PLK”) business does not have any equity method investments. Select information about our most significant equity method investments, based on the carrying value as of June 30, 2017, was as follows:
|
| | | |
Entity | Country | | Equity Interest |
TIMWEN Partnership | Canada | | 50.0% |
Carrols Restaurant Group, Inc. | United States | | 20.6% |
Pangaea Foods (China) Holdings, Ltd. | China | | 27.5% |
With respect to our TH business, the most significant equity method investment is our 50% joint venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. Distributions received from this joint venture were $3.0 million and $3.1 million during the three months ended June 30, 2017 and 2016, respectively. Distributions received from this joint venture were $5.4 million and $5.6 million during the six months ended June 30, 2017 and 2016, respectively.
The aggregate market value of our equity interest in Carrols Restaurant Group, Inc. (“Carrols”), the most significant equity method investment for our BK business, based on the quoted market price on June 30, 2017, was approximately $115.3 million. No quoted market prices are available for our other equity method investments.
We have equity interests in entities that own or franchise Tim Hortons or Burger King restaurants. Franchise and property revenues recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues from affiliates: | | | | | | | |
Franchise royalties | $ | 43.4 |
| | $ | 31.6 |
| | $ | 81.9 |
| | $ | 59.3 |
|
Property revenues | 6.6 |
| | 7.6 |
| | 12.9 |
| | 14.2 |
|
Franchise fees and other revenue | 5.3 |
| | 4.3 |
| | 11.0 |
| | 7.9 |
|
Total | $ | 55.3 |
| | $ | 43.5 |
| | $ | 105.8 |
| | $ | 81.4 |
|
We recognized $4.9 million and $5.2 million of rent expense associated with the TIMWEN Partnership during the three months ended June 30, 2017 and 2016, respectively. We recognized $9.4 million and $9.6 million of rent expense associated with the TIMWEN Partnership during the six months ended June 30, 2017 and 2016, respectively.
At June 30, 2017 and December 31, 2016, we had $23.0 million and $25.7 million, respectively, of accounts receivable, net from our equity method investments which were recorded in accounts and notes receivable, net in our condensed consolidated balance sheets.
(Income) loss from equity method investments reflects our share of investee net income or loss, non-cash dilution gains or losses from changes in our ownership interests in equity method investees and basis difference amortization. We recorded an increase to the carrying value of our equity method investment balance and a non-cash dilution gain of $11.6 million during the six months ended June 30, 2016. The dilution gain resulted from the issuance of capital stock by one of our equity method investees, which reduced our ownership interest in this equity method investment. The dilution gain we recorded in connection with the issuance of capital stock reflects adjustments to the difference between the amount of underlying equity in the net assets of the equity method investee before and after their issuance of capital stock.
Note 8. Other Accrued Liabilities and Other Liabilities, net
Other accrued liabilities (current) and other liabilities, net (noncurrent) consist of the following (in millions):
|
| | | | | | | |
| As of |
| June 30, 2017 | | December 31, 2016 |
Current: | | | |
Dividend payable | $ | 155.4 |
| | $ | 146.1 |
|
Interest payable | 69.7 |
| | 63.3 |
|
Accrued compensation and benefits | 46.8 |
| | 60.5 |
|
Taxes payable | 72.0 |
| | 43.3 |
|
Deferred income | 46.5 |
| | 54.7 |
|
Closed property reserve | 11.1 |
| | 11.0 |
|
Restructuring and other provisions | 13.9 |
| | 9.1 |
|
Other | 76.7 |
| | 81.3 |
|
Other accrued liabilities | $ | 492.1 |
| | $ | 469.3 |
|
| | | |
Noncurrent: | | | |
Unfavorable leases | $ | 272.2 |
| | $ | 275.8 |
|
Taxes payable | 376.4 |
| | 252.2 |
|
Accrued pension | 81.3 |
| | 82.9 |
|
Derivatives liabilities | 307.9 |
| | 55.1 |
|
Lease liability | 27.1 |
| | 27.2 |
|
Deferred income | 40.5 |
| | 27.1 |
|
Other | 73.5 |
| | 64.6 |
|
Other liabilities, net | $ | 1,178.9 |
| | $ | 784.9 |
|
Note 9. Long-Term Debt
Long-term debt consists of the following (in millions):
|
| | | | | | | |
| As of |
| June 30, 2017 | | December 31, 2016 |
Term Loan Facility (due February 17, 2024) | $ | 6,421.0 |
| | $ | 5,046.1 |
|
2017 Senior Notes (due May 15, 2024) | 1,500.0 |
| | — |
|
2015 Senior Notes (due January 12, 2022) | 1,250.0 |
| | 1,250.0 |
|
2014 Senior Notes (due April 1, 2022) | 2,250.0 |
| | 2,250.0 |
|
Tim Hortons Notes (a) | 5.0 |
| | 40.6 |
|
Other | 84.1 |
| | 85.4 |
|
Less: unamortized deferred financing costs and deferred issue discount | (200.8 | ) | | (187.1 | ) |
Total debt, net | 11,309.3 |
| | 8,485.0 |
|
Less: current maturities of debt | (56.4 | ) | | (74.8 | ) |
Total long-term debt | $ | 11,252.9 |
| | $ | 8,410.2 |
|
| |
(a) | $35.6 million of Tim Hortons Notes were repaid on June 1, 2017, the original maturity date. |
Refinancing of Credit Facilities
On February 17, 2017, two of our subsidiaries (the “Borrowers”) entered into a second amendment (the “Second Amendment”) to the credit agreement governing our senior secured term loan facility (the “Term Loan Facility”) and our senior secured revolving credit facility of up to $500.0 million of revolving extensions of credit outstanding at any time (including revolving loans, swingline loans and letters of credit) maturing on December 12, 2019 (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”). Under the Second Amendment, (i) the outstanding aggregate principal amount under our Term Loan Facility was decreased to $4,900.0 million as a result of a repayment of $146.1 million from cash on hand, (ii) the interest rate applicable to our Term Loan Facility was reduced to, at our option, either (a) a base rate plus an applicable margin equal to 1.25%, or (b) a Eurocurrency rate plus an applicable margin equal to 2.25%, (iii) the maturity of our Term Loan Facility was extended from December 12, 2021 to February 17, 2024, and (iv) the Borrowers and their subsidiaries were provided with additional flexibility under certain negative covenants, including incurrence of indebtedness, making of investments, dispositions and restricted payments, and prepayment of subordinated indebtedness. Except as described herein, the Second Amendment did not materially change the terms of the Credit Facilities.
In connection with the Second Amendment, we capitalized approximately $11.3 million in debt issuance costs and recorded a loss on early extinguishment of debt of $20.4 million during the six months ended June 30, 2017. The loss on early extinguishment of debt primarily reflects the write-off of unamortized debt issuance costs and discounts.
Incremental Term Loans
In connection with the Popeyes Acquisition, we obtained an incremental term loan in the aggregate principal amount of $1,300.0 million (the “Incremental Term Loan No. 1”) under our Term Loan Facility. Also, simultaneously and in connection with the issuance of the 2017 Senior Notes (described below), we obtained an additional incremental term loan in the aggregate principal amount of $250.0 million (the "Incremental Term Loan No. 2" and together with the Incremental Term Loan No. 1, the "Incremental Term Loans") under our Term Loan Facility. The Incremental Term Loans bear interest at the same rate as the Term Loan Facility and also mature on February 17, 2024. In connection with the Incremental Term Loan No. 1, Popeyes was included as loan guarantor and its assets as collateral under the Credit Facilities. Except as described herein, there were no other material changes to the terms of the Credit Facilities. Debt issuance costs capitalized in connection with the Incremental Term Loans were approximately $23.0 million.
Revolving Credit Facility
As of June 30, 2017, we had no amounts outstanding under our Revolving Credit Facility. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or share repurchases, to fund acquisitions or capital expenditures and for other general corporate purposes. We have a $125.0 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. As of June 30, 2017, we had $1.6 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability was $498.4 million.
2017 Senior Notes
On May 17, 2017, the Borrowers entered into an indenture (the "2017 Senior Notes Indenture") in connection with the issuance of $1,500.0 million of 4.25% first lien senior notes due May 15, 2024 (the "2017 Senior Notes"). No principal payments are due until maturity and interest is paid semi-annually. We expect to use the net proceeds from the offering of the 2017 Senior Notes, together with other sources of liquidity, to redeem all or a portion of the outstanding Class A 9.0% cumulative compounding perpetual voting preferred shares and for other general corporate purposes. In connection with the issuance of the 2017 Senior Notes, we capitalized approximately $12.6 million in debt issuance costs.
Obligations under the 2017 Senior Notes are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of the Borrowers' Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Worldwide, Inc., Popeyes Louisiana Kitchen, Inc. and substantially all of their respective Canadian and U.S. subsidiaries (the "Note Guarantors"). The 2017 Senior Notes are first lien senior secured obligations and rank equal in right of payment with all of the existing and future senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities.
Our 2017 Senior Notes may be redeemed in whole or in part, on or after May 15, 2020 at the redemption prices set forth in the 2017 Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 2017 Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others.
Fair Value Measurement
The fair value of our variable rate term debt and bonds is estimated using inputs based on bid and offer prices that are Level 2 inputs and was $11.5 billion and $8.8 billion at June 30, 2017 and December 31, 2016, respectively, compared to a principal carrying amount of $11.4 billion and $8.6 billion, respectively on the same dates.
Interest Expense, net
Interest expense, net consists of the following (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Debt | $ | 118.9 |
| | $ | 103.5 |
| | $ | 218.9 |
| | $ | 204.7 |
|
Capital lease obligations | 5.0 |
| | 5.0 |
| | 10.0 |
| | 9.8 |
|
Amortization of deferred financing costs and debt issuance discount | 8.2 |
| | 9.6 |
| | 16.7 |
| | 19.3 |
|
Interest income | (4.1 | ) | | (0.9 | ) | | (6.2 | ) | | (1.5 | ) |
Interest expense, net | $ | 128.0 |
| | $ | 117.2 |
| | $ | 239.4 |
| | $ | 232.3 |
|
Other
On March 27, 2017, we repaid $155.5 million of debt assumed in connection with the Popeyes Acquisition.
Note 10. Income Taxes
Our effective tax rate was 15.0% and 16.4% for the three and six months ended June 30, 2017, respectively. The effective tax rate during this period was primarily a result of the mix of income from multiple tax jurisdictions, the impact of our financing structure, excess tax benefits from share-based compensation, and transaction costs.
Our effective tax rate was 19.3% and 20.4% for the three and six months ended June 30, 2016, respectively. The effective tax rate during this period was primarily a result of the mix of income from multiple tax jurisdictions and the impact of our financing structure.
Note 11. Shareholders’ Equity
Noncontrolling Interests
The holders of Partnership exchangeable units held an economic interest of approximately 49.0% and 49.2% in Partnership common equity through the ownership of 226,848,674 and 226,995,404 Partnership exchangeable units as of June 30, 2017 and December 31, 2016, respectively.
During the six months ended June 30, 2017, Partnership exchanged 146,730 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging these Partnership exchangeable units for the same number of newly issued RBI common shares. The exchanges represented increases in our ownership interest in Partnership and were accounted for as equity transactions, with no gain or loss recorded in the accompanying condensed consolidated statement of operations. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit was cancelled concurrently with the exchange.
Accumulated Other Comprehensive Income (Loss)
The following table displays the changes in the components of accumulated other comprehensive income (loss) (“AOCI”) (in millions):
|
| | | | | | | | | | | | | | | |
| Derivatives | | Pensions | | Foreign Currency Translation | | Accumulated Other Comprehensive Income (Loss) |
Balances at December 31, 2016 | $ | 274.9 |
| | $ | (16.7 | ) | | $ | (956.5 | ) | | $ | (698.3 | ) |
Foreign currency translation adjustment | — |
| | — |
| | 461.2 |
| | 461.2 |
|
Net change in fair value of derivatives, net of tax | (235.5 | ) | | — |
| | — |
| | (235.5 | ) |
Amounts reclassified to earnings of cash flow hedges, net of tax | 11.0 |
| | — |
| | — |
| | 11.0 |
|
Pension and post-retirement benefit plans, net of tax | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
Amortization of prior service (credits) costs, net of tax | — |
| | (0.8 | ) | | — |
| | (0.8 | ) |
Amortization of actuarial (gains) losses, net of tax | — |
| | 1.2 |
| | — |
| | 1.2 |
|
Other comprehensive income attributable to noncontrolling interests | 110.3 |
| | (0.2 | ) | | (226.9 | ) | | (116.8 | ) |
Balances at June 30, 2017 | $ | 160.7 |
| | $ | (16.6 | ) | | $ | (722.2 | ) | | $ | (578.1 | ) |
The following table displays the reclassifications out of AOCI (in millions):
|
| | | | | | | | | | | | | | | | | | |
| | | | Amounts Reclassified from AOCI |
| | Affected Line Item in the Statement of Operations | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
Details about AOCI Components | | | 2017 | | 2016 | | 2017 | | 2016 |
Gains (losses) on cash flow hedges: | | | | | | | | | | |
Interest rate derivative contracts | | Interest expense, net | | $ | (9.0 | ) | | $ | (5.9 | ) | | $ | (14.9 | ) | | $ | (9.4 | ) |
Forward-currency contracts | | Cost of sales | | (0.8 | ) | | (1.1 | ) | | 0.1 |
| | 2.5 |
|
| | Total before tax | | (9.8 | ) | | (7.0 | ) | | (14.8 | ) | | (6.9 | ) |
| | Income tax (expense) benefit | | 2.5 |
| | 1.8 |
| | 3.8 |
| | 1.8 |
|
| | Net of tax | | $ | (7.3 | ) | | $ | (5.2 | ) | | $ | (11.0 | ) | | $ | (5.1 | ) |
Defined benefit pension: | | | | | | | | | | |
Amortization of prior service credits (costs) | | SG&A (a) | | $ | 0.7 |
| | $ | 0.8 |
| | $ | 1.4 |
| | $ | 1.5 |
|
Amortization of actuarial gains (losses) | | SG&A (a) | | (0.2 | ) | | (0.1 | ) | | (0.5 | ) | | (0.2 | ) |
| | Total before tax | | 0.5 |
| | 0.7 |
| | 0.9 |
| | 1.3 |
|
| | Income tax (expense) benefit | | (1.1 | ) | | (0.2 | ) | | (1.3 | ) | | (0.5 | ) |
| | Net of tax | | $ | (0.6 | ) | | $ | 0.5 |
| | $ | (0.4 | ) | | $ | 0.8 |
|
| | | | | | | | | | |
Total reclassifications | | Net of tax | | $ | (7.9 | ) | | $ | (4.7 | ) | | $ | (11.4 | ) | | $ | (4.3 | ) |
| |
(a) | Refers to selling, general and administrative expenses in the condensed consolidated statements of operations. |
Note 12. Derivative Instruments
Disclosures about Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges, derivatives designated as net investment hedges and those utilized as economic hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates.
Interest Rate Swaps
During 2015, we entered into a series of receive-variable, pay-fixed interest rate swaps with a notional value of $2,500.0 million to hedge the variability in the interest payments on a portion of our Term Loan Facility beginning May 28, 2015, through the expiration of the final swap on March 31, 2021, resetting each March 31. At inception, these interest rate swaps were designated as cash flow hedges for hedge accounting, and as such, the effective portion of unrealized changes in market value is recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Gains and losses from hedge ineffectiveness are recognized in current earnings.
During 2015, we settled certain interest rate swaps and recognized a net unrealized loss of $84.6 million in AOCI at the date of settlement. This amount will be reclassified into interest expense, net as the original hedged forecasted transaction affects earnings. The amount of pre-tax losses in AOCI as of June 30, 2017 that we expect to be reclassified into interest expense within the next 12 months is $12.4 million.
Cross-Currency Rate Swaps
To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At June 30, 2017, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates are economically offset by movements in the fair value of our cross currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in AOCI, net of tax. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations.
We terminated and settled our previous cross-currency rate swaps in June 2017, with an aggregate notional value of $5,000.0 million, between the Canadian dollar and U.S. dollar. In connection with this termination, we received $763.5 million which is reflected as a source of cash provided by investing activities in the condensed consolidated statement of cash flows. The unrealized gains totaled $533.4 million, net of tax, as of the termination date and will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. Additionally, we entered into new fixed-to-fixed cross-currency rate swaps to partially hedge the net investment in our Canadian subsidiaries. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as net investment hedges. These swaps are contracts to exchange quarterly fixed-rate interest payments we make on the Canadian dollar notional amount of C$6,753.5 million for quarterly fixed-rate interest payments we receive on the U.S. dollar notional amount of $5,000.0 million through the maturity date of June 30, 2023. In making such changes, we effectively realigned our Canadian dollar hedges to reflect our current cash flow mix and capital structure maturity profile.
At June 30, 2017, we also had outstanding a cross-currency rate swap in which we pay quarterly fixed-rate interest payments on the Euro notional value of €1,107.8 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $1,200.0 million through the maturity date of March 31, 2021. At inception, this cross-currency rate swap was designated as a hedge and is accounted for as a net investment hedge.
Foreign Currency Exchange Contracts
We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At June 30, 2017, we had outstanding forward currency contracts to manage this risk in which we sell Canadian dollars and buy U.S. dollars with a notional value of $177.6 million with maturities to September 2018. We have designated these instruments as cash flow hedges, and as such, the effective portion of unrealized changes in market value are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Gains and losses from hedge ineffectiveness are recognized in current earnings.
Credit Risk
By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty.
Credit-Risk Related Contingent Features
Our derivative instruments do not contain any credit-risk related contingent features.
Quantitative Disclosures about Derivative Instruments and Fair Value Measurements
The following tables present the required quantitative disclosures for our derivative instruments, including their estimated fair values (all estimated using Level 2 inputs) and their location on our condensed consolidated balance sheets (in millions):
|
| | | | | | | | | | | | | | | |
| Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion) |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Derivatives designated as cash flow hedges | | | | | | | |
Forward-starting interest rate swaps | $ | (15.4 | ) | | $ | (21.6 | ) | | $ | (20.4 | ) | | $ | (72.6 | ) |
Forward-currency contracts | $ | (7.0 | ) | | $ | (0.7 | ) | | $ | (5.5 | ) | | $ | (9.8 | ) |
Derivatives designated as net investment hedges | | | | | | | |
Cross-currency rate swaps | $ | (124.1 | ) | | $ | 54.4 |
| | $ | (178.3 | ) | | $ | (219.7 | ) |
|
| | | | | | | | | | | | | | | |
Classification on Condensed Consolidated Statements of Operations | Gain (Loss) Reclassified from AOCI into Earnings |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Interest expense, net | $ | (9.0 | ) | | $ | (5.9 | ) | | $ | (14.9 | ) | | $ | (9.4 | ) |
Cost of sales | $ | (0.8 | ) | | $ | (1.1 | ) | | $ | 0.1 |
| | $ | 2.5 |
|
|
| | | | | | | | | | | |
| Fair Value as of | | | | |
| June 30, 2017 | | December 31, 2016 | | Balance Sheet Location |
Assets: | | | | | |
Derivatives designated as cash flow hedges | | | | | |
Foreign currency | $ | 0.2 |
| | $ | 2.8 |
| | Prepaids and other current assets |
Derivatives designated as net investment hedges | | | | | |
Foreign currency | — |
| | 717.9 |
| | Derivative assets |
Total assets at fair value | $ | 0.2 |
| | $ | 720.7 |
| | |
| | | | | |
Liabilities: | | | | | |
Derivatives designated as cash flow hedges | | | | | |
Interest rate | $ | 66.8 |
| | $ | 55.1 |
| | Other liabilities, net |
Foreign currency | 4.3 |
| | 1.1 |
| | Other accrued liabilities |
Derivatives designated as net investment hedges | | | | | |
Foreign currency | 241.1 |
| | — |
| | Other liabilities, net |
Total liabilities at fair value | $ | 312.2 |
| | $ | 56.2 |
| | |
Note 13. Franchise and Property Revenues
Franchise and property revenues consist of the following (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Franchise royalties | $ | 308.7 |
| | $ | 249.8 |
| | $ | 550.7 |
| | $ | 477.6 |
|
Property revenues | 189.3 |
| | 198.0 |
| | 364.3 |
| | 369.3 |
|
Franchise fees and other revenue | 32.6 |
| | 33.8 |
| | 65.8 |
| | 62.7 |
|
Franchise and property revenues | $ | 530.6 |
| | $ | 481.6 |
| | $ | 980.8 |
| | $ | 909.6 |
|
Note 14. Other Operating Expenses (Income), net
Other operating expenses (income), net consist of the following (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net losses (gains) on disposal of assets, restaurant closures, and refranchisings | $ | 8.6 |
| | $ | 1.0 |
| | $ | 11.5 |
| | $ | 16.3 |
|
Litigation settlements and reserves, net | 1.1 |
| | 0.9 |
| | 1.1 |
| | 1.6 |
|
Net losses (gains) on foreign exchange | 36.8 |
| | (12.1 | ) | | 47.2 |
| | 12.0 |
|
Other, net | 0.3 |
| | (1.1 | ) | | 0.8 |
| | (0.4 | ) |
Other operating expenses (income), net | $ | 46.8 |
| | $ | (11.3 | ) | | $ | 60.6 |
| | $ | 29.5 |
|
Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods.
Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities.
Note 15. Commitments and Contingencies
Litigation
On June 19, 2017, a claim was filed in the Ontario Superior Court of Justice. The plaintiff, a franchisee of two Tim Hortons restaurants, seeks to certify a class of all persons who have carried on business as a Tim Hortons franchisee in Canada at any time after December 15, 2014. The claim alleges various causes of action against the defendants in relation to the purported misuse of amounts paid by members of the proposed class to the Tim Hortons Canada advertising fund (the “Ad Fund”). The plaintiff seeks to have the Ad Fund franchisee contributions held in trust for the benefit of members of the proposed class, an accounting of the Ad Fund, as well as damages for breach of contract, breach of trust and breach of fiduciary duties. While we believe the claims are without merit and we intend to vigorously defend against this lawsuit, we are unable to predict the ultimate outcome of this case or the range of possible loss, if any.
Note 16. Segment Reporting
As stated in Note 1, Description of Business and Organization, we manage three brands. Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Under the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. We generate revenue from four sources: (i) sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing, and distribution, as well as sales to retailers; (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (iii) property revenues from properties we lease or sublease to franchisees; and (iv) sales at Company restaurants.
Each brand is managed by a brand president that reports directly to our Chief Executive Officer, who is our Chief Operating Decision Maker. Therefore, we have three operating segments: (1) TH, which includes all operations of our Tim Hortons brand, (2) BK, which includes all operations of our Burger King brand, and (3) PLK, which includes all operations of our Popeyes brand. Our three operating segments represent our reportable segments. PLK revenues and segment income from March 28, 2017 through June 30, 2017 are included in our consolidated statement of operations for the three months ended June 30, 2017.
The following table presents revenues, by segment and by country (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues by operating segment: | | | | | | | |
TH | $ | 772.3 |
| | $ | 759.8 |
| | $ | 1,505.9 |
| | $ | 1,417.6 |
|
BK | 293.7 |
| | 280.4 |
| | 560.7 |
| | 541.1 |
|
PLK | 66.7 |
| | — |
| | 66.7 |
| | — |
|
Total revenues | $ | 1,132.7 |
| | $ | 1,040.2 |
| | $ | 2,133.3 |
| | $ | 1,958.7 |
|
| | | | | | | |
Revenues by country (a): | | | | | | | |
Canada | $ | 687.9 |
| | $ | 683.0 |
| | $ | 1,344.9 |
| | $ | 1,264.2 |
|
United States | 313.2 |
| | 246.3 |
| | 545.6 |
| | 475.8 |
|
Other | 131.6 |
| | 110.9 |
| | 242.8 |
| | 218.7 |
|
Total revenues | $ | 1,132.7 |
| | $ | 1,040.2 |
| | $ | 2,133.3 |
| | $ | 1,958.7 |
|
| |
(a) | Only Canada and the United States represented 10% or more of our total revenues in each period presented. |
Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest, (gain) loss on early extinguishment of debt, taxes, and depreciation and amortization, adjusted to exclude the non-cash impact of share-based compensation and non-cash incentive compensation expense and (income) loss from equity method investments, net of cash distributions received from equity method investments, as well as other operating expenses (income), net. Other specifically identified costs associated with non-recurring projects are also excluded from Adjusted EBITDA, including fees and expenses associated with the Popeyes Acquisition ("PLK Transaction costs"), and integration costs associated with the acquisition of Tim Hortons. Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of operating performance or the performance of an acquired business. A reconciliation of segment income to net income (loss) consists of the following (in millions).
|
| | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Segment income: | | | | | | | |
TH | $ | 281.1 |
| | $ | 279.0 |
| | $ | 537.3 |
| | $ | 506.8 |
|
BK | 216.8 |
| | 200.1 |
| | 403.9 |
| | 380.1 |
|
PLK | 33.2 |
| | — |
| | 33.2 |
| | — |
|
Adjusted EBITDA | 531.1 |
| | 479.1 |
| | 974.4 |
| | 886.9 |
|
Share-based compensation and non-cash incentive compensation expense | 11.9 |
| | 11.3 |
| | 30.4 |
| | 19.2 |
|
PLK Transaction costs | 8.5 |
| | — |
| | 42.9 |
| | — |
|
Integration costs | — |
| | 3.8 |
| | — |
| | 6.0 |
|
Impact of equity method investments (a) | 4.1 |
| | 7.8 |
| | 1.2 |
| | (7.9 | ) |
Other operating expenses (income), net | 46.8 |
| | (11.3 | ) | | 60.6 |
| | 29.5 |
|
EBITDA | 459.8 |
| | 467.5 |
| | 839.3 |
| | 840.1 |
|
Depreciation and amortization | 45.4 |
| | 43.5 |
| | 88.7 |
| | 85.5 |
|
Income from operations | 414.4 |
| | 424.0 |
| | 750.6 |
| | 754.6 |
|
Interest expense, net | 128.0 |
| | 117.2 |
| | 239.4 |
| | 232.3 |
|
Loss on early extinguishment of debt | — |
| | — |
| | 20.4 |
| | — |
|
Income tax expense | 42.9 |
| | 59.2 |
| | 80.7 |
| | 106.4 |
|
Net income | $ | 243.5 |
| | $ | 247.6 |
| | $ | 410.1 |
| | $ | 415.9 |
|
| |
(a) | Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. |
Note 17. Subsequent Event
Dividends
On July 5, 2017, we paid a cash dividend of $0.98 per Preferred Share, for a total dividend of $67.5 million, to the holder of the Preferred Shares. The dividend on the Preferred Shares included the amount due for the second calendar quarter of 2017. On July 6, 2017, we paid a cash dividend of $0.19 per common share to common shareholders of record on May 15, 2017. On such date, Partnership also made a distribution in respect of each Partnership exchangeable unit in the amount of $0.19 per exchangeable unit to holders of record on May 15, 2017.
On August 1, 2017, our board of directors declared a cash dividend of $0.98 per Preferred Share, for a total dividend of $67.5 million which will be paid to the holder of the Preferred Shares on October 2, 2017. The dividend on the Preferred Shares includes the amount due for the third calendar quarter of 2017. On August 2, 2017, our board of directors declared a cash dividend of $0.20 per common share, which will be paid on October 3, 2017, to common shareholders of record on September 15, 2017. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.20 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above.
*****
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 “Financial Statements” of this report.
The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws as described in further detail under “Special Note Regarding Forward-Looking Statements” set forth below. Actual results may differ materially from the results discussed in the forward-looking statements. Please refer to the risks and further discussion in the “Special Note Regarding Forward-Looking Statements” below.
We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors.
Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the fiscal year and our key business measures, as discussed below, may decrease for any future period. Unless the context otherwise requires, all references in this section to “RBI,” “the Company,” “we,” “us,” or “our” are to the Company and its subsidiaries, collectively.
Overview
We are a Canadian corporation originally formed on August 25, 2014 to serve as the indirect holding company for Tim Hortons and its consolidated subsidiaries and Burger King Worldwide and its consolidated subsidiaries. On March 27, 2017, we acquired Popeyes Louisiana Kitchen, Inc. and its consolidated subsidiaries (“Popeyes”). We are one of the world’s largest quick service restaurant (“QSR”) companies with more than $28 billion in system-wide sales and over 23,000 restaurants in more than 100 countries and U.S. territories as of June 30, 2017. Our Tim Hortons®, Burger King®, and Popeyes® brands have similar franchised business models with complementary daypart mixes and product platforms. Our three iconic brands are managed independently while benefiting from global scale and sharing of best practices.
Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, Timbits®, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups, and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks, and other affordably-priced food items. Popeyes restaurants are chicken quick service restaurants featuring a unique “Louisiana” style menu that includes spicy chicken, chicken tenders, fried shrimp and other seafood, red beans and rice, and other regional items.
We have three operating and reportable segments: (1) Tim Hortons (“TH”); (2) Burger King (“BK”); and (3) Popeyes Louisiana Kitchen (“PLK”). We generate revenue from four sources: (i) sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing, and distribution, as well as sales to retailers; (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (iii) property revenues from properties we lease or sublease to franchisees; and (iv) sales at restaurants owned by us (“Company restaurants”).
Operating Metrics and Key Financial Measures
We evaluate our restaurants and assess our business based on the following operating metrics and key financial measures:
| |
• | System-wide sales growth refers to the change in sales at all franchise restaurants and Company restaurants in one period from the same period in the prior year. |
| |
• | System-wide sales represent sales at all franchise restaurants and Company restaurants. We do not record franchise sales as revenues; however, our franchise revenues include royalties based on a percentage of franchise sales. System-wide results are driven by our franchise restaurants, as approximately 100% of current system-wide restaurants are franchised. |
| |
• | Comparable sales growth refers to the change in restaurant sales in one period from the same prior year period for restaurants that have been open for thirteen months or longer for TH and BK and 65 weeks or longer for PLK. |
| |
• | Commencing in 2017, we are presenting net restaurant growth on a percentage basis, reflecting the net increase in restaurant count (openings, net of closures) over a trailing twelve month period, divided by the restaurant count at the beginning of the trailing twelve month period. This presentation has been applied retrospectively to the earliest period presented to provide period-to-period comparability. Previously, we presented net restaurant growth as the number of new restaurants opened, net of closures, during a stated period. We have disclosed restaurant count at period end which can be used to determine net restaurant growth as previously presented. |
| |
• | Adjusted EBITDA, a non-GAAP measure, which represents earnings (net income or loss) before interest, (gain) loss on early extinguishment of debt, taxes, depreciation and amortization, adjusted to exclude specifically identified items that management believes are not relevant to management’s assessment of operating performance. See Non-GAAP Reconciliations. |
System-wide sales growth and comparable sales growth are measured on a constant currency basis, which means the results exclude the effect of foreign currency translation (“FX Impact”). For system-wide sales growth and comparable sales growth, we calculate the FX Impact by translating prior year results at current year monthly average exchange rates. For items included in our results of operations, we calculate the FX Impact by translating current year results at prior year monthly average exchange rates. We analyze these operating metrics on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements.
Recent Events and Factors Affecting Comparability
Popeyes Acquisition
As described in Note 2 to the accompanying unaudited condensed consolidated financial statements, on March 27, 2017, we completed the acquisition of Popeyes for total consideration of $1,654.7 million (the “Popeyes Acquisition”). The consideration was funded through (1) cash on hand of approximately $354.7 million, and (2) $1,300.0 million from incremental borrowings under our Term Loan Facility – see Note 9 to the accompanying unaudited condensed consolidated financial statements.
PLK revenues and segment income from March 28, 2017 through June 30, 2017 are included in our consolidated statement of operations for the three months ended June 30, 2017. The changes in our results of operations for the three and six months ended June 30, 2017 as compared to the three and six months ended June 30, 2016 are partially driven by the inclusion of the results of operations of PLK. The PLK statement of operations data for the three and six months ended June 30, 2017 is summarized as follows:
|
| | | |
PLK Segment (in millions of U.S. dollars) | Three and Six Months Ended June 30, 2017 |
Revenues: | |
Sales | $ | 23.0 |
|
Franchise and property revenues | 43.7 |
|
Total revenues | 66.7 |
|
Cost of sales | 19.2 |
|
Franchise and property expenses | 2.3 |
|
Segment SG&A | 14.4 |
|
Segment depreciation and amortization (a) | 2.4 |
|
Segment income | 33.2 |
|
| |
(a) | Segment depreciation and amortization consists of depreciation and amortization included in cost of sales and franchise and property expenses. |
PLK Transaction Costs
In connection with the Popeyes Acquisition, we incurred certain non-recurring fees and expenses (“PLK Transaction costs”) totaling $8.5 million and $42.9 million during the three and six months ended June 30, 2017, respectively, consisting primarily of professional fees and compensation related expenses, all of which are classified as selling, general and administrative expenses in the condensed consolidated statement of operations. We expect to incur additional PLK Transaction costs through the remainder of 2017 as we integrate the operations of PLK.
Integration Costs
In connection with the implementation of initiatives to integrate the back-office processes of TH and BK to enhance efficiencies, we incurred $3.8 million and $6.0 million related to these initiatives during the three and six months ended June 30, 2016, primarily consisting of professional fees.
Results of Operations for the Three and Six Months Ended June 30, 2017 and 2016
Tabular amounts in millions of U.S. dollars unless noted otherwise.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated | Three Months Ended
June 30, | | Variance | | FX Impact | | Variance Excluding FX Impact | | Six Months Ended
June 30, | | Variance | | FX Impact | | Variance Excluding FX Impact |
| 2017 | | 2016 | | Favorable / (Unfavorable) | | 2017 | | 2016 | | Favorable / (Unfavorable) |
Revenues: | | | | | | | | | | | | | | | | | | | |
Sales | $ | 602.1 |
| | $ | 558.6 |
| | $ | 43.5 |
| | $ | (20.7 | ) | | $ | 64.2 |
| | $ | 1,152.5 |
| | $ | 1,049.1 |
| | $ | 103.4 |
| | $ | (5.0 | ) | | $ | 108.4 |
|
Franchise and property revenues | 530.6 |
| | 481.6 |
| | 49.0 |
| | (11.6 | ) | | 60.6 |
| | 980.8 |
| | 909.6 |
| | 71.2 |
| | (6.1 | ) | | 77.3 |
|
Total revenues | 1,132.7 |
| | 1,040.2 |
| | 92.5 |
| | (32.3 | ) | | 124.8 |
| | 2,133.3 |
| | 1,958.7 |
| | 174.6 |
| | (11.1 | ) | | 185.7 |
|
Operating costs and expenses: | | | | | | | | | | | | | | | | | | | |
Cost of sales | 460.2 |
| | 438.0 |
| | (22.2 | ) | | 15.6 |
| | (37.8 | ) | | 883.6 |
| | 828.6 |
| | (55.0 | ) | | 3.6 |
| | (58.6 | ) |
Franchise and property expenses | 113.7 |
| | 111.9 |
| | (1.8 | ) | | 3.4 |
| | (5.2 | ) | | 224.7 |
| | 213.7 |
| | (11.0 | ) | | 1.3 |
| | (12.3 | ) |
Selling, general and administrative expenses | 96.7 |
| | 73.1 |
| | (23.6 | ) | | 1.0 |
| | (24.6 | ) | | 218.6 |
| | 146.3 |
| | (72.3 | ) | | 0.7 |
| | (73.0 | ) |
(Income) loss from equity method investments | 0.9 |
| | 4.5 |
| | 3.6 |
| | (0.1 | ) | | 3.7 |
| | (4.8 | ) | | (14.0 | ) | | (9.2 | ) | | (0.1 | ) | | (9.1 | ) |
Other operating expenses (income), net | 46.8 |
| | (11.3 | ) | | (58.1 | ) | | 1.2 |
| | (59.3 | ) | | 60.6 |
| | 29.5 |
| | (31.1 | ) | | 1.2 |
| | (32.3 | ) |
Total operating costs and expenses | 718.3 |
| | 616.2 |
| | (102.1 | ) | | 21.1 |
| | (123.2 | ) | | 1,382.7 |
| | 1,204.1 |
| | (178.6 | ) | | 6.7 |
| | (185.3 | ) |
Income from operations | 414.4 |
| | 424.0 |
| | (9.6 | ) | | (11.2 | ) | | 1.6 |
| | 750.6 |
| | 754.6 |
| | (4.0 | ) | | (4.4 | ) | | 0.4 |
|
Interest expense, net | 128.0 |
| | 117.2 |
| | (10.8 | ) | | — |
| | (10.8 | ) | | 239.4 |
| | 232.3 |
| | (7.1 | ) | | (0.2 | ) | | (6.9 | ) |
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | — |
| | — |
| | 20.4 |
| | — |
|