SECURITIES AND EXCHANGE COMMISSION
(Mark One)
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20152018
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto Commission file number: 001-36787
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP
(Exact name of Registrant as Specified in Its Charter)
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Ontario | Canada | 98-1206431 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| | (I.R.S. Employer
Identification No.)
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130 King Street West, Suite 300 Toronto, Ontario | |
226 Wyecroft Road
Oakville, Ontario
| | L6K 3X7M5X 1E1 |
| (Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
| Class B Exchangeable Limited Partnership Units | | Toronto Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
x☒ No
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Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨☐ No
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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
x☒ No
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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
x☒ No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated
filer”filer,” “smaller reporting company” and
“smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one): |
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| Large accelerated filer | | x☒ | | 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 | | ☐ |
If an emerging growth company, indicate by checkmark 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. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨☐ No
x☒
The aggregate market value of Class B
Exchangeable Limited Partnershipexchangeable limited partnership units held by non-affiliates of the registrant on June 30,
2015,2018, computed by reference to the closing price for such units on the Toronto Stock Exchange on such date, was C$
880,995,961.825,283,770.
The number of the registrant’s Class B exchangeable limited partnership units and Class A common units outstanding as of February
12, 201611, 2019 was
227,992,722207,510,471 units and 202,006,067 units, respectively.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement of Restaurant Brands International Inc., the registrant’s general partner, for the
20152019 Annual and Special Meeting of Shareholders of Restaurant Brands International Inc., which is to be filed no later than 120 days after December 31,
2015,2018, are incorporated by reference into Part III of this Form 10-K.
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP
2015
2018 FORM 10-K ANNUAL REPORT
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PART IItem 1. | | |
Item 1.
| | Business
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Item 1A. | | | | | 11 | |
Item 1B. | | | | | 26 | |
Item 2. | | | | | 26 | |
Item 3. | | | | | 26 | |
Item 4. | | | | | 26 | |
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Item 5. | | | | | 27 | |
Item 6. | | | | | 30 | |
Item 7. | | | | | 33 | |
Item 7A. | | | | | 55 | |
Item 8. | | | | | 61 | |
Item 9. | | | | | 130 | |
Item 9A. | | | | | 130 | |
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Item 10. | | | | | 130 | |
Item 11. | | | | | 132 | |
Item 12. | | | | | 132 | |
Item 13. | | | | | 133 | |
Item 14. | | | | | 133 | |
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Item 15. | | | |
| Item 16. | | 133 | |
Tim
Hortons®, Timbits®, TimCard®Hortons® and
Creamy Chocolate Chill®Timbits® are trademarks of Tim Hortons Canadian IP Holdings
Limited Partnership.Corporation. Burger
King®King® and
BK®BK® are trademarks of Burger King Corporation.
References to 2015, 2014, 2013, 2012Popeyes®, Popeyes Louisiana Kitchen® and
2011Popeyes Chicken & Biscuits® are
to the fiscal years ended December 31, 2015, 2014, 2013, 2012 and 2011, respectively.trademarks of Popeyes Louisiana Kitchen, Inc. Unless the context otherwise requires, all references to “we”, “us”, “our” and “Partnership” refer to Restaurant Brands International Limited Partnership and its subsidiaries.
In this document, we rely on and refer to information regarding the restaurant industry, the quick service restaurant segment and the fast food hamburger restaurant category that has been prepared by the industry research firm The NPD Group, Inc. (which prepares and disseminates Consumer Reported Eating Share Trends, or CREST® data) or compiled from market research reports, analyst reports and other publicly available information. All industry and market data that
Explanatory Note
We are
not cited as being from a
specified source are from internal analysis based upon data available from known sources or other proprietary research and analysis.Explanatory Note
On December 12, 2014, a seriessubsidiary of transactions (the “Transactions”) were completed resulting in Burger King Worldwide, Inc., a Delaware corporation (“Burger King Worldwide”), and Tim Hortons Inc., a Canadian corporation (“Tim Hortons”), becoming indirect subsidiaries of Partnership and Restaurant Brands International Inc. (“RBI”).
We are a subsidiary of RBI and the indirect parent of The TDL Group Corp. (“Tim Hortons andHortons”), Burger King Worldwide.Worldwide, Inc. (“Burger King”) and Popeyes Louisiana Kitchen, Inc. (“Popeyes”). RBI is our sole general partner and owns all of our outstanding Class A common units (“Class A common units”) and preferred units (“Partnership preferred units”). RBI has 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 Restaurant Brands International Limited Partnership (“Partnership”) in accordance with the partnership agreement of Partnership (the “partnership agreement”) and applicable laws. There is no board of directors of Partnership. RBI has established a conflicts committee composed entirely of “independent directors” (as such term is defined in the partnership agreement) in order to consent to, approve or direct various enumerated actions on behalf of RBI (in its capacity as our general partner) in accordance with the terms of the partnership agreement.
Pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Partnership is a successor issuer to Burger
King Worldwide.King. The Class B exchangeable limited partnership units of Partnership
(“(the“Partnership exchangeable units”) are deemed to be registered under Section 12(b) of the Exchange Act, and we are subject to the informational requirements of the Exchange Act and the rules and regulations promulgated thereunder.
On December 15, 2014, theThe Partnership exchangeable units
began tradingtrade on the Toronto Stock Exchange under the ticker symbol “QSP”.
In addition, on December 15, 2014, RBI’s common shares
began tradingtrade on the New York Stock Exchange and the Toronto Stock Exchange under the ticker symbol “QSR”.
We are a reporting issuer in each of the provinces and territories of Canada and, as a result, are subject to
theCanadian continuous disclosure and other
applicable reporting obligations under applicable Canadian securities laws. Pursuant to an application for exemptive relief made in accordance with National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions, we have received exemptive relief dated October 31, 2014 from the Canadian securities regulators. This exemptive relief exempts us from the continuous disclosure requirements of NI 51-102, effectively allowing us to satisfy our Canadian continuous disclosure obligations by relying on the Canadian continuous disclosure documents filed by RBI, for so long as certain conditions are satisfied. Among these conditions is a requirement that we concurrently send to all holders of Partnership exchangeable units all disclosure materials that RBI sends to its shareholders and a requirement that we separately report all material changes in respect of Partnership that are not also material changes in respect of RBI.
All references to “$” or “dollars” in this report are to the currency of the United States unless otherwise indicated. All references to
Canadian dollars“Canadian dollars” or
C$“C$” are to the currency of Canada unless otherwise indicated.
Part I
We are a limited partnership originally formed to serve as the indirect parent ofholding company for Tim Hortons and its consolidated subsidiaries and Burger King Worldwideand its consolidated subsidiaries, and, since our acquisition of Popeyes in March 2017, Popeyes and its consolidated subsidiaries. We were formed on August 25, 2014 as a general partnership and registered on October 27, 2014 as a limited partnership in accordance with the laws of the Province of Ontario generally, and the Ontario Limited Partnerships Actspecifically. We are a subsidiary of RBI, our sole general partner. We are one of the world’s largest quick service restaurant (“QSR”) businessescompanies with more than $30 billion in system-wide sales and over 19,00025,000 restaurants in approximatelymore than 100 countries and U.S. territories as of December 31, 20152018. Our Tim Hortons®, Burger King® and over 110 years of combined brand heritage. OurTim HortonsPopeyes® andBurger King® brands have similar franchisedfranchise business models with complementary daypart mixes.mixes and product platforms. Our twothree iconic brands are managed independently while benefittingbenefiting from global scale and sharing of best practices.Our Tim Hortons Brand
Founded in 1964, the Tim Hortons brand is one of the largest restaurant chains in North America and the largest in Canada. As of December 31, 2015, we owned or franchised a2018, approximately 100% of total restaurants for each of 4,413 Tim Hortons restaurants, including 3,650 in Canada, 650 in the United States and 113 in the Middle East. Of these restaurants, 4,389 were franchised (approximately 100%) and 24 were company-owned.
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.
our brands was franchised.
Our
Tim Hortons (“TH”) business generates revenue from
four sources: (i) sales exclusive to Tim Hortons franchisees related to our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers; (ii) property revenues from properties we lease or sublease to franchisees; (iii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; and (iv) sales at Company restaurants.Our Burger King Brand
Founded in 1954, the Burger King brand is the world’s second largest fast food hamburger restaurant (FFHR) chain as measured by total number of restaurants. As of December 31, 2015, we owned or franchised a total of 15,003 Burger King restaurants in approximately 100 countries and U.S. territories worldwide. Of these restaurants, 14,927 were franchised (approximately 100%) and 76 were company-owned.
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. Burger King restaurants appeal to a broad spectrum of consumers, with multiple dayparts and product platforms appealing to different customer groups. During its over 60 years of operating history, the Burger King brand has developed a scalable and cost-efficient QSR hamburger restaurant model that offers guests fast and delicious food.
Our Burger King (“BK”) business generates revenue from threefollowing sources: (i) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties that we lease or sublease to franchisees; and (iii) sales at restaurants owned by us (“Company restaurants.
restaurants”). In addition, our Tim Hortons business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers.
Our IndustryBoth of our brands operate
Tim Hortons®Brand Founded in the QSR segment1964, Tim Hortons (“TH”) is one of the largest donut/coffee/tea restaurant industry. Inchains in North America and the United Stateslargest in Canada as measured by total number of restaurants. As of December 31, 2018, we owned or franchised a total of 4,846 TH restaurants. TH restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and Canada, the QSR segmentcold specialty drinks, fresh baked goods, including donuts, Timbits®, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups and more.
Our Burger King® Brand
Founded in 1954, Burger King (“BK”) is the
world’s second largest
segment of thefast food hamburger restaurant
industry and has demonstrated growth over a long period of time. According to The NPD Group, Inc. (“
NPD Group”FFHR”)
, which prepares and disseminates CREST® data, QSR consumer spending in the United States and Canada totaled approximately $298 billion for the 12-month period ended November 2015.Our Tim Hortons brand operates in the donut/coffee/tea category of the QSR segment. According to NPD Group, the donut/coffee/tea category generated customer spending of approximately $8.7 billion in Canada for the 12-month period ended November 2015, representing 35% of chain as measured by total QSR consumer spending. According to NPD Group, for the 12-month period ended November 2015, Tim Hortons accounted for 45% of the Canadian QSR segment and 87% of the donut/coffee/tea category of the Canadian QSR segment, in each case based on the number of guests served.
restaurants. As of December 31, 2018, we owned or franchised a total of 17,796 BK restaurants in more than 100 countries and U.S. territories. BK 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.
Our Burger King brand operatesPopeyes® Brand
Founded in
the FFHR category of the QSR segment. According to NPD Group, the FFHR category1972, Popeyes (“PLK”) is the
world’s second largest
category in the QSR segment, generating consumer spendingquick service chicken concept as measured by total number of
$74.5 billion in the United States for the 12-month period ended November 2015, representing 27%restaurants. As of
December 31, 2018, we owned or franchised a total
QSR consumer spending. According to NPD Group, for the 12-month period ended November 2015, Burger King accounted for approximately 12% of
total FFHR consumer spending in the United States.3,102 PLK restaurants. PLK restaurants are quick service restaurants that distinguish themselves with a unique “Louisiana” style menu featuring spicy chicken, chicken tenders, fried shrimp and other seafood, red beans and rice and other regional items.
We believe that we have created a financially strong company built upon a foundation of
two strong,three thriving, independent brands with significant global growth potential and the opportunity to be one of the most efficient franchised QSR operators in the
world. | • | | Accelerate Global Restaurant Growth.We believe there is an attractive opportunity to grow the Tim Hortons and Burger King brands around the world by expanding our presence in existing markets and entering new markets where the brands are not present today. This strategy has been executed over the past five years with the Burger King brand and has led to a significant acceleration in restaurant growth. We are pursuing a similar strategy at TH to grow the brand’s presence globally. |
| • | | Enhance Guest Service and Experience at Our Restaurants.Guest satisfaction and providing a positive experience in our restaurants for our guests are integral to the success of our brands. We continue to focus on improving our level of service through comprehensive training, improved restaurant operations, reimaged restaurants and appealing menu options. Satisfied guests are more likely to return to our restaurants, which we believe will ultimately drive increased sales and profitability for our franchisees. |
| • | | Increase Restaurant Sales and Profitability.Restaurant sales and profitability are critical to the success of our franchise partners and our ability to grow our brands around the world. We believe that a focus on relevant menu innovation, operational simplification and excellence, compelling marketing communications and investment in a modern image for our restaurant base will allow us to continue to grow the same store sales of our existing restaurants. We are also focused on growing franchisee profitability by leveraging our global scale and using data to benchmark performance and identify areas of focus for our teams. |
| • | | Become the Most Efficient Franchised QSR Operator through a Constant Focus on Costs and Sharing Best Practices.We have achieved significant cost efficiencies at TH and BK through a Zero Based Budgeting cost management system. This annual planning method is designed to build a strong ownership culture by requiring departmental budgets to estimate and justify costs and expenditures from a “zero base,” rather than focusing on the prior year’s base. We have also begun to realize synergies across the two brands. We have implemented a global shared services platform and sharing of other non-brand dedicated functions such as finance, human resources, information technology, legal and others and the brands continue to share and leverage best practices. |
| • | | Preserve Rich Heritages of Both Brands.Both Tim Hortons and Burger King continue to be managed as independent brands with separately managed franchisee relationships. TH has its brand headquarters in Oakville, Ontario and plays a prominent role in local communities through its work with certain charities such as the Tim Hortons Children’s Foundation and the Timbits Minor Sports Program. The Burger King brand was founded in Miami over 60 years ago, and BK maintains its brand headquarters in Miami, Florida. BK is an active contributor to its local communities with a particular emphasis on education through the Burger King McLamore Foundation. |
Our Global Restaurant Operations
world through our focus on the following strategies:
accelerating net restaurant growth;
enhancing guest service and experience at our restaurants through comprehensive training, improved restaurant operations, reimaged restaurants and appealing menu options;
increasing restaurant sales and profitability which are critical to the success of our franchise partners and our ability to grow our brands around the world;
utilizing technological and digital initiatives to interact with our guests and modernize the operations of our restaurants;
efficiently managing costs and sharing best practices; and
preserving the rich heritage of each of our brands by managing them and their respective franchisee relationships independently and continuing to play a prominent role in local communities.
Our business
consistedconsists of
twothree operating segments,
at December 31, 2015. Our TH business is managed in one segmentwhich are also our reportable segments: (1) TH; (2) BK; and
our BK business is managed in the other segment.(3) PLK. Additional financial information about
our reportable segments can be found in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Note 26 to the accompanying consolidated financial statements.The table below sets forth our restaurant portfolio by segment for the periods indicated. Tim Hortons historical pre-combination figures are shown for informational purposes only.
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| | | December 31,
2015 | | | December 31,
2014 | | | December 31,
2013 | |
Number of system-wide restaurants: | | | | | | | | | | | | |
TH (1) | | | 4,413 | | | | 4,258 | | | | 4,114 | |
BK | | | 15,003 | | | | 14,372 | | | | 13,667 | |
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Total system-wide restaurants | | | 19,416 | | | | 18,630 | | | | 17,781 | |
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(1) | Excludes 398, 413 and 371 limited service kiosks as of December 31, 2015, 2014 and 2013, respectively. Commencing in the fourth quarter of 2015, we revised our presentation of restaurant counts to exclude limited service kiosks, with the revision applied retrospectively to the earliest period presented to provide period-to-period comparability. |
Of the total number of Tim Hortons restaurants as of December 31, 2015, 82.7% were located in Canada, 14.7% in the U.S. and 2.6% in the Middle East. In the U.S., Tim Hortons restaurants are located in 18 states, concentrated in the Northeast in New York, and in the Midwest in Michigan and Ohio. In Canada, Tim Hortons typically retains a controlling interest in the real estate for system restaurants that it develops by either owning the land and building, leasing the land and owning the building, or leasing both the land and building.
Operations.”
Restaurant Development
As part of our development approach for
Tim Hortonsour brands in the U.S., we have granted limited
exclusivitydevelopment rights in specific areas to
developersfranchisees in connection with area
representative and area development
agreements where the developers are investing their own capital to develop restaurants. We entered into two area representative and development agreements for the Cincinnati and Columbus designated market areas in 2015.agreements. We expect to enter into similar
area development and area representative arrangements in
the U.S. in 2016.2019 and beyond. In Canada, we have not granted exclusive or protected areas to any
Tim Hortons franchisees.Historically, international activities have not contributed significantly to Tim Hortons financial results. We have agreementsBK or TH franchisees, with Apparel FZCO for the development and operation of Tim Hortons restaurants in the Middle East. We continue to work towards leveraging our master franchise joint venture model, network of global partners and experienced global development teams to substantially accelerate Tim Hortons international growth over time to bring this iconic brand to the rest of the world.
Of the total number of Burger King restaurants as of December 31, 2015, 47.5% were located in the U.S. and 52.5% were located in our markets outside of the U.S. Since 2010, the Burger King brand has increased annual net restaurant growth by approximately four times, reaching 631 net new units in 2015 from 173 new units in 2010 and making it one of the fastest growing QSRs in the world.
limited exceptions.
As part of our international growth strategy for
the Burger King brand,all of our brands, we have
established master franchise and development agreements in a number of markets. For BK and TH, we have also created strategic master franchise joint ventures in
a number of markets across Europe, the Middle East and Africa (“EMEA”), Asia Pacific (“APAC”) and Latin America and the Caribbean (“LAC”) andwhich we received a meaningful minority equity stake in each joint venture. We
have also entered into master franchise and development agreements in a number of markets across EMEA, APAC and LAC with well-capitalized partners supported by strong local management teams. Our partners make substantial upfront equity commitments and agree to aggressive development targets. We will continue to evaluate opportunities to accelerate
international development of
all three of our
Burger King brand,brands, including through the establishment of master franchises with exclusive development rights and joint ventures with new and existing franchisees.
We believe there are significant growth opportunities throughout EMEA, APAC and LAC.Advertising and Promotions
In general, franchisees fund substantially all of the marketing programs for
each of our
Tim Hortons and Burger King brands by making contributions ranging from
3.5%2.0% to 5.0% of gross sales to advertising funds
that we manage.managed by us or by the franchisees. Advertising contributions are used to pay for expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions,
social media campaigns, technology initiatives and other support functions for the respective brands.
We manage the advertising funds for
botheach of our brands in the U.S. and Canada, as well as in
certain other markets
where Burger King Worldwide has historically operated Company restaurants.for BK. However, in many
of BK’s international markets, including the markets managed by master franchisees, franchisees make contributions into franchisee-managed advertising funds. As part of our global marketing strategy, we provide
Burger King franchisees with advertising support and guidance in order to deliver a consistent global brand message.
New product development is a key driver of the long-term success
for both of our brands. We believe the development of new products can drive traffic by expanding our customer base, allowing restaurants to expand into new dayparts, and continuing to build brand leadership in food quality and taste.
ProductBased on guest feedback, we drive product innovation
begins with an intensive, data-driven research and development process that analyzes potential new menu items, including extensive consumer testing and ongoing analysisin order to satisfy the needs of
our guests around the
economics of food cost, margin and final price point.A core strategy and success for our Tim Hortons brand remains a strong pipeline of differentiated product innovation. In 2015, we solidified previous innovation successes including Dark Roast Coffee and the Crispy Chicken Sandwich. In 2015, we had additional innovation successes, including Nutella based products, our grilled wraps and theCreamy Chocolate Chill® beverage. We plan to maintain brand focus on leveraging our strength in hot and cold beverage while expanding our daypart presence with exciting new food and baked good offerings.
In 2015, we continued to implement our strategy for the Burger King brand of launching fewer, more impactful products to simplify in-restaurant operations and reduce waste, focus the innovation pipeline and spend media dollars more wisely in a few high-impact areas. We believe that we have had significant successes on each of these fronts and this, paired with our continued compelling value offerings, have translated to significant momentum for the brand in 2015.world. This strategy will continue to be a focus of the brand for 2016in 2019 and beyond.
Our operations strategy is designed to deliver best-in-class restaurant operations by
Tim Hortonsour franchisees and
Burger King franchisees andto improve friendliness, cleanliness, speed of service and overall guest
satisfaction to drive long-term growth. Bothsatisfaction. Each of our brands
havehas uniform operating standards and specifications relating to product quality, cleanliness and maintenance of the premises. In addition,
Tim Hortons and Burger Kingour restaurants are required to be operated in accordance with quality assurance and health standards
whichthat each brand has established, as well as standards set by applicable governmental laws and regulations. Each franchisee typically participates in initial and ongoing training programs to learn all aspects of operating a
Tim Hortons or Burger King restaurant in accordance with each brand’s operating standards.
Manufacturing, Supply and Distribution
In general, we approve the manufacturers of the food, packaging,
and equipment
products and other products used in
restaurants for each of our
Tim Hortons and Burger King restaurants.brands. We have a comprehensive supplier approval process, which requires all products to pass our quality standards and the supplier’s manufacturing process and facilities to pass on-site food safety inspections. Our franchisees are required to purchase substantially all food and other products from approved suppliers and distributors.
Tim Hortons
TH products are sourced from a combination of third-party suppliers and our own manufacturing facilities.
WeTo protect our proprietary blends, we operate two
wholly-owned coffee roasting facilities in
Hamilton,Ancaster, Ontario and Rochester, New York, where we blend all of the coffee for our
Tim HortonsTH restaurants
to protect the proprietary blend of our premium restaurant coffee and, where practical, for our take home, packaged coffee. Our fondant and fills manufacturing facility
in Oakville, Ontario produces, and is the primary supplier of, the ready-to-use glaze, fondants,
fills and
fillssyrups which are used in
connection with a number of
Tim HortonsTH products.
We currently purchase allAs of
December 31, 2018, we have only one or a few suppliers to service each category of products sold at our
donuts andTimbits® from a single supplier.system restaurants.
We sell most other raw materials and supplies, including coffee, sugar, paper goods and other restaurant supplies, to Tim Hortons restaurants.TH restaurants in Canada and the U.S. We purchase those raw materials from multiple suppliers and generally have alternative sources of supply for each. While we have multiple suppliers for coffee from various coffee-producing regions, the available supply and price for high-qualityhigh-
quality coffee beans can fluctuate dramatically. Accordingly, we monitor world market conditions for green (unroasted) coffee and contract for future supply volumes to obtain expected requirements of high-quality coffee beans at acceptable prices.
Our TH business has significant supply chain operations, including procurement, warehousing and distribution, to supply paper and dry goods to a substantial majority of our Canadian restaurants, and procure and supply frozen baked goods and some refrigerated products to most of our Ontario and Quebec restaurants. We act as a distributor to
Tim HortonsTH restaurants in Canada through five distribution centers located in Canada.
In 2018, we announced plans to build two new warehouses in Western Canada and to renovate an existing warehouse in Eastern Canada to facilitate the supply of frozen and refrigerated products in those markets. We expect to complete these projects in 2020. We own or lease a significant number of trucks and trailers that regularly deliver to most of our Canadian restaurants. In the U.S., we supply similar products to system restaurants through third-party distributors.
All of the products used in our
Burger KingBK and PLK restaurants are sourced from third-party suppliers.
Restaurant Services, Inc. (“RSI”)In the U.S. and Canada, there is
thea purchasing
agentcooperative for
the Burger King system in the United States andeach brand that negotiates the purchase terms for most equipment, food, beverages (other than branded soft
drinks)drinks which we negotiate separately under long-term agreements) and other products used in
Burger KingBK and PLK restaurants.
RSIThe purchasing agent is also authorized to purchase and manage distribution services on behalf of most of the
Burger KingBK and PLK restaurants in the
United States.U.S. and Canada. PLK also utilizes exclusive suppliers for certain of its proprietary products. As of December 31,
2015,2018, four distributors serviced approximately
88.7%87% of
BK restaurants in the U.S.
systemand five distributors serviced approximately 85% of PLK restaurants
andin the
loss of any one of these distributors would likely adversely affect our business.U.S.
In 2000, Burger King Corporation entered into long-term exclusive contracts with The Coca-Cola Company and Dr Pepper/Snapple, Inc. to supply
Burger KingBK restaurants with their products and which obligate restaurants in the
United StatesU.S. to purchase a specified number of gallons of soft drink syrup. These volume commitments are not subject to any time limit. As of December 31,
2015,2018, we estimate that it will take approximately
157 years to complete the Coca-Cola
purchase commitment and
approximately 11 years to complete the Dr Pepper/Snapple, Inc. purchase
commitments.commitment. If these agreements were terminated, we would be obligated to pay an aggregate amount equal to approximately
$530$413 million as of December 31,
20152018 based on an amount per gallon for each gallon of soft drink syrup remaining in the purchase commitments, interest and certain other costs.
In 2014, Tim Hortons We have also entered into an agreementlong-term beverage supply arrangements with a supplier requiring minimum purchase obligations, withincertain major beverage vendors for the normal course of operations. As of December 31, 2015, there is a minimum purchase obligation based on a percentage of our requirements of approximately $92 million remaining over a four year term.
TH and PLK brands in the U.S. and Canada.
Franchise Agreements and Other Arrangements
General. We grant franchisesfranchisees the right to operate restaurants using Tim Hortons and Burger Kingour trademarks, trade dress and other intellectual property, uniform operating procedures, consistent quality of products and services and standard procedures for inventory control and management. For each franchise restaurant, we generally enter into a franchise agreement covering a standard set of terms and conditions. Recurring fees consist of periodic royalty and advertising payments. Franchisees report gross sales on a monthly or weekly basis and pay royalties based on gross sales. Franchise agreements are generally not assignable without our consent. Our Tim HortonsTH franchise agreements grant us the right to reacquire a restaurant under certain circumstances, and our Burger King BK and PLKfranchise agreements generally have a right of first refusal if a franchisee proposes to sell a restaurant. Defaults (including non-payment of royalties or advertising contributions, or failure to operate in compliance with our standards) can lead to termination of the franchise agreement.
U.S. and Canada. Tim Hortons TH franchisees in the U.S. and Canada operate under several types of license agreements, with a typical term for a standard restaurant of 10 years plus renewal period(s) of approximately 10 years in the aggregate. Tim Hortonsaggregate for Canada and a typical term of 20 years for the U.S. TH franchisees who lease land and/or buildings from us typically pay a royalty of 3.0% to 4.5% of weekly restaurant gross sales. Our license agreements contemplate a one-time franchise fee which must be paid in full before the restaurant opens for business and upon the grant of an additional term. Under a separate lease or sublease, Tim HortonsTH franchisees typically pay monthly rent based on the greater of a fixed monthly payment and contingent rental payments based on a percentage (usually 8.5% to 10.0%) of monthly gross sales or flow through monthly rent based on the terms of an underlying lease. Where the franchisee owns the premises, leases it from a third party or enters into a flow through lease with Tim Hortons,TH, the royalty is typically increased. In addition, the royalty rates under license agreements entered into in connection with non-standard restaurants, including self-serve kiosks and strategic alliances with third parties, may vary from those described above and are negotiated on a case-by-case basis. For some existing Tim Hortons franchisees in Canada and the U.S., we have entered into operator agreements, in which the operator acquires the right to operate a Tim Hortons restaurant, but we continue to be the owner of the equipment, signage and trade fixtures. Such arrangements usually require the operator to pay approximately 20% of the restaurant’s weekly gross sales to us. These operators also make the required contributions to our advertising funds, described above. In any such arrangement, we and the operator each have the option to terminate the agreement upon 30 days’ notice. The typical
Burger KingBK and PLK franchise agreement in the U.S. and Canada has a 20-year term
(for both initial grants and renewals of franchises) and contemplates a one-time franchise
fee which must be paid in full before the restaurant opens for business, or in the case of renewal, before expiration of the current franchise term.fee. Subject to the incentive programs described below, most new
Burger KingBK franchise restaurants
in the U.S. and Canada pay a royalty
on gross sales of 4.5%
and most PLK restaurants in the
United States.U.S. and Canada pay a royalty on gross sales of 5.0%. BK franchise agreements typically provide for a 20-year renewal term, and PLK franchise agreements typically provide for two 10-year renewal terms.
In an effort to improve the image of our BK restaurants in the United States,U.S., we offered Burger KingU.S. franchisees in the U.S. reduced up-front franchise fees and limited-term royalty and advertising fund rate reductions to remodel restaurants to our modern image during 20142016, 2017 and 20152018 and we plan to continue to offer remodel incentives to U.S. franchisees during 2016. At December 31, 2015, approximately 50% of the U.S. system was on the modern image.2019. These limited-term incentive programs are expected to negatively impact our effective royalty rate until 2021.2027. However, we expect this impact to be partially mitigated as incentive programs granted in prior years will expire and we will also be entering into new franchise agreements for Burger KingBK restaurants in
the
United StatesU.S. with a 4.5% royalty rate.
For PLK, we offered development incentive programs in 2017 pursuant to which we reduced or waived franchise fees and royalty payments to encourage our PLK franchisees to develop and open new restaurants. Most of these programs were discontinued in 2018.
International. Historically, we entered into franchise agreements for each Burger KingBK restaurant in our international markets with up-front franchise fees and monthly royalties and advertising contributions eachtypically of up to 5.0% of gross sales. However, as part of ourthe international growth strategy for each of our brands, we have increasingly entered into master franchise agreements or development agreements that grant franchisees exclusive or non-exclusive development rights and, in some cases, require them to provide support services to other franchisees in their markets. In 2018, we entered into master franchise agreements for the TH brand in China, for the PLK brand in Brazil and the Philippines, and for the BK brand in the Netherlands. The up-front franchise fees and royalty rate paid by master franchisees or exclusive developers vary from country to country, depending on the facts and circumstances of each market. We have agreements with Apparel FZCOexpect to continue implementing similar arrangements for the developmentour brands in 2019 and operation of Tim Hortons restaurants in the Middle East. Under these agreements, Apparel pays us up-front franchise fees upon the opening of each location, monthly royalties, and product and equipment sales.beyond.
Franchise Restaurant Leases. We leased or subleased 3,5653,571 properties to Tim HortonsTH franchisees, 1,634 properties to BK franchisees, and 1,84779 properties to Burger KingPLK franchisees as of December 31, 20152018 pursuant to separate lease agreements with these franchisees. For properties that we lease from third-party landlords and sublease to franchisees, our leases generally provide for fixed rental payments and may provide for contingent rental payments based on a restaurant’s annual gross sales. Franchisees who lease land only or land and building from us do so on a “triple net” basis. Under these triple net leases, the franchisee is obligated to pay all costs and expenses, including all real property taxes and assessments, repairs and maintenance and insurance. We own valuable intellectual property relating to our
Tim Hortons and Burger King brands, including trademarks, service marks, patents, copyrights, trade secrets and other proprietary
information.information, some of which are of material importance to our TH, BK and PLK businesses. We have established the standards and specifications for most of the goods and services used in the development, improvement and operation of our
Tim Hortons and Burger King restaurants. These proprietary standards, specifications and restaurant operating procedures are our trade secrets. Additionally, we own certain patents of varying duration relating to equipment used in
Burger KingBK and TH restaurants.
As
Competition
Each of
December 31, 2015, we owned 491 Tim Hortons trademark and service mark registrations and applications and 592 domain name registrations around the world, some of which are of material importance to our
TH business. As of December 31, 2015, we owned 4,604 Burger King trademark and service mark registrations and applications and approximately 1,044 domain name registrations around the world, some of which are of material importance to our BK business.Competition
Our Tim Hortons and Burger King brands competecompetes in the United States,U.S., Canada and internationally with many well-established food service companies on the basis of product choice, quality, affordability, service and location. OurWith few barriers to entry to the restaurant industry, our competitors include a variety of independent local operators, in addition to well-capitalized regional, national and international restaurant chains and franchises.franchises, and new competitors may emerge at any time. We also compete for consumer dining dollars with national, regional and local (i) quick service restaurants that offer alternative menus, (ii) casual and “fast casual” restaurant chains and (iii) convenience stores and grocery stores. Tim Hortons competitorsFurthermore, delivery aggregators and other food delivery services provide consumers with convenient access to a broad range from small local independent operators to well-capitalized national and regional chains, such as Dunkin’ Donuts, McDonald’s, Starbucks, Panera Bread, Subway and Wendy’s. Additionally, Tim Hortons competes with alternative methods of brewed coffee for home use. In the FFHR industry Burger King’s principal competitors are McDonald’s and Wendy’s, as well as regional hamburgercompeting restaurant chains such as Carl’s Jr., Jackand food retailers, particularly in the Box and Sonic.
The restaurant industry has few barriers to entry, and therefore new competitors may emerge at any time.
urban areas.
Government Regulations and Affairs
General. As manufacturers and distributors of food products, we We and our franchisees are subject to various laws and regulations including (i) licensing and regulation by federal, state, provincial, and/or municipal departments relating to the environment, health, food preparation, sanitation and safety standards and, for our distribution business, traffic and transportation regulations; federal, provincial,(ii) information security, privacy and state labor laws (including applicable minimum wage requirements, temporary foreign workers, overtime, workingconsumer protection laws; and safety conditions and employment eligibility requirements); federal, provincial, and state laws prohibiting discrimination; federal, provincial, state and local tax laws and regulations; and(iii) other laws regulating the design, accessibility and operation of facilities, such as the Americans with Disabilities Act of 1990, theAccessibility for Ontarians with Disabilities Act and similar Canadian federal and provincial legislation that can have a significant impact on our franchisees and our performance. These regulations include food safety regulations, including supervision by the U.S. Food and Drug Administration and its international equivalents, which govern the manufacture, labeling, packaging and safety of food. In addition, we are or may become subject to legislation or regulation seeking to tax and/or regulate high-fat, high-calorie and high-sodium foods, particularly in Canada, the United States,U.S., the United Kingdom and Spain. Certain counties,countries, provinces, states and municipalities have approved menu labeling legislation that requires restaurant chains to provide caloric information on menu boards, and menu labeling legislation has also been adopted on the U.S. federal level.level as well as in Ontario.
U.S. and Canada. We and our franchisees are subject to Canadian and U.S. laws affecting the operation of their Our restaurants and their business. Each Tim Hortons and Burger King restaurant must comply with licensing requirements and regulations by a number of governmental authorities, which include zoning, health, safety, sanitation, building and fire agencies in the jurisdiction in which the restaurant is located. We and our franchisees are also subject to various employment laws, including laws governing union organizing, working conditions, work authorization requirements, health insurance, overtime and wages.In addition, we and our U.S. franchisees are subject to the U.S., we
Patient Protection and Affordable Care Act. We are subject to federal franchising laws adopted by the U.S. Federal Trade Commission
(“FTC”(the “FTC”)
. In addition, a number of states in the U.S., and
the provinces of Ontario, Alberta, Prince Edward Island, Manitoba, New Brunswickstate and
British Columbia, have enacted or are in the final stages of enacting legislation that affects companies involved in franchising.provincial franchising laws. Much of the
legislation and rules adopted have been aimed at providing detailed disclosure to a prospective franchisee, duties of good faith as between the franchisor and the franchisee, and/or periodic registration by the franchisor with
applicable regulatory agencies. Additionally, some U.S. states have enacted or are considering enacting legislation that governs the termination or non-renewal of a franchise agreement and other aspects of the franchise relationship.
International. Internationally, we and our franchisees are subject to national and local laws and regulations that often are similar to those affecting themus and theirour franchisees in Canadathe U.S. and the U.S., including laws and regulations concerning franchising, zoning, health, safety, sanitation, and building and fire codes.Canada. We and our franchisees are also subject to a variety of tariffs and regulations on imported commodities and equipment, and laws regulating foreign investment. Environmental Matters
We and our franchisees are subject to various federal, state, provincial and local environmental regulations.
Various laws concerning the handling, storage and disposal of hazardous materials and restaurant waste and the operation of restaurants in environmentally sensitive locations may impact aspects of our operations and the operations of our franchisees; however,
we do not believe that compliance with applicable environmental regulations
is not believed towill have a material effect on
our capital expenditures, financial condition, results of operations, or
our competitive position. Increased focus by U.S.
, Canadian and
overseasinternational governmental authorities on environmental matters is likely to lead to new governmental initiatives, particularly in the area of climate change.
ToWhile we cannot predict the
extent thatprecise nature of these initiatives,
cause an increase in our supply or distribution costs,we expect that they may impact our business both directly and indirectly.
Furthermore,There is a possibility that government initiatives, or actual or perceived effect of changes in weather patterns, climate
change may exacerbate adverse weather conditions, whichor water resources could
adverselyhave a direct impact
ouron the operations
and/or increase the cost of our
food and other suppliesbrands in ways that we cannot predict at this time.
Our
TH and BK businesses are moderately seasonal. Our Tim Hortons and Burger King restaurant sales are typically higher in the spring and summer months when the weather is warmer
than in the fall and
winter months. Our restaurant sales are typically lowest during the winter
months, which include February, the shortest month of the year.months. Furthermore, adverse weather conditions can have material adverse effects on restaurant sales. The timing of holidays may also impact restaurant sales. Because our businesses are moderately seasonal, results for any one quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
As of December 31,
2015,2018, we had approximately
4,3006,000 employees in our restaurant support centers, regional offices, distribution centers, manufacturing facilities, field operations and Company restaurants. Our franchisees are independent business owners so their employees are not our employees and therefore are not included in our employee count.
We make available free of charge on or through the Investor Relations section of our internet website atwww.rbi.com, all materials that we file electronically with the Securities and Exchange Commission (the “SEC”), including this annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after electronically filing or furnishing such material with the SEC and with the Canadian Securities Administrators. This information is also available at www.sec.gov, an internet site maintained by the SEC that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, and on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com, a website maintained by the Canadian Securities Administrators. The material may also be read and copied by visiting the Public Reference Room of the SEC at 100 F. Street, NE, Washington, D.C. 20549. Information on the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330. The references to our website address, the SEC’s website address and the website maintained by the Canadian Securities Administrators do not constitute incorporation by reference of the information contained in these websites and should be not considered part of this document. A copy of our Corporate Governance Guidelines, Code of Business Ethics and Conduct for Non-Restaurant Employees, Code of Ethics for Executive Officers, Code of Conduct for Directors and the Charters of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, Conflicts Committee and Operations and Strategy Committee of the board of directors of RBI are posted in the Investor Relations section of ourRBI’s website at www.rbi.com. Our principal executive offices are located at
226 Wyecroft Road, Oakville, ON,130 King Street West, Suite 300, Toronto, Ontario M5X 1E1, Canada. Our telephone number is (905) 845-6511.
Item 1A. Risk Factors
Risks Related to Our Business
We face intense competition in our
BusinessOur success depends onmarkets, which could negatively impact our ability to compete with our major competitors, many of which may have greater resources than we do.
business.
The restaurant industry is intensely competitive and we compete
in Canada, the United States and internationally with many well-established food service companies
that compete on the basis of product choice, quality, affordability, service and location.
OurWith few barriers to entry, our competitors include a variety of independent local operators, in addition to well-capitalized regional, national and international restaurant chains and
franchises. Furthermore, the restaurant industry has few barriers to entry,franchises, and
therefore new competitors may emerge at any time.
For our Tim Hortons Furthermore, delivery aggregators and Burger King brands, our principal competitors are McDonald’s, Wendy’s, Starbucks, Subway, Dunkin Donuts and Panera Bread as well as, in the casefood delivery services provide consumers with convenient access to a broad range of our Burger King brand, regional hamburger restaurant chains, such as Carl’s Jr., Jack in the Box and Sonic. To a lesser extent, our Tim Hortons and Burger King brands also compete for consumer dining dollars with national, regional and local (i) quick service restaurants that offer alternative menus, (ii) casual and “fast casual”competing restaurant chains and (iii) convenience storesfood retailers, particularly in urbanized areas. Each of our brands also competes for qualified franchisees, suitable restaurant locations and grocery stores.
management and personnel.
Our ability to compete will depend on the success of our plans to improve existing products, to develop and roll-out new products,
and product line extensions, to effectively respond to consumer preferences and to manage the complexity of restaurant operations as well as the impact of our competitors’ actions.
In addition, our long-term success will depend on our ability to strengthen our customers' digital experience through expanded mobile ordering, delivery and social interaction. Some of our competitors have substantially greater financial resources, higher revenues and greater economies of scale than we do. These advantages may allow them to
(1) react to changes in pricing, marketing and the quick service restaurant segment in generalimplement their operational strategies more quickly
and moreor effectively than we can
(2) rapidly expand new product introductions, (3) spend significantly more on advertising, marketing and other promotional activities than we do,or benefit from changes in technologies, which
may give them acould harm our competitive
advantage through higher levels of brand awareness among consumers and (4) devote greater resources to accelerate their restaurant remodeling efforts. Moreover, certain of our major competitors have completed the reimaging of a significant percentage of their store base.position. These competitive advantages
arising from greater financial resources and economies of scale may be exacerbated in a difficult economy, thereby permitting our competitors to gain market share.
There can be no assurance that we will be able to successfully respond to changing consumer preferences, including with respect to new technologies and alternative methods of delivery. If we are unable to maintain our competitive position, we could experience lower demand for products, downward pressure on prices, reduced margins, an inability to take advantage of new business opportunities, a loss of market share, reduced franchisee profitability and an inability to attract qualified franchisees in the future.
Our success depends on the value of our brands and the failure to preserve their value and relevance
either through our actions or those of our franchisees and other partners, could have a negative impact on our financial results.
We depend in large part on the value of the
Tim HortonsTH, BK and
Burger KingPLK brands. To be successful in the future, we must preserve, enhance and leverage the value of our brands. Brand value is based in part on consumer tastes, preferences and perceptions on a variety of factors, including the nutritional content,
methods of production and preparation of our
food.products and our business practices. Consumer acceptance of our products may be influenced
by or subject to change for a variety of reasons. For example, adverse publicity associated with nutritional, health and other scientific studies and conclusions, which constantly evolve and often have contradictory implications, may drive popular opinion against quick service restaurants in general, which may impact the demand for our products.
In addition, adverse publicity related to litigation and regulation (including initiatives intended to drive consumer behavior) may impact the value of our brands by discouraging customers from buying our products.Moreover, health campaigns against products we offer in favor of foods that are perceived as healthier may affect consumer perception of our product offerings and impact the value of our brands.
In addition, adverse publicity related to litigation, regulation (including initiatives intended to drive consumer behavior) or incidents involving us, our franchisees, competitors or suppliers may impact the value of our brands by discouraging customers from buying our products. Perceptions may also be affected by activist campaigns to promote adverse perceptions of the quick service restaurant industry or our brands and/or our operations, suppliers, franchisees or other
partners.partners such as campaigns aimed at sustainability or living-wage opinions. Consumer demand for our products and our brand equity could diminish if we, our employees or our franchisees or other business partners fail to preserve the quality of our products, act or are perceived to act as unethical, illegal, racially-biased or in a socially irresponsible manner, including with respect to the sourcing, content or sale of our products or the use of consumer data for general or direct marketing or other purposes, fail to comply with laws and regulations, publicly take controversial positions or actions or fail to deliver a consistently positive consumer experience in each of our markets. If we are unsuccessful in addressing consumer adverse perceptions, our brands and our financial results may suffer.
Economic conditions have
adversely affected, and may continue to adversely affect, consumer discretionary spending which could negatively impact our business and operating results.
We believe that our restaurant sales, guest traffic and profitability are strongly correlated to consumer discretionary spending, which is influenced by general economic conditions, unemployment levels, the availability of discretionary income and, ultimately, consumer confidence. A protracted economic slowdown, increased unemployment and underemployment of our customer base, decreased salaries and wage rates, increased energy prices, inflation, foreclosures, rising interest rates or other industry-wide cost pressures adversely affect consumer behavior by weakening consumer confidence and decreasing consumer spending for restaurant dining occasions. There can be no assurance that governmental or other responses to economic challenges will restore or maintain consumer confidence. As a result of
these factors, during recessionary periods we
and our franchisees may experience reduced
revenues and sales deleverage, spreading fixed costs across a lower level of sales and
causing downward pressure onprofitability, which may cause our
profitabilitybusiness and
the profitability of our franchisees. These factors may also reduce sales at franchise restaurants, resulting in lower royalty payments from franchisees.operating results to suffer.
Our substantial leverage and obligations to service our debt
and preferred shares could adversely affect our business.
As of December 31,
2015,2018, we had aggregate outstanding indebtedness of
$8,725.6$12,038 million, including a senior secured term loan facility in an aggregate principal amount of
$5,097.7$6,338 million, senior secured first lien notes in an aggregate principal amount of
$1,250.0$2,750 million and senior secured second lien notes in an aggregate principal amount of
$2,250.0$2,800 million.
As of December 31, 2015, we also had outstanding 68.5 million Class A 9.0% cumulative compounding perpetual voting preferred shares entitling the holders thereof to receive cumulative cash dividends at an annual rate of 9.0% on the amount of the purchase price per preferred share, payable quarterly in arrears, and potentially to receive make-whole dividend payments. Subject to restrictions set forth in these instruments, we may also incur significant additional indebtedness in the future, some of which may be secured debt. This may have the effect of increasing our total leverage.
Our substantial leverage could have important potential consequences, including, but not limited to:
increasing our vulnerability to, and reducing our flexibility to respond to, changes in our business and general adverse economic and industry conditions;
requiring the dedication of a substantial portion of our cash flow from operations to the payment of principal of, and interest on, indebtedness,our debt service, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, acquisitions, joint ventures, product research, dividends,distributions, share repurchases and development or other corporate purposes;
increasing our vulnerability to, and limiting our flexibility to plan for, or react to, changes in our business and the competitive environment and the industry in which we operate;
increasing our vulnerability to a downgrade of our credit rating, which could adversely affect our cost of funds, liquidity and access to capital markets;
placing us at a competitive disadvantage as compared to certain of our competitors to the extent that theywho are not as highly leveraged;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
exposing us to the risk of increased interest rates as borrowings under our credit facilities are subject to variable rates of interest;
making it more difficult for us to repay, refinance or satisfy our obligations with respect to our debt;
limiting our ability to borrow additional funds in the future and increasing the cost of any such borrowing; and
exposing us to risks related to fluctuations in foreign currency as we earn profits in a variety of currencies around the world and substantially all of our debt is denominated in U.S. dollars.
There is no assurance that we will generate cash flow from operations or that future debt or equity financings will be available to us to enable us to pay our indebtedness
or dividends on preferred shares or to fund other needs. As a result, we may need to refinance all or a portion of our indebtedness on or before maturity. There is no assurance that we will be able to refinance any of our indebtedness on favorable terms, or at all.
AnyAn inability to generate sufficient cash flow or refinance our indebtedness on favorable terms could have a material adverse effect on our financial condition.
We are subject to restrictive debt covenants, which
The terms of our indebtedness limit our ability to take certain actions and perform certain corporate
functions.functions, and could have the effect of delaying or preventing a future change of control.
The terms of our indebtedness include a number of restrictive covenants that, among other things, limit our ability to:
incur additional indebtedness or guarantee or prepay indebtedness;
pay dividends on, repurchase or make distributions in respect of capital stock;
make investments or acquisitions;
create liens or use assets as security in other transactions;
consolidate, merge, sell or otherwise dispose of substantially all of our or our subsidiaries’ assets;
enter into agreements restricting the ability to pay dividends or make other intercompany transactions; and
enter into transactions with affiliates; andaffiliates.
prepay certain kinds of indebtedness.
We cannot assure you that any of theseThese limitations will notmay hinder our ability to finance future operations and capital needs and our ability to pursue business opportunities and activities that may be in our interest. In addition, our ability to comply with these covenants and restrictions may be affected by events beyond our control.
A breach of the covenants under our indebtedness could result in an event of default under the applicable agreement.
Such aIn the event of default,
could allow theour debt holders
of such indebtedness tomay accelerate
the repayment of such debt,
andwhich may result in the acceleration of the repayment of any other debt to which
a cross-acceleration or cross-default provision applies. In addition,
an event of default under our senior secured credit facilities would also permit the lenders thereunder to terminate all other commitments to extend additional credit under the senior secured credit facilities.
Similarly, in the event of a change of control, pursuant to the terms of our indebtedness, we may be required to repay our
credit facilities, or offer to repurchase the senior secured first lien and second lien notes. In addition, our future indebtedness may also be subject to mandatory repurchase or repayment upon a future change of control. Such current and future terms could have the effect of delaying or preventing a future change of control or may discourage a potential acquirer from proposing or completing a transaction that may otherwise have presented a premium to our unitholders.
In the event of either a default or change of control, we may not have sufficient resources to repurchase, repay or redeem our obligations, as applicable. Moreover, third-party financing may be required in order to provide the funds necessary for us to satisfy these obligations, and we may not be able to obtain such additional financing on terms favorable to us or at all. Furthermore, if we were unable to repay the amounts due under our secured indebtedness, the holders of such indebtedness could proceed against the collateral that secures such indebtedness. In the event our creditors accelerate the repayment of our
secured indebtedness, we and our subsidiaries may not have sufficient assets to repay that indebtedness.
The terms of our indebtedness and RBI’s preferred shares are subject to mandatory redemption or repayment upon a change of control, and such terms could have the effect of delaying or preventing a future change of control.
In connection with any future change of control of RBI or Partnership, subject to important exceptions contained in the instruments governing our indebtedness and preferred shares, (i) the terms of the credit agreement governing the senior secured term loan facility and the senior secured revolving credit facility will require repayment by RBI or Partnership in the event of a change of control and (ii) the indenture governing the senior secured first lien and second lien notes will require the issuer thereof to make an offer to repurchase the notes in connection with a change of control. In addition, in connection with any future change of control of RBI, (i) the terms of RBI’s preferred shares will require, if requested by the holders of not less than a majority of the outstanding preferred shares, the preferred shares to be redeemed in full by RBI as a result of a change of control, and (ii) the terms of our partnership agreement will require, if RBI redeems any preferred shares for cash, Partnership to make a distribution to RBI on its preferred units in an amount sufficient for RBI to fund such redemption. In addition, other existing or future indebtedness of RBI or Partnership may also be subject to mandatory repurchase or repayment upon a future change of control. Accordingly, a future change of control of RBI or Partnership would require these and possibly other obligations to become subject to repurchase, repayment and/or redemption. In any such event, we may not have sufficient resources to repurchase, repay and redeem these obligations, as applicable. Moreover, if such financing is required to be repurchased, repaid or redeemed, other third-party financing may be required in order to provide the funds necessary for us to satisfy such obligations, and we may not be able to obtain such additional financing on terms favorable to it or at all.
Any of these provisions may also discourage a potential acquirer from proposing or completing a transaction that may otherwise have presented a premium to the shareholders of RBI or the holders of Partnership exchangeable units.
Our fully franchised business model presents a number of disadvantages and risks.
Substantially all
Tim Hortons and Burger Kingof our restaurants are owned and operated by franchisees. Under our fully franchised business model, our future prospects depend on
(1)(i) our ability to attract new franchisees for
botheach of our brands that meet our criteria and
(2)(ii) the willingness
and ability of franchisees to open restaurants in existing and new markets. There can be no assurance that we will be able to identify franchisees who meet our criteria, or if we identify such franchisees, that they will successfully implement their expansion plans.
Our fully franchised business model presents a number of other drawbacks, such as limited influence over franchisees,
and reliance on franchisees to implement major initiatives, limited ability to facilitate changes in restaurant ownership, limitations on enforcement of franchise obligations due to bankruptcy or insolvency proceedings and
inability or unwillingness ofreliance on franchisees to participate in our strategic initiatives.
While we can mandate certain strategic initiatives through enforcement of our franchise agreements, we will need the active support of our franchisees if the implementation of these initiatives is to be successful. The failure of these franchisees to support our marketing programs and strategic initiatives could adversely affect our ability to implement our business strategy and could materially harm our business, results of operations and financial condition.
Our principal competitors that have a significantly higher percentage of company-operated restaurants than we do may have greater influence over their respective restaurant systems and greater ability to implement operational initiatives and business strategies, including their marketing and advertising programs.
The ability of our franchisees and prospective franchisees to obtain financing for development of new restaurants or reinvestment in existing restaurants depends in part upon financial and economic conditions which are beyond their control. If our franchisees are unable to obtain financing on acceptable terms to develop new restaurants or reinvest in existing restaurants, our business and financial results could be adversely affected.
Our franchisees are also dependent upon their ability to attract and retain qualified employees in an intensely competitive employee market. The inability of our franchisees to recruit and retain qualified individuals may delay the planned openings of new restaurants by our franchisees and could adversely impact existing franchise restaurants, which could slow our growth. Moreover, we may also face liability for employment-related claims of our franchisees’ employees based on theories of joint employer liability with our franchisees or other theories of vicarious liability, which could materially harm our results of operations and financial condition.
Our operating results are closely tied to the success of our
franchisees; however, our franchisees,
who are independent operators, and we have limited influence over their restaurant operations.
We
receivegenerate revenues in the form of royalties, fees and other amounts from our franchisees. As a result, our operating results are closely tied to the success of our franchisees. However, our franchisees are independent operators and we cannot control many factors that impact the profitability of their restaurants. If sales trends or economic conditions worsen for franchisees, their financial results may deteriorate, which could result in, among other things, restaurant closures, delayed or reduced payments to us of royalties, advertising contributions, rents and, in the case of the
Tim HortonsTH brand, delayed or reduced payments for products and supplies, and an inability for such franchisees to obtain financing to fund development, restaurant remodels or equipment initiatives on acceptable terms or at all. Furthermore, franchisees may not be willing or able to renew their franchise agreements with us due to low sales volumes, or high real estate costs, or may be unable to renew due to the failure to secure lease renewals. If our franchisees fail to renew their franchise agreements, our royalty revenues may decrease which in turn could materially and adversely affect our business and operating results.
A franchisee bankruptcy could have a substantial negative impact on our ability to collect payments due under such franchisee’s franchise agreements and, if applicable, lease agreements with us. In a Canadian or U.S. franchisee bankruptcy, the debtor in possession or bankruptcy trustee may reject its franchise arrangements under applicable bankruptcy law, in which case there would be no further royalty payments, rent payments or, in the case of the Tim Hortons brand, payments for products and supplies from such franchisee, and there can be no assurance as to the proceeds, if any, that may ultimately be recovered in a bankruptcy proceeding of such franchisee in connection with a damage claim resulting from such rejection.
Under our franchise agreements, we can, among other things, mandate menu items, signage, equipment, hours of operation and value menu, establish operating procedures and approve suppliers, distributors and products. However, the quality of franchise restaurant operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements or standards set by applicable law. In addition, franchisees may not hirelaw, including sanitation and train qualified managers and other restaurant personnel.pest control standards. Any operational shortcoming of a Tim Hortons or Burger King franchise restaurant is likely to be attributed by guests to the entire brand, thus damaging the brand’s reputation and potentially
affecting our revenues and profitability.
While we ultimately can take action to terminate franchisees that do not comply with the standards contained in our franchise agreements and our operating standards, weWe may not be able to identify problems and take
effective action quickly enough and, as a result, our image and reputation may suffer, and our franchise revenues and results of operations could decline.
Our operating results could be impacted by changes in consumer behavior that are the result of advances in technologies and alternative delivery methods.
If the behavior or preferences of our guests change as a result of advances in technologies or alternative delivery methods or channels and we are not able to respond to these changes, or our competitors respond to these changes more effectively, then our business and operating results could be materially harmed.
Our operating results depend on the effectiveness of our marketing and advertising programs and the successful development and launch of new products.
Our revenues are heavily influenced by brand marketing and advertising and by our ability to develop and launch new and innovative
products and product extensions.products. Our marketing and advertising programs may not be successful or we may fail to develop commercially successful new products, which may lead us to fail to attract new guests and retain existing
guests. If our marketingguests, which, in turn, could materially and
advertising programs are unsuccessful or if we fail to develop commercially successful new products,adversely affect our results of
operations could be materially and adversely affected.operations. Moreover, because franchisees contribute to
our advertising
fundfunds based on a percentage of gross sales at their franchise restaurants,
our advertising fund expenditures are dependent upon sales volumes at system-wide restaurants. If system-wide sales decline, there will be a reduced amount available for our marketing and advertising programs.
In addition,Furthermore, to the extent that we
have emphasized certainuse value offerings in our marketing and advertising programs to drive traffic,
at our stores. The disadvantage of value offerings is that the
low-pricelow price offerings may condition our guests to resist higher prices in a more favorable economic environment.
Franchisee support for our marketing
In addition, we continue to focus on restaurant modernization and
advertising programs is critical for our long-term success.The support of our franchisees is critical fortechnology and digital engagement in order to transform the success of our marketing and advertising programs and any new capital intensive or other strategic initiatives that we seek to undertake, and the successful executionrestaurant experience. As part of these initiatives will dependwe are seeking to improve our service model and strengthen relationships with customers, digital channels, loyalty initiatives, mobile ordering and payment systems and delivery initiatives. These initiatives may not have the anticipated impact on our ability to maintain alignment with our franchisees. Whilefranchise sales and therefore we can mandate certain strategic initiatives through enforcement of our franchise agreements, we will needmay not fully realize the active support of our franchisees if the implementationintended benefits of these initiatives is to be successful. In addition, efforts to build alignment with franchisees may result in a delay in the implementation of planned marketing and advertising programs and other key initiatives. Franchisees may not continue to support our marketing programs and strategic initiatives. The failure of these franchisees to support our marketing programs and strategic initiatives could adversely affect our ability to implement our business strategy and could materially harm our business, results of operations and financial condition.
The success of our Tim Hortons brand depends substantially on the performance of our Canadian business.
The financial performance of our Tim Hortons brand is highly dependent on the performance of the restaurants in Canada, which accounted for the substantial majority of its revenues and operating income in 2015. Accordingly, any substantial or sustained decline in Tim Hortons Canadian business or the value of the Canadian dollar would materially and adversely affect our financial results.
significant investments.
Our future growth and profitability will depend on our ability to successfully accelerate international development with strategic partners and joint ventures.
We believe that the future growth and profitability of
botheach of our brands will depend on our ability to successfully accelerate international development with strategic partners and joint ventures in new and existing international markets. New markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets. As a result, new restaurants in those markets may have lower average restaurant sales than restaurants in existing markets and may take longer than expected to reach target sales and profit levels (or may never do so). We will need to build brand awareness in those new markets we enter through advertising and promotional activity, and those activities may not promote our brands as effectively as intended, if at all.
For the past several years, Burger King Worldwide has used
We have adopted a master franchise development model
for all of our brands, which in markets with strong growth potential may include participating in strategic joint ventures,
with little to no upfront investment, to accelerate international growth.
We plan to use a similar strategy with the Tim Hortons brand to grow the brand’s presence globally through partnerships with local restaurant operators or local entrepreneurs as franchisees. These new arrangements may give our joint venture and/or master franchise partners the exclusive right to develop and manage our restaurants in a specific country or countries. A joint venture partnership involves special risks,
such asincluding the following: our joint venture partners may
at any time have economic, business or legal interests or goals that are inconsistent with those of the joint venture or us, or our joint venture partners may be unable to meet their economic or other obligations and we may be required to fulfill those obligations alone. Our master franchise arrangements present similar risks and uncertainties. We cannot control the actions of our joint venture partners or master franchisees, including any nonperformance, default or bankruptcy of joint venture partners or master franchisees. In addition, the termination of an arrangement with a master franchisee or a lack of expansion by certain master franchisees could result in the delay or discontinuation of the development of franchise restaurants, or an interruption in the operation of our brand in a particular market or markets. We may not be able to find another operator to resume development activities in such market or markets. Any such delay, discontinuation or interruption could materially and adversely affect our business and operating results.
While we believe that our joint venture and master franchise arrangements provide us with experienced local business partners in foreign countries, events or issues, including disagreements with our partners, may occur that require attention of our senior executives and may result in expenses or losses that erode the profitability of our international operations.
In addition, the U.S. Foreign Corrupt Practices Act, theCorruption of Foreign Public Officials Act (Canada) and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these laws. Despite our compliance programs, we cannot assure you that our internal control policies and procedures always will protect us from reckless or negligent acts committed by our strategic partners and joint venturers or their employees or agents. Violations of these laws, or allegations of such violations, may have a negative effect on our results of operations, financial condition and reputation.
If we are unable to effectively manage our growth, it could adversely affect our business and operating results.
As a result of the Transactions, we became
We are the indirect holding company for
Tim HortonsTH, BK, and
Burger King WorldwidePLK and their respective consolidated subsidiaries with over
19,00025,000 restaurants, of which approximately 100% are franchised restaurants. In addition,
as described elsewhere in this report, our growth strategy includes strategic expansion in existing and new markets, and contemplates a significant acceleration in the growth in the number of new restaurants. As our franchisees are independent third parties, we have
expended and may need to continue to expend substantial financial and managerial resources to enhance our existing restaurant management systems, financial and management controls, information systems and personnel to accurately capture and reflect the financial and operational activities at our franchise restaurants. On occasion we have encountered, and may in the future encounter, challenges in receiving these results from our franchisees in a consistent and timely manner. If we are not able to effectively manage the management and information demands associated with the significant growth of our franchise system, then our business and operating results could be negatively impacted.
Sub-franchisees could take actions that could harm our business and that of our master franchisees.
Our business model contemplates us entering into agreements with master franchisees and other partners that permit them to develop and operate restaurants in defined geographic areas. As permitted by certain of these agreements, master franchisees or partners may elect to sub-franchise rightslicense sub-
franchisees to develop and operate
Burger KingTH, BK, or
Tim HortonsPLK restaurants, as applicable in the geographic area covered by the agreement. These agreements contractually obligate our master franchisees
or partners, as applicable, to operate their restaurants in accordance with specified operations, safety and health standards and also require that any sub-franchise agreement contain similar requirements. However, we are not party to the agreements with the sub-franchisees and
as a result, are dependent upon our master franchisees
and partners to enforce these standards with respect to sub-franchised restaurants. As a result, the ultimate success and quality of any sub-franchised restaurant rests with the master franchisee
or partner and the sub-franchisee. If sub-franchisees do not successfully operate their restaurants in a manner consistent with required standards, franchise fees and royalty income ultimately paid to us could be adversely affected, and our brand image and reputation may be harmed, which could materially and adversely affect our business and operating results.
Our international operations subject us to additional risks and costs and may cause our profitability to decline.
Our operations outside of the U.S. and Canada are exposed to risks inherent in foreign operations. These risks, which can vary substantially by market, are described in many of the risk factors discussed in this section and include the following:
governmental laws, regulations and policies adopted to manage national economic conditions, such as increases in taxes, austerity measures that impact consumer spending, monetary policies that may impact inflation rates and currency fluctuations;
the imposition of import restrictions or controls;
the risk of markets in which we have granted exclusive development and subfranchising rights;
the effects of legal and regulatory changes and the burdens and costs of our compliance with a variety of foreign laws;
changes in the laws and policies that govern foreign investment and trade in the countries in which we operate;
compliance with U.S., Canadian and other foreign anti-corruption and anti-bribery laws, including compliance by our employees, contractors, licensees or agents and those of our strategic partners and joint ventures;
risks and costs associated with political and economic instability, corruption, anti-American sentiment and social and ethnic unrest in the countries in which we operate;
the risks of operating in developing or emerging markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations and the enforceability of contract rights and intellectual property rights;
risks arising from the significant and rapid fluctuations in currency exchange markets and the decisions and positions that we take to hedge such volatility;
changing labor conditions and difficulties experienced by our franchisees in staffing their international operations;
the impact of labor costs on our franchisees’ margins given our labor-intensive business model and the long-term trend toward higher wages in both mature and developing markets and the potential impact of union organizing efforts on day-to-day operations of our franchisees’ restaurants; and
the effects of increases in the taxes we pay and other changes in applicable tax laws.
These factors may increase in importance as we expect franchisees of
botheach of our brands to open new restaurants in international markets as part of our growth strategy.
Our operations are subject to fluctuations in foreign currency exchange and interest rates.
We report our results in U.S. dollars, which is our reporting currency. The operations of
each of TH,
BK, and
BKPLK that are denominated in currencies other than the U.S. dollar are
translated to U.S. dollars for our financial reporting purposes, and are therefore impacted by fluctuations in currency exchange rates and changes in currency regulations.
The majority of TH’s operations, income, revenues, expenses and cash flows are denominated in Canadian dollars, which we translate to U.S. dollars for our financial reporting purposes. Royalty payments from BK franchisees in our European markets and in certain other countries are denominated in currencies other than U.S. dollars. Furthermore, franchise royalties from each of TH’s and BK’s international franchisees are calculated based on local currency sales; consequently, franchise revenues are still impacted byIn addition, fluctuations
in currency exchange rates. Revenues and expenses of TH and BK that are denominated in currencies other than the U.S. dollar are translated using the average rates during the period in which they are recognized and are impacted by changes in currency exchange rates.We enter into forward contracts to reduce our exposure to volatility from foreign currency fluctuations associated with certain foreign currency-denominated assets. However, for a variety of reasons, we do not hedge our revenue exposure in other currencies. Therefore, we are exposed to volatility in those other currencies, and this volatility may differ from period to period. As a result, the foreign currency impact on our operating results for one period may not be indicative of future results. We also use forward currency contracts to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee and certain intercompany purchases, made by our TH Canadian operations.
Fluctuations in interest rates may also affect our combined business. WeAlthough we attempt to minimize this riskthese risks through geographic diversification and lower overall borrowing costs through the utilization of derivative financial instruments. We primarily utilize interest rate swaps to attempt to minimize thisinstruments, our risk management strategies may not be effective and lower our overall borrowing costs. These instruments are entered into with financial institutions and have reset dates and critical terms that match thoseresults of our forecasted interest payments. Accordingly, any changes in interest rates we pay are partially offset by changes in the market value associated with derivative financial instruments.
As a result of entering into these hedging contracts with major financial institutions, we may be subject to counterparty nonperformance risk. Should there be a counterparty default, weoperations could be exposed to the net losses on the hedged arrangements or be unable to recover anticipated net gains from the transactions.
adversely affected.
Increases in food and commodity costs
or shortages or interruptions in the supply or delivery of our food could harm our operating results and the results of our franchisees.
Our profitability and the profitability of our franchisees will depend in part on our ability to anticipate and react to changes in food and commodity and supply costs. With respect to our TH business, volatility in connection with certain key commodities that we purchase in the ordinary course of business such as coffee, wheat, edible oils and sugar, can impact our revenues, costs and margins. If commodity prices rise, franchisees may experience reduced sales due to decreased consumer demand at retail prices that have been raised to offset increased commodity prices, which may reduce franchisee profitability. In addition, with respect to our BK business, the marketmarkets for beef and chicken is particularly volatile and isare subject to significant price fluctuations due to seasonal shifts, climate conditions, demand for corn (a key ingredientthe cost of cattle and chicken feed), corn ethanol policy,grain, disease, industry demand, international commodity markets,
food safety concerns, product recalls, government regulation and other factors, all of which are beyond
itsour control and, in many instances unpredictable.
If the price of beef, chicken or other products that we use in our Company restaurantsSuch increases in
the future and we choose not to pass, or cannot pass, these increases on to our guests, our operating margins would decrease for as long as we operate Company restaurants. Any such decline in franchisee sales will reduce our royalty income, which in turncommodity costs may materially and adversely affect our business and operating results.
If
We and our franchisees are dependent on frequent deliveries of fresh food products that meet our specifications. Shortages or interruptions in the supply
of fresh food products caused by unanticipated demand, natural disasters, problems in production or
distribution, inclement weather or other conditions could adversely affect the availability, quality
and cost of
food or commodities fails to meet demand or the quality standards ofingredients, which would adversely affect our
guests, our franchisees may experience reduced sales which, in turn, would reduce rents and royalty revenues as well as supply chain sales. Such a reduction in rents and royalty revenues and supply chain sales may adversely impact our business and financialoperating results.
Our vertically integrated supply chain operations
including manufacturing, warehouse and distribution activities, subject us to additional risks and may cause our profitability to decline.
We operate a vertically integrated supply chain for our TH business in which we manufacture, warehouse, and distribute certain food and restaurant supplies to our franchise and Company restaurants. There are certain risks associated with this vertical integration growth strategy, including:
delays and/or difficulties associated with, or liabilities arising from, owning a manufacturing, warehouse and distribution business;
maintenance, operations and/or management of the facilities, equipment, employees and inventories;
limitations on the flexibility of controlling capital expenditures and overhead;
the need for skills and techniques that are outside our traditional core expertise;
increased transportation, shipping, food and other supply costs;
inclement weather or extreme weather events;
shortages or interruptions in the availability or supply of high-quality coffee beans, perishable food products and/or their ingredients;
variations in the quality of food and beverage products and/or their ingredients; and
political, physical, environmental, labor, or technological disruptions in our or our suppliers’ manufacturing and/or warehousing plants, facilities, or equipment.
If we do not adequately address the challenges related to these vertically integrated operations or the overall level of utilization or production decreases for any reason, our results of operations and financial condition may be adversely impacted. Moreover, shortages or interruptions in the availability and delivery of food, beverages and other suppliers to our restaurants may increase costs or reduce revenues.
As of December 31, 2018, we have only one or a few suppliers to service each category of products sold at our TH and PLK restaurants, and the loss of any one of these suppliers would likely adversely affect our business.
Our success is dependent on securing desirable restaurant locations for
botheach of our brands, and competition for these locations may impact our ability to effectively grow our restaurant portfolios.
The success of any restaurant depends in substantial part on its location. There can be no assurance that the current locations of our restaurants will continue to be attractive as demographic patterns change. Neighborhood or economic conditions where restaurants are located could decline in the future, thus resulting in potentially reduced sales in those locations. Competition for restaurant locations can also be intense and there may be delay or cancellation of new site developments by developers and landlords, which may be exacerbated by factors related to the commercial real estate or credit markets. If franchisees cannot obtain desirable locations for their restaurants at reasonable prices due to, among other things, higher than anticipated acquisition, construction and/or development costs of new
restaurants;restaurants, difficulty negotiating leases with acceptable
terms;terms, onerous land use or zoning
restrictions;restrictions, or challenges in securing required governmental
permits;permits, then their ability to execute their respective growth strategies may be adversely affected.
The market for retail real estate is highly competitive. Based on their size advantage and/or their greater financial resources, some of our competitors may have the ability to negotiate more favorable lease terms than we can and some landlords and developers may offer priority or grant exclusivity to some of our competitors for desirable locations. As a result, we or our franchisees may not be able to obtain new leases or renew existing leases on acceptable terms, if at all, which could adversely affect our sales and brand-building initiatives.
Our ownership and leasing of significant amounts of real estate exposes us to possible liabilities, losses, and risks.
Many of our system restaurants are presently located on leased premises. As leases underlying our Company and franchise restaurants expire, we or our franchisees may be unable to negotiate a new lease or lease extension, either on commercially acceptable terms or at all, which could cause us or our franchisees to close restaurants in desirable locations. As a result, our sales and our brand-building initiatives could be adversely affected. Furthermore, in general, we cannot cancel existing leases; therefore, if an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the
applicable
lease including, among other things, paying the base rent for the balance of the lease term.lease. In addition, the value of our owned real estate assets could decrease, and/or our costs could increase, because of changes in the investment climate for real estate, demographic trends, demand for restaurant sites and other retail properties, and exposure to or liability associated with environmental contamination and reclamation.
Typically the costs of insurance, taxes, maintenance, utilities, and other property-related costs due under a prime lease with a third-party landlord are passed through to the franchisee under our sublease. If a franchisee fails to perform the obligations passed through under the sublease, we will be required to perform these obligations resulting in an increase in our leasing and operational costs and expenses. In addition, the rent a franchisee pays us under the sublease
is generallymay be based on a percentage of gross sales. If gross sales at a certain restaurant are less than we project we may pay more rent to a third-party landlord under the prime lease than we receive from the franchisee under the sublease. These events could result in an inability to fully recover from the franchisee expenses incurred on leased properties, resulting in increased leasing and operational costs to us.
If we fail to successfully implement our store image and renovation initiatives, our ability to increase revenues and our profitability may be adversely affected.
Our restaurant reimaging initiatives depend on the ability and willingness of franchisees to remodel their existing restaurants. Even if they are willing to remodel their restaurants, many of our franchisees will need to borrow funds in order to finance these capital expenditures. If our franchisees are unable to obtain financing at commercially reasonable rates, or not at all, they may be unwilling or unable to invest in the reimaging of their existing restaurants, and our future growth could be adversely affected.
Food safety
concerns and
food-borne illness concerns
about the health risk of fast food may have an adverse effect on our business.
Food safety is a top priority for us and we dedicate substantial resources to ensure that our customers enjoy safe, high-quality food products. However, food-borne illnesses
such as E. coli, salmonella, and other food safety issues have occurred in the food industry in the past and could occur in the future. Furthermore, our reliance on third-party food suppliers and distributors increases the risk that food-borne illness incidents could be caused by factors outside of our control and that multiple locations would be affected rather than a single restaurant.
New illnesses resistant to any precautions may develop in the future, or diseases with long incubation periods could arise, such as mad cow disease, which could give rise to claims or allegations on a retroactive basis. Any report or publicity, including through social media, linking us or one of our franchisees or suppliers to instances of food-borne illness or other food safety issues, including food tampering, adulteration or contamination, could adversely affect our brands and reputation as well as our revenues and profits.
Outbreaks of disease, as well as influenza, could reduce traffic in our stores. If our customers become ill from food-borne illnesses, we could also be forced to temporarily close some restaurants. In addition, instances of food-borne illness, food tampering or food contamination occurring solelySuch occurrence at restaurants of competitors could adversely affect
ourrestaurant sales as a result of negative publicity about the foodservice industry generally.
The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our supply chain, significantly increase our costs and/or lower margins for us and our franchisees. In addition,
Some of our
industry has long beenproducts contain caffeine, dairy products, fats, sugar and other compounds and allergens, the health effects of which are the subject
of public scrutiny, including suggesting that excessive consumption of caffeine, beef, sugar and other compounds can lead to
a variety or adverse health effects. Particularly in the
threatU.S., there is increasing consumer awareness of
the health risks, including obesity, as well as increased consumer litigation based on alleged adverse health impacts of consumption of various food
tampering by suppliers, employeesproducts. An unfavorable report on the health effects of caffeine or
guests,other compounds present in our products, or negative publicity or litigation arising from other health risks such as
obesity, could significantly reduce the
additiondemand for our beverages and food products. A decrease in customer traffic as a result of
foreign objects in the food that we sell. Reports, whetherthese health concerns or
not true, of injuries caused by food tampering have in the past severely injured the reputations of restaurant chains in the quick service restaurant segmentnegative publicity could materially and
couldadversely affect
us in the future as well. Furthermore, increased use of social media may strengthen the effects of any such negative publicity.our brands and our business.
Our results can be adversely affected by unforeseen events, such as adverse weather conditions, natural disasters, terrorist attacks or threats or catastrophic events.
Unforeseen events, such as adverse weather conditions, natural disasters or catastrophic events, can adversely impact
our restaurant sales. Natural disasters such as earthquakes, hurricanes, and severe adverse weather conditions and health pandemics whether
occurring in Canada, the United States or abroad, can keep customers in the affected area from dining out and result in lost opportunities for our restaurants. Furthermore, we cannot predict the effects that actual or threatened armed conflicts, terrorist attacks, efforts to combat terrorism or heightened security requirements will have on our future operations. Because a significant portion of our restaurant operating costs isare fixed or semi-fixed in nature, the loss of sales during these periods hurts our and our franchisees' operating margins and can result in restaurant operating losses.
The loss of key management personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.
We are dependent on the efforts and abilities of our senior management, including the executives managing
botheach of our brands, and our success will also depend on our ability to attract and retain additional qualified employees. Failure to attract personnel sufficiently qualified to execute our strategy, or to retain existing key personnel, could have a material adverse effect on our business.
Changes
U.S. federal income tax reform could adversely affect us.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). This new legislation significantly modifies the Internal Revenue Code of 1986, as amended (the “Code”). Among other things, it reduces the U.S. federal corporate tax rate and puts into effect the migration from a “worldwide” system of taxation to a modified territorial system (including providing for a 100% dividends received deduction in respect of non-U.S. source income received by certain U.S. recipients from certain non-U.S. corporations). The Tax Act also puts in place a number of provisions that may adversely impact us, including (i) a provision designed to tax lawscurrently global intangible low-taxed income (GILTI)
(effectively, non-U.S. income in excess of a deemed return on tangible assets of non-U.S. corporations), with (subject to certain limitations) a potential offset by foreign tax credits (ii) a base erosion anti-abuse tax (BEAT) that eliminates the deduction of certain base-erosion payments made to related non-U.S. corporations and unanticipatedimposes a minimum tax if greater than regular tax, (iii) significant additional limitations on the deductibility of interest, (iv) a one-time transition tax on certain unrepatriated earnings of non-U.S. subsidiaries that may, if elected, be paid over eight years, (v) limitations on the deductibility of certain executive compensation and (vi) limitations on the utilization of foreign tax credits to reduce the U.S. income tax liability. The provisions of the Tax Act are complex and likely will be the subject of additional regulatory and administrative guidance, which may adversely affect us. Accordingly, our effective tax rate and results of operations could be adversely impacted.
Unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.
We are subject to income and other taxes in Canada, the United States, and numerous foreign jurisdictions. A taxation authority may disagree with certain of our
collective views, including, for example, the allocation of profits by tax jurisdiction, and the deductibility of our interest expense, and may take the position that material income tax liabilities,
interests,interest, penalties, or other amounts are payable by us, in which case, we expect to contest such assessment. Contesting such an assessment may be lengthy and costly and if we were unsuccessful, the implications could be materially adverse to us and affect our effective
income tax rate or operating income.
From time to time, we are subject to additional state and local income tax audits, international income tax audits and sales, franchise and value-added tax audits.
Our effective income tax rate and tax payments in the future could be adversely affected by a number of factors, including: changes in the mix of earnings in countries with different statutory tax rates; changes in the valuation of deferred tax assets and liabilities; continued losses in certain international markets that could trigger a valuation allowance; changes in tax laws; the outcome of income tax audits in various jurisdictions around the world; taxes imposed upon sales of Company restaurants to franchisees; and any repatriation of earnings or our determination that unremitted earnings from foreign subsidiaries for which we have not previously provided for taxes were no longer permanently reinvested.Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. There can be no assurance that the Canada Revenue Agency (the “CRA”), the U.S. Internal Revenue Service (the “IRS”) and/or foreign tax authorities will agree with our interpretation of the tax aspects of reorganizations, initiatives, transactions, or any related matters associated therewith that we have undertaken.
The results of a tax audit or related litigation could
have a material effect on our income tax provision, net income (loss) or cash flowsresult in
the period or periods for which that determination is made. The CRA or the IRS may take the position that material Canadian or U.S. federal income tax liabilities, interest and penalties, respectively, are payable or that our tax positions or views are invalid. If we are unsuccessful in disputing the CRA’s or the IRS’ assertions, we mayus not
bebeing in a position to take advantage of the effective
income tax rates and the level of benefits that we anticipated to achieve as a result of corporate reorganizations, initiatives and transactions, and the implications could
be materially adverse to us, including an increase in our effective tax rate. Even if we are successful in maintaining our positions, we may incur significant expense in contesting positions asserted or claims made by tax authorities that could have a material
impactadverse effect on our
financial position and results of operations.effective income tax rate, income tax provision, net income (loss) or cash flows in the period or periods for which that determination is made.
Partnership and RBI may be treated as U.S. corporations for U.S. federal income tax purposes, which could subject us and RBI to substantial additional U.S. taxes.
As Canadian entities, RBI and Partnership generally would be classified as foreign entities (and, therefore, non-U.S. tax residents) under general rules of U.S. federal income taxation. Section 7874 of the
Internal Revenue Code,
as amended (the “Code”), however, contains rules that result in a non-U.S. corporation being taxed as a U.S. corporation for U.S. federal income tax purposes, unless certain tests, applied at the time of the acquisition, regarding ownership of such entities (as relevant here, ownership by former Burger King
Worldwide shareholders) or level of business activities (as relevant here, business activities in Canada by us and our affiliates, including RBI), were satisfied at such time. The U.S. Treasury Regulations apply these same rules to non-U.S. publicly traded partnerships, such as Partnership. These statutory and regulatory rules are relatively new, their application is complex and there is little guidance regarding their application.
If it were determined that we and/or RBI should be taxed as U.S. corporations for U.S. federal income tax purposes, we and RBI could be liable for substantial additional U.S. federal income tax. For Canadian tax purposes, we and RBI are expected, regardless of any application of Section 7874 of the Code, to be treated as a Canadian resident partnership and company, respectively. Consequently, if we and/or RBI did not satisfy either of the applicable tests, we might be liable for both Canadian and U.S. taxes, which could have a material adverse effect on our financial condition and results of operations.
Future changes to U.S. and non-U.S. tax laws could materially affect Partnership and/or RBI, including their status as foreign entities for U.S. federal income tax purposes, and adversely affect their anticipated financial positions and results.
Changes to the rules in
sectionsections 385 and 7874 of the Code or the Treasury Regulations promulgated thereunder, or other changes in law, could adversely affect our and/or
RBI’sPartnership’s status as a non-U.S. entity for U.S. federal income tax purposes, our effective
income tax rate or future planning based on current law, and any such changes could have prospective or retroactive application to us and/or
RBI. For example, recent legislative proposals have aimed to expand the scope of section 7874 of the Code, or otherwise address certain perceived issues arising in connection with so-called inversion transactions.Partnership. It is presently uncertain whether any such legislative proposals will be enacted into law and, if so, what impact such legislation would have on us.
In addition, the U.S. Treasury has indicated that it is considering possible regulatory action in connection with so-called inversion transactions, including, most recently, in Notices 2015-79 and 2014-52. The timing and substance of any such
further action is presently uncertain. Any such change of law or regulatory action which could apply retroactively or prospectively, could adversely impact our tax position as well as our financial position and results in a material manner. The precise scope and application of
theany such regulatory proposals will not be clear until proposed Treasury Regulations are actually issued, and, accordingly, until such regulations are promulgated and fully understood, we cannot be certain that there will be no such impact.
In addition, we would be impacted by any changes in tax law in response to corporate tax reforms and other policy initiatives in the U.S. and elsewhere.
Moreover, the U.S. Congress, the Organization for Economic Co-operation and Development and other government agencies in jurisdictions where Partnership
and/or RBI and its affiliates do business have had an extended focus on issues related to the taxation of multinational corporations. In particular, specific attention has been paid to “base erosion and profit shifting”, where payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. As a result, the tax laws in the
U.S. and other countries in which we do business could change on a prospective or retroactive basis, and any such change could adversely affect us.
We may not be able to adequately protect our intellectual property, which could harm the value of our
brandbrands and branded products and adversely affect our business.
We depend in large part on the value of
the Tim Hortons and Burger Kingour brands, which represent
44.9%approximately 48% of the total assets on our balance sheet as of December 31,
2015.2018. We believe that our brands are very important to our success and our competitive position. We rely on a combination of trademarks, copyrights, service marks, trade secrets, patents and other intellectual property rights to protect our brands and the respective branded products. The success of our business depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products in both domestic and international markets. We have registered certain trademarks and have other trademark registrations pending in the
United States,U.S., Canada and foreign jurisdictions. Not all of the trademarks that our brands currently use have been registered in all of the countries in which we do business, and they may never be registered in all of these countries. We may not be able to adequately protect our trademarks, and our use of these trademarks may result in liability for trademark infringement, trademark dilution or unfair competition. The steps we have taken to protect our intellectual property in Canada, the
United StatesU.S. and in foreign countries may not be adequate and our proprietary rights could be challenged, circumvented, infringed or invalidated. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of Canada and the
United States.U.S.
We may not be able to prevent third parties from infringing on our intellectual property rights, and we may, from time to time, be required to institute litigation to enforce our trademarks or other intellectual property rights or to protect our trade secrets. Further, third parties may assert or prosecute infringement claims against us and we may or may not be able to successfully defend these claims. Any such litigation could result in substantial costs and diversion of resources and could negatively affect our revenue, profitability and prospects regardless of whether we are able to successfully enforce our rights.
We have been, and in the future may be, subject to litigation that could have an adverse effect on our business.
We may from time to time, in the ordinary course of business, be subject to litigation relating to matters including, but not limited to, disputes with franchisees, suppliers, employees,
team members, and customers, as well as disputes over our intellectual property.
Some of these claims are incidental to our business, such as “slip and fall” accidents at franchise or company-operated restaurants, claims and disputes in connection with site development and construction of system restaurants and employment claims.Whether or not any claimsFor example, there have recently been multiple class action lawsuits filed against us are valid, or whether we are ultimately held liable, suchregarding the no-poaching provision of our BK franchise agreements in the U.S. Active and potential disputes with franchisees could damage our brand reputation and our relationships with our broader franchise base.
Such litigation may be expensive to defend, harm our reputation and divert resources away from our operations and negatively impact our reported earnings. Furthermore, legal proceedings against a franchisee or its affiliates by third parties, whether in the ordinary course of business or otherwise, may include claims against us by virtue of our relationship with the franchisee.
Furthermore, in certain of our agreements, we may agree to indemnify our business partners against any losses or costs incurred in connection with claims by a third party alleging that our services infringe the intellectual property rights of the third-party. Companies have increasingly become subject to infringement threats from non-practicing organizations filing lawsuits for patent infringement.
We, or our business partners, may become subject to claims for infringement
of intellectual property rights and we may be required to indemnify or defend our
business partners from such claims. We are also exposed to a wide varietyShould management’s evaluation of falsified or exaggerated claims due to our size and brand recognition. All of these types of matters have the potential to unduly distract management’s attention and increase costs, including costs associated with defending such claims. Our current exposure with respect to legal matters pending against us could change if determinations by judges and other finders of fact are not in accordance with management’s evaluation of the claims. Should management’s evaluations prove incorrect and such claims are successful, our exposure could exceed expectations and have a material adverse effect on our business, financial condition and results of operations. Although some losses may be covered by insurance, if there are significant losses that are not covered, or there is a delay in receiving insurance proceeds, or the proceeds are insufficient to offset our losses fully, our consolidated financial condition or results of operations may be adversely affected.
Public and private concerns about the health risks associated with fast food may adversely affect our financial results.
Class action lawsuits have been filed, and may continue to be filed, against various quick service restaurants alleging, among other things, that quick service restaurants have failed to disclose the health risks associated with high-fat or high-sodium foods and that quick service restaurant marketing practices have targeted children and encouraged obesity. Adverse publicity about these allegations may negatively affect us and our franchisees, regardless of whether the allegations are true, by discouraging customers from buying our products. In addition, we face the risk of lawsuits and negative publicity resulting from illnesses and injuries, including injuries to infants and children, allegedly caused by our products, toys and other promotional items available in our restaurants or our playground equipment. In addition to decreasing our revenue and profitability and diverting our management resources, adverse publicity or a substantial judgment against us could negatively impact our business, results of operations, financial condition and brand reputation, hindering our ability to attract and retain franchisees and grow our business in Canada, the United States and internationally.
Changes in regulations may adversely affect restaurant operations and our financial results.
Our franchise and Company restaurants are subject to licensing and regulation by health, sanitation, safety and other agencies in the state, province and/or municipality in which the restaurant is located. Federal, state, provincial and local government authorities may enact laws, rules or regulations that impact restaurant operations and the cost of conducting those operations. In many of our markets, including Canada, the
United StatesU.S. and Europe, we and our franchisees are subject to increasing regulation regarding our operations which may significantly increase the cost of doing business. In developing markets, we face the risks associated with new and untested laws and judicial systems.
Among the more important regulatory risks regarding our operations are the following:the impact of the Fair Labor Standards Act,If we fail to comply with existing or future laws, we may be subject to governmental fines and similar Canadian legislation, which governs such matters as minimum wage, overtime and other working conditions, family leave mandates and a variety of other laws enacted that govern these and other employment matters;sanctions.
the risk of franchisors being considered a joint employer with franchisees;
the impact of changes in employment eligibility requirements, the cessation or limitation of access to federal, state or provincial labor programs, including amendments to the Temporary Foreign Worker Program of the Federal Government of Canada;
the impact of immigration and other local and foreign laws and regulations on our business;
disruptions in our operations or price volatility in a market that can result from governmental actions, including price controls, currency and repatriation controls, limitations on the import or export of commodities we use or government-mandated closure of our or our vendors’ operations;
the impact of the United States federal menu labeling law, and similar Canadian legislation, which requires the listing of specified nutritional information on menus and menu boards on consumer demand for our products;
the risks of operating in foreign markets in which there are significant uncertainties, including with respect to the application of legal requirements and the enforceability of laws and contractual obligations;
the impact of the Patient Protection and Affordable Care Act on the businesses of our U.S. franchisees, many of whom are small business owners who may have significant difficulty absorbing the increased costs or may need to revise the ways in which they conduct their business; and
the impact of costs of compliance with privacy, consumer protection and other laws, the impact of costs resulting from consumer fraud and the impact on our margins as the use of cashless payments increases.
We are subject to various provincial, state and foreign laws that govern the offer and sale of a franchise, including in the U.S., to a Federal Trade Commission (“FTC”) rule. Various provincial, state and foreign laws regulate certain aspects of the franchise relationship, including terminations and the refusal to renew franchises. The failure to comply with these laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales, fines
and penalties or require us to make offers of rescission or restitution, any of which could adversely affect our business and operating results. We could also face lawsuits by franchisees based upon alleged violations of these laws.
The Americans with Disabilities Act (“ADA”),
Additionally, we, our franchisees and
similar Canadian legislation, prohibits discriminationour supply chain are subject to risks and costs arising from the effects of climate change, greenhouse gases, and diminishing energy and water resources. These risks include the increased public focus, including by governmental and nongovernmental organizations, on
these and other environmental sustainability matters, such as packaging and waste, animal health and welfare, deforestation and land use. These risks also include the
basis of disability in public accommodations and employment. We have, in the past, been requiredincreased pressure to make
certain modificationscommitments, set targets or establish additional goals and take actions to
our restaurants pursuantmeet them. These risks could expose us to
the ADA. In addition, future mandated modifications to their facilities to make different accommodations for disabled personsmarket, operational and
modifications required under the ADA could result in material unanticipated expense to us and our franchisees.Additionally,execution costs or risks. If we are requiredunable to complyeffectively manage the risks associated with a number of anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, theCorruption of Foreign Public Officials Act (Canada) and The Bribery Act of 2010 (U.K.), which prohibit improper payments to foreign officials for the purpose of obtaining or retaining business. The scope and enforcement of anti-corruption laws and regulations may vary. There can be no assurance that our employees, contractors, licensees or agents will not violate these laws and regulations. Violations of these laws, or allegations of such violations,complex regulatory environment, it could disrupt our business and result inhave a material adverse effect on our results of operations.
Furthermore, certain changes to accounting standards, or changes to the interpretation of accounting standards applicable to us, could also materially affect our future results.
If we fail to comply with existing or future lawsbusiness and regulations, we may be subject to governmental or judicial fines or sanctions. In addition, our and our franchisees’ capital expenditures could increase due to remediation measures that may be required if we are found to be noncompliant with any of these laws or regulations.
financial condition.
The personal information that we collect may be vulnerable to breach, theft or loss that could adversely affect our reputation, results of operation and financial condition.
In the ordinary course of our business, we collect, process, transmit and retain personal information regarding our employees and their families, our franchisees, vendors and consumers, which can include social security numbers, social insurance numbers, banking and tax identification information, health care information and credit card
information and our franchisees collect similar information. Some of this personal information is held and managed by
our franchisees and certain of our vendors.
Although we useA third-party may be able to circumvent the security and business controls
we use to limit access and use of personal information,
a third-party may be able to circumvent those security and business controls, which could result in a breach of employee, consumer or franchisee privacy. A major breach, theft or loss of personal information regarding our employees and their families, our franchisees, vendors or consumers that is held by us or our vendors could result in substantial fines, penalties,
indemnification claims and potential litigation against us which could negatively impact our results of operations and financial condition.
Furthermore, asFor example, the European Union adopted a new regulation that became effective in May 2018, called the General Data Protection Regulation (“GDPR”), which requires companies to meet certain requirements regarding the handling of personal data. Failure to meet GDPR requirements could result in penalties of up to 4% of worldwide revenue. As a result of legislative and regulatory rules, we may be required to notify the owners of the personal information of any data breaches, which could harm our reputation and financial results, as well as subject us to litigation or actions by regulatory authorities.
Furthermore, media or other reports of existing or perceived security vulnerabilities in our systems or those of our franchisees or vendors, even if no breach has been attempted or has occurred, can adversely impact our brand and reputation, and thereby materially impact our business.
Significant capital investments and other expenditures could be required to remedy a breach and prevent future problems, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. These costs, which could be material, could adversely impact our results of operations during the period in which they are incurred. The techniques and sophistication used to conduct cyber-attacks and breaches, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. Accordingly, our expenditures to prevent future cyber-attacks or breaches may not be successful.
Information technology system failures or interruptions or breaches of our network security may interrupt our operations, subject us to increased operating costs and expose us to litigation.
As our reliance on technology has increased, so have the risks posed to our systems. We rely heavily on our computer systems and network infrastructure across operations including, but not limited to, point-of-sale processing at our
restaurants.restaurants, as well as the systems of our third party vendors to whom we outsource certain administrative functions. Despite our implementation of security measures, all of our technology systems are vulnerable to damage,
disabilitydisruption or failures due to physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from
problems with transitioning to upgraded or replacement systems, internal and external security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. If any of our technology systems were to fail, and we were unable to recover in a timely way, we could experience an interruption in
itsour operations. Furthermore, if unauthorized access to or use of our systems were to occur, data related to our proprietary information could be compromised. The occurrence of any of these incidents could have a material adverse effect on our future financial condition and results of operations. To the extent that some of our worldwide reporting systems require or rely on manual processes, it could increase the risk of a
breach.breach due to human error.
In addition, we receive and maintain certain personal information about our customers, franchisees and employees, and our franchisees receive and maintain similar information. For example, in connection with credit card transactions, we and our franchisees collect and transmit confidential credit card information by way of retail networks. We also maintain important internal data, such as personally identifiable information about our employees and franchisees and information relating to our operation. Our use of personally identifiable information is regulated by applicable laws and regulations. If our security and information systems or those of our franchisees are compromised or our business associates fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as our restaurant operations
and results of operations and financial condition. As privacy and information security laws and regulations change, we may incur additional costs to ensure that we remain in compliance.
Further, the standards for systems currently used for transmission and approval of electronic payment transactions, and the technology utilized in electronic payment themselves, all of which can put electronic payment data at risk, are determined and controlled by the payment card industry, not by us. If someone is able to circumvent our data security measures or that of third parties with whom we do business, including our franchisees, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation, liability, and could seriously disrupt our operations. Any resulting negative publicity could significantly harm our reputation and could materially and adversely affect our business and operating results.
Finally, a number of our systems and processes are not fully integrated worldwide and, as a result, require us to manually estimate and consolidate certain information that we use to manage our business. To the extent that we are not able to obtain transparency into our operations from our systems, it could impair the ability of our management to react quickly to changes in the business or economic environment.
Compliance with or cleanup activities required by environmental laws may hurt our business.
We are subject to various federal, state, provincial, local and foreign environmental laws and regulations regarding climate change, energy consumption and our management, handling, release and/or disposal of water resources, air resources, hazardous or toxic substances, solid waste and other environmental matters. These laws and regulations provide for significant fines and penalties for noncompliance. If we fail to comply with these laws or regulations, we could be fined or otherwise sanctioned by regulators. Third parties may also make personal injury, property damage or other claims against us associated with releases of, or actual or alleged exposure to, hazardous substances at, on or from our properties. Environmental conditions relating to prior, existing or future
restaurants or restaurant sites, including franchised sites, may have a material adverse effect on us. Moreover, the adoption of new or more stringent environmental laws or regulations could result in a material environmental liability to us and the current environmental condition of the properties could be harmed by tenants or other third parties or by the condition of land or operations in the vicinity of our properties.
We outsource certain aspects of our business to third-party vendors which subjects us to risks, including disruptions in our business and increased costs.
We have outsourced certain administrative functions for our business
including account payment and receivable processing, to
a third-party service
provider.providers. We also outsource certain information technology support services and benefit plan administration. In the future, we may outsource other functions to achieve cost savings and efficiencies. If the service providers to which we outsource these functions do not perform effectively, we may not be able to achieve the expected cost savings and may have to incur additional costs in connection with such failure to perform. Depending on the function involved, such failures may also lead to business disruption, transaction errors, processing inefficiencies, the loss of sales and customers, the loss of or damage to intellectual property through security breach, and the loss of sensitive data through security breach or otherwise. Any such damage or interruption could have a material adverse effect on our business, cause us to face significant fines, customer notice obligations or costly litigation, harm our reputation with our customers or prevent us from paying our collective suppliers or employees or receiving payments on a timely basis.
RBI is not in compliance with certain “best practices” established by Canadian securities regulators in respect of corporate governance.
The chairman of the board of directors of RBI, which acts as our general partner, is not “independent” for purposes of Canadian securities laws, and RBI’s nominating and corporate governance and compensation committees are not composed solely of independent directors. Accordingly, RBI is not in compliance with certain governance best practices set forth in National Policy 58-201 – Corporate Governance Guidelinesand National Instrument 58-101 – Disclosure of Corporate Governance Practices with respect to standards of director independence. Accordingly, holders of our Partnership exchangeable units and RBI shareholders will not have the same protections afforded to security holders of reporting issuers that are in compliance with the corporate governance best practices established by the Canadian Securities Administrators.
Canadian legislation contains provisions that may have the effect of delaying or preventing a change in control.
We and RBI are Canadian entities.The Investment Canada Act requires that a “non-Canadian,” as defined therein, file an application for review with the Minister responsible for theInvestment Canada Act and obtain approval of the Minister prior to acquiring control of a Canadian business, where prescribed financial thresholds are exceeded. This may discourage a potential acquirer from proposing or completing a transaction that may otherwise present a premium to RBI shareholders or holders of Partnership exchangeable unitholders. Otherwise, there are no limitations either under the laws of Canada or in our articles regarding the rights of non-Canadians to hold or vote our common shares.units.
Risks Related to our Partnership Exchangeable Units
3G RBH owns 43.1% approximately 41%of the combined voting power with respect to RBI, and its interests may conflict with or differ from the interests of the other shareholders. 3G Restaurant Brands Holdings LP (“
3G”3G RBH”) currently owns approximately
95.7%92% of the Partnership exchangeable units and
43.1%approximately 41% of the combined voting power with respect to RBI. The interests of 3G
RBH and its principals may not always be aligned with the interests of the other holders of Partnership exchangeable units. So long as 3G
RBH continues to directly or indirectly own a significant amount of the voting power of RBI, it will continue to be able to strongly influence or effectively control the business decisions of RBI and Partnership. 3G
RBH and its principals may have interests that are different from those of the other holders of Partnership exchangeable units, and 3G
RBH may exercise its voting and other rights in a manner that may be adverse to the interests of the other holders of Partnership exchangeable units.
In addition, this concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of RBI or Partnership, which could cause the market price of RBI’s common shares or Partnership exchangeable units to decline or prevent the shareholders or unitholders from realizing a premium over the market price for their RBI common shares or Partnership exchangeable units.
3G
RBH is affiliated with 3G Capital Partners, Ltd.
, a
New York private equityglobal investment firm (“3G Capital”). 3G Capital is in the business of making investments in companies and may from time to time in the future acquire or develop controlling interests in businesses engaged in the QSR industry that complement or directly or indirectly compete with certain portions of our business. In addition, 3G Capital may pursue acquisitions or opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.
The price of our Partnership exchangeable units or RBI common shares may be volatile or may decline regardless of our operating performance.
The market price of Partnership exchangeable units or RBI common shares may fluctuate materially from time to time in response to a number of factors, many of which we cannot control, including those described under “Risk Factors – Risks Related to Our Business”. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies. These broad market and industry factors may materially harm the market price of Partnership exchangeable units or RBI common shares, regardless of our operating performance. In addition, the price of Partnership exchangeable units or RBI common shares may be dependent upon the valuations and recommendations of the analysts who cover our business, and if our results do not meet the analysts’ forecasts and expectations, the price of our Partnership exchangeable units or RBI common shares could decline as a result of analysts lowering their valuations and recommendations or otherwise. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects.
Future sales of Partnership exchangeable units or RBI common shares in the public market could cause volatility in the price of our Partnership exchangeable units or cause the price of our Partnership exchangeable units to fall.
Sales of a substantial number of Partnership exchangeable units or RBI common shares in the public market, or the perception that these sales might occur, could depress the market price of Partnership exchangeable units, and could impair our ability or the ability of RBI to raise capital through the sale of additional equity securities.
Certain holders of Partnership exchangeable units and RBI common shares have required and others may require us or RBI to register their Partnership exchangeable units or common shares, as applicable, for resale under the U.S. and Canadian securities laws under the terms of certain separate registration rights agreements between us and the holders of these securities. Registration of those units or shares would allow the holders thereof to immediately resell their Partnership exchangeable units or RBI common shares in the public market. Any such sales, or anticipation thereof, could cause the market price of our Partnership exchangeable units or RBI common shares to decline.
In addition, RBI has registered common shares that are reserved for issuance under the RBI incentive plans.
Your
A shareholder’s percentage ownership in us may be diluted by future issuances of RBI common shares or Partnership exchangeable units, which could reduce the influence of our shareholders and unitholders over matters on which they are entitled to vote.
The board of directors of RBI has the authority, without action or vote of RBI’s shareholders or our unitholders, to issue
an unlimited number of additional RBI common shares or Partnership exchangeable units.
An unlimited number of each class of security is authorized. For example, RBI or Partnership, as applicable, may issue these securities in connection with investments and acquisitions. The number of RBI common shares or Partnership exchangeable units issued
in connection with an investment or acquisition could constitute a material portion of
the then-outstanding RBI common shares or Partnership exchangeable units, and could materially dilute the ownership
inof RBI shareholders or our
business represented by, the then-outstanding RBI common shares and Partnership exchangeable units. Future issuancesunitholders. Issuances of RBI common shares or Partnership exchangeable units would
also reduce the influence of holders of RBI common shares and Partnership exchangeable units over matters on which they are entitled to vote.
There is no assurance that we will pay any distributions on our Partnership exchangeable units in the future.
Although the board of directors of RBI declared a cash dividend on the RBI common shares (requiring a corresponding distribution with respect to our Partnership exchangeable units) for each quarter of
2015,2018 and for the first quarter of 2019, any future dividends on the RBI common shares and
partnershipdistributions on Partnership exchangeable units will be determined at the discretion of the board of directors of RBI and will depend upon results of operations, financial condition, contractual restrictions, including the terms of
RBI’s preferred shares and agreements governing our debt and any future indebtedness we may incur, restrictions imposed by applicable law and other factors that the board of directors of RBI deems relevant.
Although RBI is targeting a total of $2.00 in declared dividends per RBI common share and distributions per Partnership exchangeable unit for 2019, there is no assurance that RBI will achieve its target total dividend for 2019 and satisfy our debt service and other obligations. Realization of a gain on an investment in RBI common shares and in Partnership exchangeable units will depend on the appreciation of the price of the RBI common shares or the Partnership exchangeable units, which may never occur.
An active trading market for Partnership exchangeable units may not be sustained.
Partnership exchangeable units are not listed on a national exchange in the United States. Although Partnership exchangeable units are listed on the Toronto Stock Exchange, an active public market for Partnership exchangeable units may not be sustained, and such market is not as liquid as for RBI common shares. If an active public market is not sustained, it may be difficult for investors who hold Partnership exchangeable units to sell their exchangeable units at a price that is attractive to them, or at all.
Partnership exchangeable units may not trade equally with RBI common shares.
Although now exchangeable, the Partnership exchangeable units and the RBI common shares are distinct securities. The Partnership exchangeable units and RBI common shares will at all times trade separately, and the public market for Partnership exchangeable units is not as liquid as for the RBI common shares. In addition, if a holder of Partnership exchangeable units exercises its exchange right, RBI, in its capacity as the general partner of Partnership and in its sole discretion, may cause Partnership to repurchase each Partnership exchangeable unit submitted for exchange in consideration for cash (in an amount determined in accordance with the terms of the partnership agreement) in lieu of exchanging for common shares. As such, Partnership exchangeable units may not trade equally with RBI common shares, and could trade at a discount to the market price of RBI common shares, which discount could possibly be material.
The exchange of Partnership exchangeable units into RBI common shares is subject to certain restrictions and the value of RBI common shares received in any exchange may fluctuate.
Beginning on December 12, 2015, holders of Partnership exchangeable units became entitled to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for RBI common shares at a ratio of one RBI common share for each Partnership exchangeable unit, subject to the right of RBI, in its capacity as the general partner of Partnership and in its sole discretion, to cause Partnership to repurchase the Partnership exchangeable units for cash (in an amount determined in accordance with the terms of the partnership agreement) in lieu of exchanging for RBI common shares.
The RBI common shares for which Partnership exchangeable units may be exchanged may be subject to significant fluctuations in value for many reasons, including:
our operating and financial performance and prospects;
general market conditions;
the risks described in this report;
changes to the competitive landscape in the industries or markets in which we operate;
the arrival or departure of key personnel; and
speculation in the press or the investment community.
If a holder of Partnership exchangeable units elects to exchange his or her Partnership exchangeable units for RBI common shares, the exchange generally will be taxable for Canadian and U.S. federal income tax purposes.
In certain circumstances, a Limited Partner may lose its limited liability status.
TheLimited Partnerships Act (Ontario) (the “Ontario Limited Partnerships Act”) provides that a limited partner benefits from limited liability unless, in addition to exercising rights and powers as a limited partner, such limited partner takes part in the control of the business of a limited partnership of which such limited partner is a partner. Subject to the provisions of the Ontario Limited Partnerships Act and of similar legislation in other jurisdictions of Canada, the liability of each limited partner for the debts, liabilities and obligations of Partnership will be limited to the limited partner’s capital contribution, plus the limited partner’s share of any undistributed income of Partnership. However, pursuant to the Ontario Limited Partnerships Act, where a limited partner has received the return of all or part of that limited partner’s capital contribution, the limited partner would be liable to Partnership or, where Partnership is dissolved, to its creditors, for any amount, not in excess of the amount of capital contribution returned with interest, necessary to discharge the liabilities of Partnership to all creditors who extended credit or whose claims otherwise arose before the return of the capital contribution. A limited partner holds as trustee for the limited partnership any money or other property that is paid or conveyed to the limited partner as a return of the limited partner’s contribution that is made contrary to the Ontario Limited Partnerships Act. The limitation of liability conferred under the Ontario Limited Partnerships Act may be ineffective outside Ontario except to the extent it is given extra-territorial recognition or effect by the laws of other jurisdictions. There may also be requirements to be satisfied in each jurisdiction to maintain limited liability. If limited liability is lost, limited partners may be considered to be general partners (and therefore be subject to unlimited liability) in such jurisdiction by creditors and others having claims against Partnership.
Item 1B. | Unresolved Staff Comments |
Item 1B. Unresolved Staff Comments
None.
In 2015, we completed the move to our newly renovated
Item 2. Properties
Our corporate headquarters
and TH global restaurant support center which is located in
Oakville,Toronto, Ontario
Canada and consists of approximately
96,00065,000 square feet which we
own.lease. Our U.S. headquarters is located in Miami, Florida and consists of approximately 150,000 square feet which we lease. We also lease office property in Switzerland and Singapore. Related to the TH business, we own five distribution centers, two manufacturing
centers, one warehouseplants and
fourthree offices throughout Canada. In addition, we lease
one officetwo offices and one
distribution centercross-docking facility in Canada
and one manufacturing
centerplant in the U.S.
, one office In 2018, we announced plans to build two new warehouses in
Western Canada and to renovate an existing warehouse in Eastern Canada to facilitate the
Middle Eastsupply of frozen and
one officerefrigerated products in
Luxembourg.Our U.S. headquarters and BK globalthose markets. We expect to complete these projects in 2020.
As of December 31, 2018, our restaurant
support center is located in Miami, Florida and consists of approximately 213,000 square feet which we lease. We lease properties for our Burger King EMEA headquarters in Zug, Switzerland and our Burger King APAC headquarters in Singapore. We also lease additional BK support offices in Madrid, Spain and own BK support offices in Slough, United Kingdom.footprint was as follows:
|
| | | | | | | | | | | |
| | TH | | BK | | PLK | | Total |
Franchise Restaurants(1) | | | | | | | |
| Sites owned by us and leased to franchisees | 748 |
| | 707 |
| | 33 |
| | 1,488 |
|
| Sites leased by us and subleased to franchisees | 2,823 |
| | 927 |
| | 46 |
| | 3,796 |
|
| Sites owned/leased directly by franchisees | 1,268 |
| | 16,112 |
| | 2,982 |
| | 20,362 |
|
| Total franchise restaurant sites | 4,839 |
| | 17,746 |
| | 3,061 |
| | 25,646 |
|
| Company Restaurants | | | | | | | |
| Sites owned by us | 3 |
| | 15 |
| | 10 |
| | 28 |
|
| Sites leased by us | 4 |
| | 35 |
| | 31 |
| | 70 |
|
| Total company restaurant sites | 7 |
| | 50 |
| | 41 |
| | 98 |
|
| Total system-wide restaurant sites | 4,846 |
| | 17,796 |
| | 3,102 |
| | 25,744 |
|
(1) Includes VIE restaurants.
We believe that our existing headquarters and other leased and owned facilities are adequate to meet our current requirements.
As of December 31, 2015, Tim Hortons franchisees operated 4,389 restaurants across Canada, the U.S. and the Middle East, of which 783 were sites owned by us and leased to franchisees, 2,782 were leased by us, and in turn, subleased to franchisees, with the remainder either owned or leased directly by the franchisees. In addition, we operated 24 Company restaurants, of which 6 were sites owned by us and 18 were leased by us.
As of December 31, 2015, Burger King franchisees operated 14,927 Burger King restaurants across the U.S. and Canada, EMEA, APAC and LAC, of which 733 were sites owned by us and leased to franchisees, 1,114 were leased by us, and in turn, subleased to franchisees, with the remainder either owned or leased directly by the franchisees. In addition, we operated 76 Company restaurants, of which 15 were sites owned by us and 61 were leased by us.
Item 3. Legal Proceedings
From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property.
Item 4. | Mine Safety Disclosures |
On June 19, 2017, a claim was filed in the Ontario Superior Court of Justice against The TDL Group Corp, a subsidiary of RBI, RBI, the Tim Hortons Ad Fund and certain individual defendants. 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, breach of the statutory duty of fair dealing, and breach of fiduciary duties.
On October 6, 2017, a claim was filed in the Ontario Superior Court of Justice against the same defendants as named above. The plaintiffs, two franchisees of Tim Hortons restaurants, seek to certify a class of all persons who have carried on business as a Tim Hortons franchisee at any time after March 8, 2017. The claim alleges various causes of action against the defendants in relation to the purported adverse treatment of member and potential member franchisees of the Great White North Franchisee Association. The plaintiffs seek damages for, among other things, breach of contract, breach of the statutory duty of fair dealing, and breach of the franchisees’ statutory right of association.
In connection with these two lawsuits, the court granted our motion to strike the individuals named in the lawsuits, RBI and the Tim Hortons Ad Fund on October 22, 2018. The only defendant that remains in the lawsuits is The TDL Group Corp.
On July 24, 2018, a complaint for declaratory relief was filed against Tim Hortons USA, Inc. (“THUSA”) and Restaurant Brands International Limited Partnership in the Circuit Court of the 11th Judicial Circuit in Miami-Dade County, Florida by Great White North Franchisee Association - USA, Inc., on behalf of its members. The complaint alleges certain breaches of the franchise
agreements between THUSA and its franchisees and the implied covenant of good faith and fair dealing, as well as violations of the U.S. franchise rules and the Florida Deceptive and Unfair Trade Practices Act.
On October 5, 2018, a class action complaint was filed against Burger King Worldwide, Inc. (“BKW”) and Burger King Corporation (“BKC”) in the U.S. District Court for the Southern District of Florida by Jarvis Arrington, individually and on behalf of all others similarly situated. On October 18, 2018, a second class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Monique Michel, individually and on behalf of all others similarly situated. On October 31, 2018, a third class action complaint was filed against BKC and BKW in the U.S. District Court for the Southern District of Florida by Geneva Blanchard and Tiffany Miller, individually and on behalf of all others similarly situated. On November 2, 2018, a fourth class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Sandra Muster, individually and on behalf of all others similarly situated. These complaints allege that the defendants violated Section 1 of the Sherman Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Burger King franchisees are required to sign. Each plaintiff seeks injunctive relief and damages for himself or herself and other members of the class.
While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of these cases.
Item 4. Mine Safety Disclosures
Part II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Our Partnership Exchangeable Units
The Partnership exchangeable units trade on the Toronto Stock Exchange (“TSX”) under the ticker symbol “QSP”. RBI’s common shares trade on the New York Stock Exchange (“NYSE”) and TSX under the ticker symbol “QSR”.
Trading of the Partnership exchangeable units and RBI common shares commenced on December 15, 2014. Effective as of the close of trading on December 12, 2014, the common stock of Burger King Worldwide, our predecessor entity, ceased trading on the NYSE and Tim Hortons common shares ceased trading on the TSX and NYSE. As of February
12, 2016,11, 2019, there were
5948 holders of record of Partnership exchangeable units.
The following table sets forth for the periods indicated the high and low closing sales prices of Partnership exchangeable units on the TSX, RBI common shares on the NYSE and TSX and Burger King Worldwide common stock on the NYSE, distributions declared on Partnership exchangeable units and dividends declared per common share of RBI and per share of common stock of Burger King Worldwide.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Dividends / Distributions | |
| | | NYSE (U.S. $) | | | TSX (C$) | | | per Common Share / | |
| | | High | | | Low | | | High | | | Low | | | Partnership Unit (U.S.$) | |
2015 | | | | | | | | | | | | | | | | | | | | |
First Quarter - QSR | | $ | 44.67 | | | $ | 37.80 | | | C$ | 55.91 | | | C$ | 44.48 | | | $ | 0.09 | |
Second Quarter - QSR | | $ | 42.42 | | | $ | 37.10 | | | C$ | 51.04 | | | C$ | 45.65 | | | $ | 0.10 | |
Third Quarter - QSR | | $ | 43.91 | | | $ | 34.71 | | | C$ | 57.92 | | | C$ | 46.60 | | | $ | 0.12 | |
Fourth Quarter - QSR | | $ | 40.96 | | | $ | 34.66 | | | C$ | 53.99 | | | C$ | 46.05 | | | $ | 0.13 | |
First Quarter - QSP | | $ | — | | | $ | — | | | C$ | 53.50 | | | C$ | 42.75 | | | $ | 0.09 | |
Second Quarter - QSP | | $ | — | | | $ | — | | | C$ | 49.00 | | | C$ | 43.40 | | | $ | 0.10 | |
Third Quarter - QSP | | $ | — | | | $ | — | | | C$ | 55.96 | | | C$ | 45.25 | | | $ | 0.12 | |
Fourth Quarter - QSP | | $ | — | | | $ | — | | | C$ | 53.14 | | | C$ | 44.50 | | | $ | 0.13 | |
| | | | | |
2014 | | | | | | | | | | | | | | | | | | | | |
First Quarter - BKW | | $ | 27.68 | | | $ | 22.16 | | | | — | | | | — | | | $ | 0.07 | |
Second Quarter - BKW | | $ | 27.26 | | | $ | 25.00 | | | | — | | | | — | | | $ | 0.07 | |
Third Quarter - BKW | | $ | 33.82 | | | $ | 26.05 | | | | — | | | | — | | | $ | 0.08 | |
Fourth Quarter - BKW (1) | | $ | 36.66 | | | $ | 28.48 | | | | — | | | | — | | | $ | 0.08 | |
Fourth Quarter - QSR (2) | | $ | 41.90 | | | $ | 35.29 | | | C$ | 47.03 | | | C$ | 41.14 | | | $ | — | |
Fourth Quarter - QSP (2) | | $ | — | | | $ | — | | | C$ | 45.95 | | | C$ | 41.85 | | | $ | — | |
(1) | Represents period from October 1, 2014 through December 12, 2014. |
(2) | Represents period from December 15, 2014 through the end of the quarter. |
On
February 16, 2016,January 22, 2019, the board of directors of RBI declared a cash dividend of
$0.14$0.50 per RBI common share
whichfor the first quarter of 2019. The dividend will be paid on April
4, 20163, 2019 to common shareholders of record on March
3, 2016. Pursuant to the partnership agreement,15, 2019. Partnership will
also make a distribution in respect of each Partnership exchangeable unit in the amount of
$0.14$0.50 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. To fund the RBI common share dividend, Partnership will also make a corresponding distribution in respect of the Class A common units (all of which are held by RBI) in an amount equal to the aggregate amount of dividends payable in respect of the RBI common shares.
On February 15, 2016, the board of directors of
RBI
also declared a cash dividend of $0.98 per share of Class A 9.0% cumulative compounding perpetual voting preferred shares of RBI (the “Preferred Shares”), foris targeting a total
dividend of
$67.5 million which will be paid to the holder of the Preferred Shares on April 1, 2016. Pursuant to the partnership agreement, Partnership will make a corresponding distribution$2.00 in declared dividends per common share and distributions in respect of
the Partnership preferred units (all of which are held by RBI) in an amount equal to the aggregate amount of dividends payable in respect of the Preferred Shares. Our ability to pay cash distributions on oureach Partnership exchangeable
units may be limited by restrictions under the terms of the Preferred Shares, the partnership agreement and agreements governing our debt.unit for 2019.
We do not have a
formal dividend policy. However, pursuant to the partnership agreement, RBI, as our general partner, must cause us to make distributions
on our Partnership preferred units when a dividend has been declared and is payable in respect of the Preferred Shares, and on our Class A common units and Partnership exchangeable units, when a dividend has been declared and is payable in respect of RBI common shares.
Issuer Purchases of Equity Securities
During
the fourth quarter of 2015,2018, we received exchange notices representing
31,302,13510,185,333 Partnership exchangeable
units.units, including 10,020,000 during the fourth quarter of 2018. Pursuant to the terms of the partnership agreement, we satisfied the exchange notices by repurchasing
8,150,00310,000,000 Partnership exchangeable units for approximately
$293.7$561 million in cash
during the fourth quarter and full year of 2018 and exchanging
23,152,132the remaining Partnership exchangeable units for the same number of newly issued RBI common shares.
During 2017 and 2016, we received exchange notices representing 9,286,480 and 6,744,244 Partnership exchangeable units, respectively. We satisfied the exchange notices by repurchasing 5,000,000 Partnership exchangeable units for approximately $330 million in cash during 2017 and exchanging the remaining Partnership exchangeable units for the same number of newly issued RBI common shares. There were no exchanges for cash in 2016. Pursuant to the terms of the partnership agreement, the purchase price for the Partnership exchangeable units was based on the weighted average trading price of RBI’s common shares on the NYSE for the 20 consecutive trading days ending on the last business day prior to
December 14, 2015, which was the exchange
date for the units repurchased for cash.date. Upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit was automatically deemed cancelled concurrently with such exchange.
Securities Authorized for Issuance under Equity Compensation Plans
The following table presents information regarding equity awards outstanding under RBI’s compensation plans as
The
following graph
showsdepicts the
cumulative equity holder returnstotal return to the holders of
RBI and Partnership
over the periodexchangeable units from
June 20, 2012, the date Burger King Worldwide common stock was listed on the NYSE, to December 31,
2015. The graph reflects total equity holder returns for Burger King Worldwide from June 20, 20122014 through December 31, 2018, relative to
December 12, 2014,the performance of the Standard & Poor’s/TSX Composite Index and
for RBI and Partnership fromthe Standard & Poor’s/TSX Capped Consumer Discretionary Index, a peer group. December 15, 2014
to December 31, 2015. December 12, 2014 was
the last day of trading on the NYSE of Burger King Worldwide common stock and December 15, 2014 was the first day of trading on the NYSE and TSX of RBI common shares and the first day of trading on the TSX of Partnership exchangeable units. The graph
shows combined Burger King Worldwide and RBI and Partnership equity holder returns because RBI and Partnership have less than two years of history as a public company. The following graph depicts the total return to the equity holders from June 20, 2012 through December 31, 2015, relative to the performance of the Standard & Poor’s 500 Index and the Standard & Poor’s Restaurant Index, a peer group. The graph assumes an investment of $100 in
Burger King Worldwide common stockPartnership exchangeable units and each index on
June 20, 2012December 31, 2014 and the reinvestment of
dividendsdistributions paid since that date. The
unit price performance shown in the graph is not necessarily indicative of future price performance.
| | | | | | | | | | | | | | | | | | | | |
| | | 6/20/2012 | | | 12/31/2012 | | | 12/31/2013 | | | 12/31/2014 | | | 12/31/2015 | |
Restaurant Brands International (NYSE) | | $ | 100 | | | $ | 110 | | | $ | 153 | | | $ | 261 | | | $ | 250 | |
S&P 500 Index | | $ | 100 | | | $ | 105 | | | $ | 136 | | | $ | 151 | | | $ | 150 | |
S&P Restaurant Index | | $ | 100 | | | $ | 99 | | | $ | 121 | | | $ | 123 | | | $ | 151 | |
Item 6. | Selected Financial Data |
Our selected historical consolidated financial data reflects the consolidation
|
| | | | | | | | | | | | | | | | | | | |
| | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 |
| Restaurant Brands International Limited Partnership (TSX) | $ | 100 |
| | $ | 118 |
| | $ | 146 |
| | $ | 176 |
| | $ | 163 |
|
| S&P/TSX Composite Index (C$) | $ | 100 |
| | $ | 89 |
| | $ | 104 |
| | $ | 111 |
| | $ | 98 |
|
| S&P/TSX Capped Consumer Discretionary Index (C$) | $ | 100 |
| | $ | 97 |
| | $ | 104 |
| | $ | 126 |
| | $ | 103 |
|
Item 6.Selected Financial Data
Unless the context otherwise requires, all references to “Partnership”, “we”, “us” or “our” refer to Restaurant Brands International Limited Partnership and its subsidiaries, collectively.
All references to “$” or “dollars” in this report are to the currency of the United States unless otherwise indicated. All references to
Canadian dollars“Canadian dollars” or
C$“C$” are to the currency of Canada unless otherwise indicated.
Selected Financial Data
The following tables present our selected historical consolidated financial
and other data as of the dates and for each of the periods indicated.
All references to 2015, 2014, 2013, 2012 and 2011 in this section are for the years ended December 31, 2015, December 31, 2014, December 31, 2013, December 31, 2012 and December 31, 2011, respectively. The selected historical financial data as of December 31,
20152018 and December 31,
20142017 and for
2015, 20142018, 2017 and
20132016 have been derived from our audited consolidated financial statements and notes thereto included in this report. The selected historical financial data as of December 31,
2013,2016, December 31,
20122015 and December 31,
20112014 and for
20122015 and
20112014 have been derived from our audited consolidated financial statements and notes thereto, which are not included in this
report, and reflects the reclassification of debt issuance costs from assets to liabilities as a result of the adoption of an accounting standards update during 2015 that changed the presentation of debt issuance costs in the financial statements. The other operating data for 2015, 2014 and 2013 have been derived from our internal records.report.
The selected historical consolidated financial and other operating data presented below contain all normal recurring adjustments that, in the opinion of management, are necessary to present fairly our financial position and results of operations as of and for the periods presented. The selected historical consolidated financial and other operating data included below and elsewhere in this report are not necessarily indicative of future results. The information presented belowin this section should be read in conjunction with“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in Part II, Item 7 and “Financial Statements and SupplementaryData” in Part II, Item 8 of this report. | | | | | | | | | | | | | | | | | | | | |
| | | 2015 | | | 2014 (1) | | | 2013 | | | 2012 | | | 2011 | |
| | | (In millions, except per share/unit data) | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 2,169.0 | | | $ | 167.4 | | | $ | 222.7 | | | $ | 1,169.0 | | | $ | 1,638.7 | |
Franchise and property revenues | | | 1,883.2 | | | | 1,031.4 | | | | 923.6 | | | | 801.9 | | | | 701.2 | |
| | | | | | | | | | | | | | | | | | | | |
Total revenues | | | 4,052.2 | | | | 1,198.8 | | | | 1,146.3 | | | | 1,970.9 | | | | 2,339.9 | |
Income from operations (2) | | | 1,192.2 | | | | 181.1 | | | | 522.2 | | | | 417.7 | | | | 362.5 | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) (2) | | $ | 511.7 | | | $ | (268.9 | ) | | $ | 233.7 | | | $ | 117.7 | | | $ | 88.1 | |
| | | | | | | | | | | | | | | | | | | | |
Earnings (loss) per unit/share - Basic: | | | | | | | | | | | | | | | | | | | | |
Class A common units (3) | | $ | 0.51 | | | $ | (1.63 | ) | | | — | | | | — | | | | — | |
Partnership exchangeable units (3) | | $ | 0.51 | | | $ | (1.63 | ) | | | — | | | | — | | | | — | |
Common shares (3) | | | — | | | $ | (0.20 | ) | | $ | 0.67 | | | $ | 0.34 | | | $ | 0.25 | |
Earnings (loss) per unit/share - Diluted: | | | | | | | | | | | | | | | | | | | | |
Class A common units (3) (4) | | $ | 0.51 | | | $ | (1.63 | ) | | | — | | | | — | | | | — | |
Partnership exchangeable units (3) (4) | | $ | 0.51 | | | $ | (1.63 | ) | | | — | | | | — | | | | — | |
Common shares (3) (4) | | | — | | | $ | (0.20 | ) | | $ | 0.65 | | | $ | 0.33 | | | $ | 0.25 | |
Dividends per common unit/share | | $ | 0.44 | | | $ | 0.30 | | | $ | 0.24 | | | $ | 0.04 | | | $ | 1.13 | |
| | | | | |
Other Financial Data: | | | | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 1,200.7 | | | $ | 259.3 | | | $ | 325.2 | | | $ | 224.4 | | | $ | 406.2 | |
Net cash provided by (used for) investing activities | | | (61.5 | ) | | | (7,790.8 | ) | | | 43.0 | | | | 33.6 | | | | (41.4 | ) |
Net cash provided by (used for) financing activities | | | (2,115.2 | ) | | | 8,565.6 | | | | (132.7 | ) | | | (174.6 | ) | | | (108.0 | ) |
Capital expenditures | | | 115.3 | | | | 30.9 | | | | 25.5 | | | | 70.2 | | | | 82.1 | |
| | | | | |
| | | December 31,
2015 | | | December 31,
2014 (1) | | | December 31,
2013 | | | December 31,
2012 | | | December 31,
2011 | |
| | | (In millions) | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 753.7 | | | $ | 1,803.2 | | | $ | 786.9 | | | $ | 546.7 | | | $ | 459.0 | |
Total assets | | | 18,408.5 | | | | 21,343.0 | | | | 5,785.5 | | | | 5,513.0 | | | | 5,541.6 | |
Total debt and capital lease obligations | | | 8,721.8 | | | | 10,199.0 | | | | 2,994.0 | | | | 2,998.3 | | | | 3,072.4 | |
Total liabilities | | | 12,198.4 | | | | 13,706.2 | | | | 4,269.3 | | | | 4,338.0 | | | | 4,492.4 | |
Partnership preferred units | | | 3,297.0 | | | | 3,297.0 | | | | — | | | | — | | | | — | |
Total equity | | | 2,913.1 | | | | 4,339.8 | | | | 1,516.2 | | | | 1,175.0 | | | | 1,049.2 | |
| | | | |
| | | 2015 | | | 2014 | | | 2013 | | | | |
Other operating data: | | | | | | | | | | | | | |
System-wide sales growth(5)(6) | | | | | | | | | | | | | |
Tim Hortons (8) | | | 9.3 | % | | | 6.6 | % | | | 4.7 | % | |
Burger King | | | 10.3 | % | | | 6.8 | % | | | 4.2 | % | |
Comparable sales growth (5)(6)(7) | | | | | | | | | | | | | |
Tim Hortons (8) | | | 5.6 | % | | | 3.1 | % | | | 1.2 | % | |
Burger King | | | 5.4 | % | | | 2.1 | % | | | 0.5 | % | |
System-wide sales ($ in million)(6) | | | | | | | | | | | | | |
Tim Hortons (8) | | $ | 6,349.8 | | | $ | 6,616.0 | | | $ | 6,606.7 | | |
Burger King | | $ | 17,303.7 | | | $ | 17,017.1 | | | $ | 16,301.0 | | |
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017(a) | | 2016 | | 2015 | | 2014(b) |
| | (In millions, except per share data) |
| Statement of Operations Data: | | | | | | | | | |
| Revenues: | | | | | | | | | |
| Sales | $ | 2,355 |
| | $ | 2,390 |
| | $ | 2,205 |
| | $ | 2,169 |
| | $ | 167 |
|
| Franchise and property revenues | 3,002 |
| | 2,186 |
| | 1,941 |
| | 1,883 |
| | 1,031 |
|
| Total revenues | 5,357 |
| | 4,576 |
| | 4,146 |
| | 4,052 |
| | 1,198 |
|
| Income from operations (c) | 1,917 |
| | 1,735 |
| | 1,667 |
| | 1,192 |
| | 181 |
|
| Net income (loss) (c) | $ | 1,144 |
| | $ | 1,235 |
| | $ | 956 |
| | $ | 512 |
| | $ | (269 | ) |
| Earnings (loss) per unit/share - Basic: | | | | | | | | | |
| Class A common units | $ | 3.03 |
| | $ | 3.10 |
| | $ | 1.71 |
| | $ | 0.51 |
| | $ | (1.63 | ) |
| Partnership exchangeable units | $ | 2.46 |
| | $ | 2.59 |
| | $ | 1.48 |
| | $ | 0.51 |
| | $ | (1.63 | ) |
| Common shares | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.20 | ) |
| Earnings (loss) per unit/share - Diluted: | | | | | | | | | |
| Class A common units | $ | 3.03 |
| | $ | 3.10 |
| | $ | 1.71 |
| | $ | 0.51 |
| | $ | (1.63 | ) |
| Partnership exchangeable units | $ | 2.46 |
| | $ | 2.59 |
| | $ | 1.48 |
| | $ | 0.51 |
| | $ | (1.63 | ) |
| Common shares | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.20 | ) |
| Distributions/dividends per common unit/share | | | | | | | | | |
| Class A common units | $ | 2.23 |
| | $ | 0.92 |
| | $ | 0.72 |
| | $ | 0.44 |
| | $ | — |
|
| Partnership exchangeable units | $ | 1.80 |
| | $ | 0.78 |
| | $ | 0.62 |
| | $ | 0.44 |
| | $ | — |
|
| Common shares | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.30 |
|
| Other Financial Data: | | | | | | | | | |
| Net cash provided by (used for) operating activities | $ | 1,165 |
| | $ | 1,431 |
| | $ | 1,214 |
| | $ | 1,207 |
| | $ | 294 |
|
| Net cash provided by (used for) investing activities | (44 | ) | | (858 | ) | | 27 |
| | (62 | ) | | (7,791 | ) |
| Net cash provided by (used for) financing activities | (1,285 | ) | | (936 | ) | | (591 | ) | | (2,115 | ) | | 8,566 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017(a) | | 2016 | | 2015 | | 2014(b) |
| | (In millions) |
| Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 913 |
| | $ | 1,097 |
| | $ | 1,436 |
| | $ | 788 |
| | $ | 1,838 |
|
| Total assets | 20,141 |
| | 21,224 |
| | 19,125 |
| | 18,409 |
| | 21,343 |
|
| Total debt and capital lease obligations | 12,140 |
| | 12,123 |
| | 8,723 |
| | 8,722 |
| | 10,199 |
|
| Total liabilities | 16,523 |
| | 16,663 |
| | 12,339 |
| | 12,198 |
| | 13,706 |
|
| Partnership preferred units | — |
| | — |
| | 3,297 |
| | 3,297 |
| | 3,297 |
|
| Total equity | 3,618 |
| | 4,561 |
| | 3,489 |
| | 2,913 |
| | 4,340 |
|
(1) | |
| (a) | On March 27, 2017, we acquired PLK. Statement of operations data and other financial data includes PLK results from the acquisition date through December 31, 2017. Balance sheet data includes PLK data as of December 31, 2017. |
| |
| (b) | On December 12, 2014, we acquired Tim Hortons.TH. Statement of operations data and other financial data include TH results from the acquisition date through December 28, 2014, the end of Tim HortonsTH's 2014 fiscal year. Balance sheet data includes TH data as of December 28, 2014. |
(2) | |
| (c) | Amount includes $116.7$10 million of PLK Transaction costs, $25 million of Corporate restructuring and tax advisory fees and $20 million of Office centralization and relocation costs for 2018. Amount includes $62 million of PLK Transaction costs and $2 million of Corporate restructuring and tax advisory fees for 2017. Amount includes $16 million of integration costs for 2016. Amount includes $117 million of TH transaction and restructuring costs and $0.5$1 million of acquisition accounting impact on cost of sales for 2015. Amount includes $125.0$125 million of TH transaction and restructuring costs, $11.8$12 million of acquisition accounting impact on cost of sales and $290.9$291 million of net losses on derivatives for 2014. Amount includes $26.2 million of global portfolio realignment project costs for 2013. Amount includes $30.2 million of global portfolio realignment project costs and $27.0 million of business combination agreement expenses for 2012. Amount includes $3.7 million of costs in connection with the acquisition of Burger King Holdings, Inc. by 3G, $46.5 million of global restructuring and related professional fees, $10.6 million of field optimization project costs and $7.6 million of global portfolio realignment project costs for 2011. |
Operating Metrics
We evaluate our restaurants and assess our business based on the following operating metrics:
System-wide sales growth refers to the percentage change in sales at all franchise restaurants and Company restaurants in one period from the same period in the prior year.
Comparable sales refers to the percentage change in restaurant sales in one period from the same prior year period for restaurants that have been open for 13 months or longer for TH and BK and 17 months or longer for PLK.
System-wide sales growth and comparable sales 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, we calculate the FX Impact by translating prior year results at current year monthly average exchange rates.
Unless otherwise stated, system-wide sales growth, system-wide sales and comparable sales are presented on a system-wide basis, which means they include franchise restaurants and Company restaurants. System-wide results are driven by our franchise restaurants, as approximately 100% of system-wide restaurants are franchised for each of our brands. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues are calculated based on a percentage of franchise sales.
Net restaurant growth refers to 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.
The following table presents our operating metrics for each of the periods indicated, which have been derived from our internal records. The system-wide sales growth, system-wide sales, comparable sales and net restaurant growth presented for Popeyes are calculated using the historical information from Popeyes when it was under previous ownership for the periods prior to the acquisition date of March 27, 2017. Consequently, these metrics for Popeyes, as well as consolidated system-wide sales and consolidated net restaurant growth, may not necessarily reflect actual data as if Popeyes had been included in our results for the full year 2017 and 2016. We evaluate our restaurants and assess our business based on these operating metrics. These metrics may differ from those used by other companies in our industry who may define these metrics differently.
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| System-wide sales growth | | | | | |
| Tim Hortons | 2.4 | % | | 3.0 | % | | 5.2 | % |
| Burger King | 8.9 | % | | 10.1 | % | | 7.8 | % |
| Popeyes (a)(b) | 8.9 | % | | 5.1 | % | | 7.4 | % |
| System-wide sales ($ in millions) | | | | | |
| Tim Hortons | $ | 6,869 |
| | $ | 6,717 |
| | $ | 6,405 |
|
| Burger King | $ | 21,624 |
| | $ | 20,075 |
| | $ | 18,209 |
|
| Popeyes (a)(b) | $ | 3,732 |
| | $ | 3,512 |
| | $ | 3,287 |
|
| Consolidated | $ | 32,225 |
| | $ | 30,304 |
| | $ | 27,901 |
|
| Comparable sales | | | | | |
| Tim Hortons | 0.6 | % | | (0.1 | )% | | 2.5 | % |
| Burger King | 2.0 | % | | 3.1 | % | | 2.3 | % |
| Popeyes (a)(b) | 1.6 | % | | (1.5 | )% | | 1.7 | % |
| Net restaurant growth | | | | | |
| Tim Hortons | 2.1 | % | | 2.9 | % | | 4.5 | % |
| Burger King | 6.1 | % | | 6.5 | % | | 4.9 | % |
| Popeyes (a)(c) | 7.3 | % | | 6.1 | % | | 6.2 | % |
| Consolidated | 5.5 | % | | 5.8 | % | | 5.0 | % |
| System Restaurant count | | | | | |
| Tim Hortons | 4,846 |
| | 4,748 |
| | 4,613 |
|
| Burger King | 17,796 |
| | 16,767 |
| | 15,738 |
|
| Popeyes (a)(c) | 3,102 |
| | 2,892 |
| | 2,725 |
|
| Consolidated | 25,744 |
| | 24,407 |
| | 23,076 |
|
(3) | For 2014, the earnings (loss) per unit for Class A common units and Partnership exchangeable units reflect the period from December 12, 2014 through December 31, 2014. Additionally, for 2014, the earnings (loss) per common share reflects the period from January 1, 2014 through December 11, 2014. See Note 4 to the accompanying consolidated financial statements for additional information on the calculation of earnings (loss) per unit / share. |
(4)(a) | For 2015 and 2014, since all stock options were issued by RBI, there are no dilutive securities for Partnership as the exercise of stock options will not affect the numbers of Partnership Class A common units or Partnership exchangeable units outstanding. However, the issuance of shares by RBI in future periods will affect the allocation of net income attributable to common unitholders between Partnership’s Class A common units and Partnership exchangeable units. |
(5) | Comparable sales growth and system-wide sales growth are analyzed on a constant currency basis, which means they are calculated by translating prior year results at current year average exchange rates, to remove the effects of currency fluctuations from these trend analyses. We believe these constant currency measures provide a more meaningful analysis of our business by identifying the underlying business trends, without distortion from the effect of foreign currency movements. |
(6) | Unless otherwise stated, comparable sales growth and system-wide sales growth are presented on a system-wide basis, which means they include Company restaurants and franchise restaurants. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues are calculated based on a percentage of franchise sales. See“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Business Metrics” in Part II, Item 7 of this report. |
(7) | Comparable sales growth refers to the change in restaurant sales in one period from the same prior year period for restaurants that have been opened for thirteen months or longer. |
(8) | Tim Hortons 2014PLK 2016 annual figures and historical pre-combination figures are shown for informational purposes only. |
Restaurant Brands International Limited Partnership and Subsidiaries Restaurant Count
The table below sets forth our restaurant portfolio by segment for the periods indicated. Tim Hortons historical pre-combination figures are shown for informational purposes only.
| | | | | | | | | | | | |
| | | December 31, | | | December 31, | | | December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
Number of system-wide restaurants: | | | | | | | | | | | | |
TH (1) | | | 4,413 | | | | 4,258 | | | | 4,114 | |
BK | | | 15,003 | | | | 14,372 | | | | 13,667 | |
| | | | | | | | | | | | |
Total system-wide restaurants | | | 19,416 | | | | 18,630 | | | | 17,781 | |
| | | | | | | | | | | | |
(1) | Excludes 398, 413 |
| (b) | For 2017, PLK comparable sales, system-wide sales growth and 371 limited service kioskssystem-wide sales are for the period from December 26, 2016 through December 31, 2017. Comparable sales and system-wide sales growth are calculated using the same period in the prior year (December 26, 2015 through December 31, 2016). Results for 2016 are consistent with PLK's former fiscal calendar. Consequently, results for 2018 may not be comparable to those of 2017 and 2016. |
| |
| (c) | For 2017, net restaurant growth is for the period from December 26, 2016 through December 31, 2017. Results for 2016 are consistent with PLK's former fiscal calendar. Restaurant count is as of December 31, 2015, 20142018 for 2018, December 31, 2017 for 2017, and 2013, respectively. Commencing in the fourth quarteras of 2015, we revised our presentationDecember 25, 2016 for 2016, inclusive of restaurant counts to exclude limited service kiosks, with the revision applied retrospectively to the earliest period presented to provide period-to-period comparability.temporary closures. |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
On December 12, 2014, a series
Item 7. Management’s Discussion and Tim Hortons Inc., a Canadian corporation (“Tim Hortons”), becoming indirect subsidiariesAnalysis of Restaurant Brands International Inc., a Canadian corporation (“RBI”),Financial Condition and Restaurant Brands International Limited Partnership, an Ontario limited partnership (“Partnership”).Our consolidated financial data reflects the consolidation
Results of Tim Hortons beginning on December 12, 2014, the closing date of the Transactions.We are a subsidiary of RBI and the indirect parent of Tim Hortons and Burger King Worldwide. RBI is our sole general partner and owns all of our outstanding Class A common units (“Class A common units”) and preferred units (“Partnership preferred units”). RBI has 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 in accordance with the partnership agreement of Partnership (the “partnership agreement”) and applicable laws. There is no board of directors of Partnership. RBI has established a conflicts committee composed entirely of “independent directors” (as such term is defined in the partnership agreement) in order to consent to, approve or direct various enumerated actions on behalf of RBI (in its capacity as our general partner) in accordance with the terms of the partnership agreement.
Operations
You should read the following discussion together with Part II, Item 6 “Selected Financial Data” of our Annual Report for the year ended December 31,
20152018 (our “Annual Report”) and our audited Consolidated Financial Statements and the related notes thereto included in Part II, Item 8 “Financial Statements and Supplementary
DataData” of our Annual 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
the Canadian securities laws as described in further detail under “Special Note Regarding Forward-Looking Statements” that is set forth below. Actual results may differ materially from the results discussed in the forward-looking statements because of a number of risks and uncertainties, including the matters discussed in the “Special Note Regarding Forward-Looking Statements” below. In addition, please refer to the risks set forth under the caption “Risk Factors” included in our Annual Report for a further description of risks and uncertainties affecting our business and financial results. Historical trends should not be taken as indicative of future operations and financial results. Other than as required under the U.S. Federal securities laws or the Canadian securities laws, we do not assume a duty to update these
forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
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,
and a reconciliation to GAAP
measures.measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors.
Unless the context otherwise requires, all references in this section to
the “Partnership,” “we,” “us,” or “our” are to
Restaurant Brands International Limited Partnership and its subsidiaries, collectively.
Unless otherwise stated, comparable sales growth and sales growth are presented on a system-wide basis, which means that these measures include sales at both restaurants owned by us (“Company restaurants”) and franchise restaurants. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our franchise revenues include royalties based on franchise sales. System-wide results are driven by our franchise restaurants, as approximately 100% of current Tim Hortons and Burger King system-wide restaurants are franchised.We are a Canadian limited partnership originally formed to serve as the indirect holding company for Tim Hortons and its consolidated subsidiaries and for Burger King Worldwideand its consolidated subsidiaries. On March 27, 2017, we acquired Popeyes Louisiana Kitchen, Inc. and its consolidated subsidiaries. We were formed on August 25, 2014 as a general partnership and registered on October 27, 2014 as a limited partnership in accordance with the laws of the Province of Ontario generally, and the Ontario Limited Partnerships Act specifically. We are a subsidiary of RBI, our sole general partner. We are one of the world’s largest quick service restaurant (“QSR”) companies with more than $30 billion in system-wide sales and over 19,00025,000 restaurants in approximatelymore than 100 countries and U.S. territories as of December 31, 20152018. Our Tim Hortons®, Burger King®, and over 110 years of combined brand heritage. OurTim HortonsPopeyes® andBurger King® brands have similar franchisedfranchise business models with complementary daypart mixes.mixes and product platforms. Our twothree iconic brands are managed independently while benefittingbenefiting 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 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
generatehave three operating and reportable segments: (1) Tim Hortons (“TH”); (2) Burger King (“BK”); and (3) Popeyes Louisiana Kitchen (“PLK”). Our business generates revenue from
fourthe following sources: (i)
sales exclusive to Tim Hortons franchisees related to our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers; (ii) property revenues from properties we lease or sublease to franchisees; (iii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees;
(ii) property revenues from properties we lease or sublease to franchisees; and
(iv)(iii) sales at
restaurants owned by us (“Company
restaurants.restaurants”). In addition, our Tim Hortons business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers.
Recent Events and Factors Affecting Comparability
Transition to New Revenue Recognition Accounting Standard
We transitioned to Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), effective January 1, 2018 using the modified retrospective method. Our consolidated financial statements for 2018 reflect the application of ASC 606 guidance, while our consolidated financial statements for 2017 and 2016 were prepared under the guidance of previously applicable accounting standards.
The most significant effects of this transition that affect comparability of our results of operations between 2018 and previous periods include the following:
Franchise fee revenue for franchise agreements entered into subsequent to the acquisitions of BK in 2010, TH in 2014 and PLK in 2017 are deferred and amortized over the franchise agreement term beginning in 2018 compared to upfront recognition in 2017 and 2016 under previously applicable accounting standards. Franchise fees associated with acquired franchise agreements are not included in franchise fee revenue under ASC 606. Consequently, we expect the impact to be greater in those periods in which more openings occur.
Advertising fund contributions and advertising fund expenses are reflected on a gross basis in our 2018 statement of operations and there may be a difference in timing for recognition of advertising fund contributions and advertising fund expenses beginning in 2018. Under previously applicable accounting standards, our statement of operations did not reflect gross advertising fund contributions and advertising fund expenses and temporary net differences between contributions and expenses due to the timing of expenses were reflected as current assets or current liabilities on our consolidated balance sheet.
The portion of gift cards sold to customers which are never redeemed is commonly referred to as gift card breakage. Under ASC 606, we recognize gift card breakage income proportionately as each gift card is redeemed using an estimated breakage rate based on our historical experience. Under previously applicable accounting standards, we recognized gift card breakage income for each gift card’s remaining balance when redemption of that balance was deemed remote. This change impacts the timing of when gift card breakage income is recognized.
Please refer to Note 16, Revenue Recognition, to the accompanying audited consolidated financial statements for further details of the effects of this change in accounting principle.
Tax Reform
In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that significantly revises the U.S. tax code generally effective January 1, 2018 by, among other changes, lowering the corporate income tax rate from 35% to 21%, limiting deductibility of interest expense and performance based incentive compensation and implementing a modified territorial tax system. As discusseda Canadian entity, we generally would be classified as a foreign entity (and, therefore, a non-U.S. tax resident) under general rules of U.S. federal income taxation. However, we have subsidiaries subject to U.S. federal income taxation and therefore the Tax Act impacted our consolidated results of operations in 2017 and 2018, and is expected to continue to impact our consolidated results of operations in future periods.
The impacts to our consolidated statements of operations consist of the following (“Tax Act Impact”):
A provisional benefit of $420 million recorded in our provision from income taxes for 2017 and a favorable adjustment of $9 million recorded for 2018, as a result of the remeasurement of net deferred tax liabilities.
Provisional charges of $103 million recorded in 2017 and a favorable adjustment of $3 million recorded in 2018, related to certain deductions allowed to be carried forward before the Tax Act, which potentially may not be carried forward and deductible under the Tax Act.
A provisional estimate for a one-time transitional repatriation tax on unremitted foreign earnings (the “Transition Tax”) of $119 million recorded in 2017, most of which had been previously accrued with respect to certain undistributed foreign earnings, and a favorable adjustment of $15 million (primarily related to utilization of foreign tax credits) recorded in 2018.
In accordance with Staff Accounting Bulletin No. 118 issued by the staff of the Securities and Exchange Commission (the “SEC”), adjustments to provisional amounts were recorded as discrete items in the provision for income taxes in 2018, the period in which those adjustments became reasonably estimable, as described above.
We recorded $25 million during 2018 and $2 million during 2017 of costs associated with corporate restructuring initiatives and professional advisory and consulting services related to the interpretation and implementation of the Tax Act (“Corporate restructuring and tax advisory fees”). We expect to continue to incur additional Corporate restructuring and tax advisory fees related to the Tax Act in 2019.
Popeyes Acquisition and PLK Transaction Costs
As described in Note
263 to the accompanying consolidated financial statements,
on March 27, 2017, we completed
an internal reorganizationthe acquisition of Popeyes for total consideration of $1,655 million (the “Popeyes Acquisition”). The consideration was funded through (1) cash on hand of approximately $355 million and (2) $1,300 million from incremental borrowings under our Term Loan Facility – see Note 9 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our
business following the Transactions that resulted in two operating and reportable segments: (1) Tim Hortons (“TH”) and (2) Burger King (“BK”). This change had no effect on our previously reportedAnnual Report. Our 2018 consolidated
resultsstatements of operations
financial position or cash flows. In connection with this change, we have reclassified historical amounts to conform to our currentincludes PLK revenues and segment
presentation.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.
Comparable sales growth refers to the change in restaurant sales in one period from the same prior year period for restaurants that have been opened for thirteen months or longer.
Net restaurant growth (“NRG”) represents the opening of new restaurants (other than limited service kiosks) during a stated period, net of closures. Commencing in the fourth quarter of 2015, we revised our presentation of NRG to exclude limited service kiosks, with the revision applied retrospectively to the earliest period presented to provide period-to-period comparability.
| • | | Adjusted EBITDA, which represents earnings (net income or loss) before interest, taxes, depreciation and amortization, adjusted to exclude specifically identified items that management believes do not directly reflect our core operations. SeeNon-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 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 certain financial measures 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
Tim Hortons Acquisition
We have consolidated the results of operations of our TH business commencing on the acquisition date of December 12, 2014, and the changes in our results of operations for 2015 as compared to 2014 are largely driven by the inclusion of the results of operations of Tim Hortons for a full year in 2015 compared to the periodfiscal year. Our 2017 consolidated statements of December 12, 2014operations includes PLK revenues and segment income from March 28, 2017 through December 28, 2014 in 2014. The TH statement of operations data for 2015 and the period of December 12, 2014 through December 28, 2014, the end of Tim Hortons 2014 fiscal year, is summarized as follows:
| | | | | | | | |
Tim Hortons Impact (millions) | | 2015 | | | December 12,
2014 through
December 28,
2014 | |
Revenues: | | | | | | | | |
Sales | | $ | 2,074.3 | | | $ | 92.8 | |
Franchise and property revenues | | | 882.6 | | | | 50.8 | |
| | | | | | | | |
Total revenues | | | 2,956.9 | | | | 143.6 | |
Cost of sales | | | 1,728.1 | | | | 92.1 | |
Franchise and property expenses | | | 360.7 | | | | 26.1 | |
Selling, general and administrative expenses (1) | | | 172.9 | | | | 78.4 | |
(Income) loss from equity method investments | | | (7.9 | ) | | | (0.3 | ) |
Other operating expenses (income), net | | | 20.9 | | | | 1.1 | |
| | | | | | | | |
Total operating costs and expenses | | | 2,274.7 | | | | 197.4 | |
| | | | | | | | |
Income from operations | | $ | 682.2 | | | $ | (53.8 | ) |
| | | | | | | | |
(1) | Tim Hortons selling, general and administrative expenses for 2015 and the period from December 12, 2014 through December 28, 2014 include (i) $58.5 million and $63.9 million, respectively, of transaction and restructuring costs associated with the Transactions, which are included in the amounts discussed below, and (ii) $13.8 million and $7.7 million, respectively, of share-based compensation expense associated with the remeasurement of liability-classified stock options to fair value. |
TH Transaction and Restructuring Costs
31, 2017.
In connection with the Transactions and a series of post-closing transactions during 2015 that resulted in changes to our legal and capital structure,Popeyes Acquisition, we incurred certain non-recurring fees and expenses (“PLK Transaction costs”) totaling $10 million during 2018 and $62 million during 2017 consisting primarily of professional fees and compensation related expenses, all of which are classified as selling, general and administrative expenses during 2015in the consolidated statements of operations. We do not expect to incur any additional PLK Transaction costs.
Office Centralization and
2014, consisting of the following:Relocation Costs Financing, legal and advisory fees, share-based compensation expense due to accelerated vesting of equity awards as a result of the Transactions and integration costs related to a realignment of our global structure to better accommodate the needs of the combined business, totaling $83.4 million and $108.7 million during 2015 and 2014, respectively;
Severance benefits, other compensation costs and training expenses of approximately $31.1 million and $16.3 million during 2015 and 2014, respectively, related to a restructuring plan we implemented following the Transactions, which resulted in work force reductions throughout our TH business; and
Financing, legal and advisory fees totaling $2.2 million during 2015, in connection with issuing $1,250.0 million of 4.625% first lien senior secured notes due January 15, 2022 and entering into a first amendment to our credit agreement in May 2015.
Other Factors
In addition to the impact of consolidating TH results of operations commencing on the acquisition date of December 12, 2014 and TH transaction and restructuring costs, we also recorded losses on derivatives, incremental interest expense related to new borrowings and a loss on early extinguishment of debt in connection with the Transactions. SeeResultscentralization and relocation of Operations – Other operating expenses (income), net, –Interest expense, netour Canadian and – Loss on early extinguishment of debt.
Global Portfolio Realignment Project
During 2011, we initiated a projectU.S. restaurant support centers to realign our global restaurant portfolio by selling our BK company restaurants to franchisees, which we refer to as our “refranchising initiative”,new offices in Toronto, Ontario, and establishing strategic partnerships to accelerate development through joint ventures and master franchise and development agreements (the “global portfolio realignment project”). As a result of the global portfolio realignment project,Miami, Florida, respectively, we incurred $26.2certain non-operational expenses (“Office centralization and relocation costs”) totaling $20 million during 2018 consisting primarily of duplicate rent expense, moving costs, and relocation-driven compensation expenses, which are classified as selling, general and administrative expenses in the consolidated statement of operations.
Integration Costs
In connection with the implementation of initiatives to integrate the back-office processes of TH and BK to enhance efficiencies, we incurred $16 million related to these initiatives during 2016, primarily consisting of professional
fees and severance in 2013. We completed our global portfolio realignment project, including our refranchising initiative, in 2013. As such, we did not incur any expenses related to the global portfolio realignment project during 2015 and 2014.As a resultfees.
Tabular amounts in millions of
U.S. dollars unless noted otherwise.
Consolidated
| | | | | | | | | | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | | | 2015
Compared
to 2014 | | | 2014
Compared
to 2013 | |
| | | | | | | | | | | | Favorable / (Unfavorable) | |
Revenues: | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 2,169.0 | | | $ | 167.4 | | | $ | 222.7 | | | $ | 2,001.6 | | | $ | (55.3 | ) |
Franchise and property revenues | | | 1,883.2 | | | | 1,031.4 | | | | 923.6 | | | | 851.8 | | | | 107.8 | |
| | | | | | | | | | | | | | �� | | | | | | |
Total revenues | | | 4,052.2 | | | | 1,198.8 | | | | 1,146.3 | | | | 2,853.4 | | | | 52.5 | |
Cost of sales | | | 1,809.5 | | | | 156.4 | | | | 195.3 | | | | (1,653.1 | ) | | | 38.9 | |
Franchise and property expenses | | | 503.2 | | | | 179.0 | | | | 152.4 | | | | (324.2 | ) | | | (26.6 | ) |
Selling, general and administrative expenses | | | 437.7 | | | | 345.4 | | | | 242.4 | | | | (92.3 | ) | | | (103.0 | ) |
(Income) loss from equity method investments | | | 4.1 | | | | 9.5 | | | | 12.7 | | | | 5.4 | | | | 3.2 | |
Other operating expenses (income), net | | | 105.5 | | | | 327.4 | | | | 21.3 | | | | 221.9 | | | | (306.1 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total operating costs and expenses | | | 2,860.0 | | | | 1,017.7 | | | | 624.1 | | | | (1,842.3 | ) | | | (393.6 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income from operations | | | 1,192.2 | | | | 181.1 | | | | 522.2 | | | | 1,011.1 | | | | (341.1 | ) |
Interest expense, net | | | 478.3 | | | | 279.7 | | | | 200.0 | | | | (198.6 | ) | | | (79.7 | ) |
Loss on early extinguishment of debt | | | 40.0 | | | | 155.4 | | | | — | | | | 115.4 | | | | (155.4 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | 673.9 | | | | (254.0 | ) | | | 322.2 | | | | 927.9 | | | | (576.2 | ) |
Income tax expense | | | 162.2 | | | | 14.9 | | | | 88.5 | | | | (147.3 | ) | | | 73.6 | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | 511.7 | | | | (268.9 | ) | | | 233.7 | | | | 780.6 | | | | (502.6 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) attributable to noncontrolling interests | | | 3.4 | | | | 0.2 | | | | — | | | | (3.2 | ) | | | (0.2 | ) |
Partnership preferred unit distributions | | | 271.2 | | | | 13.8 | | | | — | | | | (257.4 | ) | | | (13.8 | ) |
Accretion of Partnership preferred units | | | — | | | | 546.4 | | | | — | | | | 546.4 | | | | (546.4 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) attributable to common unitholders | | $ | 237.1 | | | $ | (829.3 | ) | | $ | 233.7 | | | $ | 1,066.4 | | | $ | (1,063.0 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | |
NM - Not Meaningful | | | | | | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | | |
BK Segment FX ImpactFavorable/(Unfavorable) | | | | | | | | | | | | | |
Consolidated total revenues | | $ | (69.8 | ) | | $ | (14.6 | ) | | $ | (7.5 | ) | |
Consolidated franchise and property expenses | | | 4.8 | | | | — | | | | 0.3 | | |
Consolidated SG&A | | | 7.8 | | | | 0.8 | | | | (1.2 | ) | |
Consolidated income from operations | | | (66.4 | ) | | | (15.5 | ) | | | (8.7 | ) | |
Consolidated net income | | | (62.9 | ) | | | (14.7 | ) | | | (8.6 | ) | |
Consolidated Adjusted EBITDA | | | (61.9 | ) | | | (14.7 | ) | | | (8.6 | ) | |
| | | 2015 | | | 2014 | | | 2013 | | |
Key Business Metrics | | | | | | | | | | | | | |
System-wide sales growth | | | | | | | | | | | | | |
TH (a) | | | 9.3 | % | | | 6.6 | % | | | n/a | | |
BK | | | 10.3 | % | | | 6.8 | % | | | 4.2 | % | |
System-wide sales | | | | | | | | | | | | | |
TH (a) | | $ | 6,349.8 | | | $ | 6,616.0 | | | | n/a | | |
BK | | $ | 17,303.7 | | | $ | 17,017.1 | | | $ | 16,301.0 | | |
Comparable sales growth | | | | | | | | | | | | | |
TH (a) | | | 5.6 | % | | | 3.1 | % | | | n/a | | |
BK | | | 5.4 | % | | | 2.1 | % | | | 0.5 | % | |
System Net Restaurant Growth (NRG) | | | | | | | | | | | | | |
TH (a) | | | 155 | | | | 144 | | | | n/a | | |
BK | | | 631 | | | | 705 | | | | 670 | | |
Restaurant counts at period end | | | | | | | | | | | | | |
TH (b) | | | 4,413 | | | | 4,258 | | | | n/a | | |
BK | | | 15,003 | | | | 14,372 | | | | 13,667 | | |
System | | | 19,416 | | | | 18,630 | | | | 13,667 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Consolidated | 2018 | | 2017 | | 2016 | | Variance | | FX
Impact (a) | | Variance
Excluding
FX Impact | | Variance | | FX
Impact | | Variance
Excluding
FX Impact |
| | | | | | | | Favorable / (Unfavorable) |
| Revenues: | | | | | | | | | | | | | | | | | |
| Sales | $ | 2,355 |
| | $ | 2,390 |
| | $ | 2,205 |
| | $ | (35 | ) | | $ | 1 |
| | $ | (36 | ) | | $ | 185 |
| | $ | 40 |
| | $ | 145 |
|
| Franchise and property revenues | 3,002 |
| | 2,186 |
| | 1,941 |
| | 816 |
| | (10 | ) | | 826 |
| | 245 |
| | 18 |
| | 227 |
|
| Total revenues | 5,357 |
| | 4,576 |
| | 4,146 |
| | 781 |
| | (9 | ) | | 790 |
| | 430 |
| | 58 |
| | 372 |
|
| Operating costs and expenses: | | | | | | | | | | | | | | | | | |
| Cost of sales | 1,818 |
| | 1,850 |
| | 1,727 |
| | 32 |
| | — |
| | 32 |
| | (123 | ) | | (31 | ) | | (92 | ) |
| Franchise and property expenses | 422 |
| | 478 |
| | 454 |
| | 56 |
| | — |
| | 56 |
| | (24 | ) | | (6 | ) | | (18 | ) |
| Selling, general and administrative expenses | 1,214 |
| | 416 |
| | 319 |
| | (798 | ) | | — |
| | (798 | ) | | (97 | ) | | (8 | ) | | (89 | ) |
| (Income) loss from equity method investments | (22 | ) | | (12 | ) | | (20 | ) | | 10 |
| | — |
| | 10 |
| | (8 | ) | | — |
| | (8 | ) |
| Other operating expenses (income), net | 8 |
| | 109 |
| | (1 | ) | | 101 |
| | (5 | ) | | 106 |
| | (110 | ) | | — |
| | (110 | ) |
| Total operating costs and expenses | 3,440 |
| | 2,841 |
| | 2,479 |
| | (599 | ) | | (5 | ) | | (594 | ) | | (362 | ) | | (45 | ) | | (317 | ) |
| Income from operations | 1,917 |
| | 1,735 |
| | 1,667 |
| | 182 |
| | (14 | ) | | 196 |
| | 68 |
| | 13 |
| | 55 |
|
| Interest expense, net | 535 |
| | 512 |
| | 467 |
| | (23 | ) | | — |
| | (23 | ) | | (45 | ) | | — |
| | (45 | ) |
| Loss on early extinguishment of debt | — |
| | 122 |
| | — |
| | 122 |
| | — |
| | 122 |
| | (122 | ) | | — |
| | (122 | ) |
| Income before income taxes | 1,382 |
| | 1,101 |
| | 1,200 |
| | 281 |
| | (14 | ) | | 295 |
| | (99 | ) | | 13 |
| | (112 | ) |
| Income tax (benefit) expense | 238 |
| | (134 | ) | | 244 |
| | (372 | ) | | (12 | ) | | (360 | ) | | 378 |
| | (1 | ) | | 379 |
|
| Net income | $ | 1,144 |
| | $ | 1,235 |
| | $ | 956 |
| | $ | (91 | ) | | $ | (26 | ) | | $ | (65 | ) | | $ | 279 |
| | $ | 12 |
| | $ | 267 |
|
| |
| (a) | TH 2014 annual figures are shown for informational purposes only.We calculate the FX Impact by translating prior year results at current year monthly average exchange rates. We analyze these results on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| TH Segment | 2018 | | 2017 | | 2016 | | Variance | | FX
Impact (a) | | Variance
Excluding
FX Impact | | Variance | | FX
Impact | | Variance
Excluding
FX Impact |
| | | | | | | | Favorable / (Unfavorable) |
| Revenues: | | | | | | | | | | | | | | | | | |
| Sales | $ | 2,201 |
| | $ | 2,229 |
| | $ | 2,112 |
| | $ | (28 | ) | | $ | 1 |
| | $ | (29 | ) | | $ | 117 |
| | $ | 39 |
| | $ | 78 |
|
| Franchise and property revenues | 1,091 |
| | 926 |
| | 889 |
| | 165 |
| | (2 | ) | | 167 |
| | 37 |
| | 17 |
| | 20 |
|
| Total revenues | 3,292 |
| | 3,155 |
| | 3,001 |
| | 137 |
| | (1 | ) | | 138 |
| | 154 |
| | 56 |
| | 98 |
|
| Cost of sales | 1,688 |
| | 1,707 |
| | 1,647 |
| | 19 |
| | — |
| | 19 |
| | (60 | ) | | (30 | ) | | (30 | ) |
| Franchise and property expenses | 279 |
| | 336 |
| | 317 |
| | 57 |
| | 1 |
| | 56 |
| | (19 | ) | | (6 | ) | | (13 | ) |
| Segment SG&A | 314 |
| | 91 |
| | 79 |
| | (223 | ) | | — |
| | (223 | ) | | (12 | ) | | (1 | ) | | (11 | ) |
| Segment depreciation and amortization (b) | 102 |
| | 103 |
| | 102 |
| | 1 |
| | 1 |
| | — |
| | (1 | ) | | (1 | ) | | — |
|
| Segment income (c) | 1,127 |
| | 1,136 |
| | 1,072 |
| | (9 | ) | | (1 | ) | | (8 | ) | | 64 |
| | 20 |
| | 44 |
|
| |
| (b) | Segment depreciation and amortization consists of depreciation and amortization included in cost of sales and franchise and property expenses. |
(b) | Excludes 398 |
| (c) | TH segment income includes $15 million, $13 millionand 413 limited service kiosks at$12 millionof cash distributions received from equity method investments for 2018, 2017 and 2016, respectively. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| BK Segment | 2018 | | 2017 | | 2016 | | Variance | | FX
Impact (a) | | Variance
Excluding
FX Impact | | Variance | | FX
Impact | | Variance
Excluding
FX Impact |
| | | | | | | | Favorable / (Unfavorable) |
| Revenues: | | | | | | | | | | | | | | | | | |
| Sales | $ | 75 |
| | $ | 94 |
| | $ | 93 |
| | $ | (19 | ) | | $ | — |
| | $ | (19 | ) | | $ | 1 |
| | $ | 1 |
| | $ | — |
|
| Franchise and property revenues | 1,576 |
| | 1,125 |
| | 1,052 |
| | 451 |
| | (7 | ) | | 458 |
| | 73 |
| | 1 |
| | 72 |
|
| Total revenues | 1,651 |
| | 1,219 |
| | 1,145 |
| | 432 |
| | (7 | ) | | 439 |
| | 74 |
| | 2 |
| | 72 |
|
| Cost of sales | 67 |
| | 86 |
| | 80 |
| | 19 |
| | — |
| | 19 |
| | (6 | ) | | (1 | ) | | (5 | ) |
| Franchise and property expenses | 131 |
| | 135 |
| | 137 |
| | 4 |
| | (1 | ) | | 5 |
| | 2 |
| | — |
| | 2 |
|
| Segment SG&A | 577 |
| | 143 |
| | 160 |
| | (434 | ) | | (2 | ) | | (432 | ) | | 17 |
| | (1 | ) | | 18 |
|
| Segment depreciation and amortization (b) | 48 |
| | 47 |
| | 48 |
| | (1 | ) | | (1 | ) | | — |
| | 1 |
| | (1 | ) | | 2 |
|
| Segment income (d) | 928 |
| | 903 |
| | 816 |
| | 25 |
| | (9 | ) | | 34 |
| | 87 |
| | 1 |
| | 86 |
|
| |
| (d) | BK segment income includes $5 millionand $1 millionof cash distributions received from equity method investments for 2018and 2017, respectively. |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 2018 vs. 2017 |
| PLK Segment | 2018 | | 2017(e) | | | | Variance | | FX
Impact (a) | | Variance
Excluding
FX Impact |
| | | | | | | | Favorable / (Unfavorable) |
| Revenues: | | | | | | | | | | | |
| Sales | $ | 79 |
| | $ | 67 |
| | | | $ | 12 |
| | $ | — |
| | $ | 12 |
|
| Franchise and property revenues | 335 |
| | 135 |
| | | | 200 |
| | (1 | ) | | 201 |
|
| Total revenues | 414 |
| | 202 |
| | | | 212 |
| | (1 | ) | | 213 |
|
| Cost of sales | 63 |
| | 57 |
| | | | (6 | ) | | — |
| | (6 | ) |
| Franchise and property expenses | 12 |
| | 7 |
| | | | (5 | ) | | — |
| | (5 | ) |
| Segment SG&A | 193 |
| | 40 |
| | | | (153 | ) | | — |
| | (153 | ) |
| Segment depreciation and amortization (b) | 10 |
| | 9 |
| | | | (1 | ) | | — |
| | (1 | ) |
| Segment income | 157 |
| | 107 |
| | | | 50 |
| | (1 | ) | | 51 |
|
| |
| (e) | PLK revenues and segment income from the acquisition date of March 27, 2017 through December 31, 2015 and 2014, respectively. Commencing2017 are included in the fourth quarterour consolidated statement of 2015, we revised our presentation of restaurant counts to exclude limited service kiosks, with the revision applied retrospectively to the earliest period presented to provide period-to-period comparability.operations for 2017. |
TH
global system comparable sales
growth of 5.6%were 0.6% for
2015 was driven by continued strength in beverages and innovative new product launches, such as grilled breakfast and lunch wraps and Nutella baked goods.BK global system2018, including Canada comparable sales growth of 5.4% and 2.1%0.9%. BK comparable sales were 2.0% for 2015 and 2014, respectively, reflects the impact2018, including U.S. comparable sales of successful new products and promotions.
1.4%. PLK comparable sales were 1.6% for 2018, including U.S. comparable sales of 0.9%.
Sales include TH supply chain sales and sales from Company restaurants. TH supply chain sales represent sales of products, supplies and restaurant equipment, as well as sales to
retailers, other thanretailers. In periods prior to January 1, 2018, we classified revenues derived from sales of equipment
sales related to initialpackages at the establishment of a restaurant
establishmentand in connection with renewal or
renovations that are shipped directly from our warehouses or by third-party distributors to restaurants or retailers.renovation as franchise and property revenues. Sales from Company restaurants, including sales by our consolidated TH Restaurant VIEs,
(see Note 3 to the accompanying consolidated financial statements for additional information on Restaurant VIEs), represent restaurant-level sales to our guests.
Cost of sales includes costs associated with the management of our TH supply chain, including cost of goods, direct labor and depreciation, as well as the cost of
goods delivered by third-party distributors to the restaurants for which we manage the supply chain logistics, and for products sold
through grocery stores.to retailers. Cost of sales also includes food, paper and labor costs of Company
restaurants, which are principallyrestaurants. In periods prior to January 1, 2018, we classified costs
incurred by our consolidated TH Restaurant VIEs.related to sales of equipment packages at the establishment of a restaurant and in connection with renewal or renovation as franchise and property expenses.
During
2015, the increase in sales was driven primarily by the inclusion of $2,074.3 million of TH sales for a full year compared to $92.8 million in 2014 as a result of the Transactions.During 2014,2018, the decrease in sales was driven by a $148.1decrease of $29 million in our TH segment and a decrease of $19 million in our BK segment, partially offset by an increase of $12 million in our PLK segment, primarily as a result of including PLK for a full year in 2018 compared to nine months in 2017, and a favorable FX Impact of $1 million. The decrease in our TH segment was driven by a $48 million decrease in BKour TH Company restaurant revenue, primarily from the conversion of Restaurant VIEs to franchise restaurants, partially offset by a $19 million increase in supply chain sales. The increase in supply chain sales was primarily due to the net refranchisingreclassification of 360 BK Company restaurants during 2013. These factors wererevenue from the sales of equipment packages from franchise and property revenues to sales beginning January 1, 2018, partially offset by $92.8the non-recurrence of the roll-out of espresso equipment and related espresso inventory in 2017. The decrease in our BK segment was due to Company restaurant refranchisings in prior periods.
During 2017, the increase in sales was driven by a $78 million increase in our TH segment, the inclusion of $67 million from our PLK segment, and a $40 million favorable FX Impact. The increase in our TH segment was driven by a $135 million increase in supply chain sales primarily reflecting growth in system-wide sales and the launch of our espresso-based beverage platform, partially offset by a $57 million decrease in our TH Company restaurant revenue, primarily from the conversion of Restaurant VIEs to franchise restaurants.
During 2018, the decrease in cost of sales was driven primarily by a decrease of $19 million in our TH segment and a decrease of $19 million in our BK segment, partially offset by an increase of $6 million in our PLK segment, primarily as a result of
including PLK for a full year in 2018 compared to nine months in 2017. The decrease in our TH segment was primarily due to a decrease of $41 million in Company restaurant cost of sales, primarily from the
Transactions.conversion of Restaurant VIEs to franchise restaurants, partially offset by an increase of $22 million in supply chain cost of sales. The increase in supply chain cost of sales was primarily due to the reclassification of costs from the sales of equipment packages from franchise and property expenses to costs of sales beginning January 1, 2018, partially offset by a decrease in costs in connection with the non-recurrence of the roll-out of espresso equipment in 2017. The decrease in our BK segment was due to Company restaurant refranchisings in prior periods.
During
2015,2017, the increase in cost of sales was driven primarily by the inclusion of
$1,728.1$57 million
offrom our PLK segment, a $30 million increase in our TH
segment, a $5 million increase in our BK segment, and a $31 million unfavorable FX Impact. The increase in our TH segment was primarily due to an $80 million increase in supply chain cost of sales
for a full year compared to $92.1 million in 2014 as a result of the Transactions.During 2014, the decrease in cost of sales was driven by the increase in supply chain sales described above, net of supply chain cost savings derived from effective cost management. This factor was partially offset by a $131.0$50 million decrease in BK Company restaurant cost of sales, primarily duefrom the conversion of Restaurant VIEs to the net refranchisingfranchise restaurants.
Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or subleased to franchisees, franchise fees, revenues derived from equipment packages at establishment of a restaurant and in connection with renewal or renovation, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, costsamortization of franchise agreements, and bad debt expense (recoveries). In periods prior to January 1, 2018, franchise and property revenues and franchise and property expenses included revenues and cost of sales, respectively, related to equipment packages sold at establishment of a restaurant and in connection with renewals or renovations.
During 2018, the increase in franchise and property revenues was driven by an increase of $458 million in our BK segment, an increase of $201 million in our PLK segment, and an increase of $167 million in our TH segment, partially offset by a $10 million unfavorable FX Impact. The increase in our BK, TH and PLK segments reflects the inclusion of advertising fund contributions from franchisees as a result of the application of ASC 606 beginning January 1, 2018, an increase in PLK franchise and property revenues as a result of including PLK for a full year in 2018 compared to nine months in 2017, and an increase in royalties driven by system-wide sales growth. These factors were partially offset by a decrease in franchise fees and other revenue, primarily due to the deferral of initial and renewal
or renovation, amortizationfranchise fees as a result of
the application of ASC 606 and for our TH segment, the reclassification of revenue from the sales of equipment packages from franchise
agreements and
bad debt expense (recoveries).property revenues to sales beginning January 1, 2018.
During 2015,2017, the increase in franchise and property revenues was driven by the inclusion of $882.6$135 million from our PLK segment, a $72 million increase in our BK segment, a $20 million increase in our TH segment, and an $18 million favorable FX Impact. The increase in our BK segment was primarily due to an increase in royalties, driven by system-wide sales growth. The increase in our TH segment was primarily due to an increase in royalties, driven by system-wide sales growth, and an increase in property revenues, driven by new leases and subleases associated with additional restaurants leased or subleased to franchisees as a result of THconverting Restaurant VIEs to franchise restaurants.
During 2018, the decrease in franchise and property revenuesexpenses was driven by a decrease of $56 million in our TH segment and a decrease of $5 million in our BK segment, partially offset by an increase of $5 million in our PLK segment, primarily as a result of including PLK for a full year in 2018 compared to $50.8 millionnine months in 2014 as a result2017. The decrease in our TH segment was primarily due to the reclassification of the Transactions. To a lesser extent, the increase inexpenses from sales of equipment packages from franchise and property revenues, excluding FX impact, was driven by a $89.0 million increase in BK franchise and property revenues due primarilyexpenses to (i) an increasecost of $75.6 million in BK franchise royalties driven by NRG and comparable sales growth during 2015 and (ii) an increase of $13.7 million in BK franchise fees and other revenue driven primarily by an increase in renewal franchise fees. beginning January 1, 2018.
During
2015, franchise and property revenues had a $69.0 million unfavorable FX impact related to our BK segment.During 2014, the increase in franchise and property revenues, excluding FX impact, was driven by a $71.6 million increase in BK franchise and property revenues due primarily to (i) an increase of $47.8 million in BK franchise royalties driven by worldwide net restaurants growth of 705 restaurants during 2014, the net refranchising of 360 BK Company restaurants during 2013 and comparable sales growth, (ii) an increase of $21.7 million in BK franchise fees and other revenue driven primarily by an increase in renewal franchise fees, and (iii) an increase of $2.1 million in BK property revenue. Additionally, franchise and property revenues increased due to $50.8 million of TH franchise and property revenues as a result of the Transactions. During 2014, franchise and property revenues had a $14.6 million unfavorable FX impact related to our BK segment.
During 2015,2017, the increase in franchise and property expenses was driven primarily by a $13 million increase in our TH segment, the inclusion of $360.7$7 million offrom our PLK segment, and a $6 million unfavorable FX Impact, partially offset by a $2 million decrease in our BK segment. The increase in our TH franchise andsegment was primarily due to an increase in property expenses for a full year compareddriven by new subleases associated with additional restaurants subleased to $26.1 million in 2014franchisees as a result of the Transactions.
During 2014, the increase inconverting Restaurant VIEs to franchise and property expenses was driven primarily by the inclusion of $26.1 million of TH franchise and property expenses in 2014 as a result of the Transactions.
restaurants.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses were comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 2015 Compared to 2014 | | | 2014 Compared to 2013 | |
| | | 2015 | | | 2014 | | | 2013 | | | $ | | | % | | | $ | | | % | |
| | | | | | | | | | | | Favorable / (Unfavorable) | |
Selling expenses | | $ | 13.7 | | | $ | 2.4 | | | $ | 6.2 | | | $ | (11.3 | ) | | | NM | | | $ | 3.8 | | | | 61.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Management general and administrative expenses | | | 238.5 | | | | 166.7 | | | | 181.0 | | | | (71.8 | ) | | | (43.1 | )% | | | 14.3 | | | | 7.9 | % |
Share-based compensation and non-cash incentive compensation expense | | | 51.8 | | | | 37.3 | | | | 17.6 | | | | (14.5 | ) | | | (38.9 | )% | | | (19.7 | ) | | | (111.9 | )% |
Depreciation and amortization | | | 17.0 | | | | 14.0 | | | | 11.4 | | | | (3.0 | ) | | | (21.4 | )% | | | (2.6 | ) | | | (22.8 | )% |
TH transaction and restructuring costs | | | 116.7 | | | | 125.0 | | | | — | | | | 8.3 | | | | NM | | | | (125.0 | ) | | | NM | |
Global portfolio realignment project costs | | | — | | | | — | | | | 26.2 | | | | — | | | | NM | | | | 26.2 | | | | NM | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total general and administrative expenses | | | 424.0 | | | | 343.0 | | | | 236.2 | | | | (81.0 | ) | | | (23.6 | )% | | | (106.8 | ) | | | (45.2 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | $ | 437.7 | | | $ | 345.4 | | | $ | 242.4 | | | $ | (92.3 | ) | | | (26.7 | )% | | $ | (103.0 | ) | | | (42.5 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| | 2018 | | 2017 | | 2016 | | $ | | % | | $ | | % |
| | | | | | | | Favorable / (Unfavorable) |
| TH Segment SG&A | $ | 314 |
| | $ | 91 |
| | $ | 79 |
| | $ | (223 | ) | | NM |
| | $ | (12 | ) | | (15.2 | )% |
| BK Segment SG&A | 577 |
| | 143 |
| | 160 |
| | (434 | ) | | NM |
| | 17 |
| | 10.6 | % |
| PLK Segment SG&A | 193 |
| | 40 |
| | — |
| | (153 | ) | | NM |
| | (40 | ) | | NM |
|
| Share-based compensation and non-cash incentive compensation expense | 55 |
| | 55 |
| | 42 |
| | — |
| | — | % | | (13 | ) | | (31.0 | )% |
| Depreciation and amortization | 20 |
| | 23 |
| | 22 |
| | 3 |
| | 13.0 | % | | (1 | ) | | (4.5 | )% |
| PLK Transaction costs | 10 |
| | 62 |
| | — |
| | 52 |
| | 83.9 | % | | (62 | ) | | NM |
|
| Corporate restructuring and tax advisory fees | 25 |
| | 2 |
| | — |
| | (23 | ) | | NM |
| | (2 | ) | | NM |
|
| Office centralization and relocation costs | 20 |
| | — |
| | — |
| | (20 | ) | | NM |
| | — |
| | NM |
|
| Integration costs | — |
| | — |
| | 16 |
| | — |
| | NM |
| | 16 |
| | NM |
|
| Selling, general and administrative expenses | $ | 1,214 |
| | $ | 416 |
| | $ | 319 |
| | $ | (798 | ) | | NM |
| | $ | (97 | ) | | (30.4 | )% |
NM – Not Meaningful
Selling expenses consist primarily
Upon our transition to ASC 606 on January 1, 2018, segment selling,
expenses for 2015 was primarily a result of advertising fund contributions from TH Restaurant VIEs. During 2014, selling expenses decreased primarily as a result of the net refranchisings of 360 BK Company restaurants during 2013.Management general and administrative expenses (“Management GSegment SG&A”) include segment selling expenses, which consist primarily of advertising fund expenses, and segment general and administrative expenses, which are comprised primarily of salary and employee relatedemployee-related costs for our non-restaurant employees, professional fees, information technology systems, and general overhead for our corporate offices. Prior to our transition to ASC 606 on January 1, 2018, our statement of operations did not reflect advertising fund contributions or advertising fund expenses, since such amounts were netted under previously applicable accounting standards. Segment SG&A excludes share-based compensation and non-cash incentive compensation expense, depreciation and amortization, PLK Transaction costs, Corporate restructuring and tax advisory fees, Office centralization and relocation costs and Integration costs.
During 2015, the increase in Management G2018, TH, BK and PLK Segment SG&A was drivenincreased primarily bydue to the inclusion of $79.7 millionadvertising fund expenses from the application of ASC 606 beginning January 1, 2018.
During 2017, TH
Management GSegment SG&A
forincreased primarily due to an increase in salaries and benefits and an unfavorable FX Impact. During the same period, BK Segment SG&A decreased primarily due to a
full year compared to $5.6 milliondecrease in
2014 as a result of the Transactions,salaries and benefits, partially offset by
favorablean unfavorable FX
impact related to our BK segment. The decrease in Management G&A in 2014 was driven primarily by a decrease in BK salary and fringe benefits, professional services and favorable FX impact, partially offset by the inclusion of $5.6 million of TH Management G&A.Impact.
During
2015,2017, the increase in share-based compensation and non-cash incentive compensation expense was
due primarily
to an increase of $4 million in equity award modifications and an increase due to additional
stock optionsequity awards granted during
2015, an increase in non-cash incentive compensation of $4.0 million and a $6.1 million increase in share-based compensation expense to $16.2 million related to the remeasurement of stock options that are liability-classified or granted to non-employees to fair value. During 2015, we modified a portion of liability-classified awards that resulted in a change in classification of the awards from liability to equity and as such these modified awards will no longer be revalued after the modification date.During 2014, the increase in share-based compensation and non-cash incentive compensation expense was primarily due to additional stock options granted during 2014, a $6.4 million increase in stock option modifications compared to 2013 and a $10.5 million increase in share-based compensation expense to $12.3 million related to the remeasurement of stock options that are liability-classified or granted to non-employees to fair value, including $7.7 million for liability-classified Tim Hortons stock options.
During 2015, the increase in depreciation and amortization expense is primarily due to the inclusion of the TH business for a full year as a result of the Transactions. During 2014, the increase in depreciation and amortization expenses is primarily due to corporate capital expenditures.
2017.
(Income) Loss from Equity Method Investments
(Income) loss from equity method investments reflects our share of investee net income or loss. (Income) loss, non-cash dilution gains or losses from changes in our ownership interests in equity method investments from these investments is considered to be an integrated part of our business operations,investees, and is therefore includedbasis difference amortization.
The change in
operating income.During 2015, the (income) loss from equity method investments includes $7.9during 2018 was primarily driven by the current year recognition of a $20 million non-cash dilution gain on the initial public offering by one of investee net income from THour equity method investments. During 2015,investees, partially offset by an increase in equity method investment net losses that we also recordedrecognized during 2018.
The change in (income) loss from equity method investments during 2017 was primarily driven by the prior year recognition of a
$10.9$12 million
noncashincrease to the carrying value of our investment balance and a non-cash dilution gain included in (income) loss from equity method investments on the issuance of capital stock by
BK Brasil Operacao E Assesoria A Restaurantes S.A., our Brazilian joint venture and one of our equity method
investees. The investee net income from THinvestees, partially offset by improved results of our BK equity method investments
and dilution gain are offset by net losses from other BK equity method investments.During 2014, we recorded a $5.8 million noncash dilution gain included in (income) loss from equity method investments on the issuance of stock by Carrols Restaurant Group, Inc. (“Carrols”), one of our equity method investees. The dilution gain is offset by net losses from BK equity method investments.
2017.
Other Operating Expenses (Income), net
Our other operating expenses (income), net were comprised of the following:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Net losses (gains) on disposal of assets, restaurant closures and refranchisings | | $ | 22.0 | | | $ | 25.4 | | | $ | 0.7 | |
Litigation settlements and reserves, net | | | 1.3 | | | | 4.0 | | | | 7.6 | |
Net losses on derivatives | | | 37.3 | | | | 290.9 | | | | — | |
Foreign exchange net losses (gains) | | | 46.7 | | | | (3.8 | ) | | | 7.4 | |
Other, net | | | (1.8 | ) | | | 10.9 | | | | 5.6 | |
| | | | | | | | | | | | |
Other operating expenses (income), net | | $ | 105.5 | | | $ | 327.4 | | | $ | 21.3 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Net losses on disposal of assets, restaurant closures and refranchisings | $ | 19 |
| | $ | 29 |
| | $ | 18 |
|
| Litigation settlements and reserves, net | 11 |
| | 2 |
| | 1 |
|
| Net losses (gains) on foreign exchange | (33 | ) | | 77 |
| | (20 | ) |
| Other, net | 11 |
| | 1 |
| | — |
|
| Other operating expenses (income), net | $ | 8 |
| | $ | 109 |
| | $ | (1 | ) |
Net losses
(gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and
refranchisings, and are recorded in other operating expenses (income), net in the accompanying consolidated statements of operations.refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods.
During 2015,
Litigation settlements and reserves, net
losses on disposal of assets, restaurant closuresprimarily reflects accruals and
refranchisings consisted of net losses associatedproceeds received in connection with
refranchisings of $2.6 million and net losses associated with asset disposals and restaurant closures of $19.4 million.During 2014, net losses on disposal of assets, restaurant closures and refranchisings consisted of net losses associated with refranchisings of $10.5 million and net losses associated with asset disposals and restaurant closures of $14.9 million.
During 2013, net losses on disposal of assets, restaurant closures and refranchisings consisted of net gains associated with refranchisings of $5.3 million, net losses from sale of subsidiaries of $1.0 million and net losses associated with asset disposals and restaurant closures of $5.0 million.
litigation matters.
Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities.
During 2015,
Other, net losses on derivativesduring 2018 is comprised primarily reflectsof a payment in connection with the reclassificationsettlement of losses on cash flow hedges from accumulated other comprehensive income (loss) to earningscertain provisions associated with the 2017 redemption of our preferred shares as a result of de-designationrecently proposed Treasury regulations.
Interest Expense, net
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Interest expense, net | $ | 535 |
| | $ | 512 |
| | $ | 467 |
|
| Weighted average interest rate on long-term debt | 4.8 | % | | 4.8 | % | | 5.1 | % |
During 2018, interest expense, net increased primarily due to higher outstanding debt from the incurrence of incremental term loans and settlementthe issuance of certain interest rate swaps.During 2014, we entered into foreign currency forward and foreign currency option contractssenior notes during 2017, partially offset by a $60 million benefit during 2018 from our adoption of the new hedge accounting standard. Please refer to hedge our exposureNote 2,
Significant Accounting Policies - New Accounting Pronouncements, to the volatility of the Canadian dollar in connection with the cash portion of the purchase price of the Tim Hortons acquisition. We recorded a net loss on derivatives of $133.0 million related to the change in fair value on these instruments and an expense of $59.9 million related to the premium on the foreign currency option contracts. These instruments were settled in the fourth quarter of 2014. Additionally, as a result of discontinuing hedge accounting on our interest rate caps and forward-starting interest rate swaps, werecognized a loss of $34.5 million related to the change in fair value related to both instruments and a net gain of $13.4 million related to the reclassification of amounts from AOCI into earnings related to both instruments. These instruments were settled in the fourth quarter of 2014. Additionally, during the fourth quarter of 2014 we entered into a series of forward-starting interest rate swaps to economically hedge the variability in the interest payments associated with our 2014 Term Loan Facility (as defined below) and recorded a gain of $88.9 million related to the change in fair value related to these instruments. Lastly, during the fourth quarter of 2014 we entered into a series of cross-currency rate swaps to protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates and recorded a loss of $165.8 million related to the change in fair value on these instruments. See Note 17 to the accompanying audited consolidated financial statements for additional information aboutfurther details of the effects of the adoption of the new hedge accounting for our derivative instruments.
Interest Expense, net
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Interest expense, net | | $ | 478.3 | | | $ | 279.7 | | | $ | 200.0 | |
Weighted average interest rate on long-term debt | | | 5.2 | % | | | 6.0 | % | | | 6.6 | % |
standard. Subject to foreign exchange rate movements and other factors, we expect a benefit to continue during 2019.
During
2015,2017, interest expense, net increased
compared to 2014 primarily due to
higher outstanding debt from the incurrence of incremental term loans and the issuance of senior notes during 2017, partially offset by an increase in
outstanding debt forinterest income and a
full year as a result of the Transactions in December 2014, partially offset by a reduction in ourlower weighted average interest rate.
During 2014, interest expense, net increased compared to 2013 primarily due to an increase in outstanding debt as a result of the Transactions in December 2014. In connection with the Transactions, we incurred $6,750.0 million of term loans on October 27, 2014 and $2,250.0 million of senior notes on October 8, 2014, with interest expense beginning to accrue from each respective date. See Note 12 to the accompanying consolidated financial statements for additional information on interest expense, net.
Loss on Early Extinguishment of Debt
In connection with the refinancing and prepayment of a portion of the term loans outstanding under our 2014 Credit Facilities as well as the redemption of a portion of our Tim Hortons Notes (as such terms are defined below),
During 2017, we recorded a
$40.0$122 million loss on early extinguishment of debt
in 2015. The loss on early extinguishmentwhich primarily reflects the payment of
debt primarily reflectspremiums to fully redeem our second lien notes and the write-off of unamortized debt issuance costs and
discounts.Indiscounts in connection with the refinancing of term loans outstanding underour Term Loan Facility.
Income Tax Expense
The change in our effective income tax rate to 17.2% in 2018 from (12.1)% in 2017 is primarily due to the 2012 Credit Agreement,impact of certain aspects of the Tax Act, realignment of certain intercompany financings and changes in foreign currency exchange rates, partially offset by the release of a valuation allowance related to use of capital losses.
The change in our effective income tax rate to (12.1)% in 2017 from 20.3% in 2016 is primarily due to provisional amounts recorded in 2017 for the Tax Act Impact. Our effective income tax rate in 2017 also includes a benefit from stock option exercises as a result of the required adoption of a new share-based compensation accounting standard, as well as differing tax rules applicable to certain subsidiaries outside Canada. These factors were partially offset by a valuation allowance on foreign exchange capital losses.
Net Income
We reported net income of $1,144 million for 2018 compared to net income of $1,235 million for 2017. The decrease in net income is primarily due to a $372 million increase in income tax expense, a $23 million increase in interest expense, net, a $23 million increase in Corporate restructuring and tax advisory fees, the redemptionsinclusion of our 2011 Discount Notes$20 million of Office centralization and 2010 Senior Notes (as such terms are defined below)relocation costs, and a $9 million decrease in TH segment income. These factors were partially offset by the non-recurrence of $122 million of loss on early extinguishment of debt recognized in the prior period, a $101 million favorable change in results from other operating expenses (income), we recordednet, a $155.4$52 million decrease in PLK Transaction costs, a $50 million increase in PLK segment income, primarily as a result of including PLK for a full year in 2018 compared to nine months in 2017, and a $25 million increase in BK segment income.
Our net income increased to $1,235 million for 2017 compared to net income of $956 million for 2016, primarily as a result of a $134 million income tax benefit in 2017 compared to a $244 million income tax expense in 2016, a net change of $378 million. Additionally, segment income in TH and BK increased $151 million and 2017 includes $107 million of PLK segment income. These factors were partially offset by a $122 million loss on early extinguishment of debt,
in 2014. The loss on early extinguishment of debt reflects the write-off of unamortized debt issuance costs, the write-off of unamortized discounts, commitment fees associated with the bridge loan available at the closing of the Transactions, and the payment of premiums to redeem the 2011 Discount Notes and 2010 Senior Notes.Income Tax Expense
During 2015 and 2014, we completed a series of transactions which resulted in a change to our legal and capital structure. The restructuring impacts the comparability of the current period effective tax rate to prior periods.
Our effective tax rate was 24.1% in 2015, primarily a result of the mix of income from multiple tax jurisdictions, partially offset by the favorable impact from intercompany financing.
Our effective tax rate was a negative 5.9% in 2014, primarily due to the impact of the Transactions, including non-deductible transaction related costs, and the mix of income from multiple tax jurisdictions.
Our effective tax rate was 27.5% in 2013, primarily as a result of the mix of income from multiple tax jurisdictions and the impact of non-deductible expenses related to our global portfolio realignment project, partially offset by a favorable impact from the sale of foreign subsidiaries and a reduction in the state effective tax rate related to our global portfolio realignment project.
Net Income (Loss)
We reported net income of $511.7$110 million during 2015, compared to a net loss of $268.9 million during 2014, primarily as a result of an increase in income from operations of $1,011.1 million and a decrease in loss on early extinguishment of debt of $115.4 million, partially offset by an increase in interest expense, net of $198.6 million and an increase in income tax expense of $147.3 million. The increase in income from operations was driven by an increase in sales, an increase in franchise and property revenues and a decrease in other operating expenses (income), net, partially offset by an increase in cost of sales, an increase in franchise and property expenses, and an increase in selling, general and administrative expenses, as discussed above.
We reported a net loss of $268.9 million during 2014, compared to net income of $233.7 million during 2013, primarily as a result of a $341.1 million decrease in income from operations, which was driven by an increase in other operating expenses (income), net, an increase in selling, general and administrative expenses, a decrease in sales and an increase in franchise and property expenses, partially offset by an increase in franchise and property revenues, a decrease in cost$62 million of salesPLK Transaction costs, and a decrease in (income) loss from equity method investments. Additionally, our net loss was also impacted by an$45 million increase in interest expense, net of $79.7 million and the recognition of loss on early extinguishment of debt of $155.4 million, partially offset by a decrease in income tax expense of $73.6 million.
net.
The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. These non-GAAP measures do not have a standardized meaning under U.S. GAAP and may differ from similar captioned measures of other companies in our industry. We believe that these non-GAAP measures are useful to investors in assessing our operating performance, as it provides them with the same tools that management uses to evaluate our performance and is responsive to questions we receive from both investors and analysts. By disclosing these non-GAAP measures, we intend to provide investors with a consistent comparison of our operating results and trends for the periods presented. EBITDA is defined as earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, taxes,income tax (benefit) expense, and depreciation and amortization.amortization and is
used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA excluding the
non-cash impact of share-based compensation and non-cash incentive compensation expense
other operating expenses (income), net,and (income) loss from equity method investments, net of cash distributions received from equity method investments,
and allas well as other
operating expenses (income), net. Other specifically identified costs associated with non-recurring projects
are also excluded from Adjusted EBITDA, including
PLK Transaction costs associated with the Popeyes Acquisition, Corporate restructuring and tax advisory fees related to the interpretation and implementation of the Tax Act, including Treasury regulations proposed in late 2018, non-operational Office centralization and relocation costs in connection with the centralization and relocation of our Canadian and U.S. restaurant support centers to new offices in Toronto, Ontario, and Miami, Florida, respectively, and Integration costs associated with the acquisition
accounting impact on cost of
sales and TH transaction and restructuring costs.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
doare not
directly reflect our core operations, andrelevant to management’s assessment of operating performance or the performance of an acquired business. Adjusted EBITDA, as defined above, also represents our measure of segment
income. | | | | | | | | | | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | | | 2015
Compared
to 2014 | | | 2014
Compared
to 2013 | |
| | | | | | | | | | | | Favorable / (Unfavorable) | |
Segment income: | | | | | | | | | | | | | | | | | | | | |
TH | | $ | 906.7 | | | $ | 34.9 | | | $ | — | | | $ | 871.8 | | | $ | 34.9 | |
BK | | | 759.5 | | | | 726.0 | | | | 665.6 | | | | 33.5 | | | | 60.4 | |
| | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | | | 1,666.2 | | | | 760.9 | | | | 665.6 | | | | 905.3 | | | | 95.3 | |
Share-based compensation and non-cash incentive compensation expense | | | 51.8 | | | | 37.3 | | | | 17.6 | | | | (14.5 | ) | | | (19.7 | ) |
Acquisition accounting impact on cost of sales | | | 0.5 | | | | 11.8 | | | | — | | | | 11.3 | | | | (11.8 | ) |
TH transaction and restructuring costs | | | 116.7 | | | | 125.0 | | | | — | | | | 8.3 | | | | (125.0 | ) |
Global portfolio realignment project costs | | | — | | | | — | | | | 26.2 | | | | — | | | | 26.2 | |
Impact of equity method investments (a) | | | 17.7 | | | | 9.5 | | | | 12.7 | | | | (8.2 | ) | | | 3.2 | |
Other operating expenses (income), net | | | 105.5 | | | | 327.4 | | | | 21.3 | | | | 221.9 | | | | (306.1 | ) |
| | | | | | | | | | | | | | | | | | | | |
EBITDA | | | 1,374.0 | | | | 249.9 | | | | 587.8 | | | | 1,124.1 | | | | (337.9 | ) |
Depreciation and amortization | | | 181.8 | | | | 68.8 | | | | 65.6 | | | | (113.0 | ) | | | (3.2 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income from operations | | | 1,192.2 | | | | 181.1 | | | | 522.2 | | | | 1,011.1 | | | | (341.1 | ) |
Interest expense, net | | | 478.3 | | | | 279.7 | | | | 200.0 | | | | (198.6 | ) | | | (79.7 | ) |
Loss on early extinguishment of debt | | | 40.0 | | | | 155.4 | | | | — | | | | 115.4 | | | | (155.4 | ) |
Income tax expense | | | 162.2 | | | | 14.9 | | | | 88.5 | | | | (147.3 | ) | | | 73.6 | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 511.7 | | | $ | (268.9 | ) | | $ | 233.7 | | | $ | 780.6 | | | $ | (502.6 | ) |
| | | | | | | | | | | | | | | | | | | | |
NM – Not Meaningful
income for each of our three operating segments.
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| | | | | | | | Favorable / (Unfavorable) |
| Segment income: | | | | | | | | | |
| TH | $ | 1,127 |
| | $ | 1,136 |
| | $ | 1,072 |
| | $ | (9 | ) | | $ | 64 |
|
| BK | 928 |
| | 903 |
| | 816 |
| | 25 |
| | 87 |
|
| PLK | 157 |
| | 107 |
| | — |
| | 50 |
| | 107 |
|
| Adjusted EBITDA | 2,212 |
| | 2,146 |
| | 1,888 |
| | 66 |
| | 258 |
|
| Share-based compensation and non-cash incentive compensation expense | 55 |
| | 55 |
| | 42 |
| | — |
| | (13 | ) |
| PLK Transaction costs | 10 |
| | 62 |
| | — |
| | 52 |
| | (62 | ) |
| Corporate restructuring and tax advisory fees | 25 |
| | 2 |
| | — |
| | (23 | ) | | (2 | ) |
| Office centralization and relocation costs | 20 |
| | — |
| | — |
| | (20 | ) | | — |
|
| Integration costs | — |
| | — |
| | 16 |
| | — |
| | 16 |
|
| Impact of equity method investments (a) | (3 | ) | | 1 |
| | (8 | ) | | 4 |
| | (9 | ) |
| Other operating expenses (income), net | 8 |
| | 109 |
| | (1 | ) | | 101 |
| | (110 | ) |
| EBITDA | 2,097 |
| | 1,917 |
| | 1,839 |
| | 180 |
| | 78 |
|
| Depreciation and amortization | 180 |
| | 182 |
| | 172 |
| | 2 |
| | (10 | ) |
| Income from operations | 1,917 |
| | 1,735 |
| | 1,667 |
| | 182 |
| | 68 |
|
| Interest expense, net | 535 |
| | 512 |
| | 467 |
| | (23 | ) | | (45 | ) |
| Loss on early extinguishment of debt | — |
| | 122 |
| | — |
| | 122 |
| | (122 | ) |
| Income tax (benefit) expense | 238 |
| | (134 | ) | | 244 |
| | (372 | ) | | 378 |
|
| Net income | $ | 1,144 |
| | $ | 1,235 |
| | $ | 956 |
| | $ | (91 | ) | | $ | 279 |
|
| |
| (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. |
Segment income is affected by the application of ASC 606 beginning January 1, 2018, including the deferral of initial and renewal franchise fees and the timing of advertising fund related revenues and expenses. See Note 19, Segment Reporting and Geographical Information, to the accompanying audited consolidated financial statements for 2018 segment income under Previous Standards. The increase in Adjusted EBITDA for 20152018 reflects the increase in segment income in our BK and PLK segments, primarily reflects consolidationas a result of THincluding PLK for a full year in 2015 and,2018 compared to nine months in 2017, partially offset by a decrease in our TH segment.
The increase in EBITDA for 2018 is primarily due to a lesser extent,decrease in other operating expenses (income), net, an increase in segment income in our BK and PLK segments, primarily as a result of including PLK for a full year in 2018 compared to nine months in 2017, a decrease in PLK Transaction costs, and favorable results from the impact of equity method investments in the current period, partially offset by the increase in Corporate restructuring and tax advisory fees, the inclusion of Office centralization and relocation costs and a decrease in segment income in our TH segment.
The increase in Adjusted EBITDA for 2014 primarily2017 reflects an increaseincreases in segment income in our TH and BK segment as well assegments and the impactinclusion of the consolidationour PLK segment.
The increase in EBITDA for
20152017 is primarily
reflects consolidation of TH for a full yeardue to increases in
2015, an increase in BK segment income
a decreasein our TH and BK segments, the inclusion of PLK segment income, and the non-recurrence of integration costs, partially offset by an increase in other operating expenses (income), net,
a decrease in TH transaction and restructuringPLK Transaction costs and
a decreaseCorporate restructuring and tax advisory fees recognized in
acquisition accounting impact on cost of sales, partially offset bythe current period, an increase in share-based compensation and non-cash incentive compensation,
expense.EBITDA for 2014 decreased primarily from an increase in other operating expenses (income), net, the incurrence of TH transaction and restructuring costs, the acquisition accounting impact on cost of sales and an increase in share-based compensation and non-cash incentive compensation expenses, partially offset by the factors described above that resulted in an increase in Adjusted EBITDA as well as the non-recurrence of global portfolio realignment project costs.
Segment Results for 2015
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | BK Segment | |
| | | 2015 | | | 2014 | | | Favorable / (Unfavorable) | |
| | | Total | | | TH Segment | | | BK Segment | | | Total | | | TH Segment | | | BK Segment | | | $ | | | % | |
Franchise: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Franchise and property revenues | | $ | 1,883.2 | | | $ | 882.6 | | | $ | 1,000.6 | | | $ | 1,031.4 | | | $ | 50.8 | | | $ | 980.6 | | | $ | 20.0 | | | | 2.0 | % |
Franchise and property expenses | | | 503.2 | | | | 360.7 | | | | 142.5 | | | | 179.0 | | | | 26.1 | | | | 152.9 | | | | 10.4 | | | | 6.8 | % |
| | | | | | | | |
Sales and cost of sales (1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales | | | 2,169.0 | | | | 2,074.3 | | | | 94.7 | | | | 167.4 | | | | 92.8 | | | | 74.6 | | | | 20.1 | | | | 26.9 | % |
Cost of sales | | | 1,809.5 | | | | 1,728.1 | | | | 81.4 | | | | 156.4 | | | | 92.1 | | | | 64.3 | | | | (17.1 | ) | | | (26.6 | )% |
| | | | | | | | |
Segment SG&A (2) | | | 252.2 | | | | 93.2 | | | | 159.0 | | | | 169.1 | | | | 6.6 | | | | 162.5 | | | | 3.5 | | | | 2.2 | % |
Segment depreciation and amortization (3) | | | 164.8 | | | | 117.7 | | | | 47.1 | | | | 54.8 | | | | 4.3 | | | | 50.5 | | | | 3.4 | | | | 6.7 | % |
Segment income (4) | | | 1,666.2 | | | | 906.7 | | | | 759.5 | | | | 760.9 | | | | 34.9 | | | | 726.0 | | | | 33.5 | | | | 4.6 | % |
(1) | Includes Restaurant VIEs. |
(2) | Segment selling, general and administrative expenses (“Segment SG&A”) consists of segment selling expenses and management general and administrative expenses. |
(3) | Segment depreciation and amortization consists of depreciation and amortization included in cost of sales and franchise and property expenses. |
(4) | TH segment income for 2015 excludes $0.5 million of acquisition acounting impact on cost of sales and includes $13.6 million of cash distributions received from equity method investments. TH segment income for 2014 excludes $11.8 million of acquisition acounting impact on cost of sales. |
Results of Operations for TH Segment for 2015
Results of operations for our TH segment reflect consolidation of TH for a full year in 2015 compared to the period of December 12, 2014 through December 28, 2014 in 2014, as a result of the Transactions in December 2014.
Results of Operations for BK Segment for 2015
Franchise and Property
During 2015, the increase in franchise and property revenues, excluding FX impact, was due primarily to (i) an increase of $75.6 million in franchise royalties primarily driven by NRG and comparable sales growth and (ii) an increase of $13.7 million in franchise fees and other revenue driven by an increase in renewal franchise fees. During 2015, franchise and property revenues had a $69.0 million unfavorable FX impact.
During 2015, the decrease in franchise and property expenses was primarily related to a decrease in property expenses and a $4.8 million favorable FX impact.
Segment SG&A
During 2015, the decrease in Segment SG&A was driven primarily by favorable FX impact.
Segment Income
During 2015, segment income increased primarily due to an increase in franchise and property revenues net of expenses, an increase in sales net of cost of sales and a decrease in Segment SG&A.
Segment Results for 2014
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | BK Segment | |
| | | 2014 | | | 2013 | | | Favorable / (Unfavorable) | |
| | | Total | | | TH Segment | | | BK Segment | | | BK Segment | | | $ | | | % | |
Franchise: | | | | | | | | | | | | | | | | | | | | | | | | |
Franchise and property revenues | | $ | 1,031.4 | | | $ | 50.8 | | | $ | 980.6 | | | $ | 923.6 | | | $ | 57.0 | | | | 6.2 | % |
Franchise and property expenses | | | 179.0 | | | | 26.1 | | | | 152.9 | | | | 152.4 | | | | (0.5 | ) | | | (0.3 | )% |
| | | | | | |
Sales and cost of sales (1): | | | | | | | | | | | | | | | | | | | | | | | | |
Sales | | | 167.4 | | | | 92.8 | | | | 74.6 | | | | 222.7 | | | | (148.1 | ) | | | (66.5 | )% |
Cost of sales | | | 156.4 | | | | 92.1 | | | | 64.3 | | | | 195.3 | | | | 131.0 | | | | 67.1 | % |
| | | | | | |
Segment SG&A (2) | | | 169.1 | | | | 6.6 | | | | 162.5 | | | | 187.2 | | | | 24.7 | | | | 13.2 | % |
Segment depreciation and amortization (3) | | | 54.8 | | | | 4.3 | | | | 50.5 | | | | 54.2 | | | | 3.7 | | | | 6.8 | % |
Segment income (4) | | | 760.9 | | | | 34.9 | | | | 726.0 | | | | 665.6 | | | | 60.4 | | | | 9.1 | % |
Results of Operations for BK Segment for 2014
Franchise and Property
During 2014, the increase in franchise and property revenues, excluding FX impact, was due primarily to (i) an increase of $47.8 million in franchise royalties primarily driven by NRG, the net refranchising of 360 BK Company restaurants during 2013 and comparable sales growth, (ii) an increase of $21.7 million in franchise fees and other revenue driven primarily by an increase in renewal franchise fees, and (iii) an increase of $2.1 million in BK property revenue. During 2014, franchise and property revenues had a $14.6 million unfavorable FX impact.
During 2014, the change in franchise and property expensesresults from the prior year was not meaningful.
Segment SG&A
During 2014, the decrease in Segment SG&A was driven primarily by a decrease in salary and fringe benefits.
Segment Income
During 2014, segment income increased primarily due to an increase in franchise and property revenues netimpact of expenses and a decrease in Segment SG&A.
equity method investments.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash generated by operations and borrowings available under our
2014 Revolving Credit Facility (as defined below). We have used, and may in the future use, our liquidity to make required interest and/or principal payments, to
make distributions onrepurchase our
common shares, to repurchase Class
A commonB exchangeable limited partnership units
Partnership preferred units and (“Partnership exchangeable
units, to repurchase Partnership exchangeable units, to repurchase RBI common shares,units”), to voluntarily prepay and repurchase our or one of our affiliate’s outstanding debt,
and to fund our investing
activities.activities and to pay dividends on our common shares and make distributions on the Partnership exchangeable units. As a result of our borrowings, we are highly leveraged. Our liquidity requirements are significant, primarily due to debt service
and the cash distribution requirements of Partnership preferred units.requirements.
At December 31,
2015,2018, we had cash and cash equivalents of
$757.8$913 million and working capital of
$248.5$92 million. In addition, at December 31,
2015,2018, we had borrowing availability of
$496.2$480 million under our Revolving Credit Facility. Based on our current level of operations and available cash, we believe our cash flow from operations, combined with availability under our Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations,
Preferred Share dividends, debt service requirements and capital spending over the next twelve months.
At December 31, 2015,
During 2018, we received exchange notices representing 10,185,333 Partnership exchangeable units, including 10,020,000 received during the fourth quarter of 2018. Pursuant to the terms of the partnership agreement, we satisfied the exchange notices by repurchasing 10,000,000 Partnership exchangeable units for approximately 22%$561 million in cash during the fourth quarter and full year of our consolidated cash2018 and cash equivalents balances were heldexchanging the remaining Partnership exchangeable units for the same number of newly issued RBI common shares.
On August 2, 2016, the RBI board of directors approved a share repurchase authorization that allows us to purchase up to $300 million of RBI common shares through July 2021. Repurchases under this authorization will be made in tax jurisdictions other than Canadathe open market or through privately negotiated transactions. On August 7, 2018, RBI announced that the Toronto Stock Exchange (the “TSX”) had accepted the notice of RBI's intention to renew the normal course issuer bid. Under this normal course issuer bid, RBI is permitted to repurchase up to 24,087,172 RBI common shares for the one-year period commencing on August 8, 2018 and ending on August 7, 2019, or earlier if RBI completes the U.S. Undistributed earnings of our foreign subsidiaries for periodsrepurchases prior to such date. Share repurchases under the Transactions are considered indefinitely reinvested for U.S. income tax purposes. Subsequentnormal course issuer bid will be made through the facilities of the TSX, the New York Stock Exchange (the “NYSE”) and/or other exchanges and alternative Canadian or foreign trading systems, if eligible, or by such other means as may be permitted by the TSX and/or the NYSE under applicable law. Partnership unitholders and RBI shareholders may obtain a copy of the prior notice, free of charge, by contacting us. If RBI repurchases any RBI common shares, pursuant to the Transactions,partnership agreement, Partnership will, immediately prior to such repurchase, make a distribution to RBI on its Class A common units in an amount sufficient for RBI to fund such repurchase. As of the date of this report, there have been no RBI common share repurchases under the normal course issuer bid.
Prior to the Tax Act, we recordprovided deferred taxes on certain undistributed foreign earnings. Under our transition to a modified territorial tax system whereby all previously untaxed undistributed foreign earnings are subject to a transition tax charge at reduced rates and future repatriations of foreign earnings will generally be exempt from U.S. tax, we wrote off the existing deferred tax liability on undistributed foreign earnings and recorded the impact of the new transition tax charge on foreign earnings during the fourth quarter of 2017. We will continue to monitor available evidence and our plans for foreign earnings and expect to continue to provide any applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of foreign subsidiaries with U.S. parent companies when such amounts are not considered permanently reinvested and would be subject to tax in the U.S. upon repatriationreinvested.
Debt Instruments and Debt Service Requirements
Our
As of December 31, 2018, our long-term debt
is comprisedconsists primarily of borrowings under our
2015 Amended Credit
Agreement,Facilities, amounts outstanding under our
20152017 4.25% Senior Notes,
20142015 4.625% Senior Notes and
Tim Hortons2017 5.00% Senior Notes (each
as defined below), and obligations under capital leases. For further information about our long-term debt, see Note
129 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report.
Credit Facilities
On May 22, 2015,October 2, 2018, two of our subsidiaries (the “Borrowers”) issued $1,250.0 million of 4.625% first lien senior secured notes due January 15, 2022 (the “2015 Senior Notes”) and entered into a firstthird amendment (the “Third Amendment”) to ourthe credit agreement dated October 27, 2014 (the “2015 Amended Credit“Credit Agreement”). Under the 2015 Amended Credit Agreement, (1) the aggregate principal amount of the governing our senior secured term loansloan facility (the “Term Loan Facility”) was reduced to $5,140.4 million as a result of the repayment of $1,550.0 million from the net proceeds from the offering of the 2015 Senior Notes and cash on hand and (2) the interest rate applicable to the Term Loan Facility was reduced to, at our option, either (i) a base rate plus an applicable margin equal to 1.75% or (ii) a Eurocurrency rate plus an applicable margin equal to 2.75%. The 2015 Amended Credit Agreement also provides for a senior secured revolving credit facility forof up to $500.0$500 million of revolving extensions of credit outstanding at any time (including revolving loans, swingline loans and letters of credit), the amount of which was unchanged by the May 22, 2015 amendment (the “Revolving Credit Facility,”Facility”) and together with the Term Loan Facility, the “Credit Facilities”).2015 Amended The Third Amendment amended the Credit Agreement
to (i) exclude from GAAP any applicable changes with respect to revenue recognition such that the revenue recognition standards from Accounting Standards Codification (“ASC”) Topic 605,
Revenue Recognition and ASC Subtopic 952-605, Franchisors - Revenue Recognition, solely as it relates to initial and renewal franchise fees and upfront fees from development agreements and master franchise and development agreements, shall continue to apply; (ii) provide for mandatory prepayments equal to 50%, 25% and 0% of annual excess cash flow of the Borrowers and their subsidiaries if the first lien senior secured leverage ratio is above 4.00x, between 3.75x and 4.00x and below 3.75x, respectively (rather than above 3.75x, between 3.50x and 3.75x and below 3.50x, respectively); and (iii) allow for unlimited restricted payments when the total leverage ratio is not greater than 4.75x (rather than 4.50x). As of December 31,
2015,2018, there was
$5,097.7$6,338 million outstanding principal amount under the Term Loan
Facility. As of December 31, 2015, theFacility with a weighted average interest rate
was 3.75% on our Term Loan Facility.of 4.77%. Based on the amounts outstanding under the Term Loan Facility and
the three-month LIBOR
rate as of December 31,
2015,2018, subject to a floor of 1.00%, required debt service for the next twelve months is estimated to be approximately
$194.1$287 million in interest payments and
$34.4$65 million in principal payments. In addition,
based on LIBOR as of December 31,
2015,2018, net cash settlements that we expect to pay on our
$2,500.0$3,500 million interest rate swap are estimated to be approximately
$7.6$4 million for the next twelve months.
The Term Loan Facility matures on February 17, 2024, and we may prepay the Term Loan Facility in whole or in part at any time. Additionally, subject to certain exceptions, the Term Loan Facility may be subject to mandatory prepayments using (i) proceeds from non-ordinary course asset dispositions, (ii) proceeds from certain incurrences of debt or (iii) a portion of our annual excess cash flows based upon certain leverage ratios.
As of December 31, 2015,2018, we had no amounts outstanding under the Revolving Credit Facility.Facility, had $20 million of letters of credit issued against the facility, and our borrowing availability was $480 million. Funds available under the Revolving Credit Facility for future borrowings may be used to repay other debt, finance debt or share repurchases, fund acquisitions or capital expenditures, and for other general corporate purposes. We have a $125.0$125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing capacity under this facilityavailability thereunder by the cumulative amount of outstanding letters of credit. As of December 31, 2015, we had $3.8 million ofWe are also required to pay (i) letters of credit issued againstfees on the aggregate face amounts of outstanding letters of credit plus a fronting fee to the issuing bank and (ii) administration fees. Amounts drawn under each letter of credit bear interest ranging from 1.25% to 2.00%, depending on our leverage ratio. The Revolving Credit Facility matures on October 13, 2022, provided that if on October 15, 2021, more than an aggregate of $150 million of the 2015 4.625% Senior Notes (as defined below) are outstanding, then the maturity date of the Revolving Credit Facility will be October 15, 2021.
The interest rate applicable to borrowings under our Credit Facilities is, at our option, either (i) a base rate plus an applicable margin equal to 1.25% for the Term Loan Facility and
ranging from 0.25% to 1.00%, depending on our
borrowing availability was $496.2 million.leverage ratio, for the Revolving Credit Facility, or (ii) a Eurocurrency rate plus an applicable margin of 2.25% for the Term Loan Facility and ranging from 1.25% to 2.00%, depending on our leverage ratio, for the Revolving Credit Facility. Borrowings are subject to a floor of 2.00% for base rate borrowings and 1.00% for Eurocurrency rate borrowings. The obligationsunused portion of the Revolving Credit Facility is subject to a commitment fee of 0.25%. Obligations under the Credit Facilities are guaranteed on a senior secured basis, jointly and severally, by the direct parent company of one of the Borrowers and substantially all of its Canadian and U.S. subsidiaries, including Tim Hortons, Burger King, WorldwidePopeyes and substantially all of their respective Canadian and U.S. subsidiaries (the “Credit Guarantors”). Amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future property (subject to certain exceptions) of each Borrower and Credit Guarantor.
The Term Loan Facility matures on December 12, 2021 and
Senior Notes
In May 2017, the Revolving Credit Facility matures on December 12, 2019. The principal amount of the Term Loan Facility amortizesBorrowers entered into an indenture (the “2017 4.25% Senior Notes Indenture”) in quarterly installments equal to 0.25% of the aggregate principal amount of the Term Loan Facility as of May 22, 2015,connection with the balance payable at maturity. Any prepayments made onissuance of $1,500 million of 4.25% first lien senior secured notes due May 15, 2024 (the “2017 4.25% Senior Notes”). No principal payments are due until maturity and interest is paid semi-annually.
During 2017, the Term Loan Facility will reduceBorrowers entered into an indenture (the “2017 5.00% Senior Notes Indenture”) in connection with the quarterly installments. Asissuance in August 2017 and October 2017 of an aggregate of $2,800 million of 5.00% second lien senior secured notes due October 15, 2025 (the “2017 5.00% Senior Notes”). No principal payments are due until maturity and interest is paid semi-annually.
The Borrowers are also party to an indenture (the “2015 4.625% Senior Notes Indenture”) in connection with the issuance of $1,250 million of 4.625% first lien senior notes due January 15, 2022 (the “2015 4.625% Senior Notes”). No principal payments are due until maturity and interest is paid semi-annually.
The Borrowers may redeem a
resultseries of
the prepayments made during 2015, the annual principal amount due during 2016 was reduced from $51.4 million to $34.4 million.We may prepay the Term Loan FacilitySenior Notes, in whole or in part, at any time. Additionally, subject to certain exceptions, the Term Loan Facility is subject to mandatory prepayments in amounts equal to (1) 100% of the net cash proceeds from any non-ordinary course sale or other disposition of assets (including as a result of casualty or condemnation); (2) 100% of the net cash proceeds from issuances or incurrences of debt by Partnership or any of its restricted subsidiaries (other than indebtedness permitted by the Credit Facilities); and (3) 50% (with stepdowns to 25% and 0% based upon achievement of specified first lien senior secured leverage ratios) of annual excess cash flow of Partnership and its subsidiaries.
2015 Senior Notes
The Borrowers are party to an indenture, dated as of May 22, 2015 (the “2015 Senior Notes Indenture”), in connection with the issuance of the 2015 Senior Notes. The 2015 Senior Notes bear interest at a rate of 4.625% per annum and are payable semi-annually on January 15 and July 15 of each year. The net proceeds from the offering of the 2015 Senior Notes, together with cash on hand, were used to repay $1,550.0 million of the outstanding borrowings under our Term Loan Facility and to pay related premiums, fees and expenses. Based on the amount outstanding at December 31, 2015, required debt service for the next twelve months on the 2015 Senior Notes is $57.8 million in interest payments. No principal payments are due until maturity.
The 2015 Senior Notes are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of their Canadian and U.S. subsidiaries, including Tim Hortons, Burger King Worldwide and substantially all of their respective Canadian and U.S. subsidiaries (the “Note Guarantors”). The 2015 Senior Notes are secured by a first priority lien, subject to certain exceptions and permitted liens, on all of the Borrowers’ and the Note Guarantors’ present and future property that secures the Credit Facilities and any outstanding Tim Hortons Notes (as defined below).
The Borrowers may redeem some or all of the 2015 Senior Notes at any time prior to May 15, 2020 for the 2017 4.25% Senior Notes and October 1,15, 2020 for the 2017 5.00% Senior Notes, at a price equal to 100% of the principal amount redeemed plus a “make whole”“make-whole” premium, and accrued and unpaid interest, if any. The 2015 Senior Notes are redeemable at our option, in whole or in part, at any time during the twelve-month period beginning on October 1, 2017 at 102.313% of the principal amount redeemed, at any time during the twelve-month period beginning on October 1, 2018 at 101.156% of the principal amount redeemed or at any time on or after October 1, 2019 at 100.0% of the principal amount redeemed. In addition, at any time prior to October 1, 2017, up to 40% of the aggregate principal amount of the 2015 Senior Notes may be redeemed with the net proceeds of certain equity offerings, at a redemption price equal to 104.625% of the principal amount of the 2015 Senior Notes plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In connection with any tender offer foraddition, the Borrowers may redeem, in whole or in part, the 2015 4.625% Senior Notes including aat any time and the 2017 4.25% Senior Notes and 2017 5.00% Senior Notes on or after the applicable date noted above, at the redemption prices set forth in the applicable Senior Notes Indenture. The Senior Notes Indentures also contain optional redemption provisions related to tender offers, change of control offer or an asset sale offer, the Borrowers will have the right to redeem the 2015 Senior Notes at a redemption price equal to the amount offered in that tender offer if not less than 90% in aggregate principal amount of the outstanding 2015 Senior Notes validly tender and do not withdraw such 2015 Senior Notes in such tender offer. If the Borrowers experience a change of control, the holders of the 2015 Senior Notes will have the right to require the Borrowers to repurchase the 2015 Senior Notes at a purchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest and Additional Amounts (as defined in the 2015 Senior Notes Indenture), if any, to the date of such repurchase.
2014 Senior Notes
The Borrowers are parties to an indenture, dated as of October 8, 2014 (the “2014 Senior Notes Indenture”) in connection with the issuance of $2,250.0 million of 6.00% second lien senior secured notes due April 1, 2022 (the “2014 Senior Notes”) by the Borrowers. The 2014 Senior Notes bear interest at a rate of 6.00% per annum, payable semi-annually on April 1 and October 1 of each year. equity offerings, among others.
Based on the
amountamounts outstanding at December 31,
2015,2018, required debt service for the next twelve months on
all of the
2014 Senior Notes
outstanding is
$135.0approximately $262 million in interest payments.
No principal payments are due until maturity.The 2014 Senior Notes are guaranteed on
TH Facility
On October 11, 2018, one of our subsidiaries entered into a
senior secured basis, jointly and severally, by the Note Guarantors. The 2014 Senior Notes are secured bynon-revolving delayed drawdown term credit facility in a
second-priority lien, subject to certain exceptions and permitted liens, on all of the Borrowers’ and the Note Guarantors’ present and future property that secures the 2014 Credit Facilities and any outstanding Tim Hortons Notes, to the extent of the value of the collateral securing such first-priority senior secured debt.The Borrowers may redeem some or all of the 2014 Senior Notes at any time prior to October 1, 2017 at a price equal to 100% of the principal amount of the Notes redeemed plus a “make whole” premium and, at any time on or after October 1, 2017, at the redemption prices set forth in the 2014 Senior Notes Indenture. In addition, at any time prior to October 1, 2017, up to 40% of thetotal aggregate principal amount of C$100 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the 2014TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40% or the Prime Rate plus an applicable margin equal to 0.40%, at our option. Obligations under the TH Facility are guaranteed by three of our subsidiaries, and amounts borrowed under the TH Facility are and will be secured by certain parcels of real estate. As of December 31, 2018, we had drawn down the entire C$100 million available under the TH Facility with a weighted average interest rate of 3.64%.
Restrictions and Covenants
Our Credit Facilities, 2017 4.25% Senior Notes
may be redeemed with the net proceeds of certain equity offerings, at the redemption price specified in the 2014Indenture, 2017 5.00% Senior Notes
Indenture. In connection with any tender offer for the 2014Indenture and 2015 4.625% Senior Notes
including a change of control offer or an asset sale offer, the Borrowers will have the right to redeem the 2014 Senior Notes at a redemption price equal to the amount offered in that tender offer if not less than 90% in aggregate principal amount of the outstanding 2014 Senior Notes validly tender and do not withdraw such 2014 Senior Notes in such tender offer. If the Borrowers experience a change of control, the holders of the 2014 Senior Notes will have the right to require the Borrowers to repurchase the 2014 Senior Notes at a purchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest and Additional Amounts (as defined in the 2014 Senior Notes Indenture), if any, to the date of such repurchase.Tim Hortons Notes
At December 31, 2015, we had notes outstanding with the following carrying values and terms: (i) C$48.0 million of 4.20% Senior Unsecured Notes, Series 1, due June 1, 2017, (ii) C$2.6 million of 4.52% Senior Unsecured Notes, Series 2, due December 1, 2023 and (iii) C$3.9 million of 2.85% Senior Unsecured Notes, Series 3, due April 1, 2019 (collectively, the “Tim Hortons Notes”). Based on the amounts outstanding at December 31, 2015, required debt service for the next twelve months on the Tim Hortons Notes is C$2.2 million in interest payments. No principal payments are due until maturity.
Restrictions and Covenants
The 2014 Credit FacilitiesIndenture contain a number of customary affirmative and negative covenants that, among other things, limit or restrict the ability of the BorrowersPartnership and certain of theirour subsidiaries to: incur additional indebtedness; make investments; incur liens; engage in mergers, consolidations, liquidations and dissolutions; sell assets; pay dividends and make other payments in respect of capital stock; make investments, loans and advances; pay or modify the terms of certain indebtedness; engage in certain transactions with affiliates. In addition, the Borrowers are not permitted to exceed a specified first lien senior secured leverage ratio when the sum of the amount of letters of credit in excess of $50,000,000 (other than those that are cash collateralized), any loans under the Revolving Credit Facility and any swingline loans outstanding6.50 to 1.00 when, as of the end of any fiscal quarter, the sum of (i) the amount of letters of credit outstanding exceeding $50 million (other than those that are cash collateralized); (ii) outstanding amounts under the Revolving Credit Facility and (iii) outstanding amounts of swing line loans, exceeds 30% of the commitments under the Revolving Credit Facility.
The
terms ofrestrictions under the
2015Credit Facilities, the 2017 4.25% Senior Notes Indenture, 2017 5.00% Senior Notes Indenture and
2014 Senior Notes Indenture, among other things, limit the ability of the Borrowers and their restricted subsidiaries to: incur additional indebtedness; create liens or use assets as security in other transactions; declare or pay dividends, redeem stock or make other distributions to stockholders; make investments; merge or consolidate, or sell, transfer, lease or dispose of substantially all of the Borrowers’ assets; enter into transactions with affiliates; sell or transfer certain assets; and agree to certain restrictions of the ability of restricted subsidiaries to make payments to us. These covenants are subject to a number of important qualifications, limitations and exceptions that are described in the 2015
Senior Notes Indenture and 2014 Senior Notes Indenture.The restrictions under the 2015 Amended Credit Agreement, the 2015 Senior Notes Indenture and the 20144.625% Senior Notes Indenture have resulted in substantially all of our consolidated assets being restricted.
As of December 31,
2015,2018, we were in compliance with all
debt covenants
ofunder the
2015 Amended Credit
Agreement,Facilities, the
2015TH Facility, the 2017 4.25% Senior Notes Indenture,
the 20142017 5.00% Senior Notes Indenture and
the indenture governing the Tim Hortons2015 4.625% Senior Notes
Indenture, and there were no limitations on our ability to draw on
the remaining availability under our Revolving Credit Facility.
Cash Distributions
On January 4, 2019, RBI paid a dividend of $0.45 per RBI common share and Partnership
Preferred UnitsIn connection withmade a distribution on the Transactions, we issued 68,530,939 preferred units (“Partnership preferred units”)same day to RBI which are entitled to receive preferred distributions from Partnership that correspond to preferredas holder of Class A common units in the amount of the aggregate dividends paid by RBI on the 68,530,939 Class A 9.0% cumulative compounding perpetual voting preferred shares of RBI (“Preferred Shares”) that were sold by RBI to a subsidiary of Berkshire Hathaway Inc. (“Berkshire”).
The distribution provisions of the partnership agreement requiringcommon shares. On January 4, 2019, Partnership to fund the redemption of the Preferred Shares represent an in substance redemption provision of the Partnership preferred units and Partnership’s lack of control over this distribution provision results in the requirement for Partnership to classify the Partnership preferred units as temporary equity.
Distribution Entitlements
Under the terms of the partnership agreement, if a dividend has been declared and is payable in respect of the Preferred Shares, Partnership must makealso made a distribution in respect of theeach Partnership preferred unitsexchangeable unit in an amount equal to the aggregate amount of dividends payable in respect of the Preferred Shares. The holders of the Preferred Shares are entitled to receive, as and when declared by$0.45 per Partnership exchangeable unit.
On January 22, 2019, the board of directors of RBI
cumulative cash dividends at an annual rate of 9.0% on the amount of the purchase price per Preferred Share, payable quarterly in arrears (“regular quarterly dividends”). Such dividends accrue daily on a cumulative basis, whether or not declared
by RBI’s board of directors. If any such dividend or make-whole dividend (defined below) is not paid in full on the scheduled payment date or the required payment date, as applicable (the unpaid portion, “past due dividends”), additional cash dividends (“additional dividends”) shall accrue daily on a cumulative basis on past due dividends at an annual rate of 9.0%, compounded quarterly, whether or not such additional dividends are declared by the board of directors of RBI, until the date the same are declared by the board of director of RBI and paid in cash to the holders of the Preferred Shares. While the board of directors of RBI has declared, and RBI has paid, regular quarterly dividends on the Preferred Shares every quarter since the three months ended March 31, 2015, the board of directors of RBI may elect not to declare such dividends in the future and, in such event, additional dividends will accrue on any past due dividends as set forth above.For each fiscal year during which any Preferred Shares are outstanding, beginning with the year that includes the third anniversary of the original issue date of such shares, in addition to the regular quarterly dividends, RBI is required to pay to the holder of the Preferred Shares an additional amount (a “make-whole dividend”). The amount of the make-whole dividend is determined by a formula designed to ensure that on an after tax basis the net amount of the dividends received by the holder on the Preferred Shares from the original issue date is the same as it would have been had RBI been a U.S. corporation. The make-whole dividend can be paid, at RBI’s option, in cash, common shares or a combination of both. If, however, the common shares issued to the holder would be “restricted securities” within the meaning of Rule 144(a)(3) of the Securities Act, then the resale of such common shares must be covered by an effective registration statement. In addition, any RBI common shares so issued will be valued for purposes of the make-whole dividend at 97% of the average volume weighted average price of RBI common shares over each of the five consecutive trading days prior to the delivery of such shares. The make-whole dividends are payable not later than 75 days after the close of each fiscal year starting with the fiscal year that includes the third anniversary of the original issue date. The right to receive the make-whole dividends shall terminate if and at the time that 100% of the outstanding Preferred Shares are no longer held by Berkshire or any one of its subsidiaries; provided, however, that in the event of a redemption of Preferred Shares or a liquidation, dissolution or winding up of RBI’s affairs, a final make-whole dividend for the year of redemption or liquidation will be computed and paid with respect to all Preferred Shares subject to the redemption, and in the case of a liquidation, with respect to all Preferred Shares.
Voting Rights
Except as otherwise provided by law, the holders of Preferred Shares are entitled to (i) receive notice of and to attend all shareholder meetings that the holders of the RBI common shares are entitled to attend, (ii) receive copies of all notices and other materials sent by RBI to its shareholders relating to such meetings, and (iii) vote at such meetings. At any such meeting, holders of the Preferred Shares are entitled to cast one vote for each Preferred Share. Berkshire has agreed with RBI that (i) with respect to Preferred Shares representing 10% of the total votes attached to all RBI voting shares, Berkshire may vote such shares with respect to matters on which it votes as a class with all RBI voting shares, in any manner it wishes and (ii) with respect to Preferred Shares representing in excess of 10% of the total votes attached to all RBI voting shares, Berkshire will vote such shares with respect to matters on which it votes as a class with all RBI voting shares in a manner proportionate to the manner in which the other holders of voting shares voted in respect of such matter. This voting agreement does not apply with respect to special approval matters.
Redemption
If RBI redeems, repurchases or otherwise acquires any Preferred Shares for cash, the partnership agreement requires that Partnership, immediately prior to such redemption, repurchase or acquisition, make a distribution to RBI on its Partnership preferred units in an amount sufficient for RBI to fund such redemption, repurchase or acquisition, as the case may be. The Preferred Shares may be redeemed at RBI’s option, in whole or in part, at any time on and after the third anniversary of their original issuance on the closing date of the Transactions. After the tenth anniversary of the original issue date, holders of not less than a majority of the outstanding Preferred Shares may cause RBI to redeem the Preferred Shares at a 109.9% premium, or a redemption price of $48.109657 per Preferred Share (the “Call Amount”), plus accrued and unpaid dividends and unpaid make-whole dividends. Holders
of Preferred Shares also hold a contingently exercisable option to cause RBI to redeem their Preferred Shares at the redemption price in the event of a triggering event (as defined below). In the event that a triggering event is announced, the holders of not less than a majority of the Preferred Shares may require RBI, to the fullest extent permitted by law, to redeem all of the outstanding Preferred Shares of such holders at a price equal to the redemption price for each redeemed share on the date of the consummation of the triggering event. For this purpose, a “triggering event” means the occurrence of one or more of the following: (i) the acquisition of RBI by another entity by any transaction or series of transactions (including, without limitation, any merger, amalgamation, arrangement, consolidation or reorganization) if RBI’s shareholders constituted immediately prior to such transaction or series of related transactions hold less than 50% of the voting power of the surviving or acquiring entity; (ii) the closing of the transfer, in one transaction or a series of related transactions, to a person or entity (or a group of persons or entities) of RBI’s securities if, after such closing, RBI’s shareholders constituted immediately prior to such transaction or series of related transactions hold less than 50% of the voting power of RBI or its successor; or (iii) a sale, license or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of Partnership. Since the redemption features are not solely within the control of RBI, the Preferred Shares are classified as temporary equity. Once a Preferred Share has been redeemed and all payments and dividends to the holders have been made in full, it must be cancelled and may not be reissued.
Liquidation Preference
Upon any dissolution of Partnership, if there are any assets of Partnership remaining after the receiver pays the debts and liabilities of Partnership and liquidation expenses, the holder of Partnership preferred units, namely RBI, will be entitled to receive a priority distribution (before any distributions are made to the holder of Class A common units, namely RBI, or the holders of Partnership exchangeable units), in an amount sufficient to fund its payment obligations with respect to the Preferred Shares corresponding to Partnership preferred units. Holders of Preferred Shares are entitled to receive for each Preferred Share, out of the assets of RBI or proceeds thereof available for distribution to shareholders of RBI and after satisfaction of all liabilities and obligations to creditors of RBI, before any distribution of such assets or proceeds is made to or set aside for holders of RBI common shares, payment in full in cash in an amount equal to the sum of (i) for each Preferred Share that has not been redeemed the Call Amount, plus (ii) for each Preferred Share that is issued and not yet cancelled, the accrued and unpaid dividends per share, including any and all past due dividends and additional dividends on such past due dividends, in each case, whether or not declared, to each date of payment, and unpaid make-whole dividends for all prior fiscal years and a final make-whole dividend payment, as well as past due dividends in respect thereof and amounts accrued thereon, in each case, whether or not declared.
Transfer
The Preferred Shares are subject to restrictions on transfer. Berkshire has agreed in the Securities Purchase Agreement that, until the fifth anniversary of the closing of the Transactions, it may not transfer the Preferred Shares without the consent of the holders of at least 25% of RBI common shares (except to a subsidiary in which it owns at least 80% of the equity interests). On or after such fifth anniversary, Berkshire (or any such subsidiary) may transfer the Preferred Shares provided that any such transfer must be in minimum increments of at least $600,000,000 of aggregate liquidation value.
Cash Distributions
As noted above, if a dividend has been declared and is payable in respect of the Preferred Shares, we are required to make a distribution in respect of the Partnership preferred units in an amount equal to the aggregate amount of dividends or distributions payable on the Preferred Shares, including cash make-whole dividends. On February 15, 2016, the Board of Directors of RBI declared a quarterly dividend of $0.98$0.50 per Preferred Share, payable on April 1, 2016, for a total of $67.5 millioncommon share for the first quarter of 2016. Accordingly, RBI, in its capacity as general partner of Partnership, will cause a corresponding distribution in respect of the Partnership preferred units. Since RBI expects to make quarterly dividend payments of $67.5 million ($270.0 million per year) on the Preferred Shares going forward, we expect to make quarterly distributions in the same amount in respect of the Partnership preferred units. The quarterly dividend on the Preferred Shares is due on April 1st, July 1st, October 1st and January 1st of each year and the payment of distributions in respect of the Partnership preferred units will correspond to those dates.
On February 16, 2016, the Board of Directors of RBI declared a dividend of $0.14 per common share,2019, payable on April 4, 20163, 2019 to RBI shareholders of record on March 3, 2016.15, 2019. Partnership will make a distribution to RBI as holder of Class A common units in the amount of the aggregate dividends declared and paid by RBI on RBI common shares. Pursuant to the terms of the partnership agreement, each Partnership exchangeable unit is entitled to distributions from Partnership in an amount equal to any dividends or distributions that have been declared and are payable in respect of an RBI common share. The record date and payment date for these distributions on the Partnership exchangeable units are to be the same as the relevant record date and payment date for the corresponding dividends on RBI common shares. Accordingly, Partnership will also make a distribution in respect of each
Partnership exchangeable unit in the amount of
$0.14$0.50 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.
No dividend may be
RBI and Partnership are targeting a total of $2.00 in declared or paid on RBIdividends per common shares orshare and distributions in respect of each Partnership exchangeable units untilunit for 2019.
Because we are a
dividend is declared or paid on the Preferred Shares. In addition, if holders of at least a majority of the outstanding Preferred Shares have delivered a notice to exercise their right to have RBI redeem the Preferred Shares, no dividend may be declared or paid on RBI common shares or Partnership exchangeable units (except that dividends declared on RBI common shares and Partnership exchangeable units prior to the date of such delivery may be paid) unless on the date of such declaration or payment all Preferred Shares subject to such notice have been redeemed in full. Additionally, if RBI proposes to redeem, repurchase or otherwise acquire any RBI common shares, the partnership agreement requires that Partnership, immediately prior to such redemption, repurchase or acquisition, make a distribution to RBI on the Class A common units in an amount sufficient for RBI to fund such redemption, repurchase or acquisition, as the case may be.Ourholding company, our ability to pay cash distributions on our Partnership exchangeable units may be limited by restrictions under our debt agreements.
Outstanding Security Data
As of February
12, 2016,11, 2019, we had outstanding 202,006,067 Class A common units issued to RBI
68,530,939 Partnership preferred units issued to RBI and
227,992,722207,510,471 Partnership exchangeable units. One special voting share of RBI is held by a trustee, entitling the trustee to that number of votes on matters on which holders of RBI common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting of RBI, holders of RBI common shares vote together as a single class with the
Preferred Shares and the special voting share except as otherwise provided by law. For information on our share-based compensation and RBI’s outstanding equity awards, see Note
2015 to the accompanying consolidated financial statements in Part II, Item 8
“Financial Statements and Supplementary Data” of our Annual Report.
Since December 12, 2015, the holders of Partnership exchangeable units have had the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for RBI common shares at a ratio of one share for each Partnership exchangeable unit, subject to RBI’s right as the general partner of Partnership to determine to settle any such exchange for a cash payment in lieu of RBI common shares.
Cash provided by operating activities was $1,200.7$1,165 million in 2015,2018, compared to $259.3$1,431 million in 2014.2017. The decrease in cash provided by operating activities was driven by an increase in income tax payments, primarily due to the payment of accrued income taxes related to the December 2017 redemption of preferred shares, increases in interest payments and Corporate restructuring and tax advisory fees and Office centralization and relocation costs incurred in the current year. These factors were partially offset by an increase in PLK segment income, primarily as a result of including PLK for a full year in 2018 compared to nine months in 2017, an increase in BK segment income, a decrease in PLK Transaction costs and a decrease in cash used for working capital.
Cash provided by operating activities was $1,431 million in 2017, compared to $1,214 million in 2016. The increase in cash provided by operating activities was driven
primarily by
an increase in netthe inclusion of PLK segment income
excluding non-cash adjustments, as a result of the Transactions in December 2014, changes in working capital driven byand increases in
accountsTH and
drafts payableBK segment income, partially offset by PLK Transaction costs, increases in income tax payments and
the reclassification of restricted cash to cash and cash equivalents during 2015.Cash provided by operating activities was $259.3 million in 2014, compared to $325.2 million in 2013. The decrease in cash provided by operating activities was driven primarily by a decrease in net income, excluding non-cash adjustments, primarily driven by transaction costsinterest payments, and an increase in cash interest payments.
used by changes in working capital.
Cash used
infor investing activities was
$61.5$44 million in
2015,2018, compared to
cash used in investing activities of $7,790.8$858 million in
2014.2017. The change in investing activities was driven primarily
as a result of the acquisition of Tim Hortons in 2014, paymentsby net cash used for the
settlement/salePopeyes Acquisition during 2017, partially offset by proceeds from the settlement of derivatives in
2014, partially offset by2017 and an increase in capital expenditures
in 2015.during 2018.
Cash used
infor investing activities was
$7,790.8$858 million in
2014,2017, compared to cash provided by investing activities of
$43.0$27 million in
2013.2016. The change in investing activities was driven primarily
as a result of the acquisition of Tim Hortons, paymentsby net cash used for the
settlement/sale of derivatives, a decrease in proceeds from refranchisings, net, and an increase in capital expenditures,Popeyes Acquisition partially offset by
a decrease in payments for acquired franchisee operations.Capital expenditures have historically been comprised primarilyproceeds received from the settlement and termination of (i) costs to build new Company restaurants and new restaurants that we lease to franchisees, (ii) costs to maintain the appearance of existing restaurants in accordance with our standards, including investments in new equipment and remodeling, and restaurant replacements and (iii) investments in replacement and expansion projects at our distribution facilities, investments in information technology systems and other corporate needs. The following table presents capital expenditures, by type of expenditure:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
New restaurants | | $ | 17.8 | | | $ | 4.5 | | | $ | 1.1 | |
Existing restaurants | | | 64.3 | | | | 12.4 | | | | 11.2 | |
Other, including corporate | | | 33.2 | | | | 14.0 | | | | 13.2 | |
| | | | | | | | | | | | |
Total | | $ | 115.3 | | | $ | 30.9 | | | $ | 25.5 | |
| | | | | | | | | | | | |
While we expect to have capital expenditures during 2016, we did not have any material capital expenditure commitments as of December 31, 2015. We do not expect capital expenditures in 2016 to be material to our financial position and plan to fund these expenditures from cash on hand and cash flow from operations.
previous cross-currency rate swaps.
Cash used for financing activities was $2,115.2$1,285 million in 2015,2018, compared to cash provided by$936 million in 2017. The change in financing activities of $8,565.6 million in 2014. The cash used for financing activities in 2015 was driven primarily by the $1,550.0 million repayment of the 2014 Term Loan Facility, the redemption of a portion of the Tim Hortons Notes,an increase in distributions on common units and Partnership exchangeable units during 2018, an increase in payments in connection with the repurchase of Partnership exchangeable units, and dividendthe 2018 distributions to RBI to fund payments on common shares andrelated to the December 2017 redemption of Preferred Shares and a decrease in proceeds from the issuance of long-term debt. These factors were partially offset by non-recurring uses of cash for financing activities in 2017, including the distribution to RBI in connection with the redemption of the Preferred Shares, payment of financing costs, and distributions on preferred units, a decrease in debt repayments in 2018 and an increase in capital contribution from RBI in 2018.
Cash used for financing activities was $936 million in 2017, compared to $591 million in 2016. The change in financing activities was driven primarily by the distribution to RBI in connection with the redemption of the Preferred Shares, repurchases of Partnership exchangeable units, debt repayments, payment of financing costs and redemption premiums, and higher distribution payments, partially offset by proceeds from
the offering of the 2015 Senior Notes. Cash provided by financing activities in 2014 is described below.Cash provided by financing activities was $8,565.6 million in 2014, compared to cash used for financing activities of $132.7 million in 2013. The increase in cash provided by financing activities was primarily a result of borrowings under the 2014 Term Loan Facility, the issuance of the Preferred Shares and the issuance of the 2014 Senior Notes to fund the Transactions. These increases in cash were partially offset by the principal repayment of the 2012 Term Loan Facility, the redemption of our 2010 Senior Notes and 2011 Discount Notes as a result of the Transactions, payments for financing costs and an increase in dividend payments.
new borrowings.
Contractual Obligations and Commitments
Our significant contractual obligations and commitments as of December 31,
20152018 are shown in the following table.
| | | | | | | | | | | | | | | | | | | | |
| | | Payment Due by Period | |
Contractual Obligations | | Total | | | Less Than
1 Year | | | 1-3 Years | | | 3-5 Years | | | More Than
5 Years | |
| | | (In millions) | |
Credit Facilities, including interest (1) | | $ | 6,241.6 | | | $ | 231.0 | | | $ | 489.5 | | | $ | 479.5 | | | $ | 5,041.6 | |
2015 Senior Notes, including interest | | | 1,599.2 | | | | 57.8 | | | | 115.6 | | | | 115.6 | | | | 1,310.2 | |
2014 Senior Notes, including interest | | | 3,127.5 | | | | 135.0 | | | | 270.0 | | | | 270.0 | | | | 2,452.5 | |
Tim Hortons Notes, including interest | | | 41.9 | | | | 1.6 | | | | 35.2 | | | | 3.0 | | | | 2.1 | |
Other long-term debt | | | 87.8 | | | �� | 4.4 | | | | 10.2 | | | | 11.9 | | | | 61.3 | |
Preferred Shares dividends (2) | | | 2,430.0 | | | | 270.0 | | | | 540.0 | | | | 540.0 | | | | 1,080.0 | |
Operating lease obligations | | | 1,503.4 | | | | 165.6 | | | | 300.0 | | | | 243.0 | | | | 794.8 | |
Purchase commitments (3) | | | 665.7 | | | | 536.7 | | | | 90.6 | | | | 35.8 | | | | 2.6 | |
Capital lease obligations | | | 328.2 | | | | 31.0 | | | | 57.4 | | | | 50.0 | | | | 189.8 | |
Unrecognized tax benefits (4) | | | 254.7 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 16,280.0 | | | $ | 1,433.1 | | | $ | 1,908.5 | | | $ | 1,748.8 | | | $ | 10,934.9 | |
| | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | Payment Due by Period |
| Contractual Obligations | Total | | Less Than
1 Year | | 1-3 Years | | 3-5 Years | | More Than
5 Years |
| | (In millions) |
| Credit Facilities, including interest (a) | $ | 7,789 |
| | $ | 354 |
| | $ | 699 |
| | $ | 685 |
| | $ | 6,051 |
|
| Senior Notes, including interest | 7,025 |
| | 262 |
| | 526 |
| | 1,662 |
| | 4,575 |
|
| Other long-term debt | 162 |
| | 8 |
| | 19 |
| | 26 |
| | 109 |
|
| Operating lease obligations (b) | 1,619 |
| | 183 |
| | 330 |
| | 275 |
| | 831 |
|
| Purchase commitments (c) | 697 |
| | 589 |
| | 105 |
| | 2 |
| | 1 |
|
| Capital lease obligations | 372 |
| | 38 |
| | 70 |
| | 63 |
| | 201 |
|
| Total | $ | 17,664 |
| | $ | 1,434 |
| | $ | 1,749 |
| | $ | 2,713 |
| | $ | 11,768 |
|
(1) | |
| (a) | We have estimated our interest payments through the maturity of our Credit Facilities based on currentthe three-month LIBOR rates.as of December 31, 2018. |
(2) | Represents distribution |
| (b) | Operating lease payment obligations have not been reduced by the amount of payments on our Partnership preferred units.due in the future under subleases. |
(3) | |
| (c) | Includes open purchase orders, as well as commitments to purchase certain food ingredients and advertising expenditures, and obligations related to information technology and service agreements. |
(4) | We have provided only a total in the table above since the timing of the unrecognized tax benefit payments is unknown. |
We have not included in the contractual obligations table approximately $492 million of gross liabilities for unrecognized tax benefits relating to various tax positions we have taken. These liabilities may increase or decrease over time primarily as a result of tax examinations, and given the status of the examinations, we cannot reliably estimate the period of any cash settlement with the respective taxing authorities. For additional information on unrecognized tax benefits, see Note 11 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report.
Other Commercial Commitments and Off-Balance Sheet Arrangements
During the fiscal year ended June 30, 2000, we entered into long-term, exclusive contracts with soft drink vendors to supply Company and franchise restaurants with their products and obligating Burger King restaurants in the United States to purchase a
specified number of gallons of soft drink syrup. These volume commitments are not subject to any time limit and as of December 31, 2015, we estimate it will take approximately 15 years for these purchase commitments to be completed. If these agreements were terminated, we would be obligated to pay an aggregate amount equal to approximately $530 million as of December 31, 2015 based on an amount per gallon for each gallon of soft drink syrup remaining in the purchase commitments, interest and certain other costs.
In 2014, Tim Hortons entered into an agreement with a supplier requiring minimum purchase obligations, within the normal course of operations. As of December 31, 2015, there is a minimum purchase obligation based on a percentage of our requirements of approximately $92 million remaining over a four year term.
From time to time, we enter into agreements under which we guarantee loans made by third parties to qualified franchisees. As of December 31,
2015,2018, there were
$119.1$55 million of loans outstanding to Burger King franchisees that we had guaranteed under six such programs, with additional franchisee borrowing capacity of approximately
$235.5$300 million remaining. Our maximum guarantee liability under these
six programs is limited to an aggregate of
$42.5$42 million, assuming full utilization of all borrowing capacity. We record a liability in the period the loans are funded and the maximum term of the guarantee is approximately ten years. As of December 31,
2015,2018, the liability reflecting the fair value of these guarantee obligations was
$4.4$1 million.
In addition to these six programs, asAs of December 31,
2015, we also had a liability of $0.1 million, with a potential maximum guarantee exposure of $2.5 million,2018, there were no significant guarantees in connection with Tim Hortons franchisee
loan guarantees.loans and no guarantees in connection with Popeyes franchisee loans. No significant payments have been made by us in connection with these guarantees through December 31,
2015.2018.
Critical Accounting Policies and Estimates
This discussion and analysis of financial condition and results of operations is based on our audited consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”).GAAP. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosures of contingent assets and liabilities. We evaluate our estimates on an ongoing basis and we base our estimates on historical experience and various other assumptions we deem reasonable to the situation. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Volatile credit, equity, foreign currency and energy markets, and declines in consumer spending have increased and may continue to create uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in our estimates could materially impact our results of operations and financial condition in any particular period.
We consider our critical accounting policies and estimates to be as follows based on the high degree of judgment or complexity in their application:
Business Combinations
The acquisition
Goodwill and Intangible Assets Not Subject to Amortization
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in connection with the Transactions and the 2010 acquisition of Burger King Holdings, Inc. by 3G.acquisitions. Our indefinite-lived intangible assets consist of the Tim Hortons brand, the Burger King brand, and the Burger KingPopeyes brand (each a “Brand” and together, the “Brands”). Goodwill and the Brands are tested for impairment at least annually as of October 1 of each year and more often if an event occurs or circumstances change, which indicate impairment might exist. Our annual impairment tests of goodwill and the Brands may be completed through qualitative assessments, as further described below.assessments. We may elect to bypass the qualitative assessment and proceed directly to a two-step quantitative impairment test, for any reporting unit or either Brand, in any period. We can resume the qualitative assessment for any reporting unit or Brand in any subsequent period. Under a qualitative approach, our impairment review for goodwill consists of an assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for any reporting units, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a reporting unit exceeds its fair value, we perform a two-step quantitative goodwill impairment test. The first step requires us to estimate the fair value of the reporting unit. If the fair value of the reporting unit is less than its carrying amount, the estimated fair value of the reporting unit is allocated to all its underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair value. If necessary, goodwill is then written down to its implied fair value.
We use an income approach to estimate a reporting unit’s fair value, which discounts the reporting unit’s projected cash flows using a discount rate we determine. We make significant assumptions when estimating a reporting unit’s projected cash flows, including revenue, driven primarily by net restaurant growth, comparable sales growth and average royalty rates, general and administrative expenses, capital expenditures and income tax rates.
Under a qualitative approach, our impairment review for the Brands consists of an assessment of whether it is more-likely-than-not that a Brand’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for
either Brand,any of our Brands, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a Brand exceeds its fair value, we estimate the fair value of the Brand and compare it to its carrying amount. If the carrying amount exceeds fair value, an impairment loss is recognized in an amount equal to that excess.
We use an income approach to estimate a Brand’s fair value, which discounts the projected Brand-related cash flows using a discount rate we determine. We make significant assumptions when estimating Brand-related cash flows, including system-wide sales, driven by net restaurant growth and comparable sales growth, average royalty rates, brand maintenance costs and income tax rates.
We completed our impairment
testsreviews for goodwill and the Brands as of October 1,
2015, 20142018, 2017 and
20132016 and no impairment resulted.
During 2015,The estimates and assumptions we
electeduse to
perform aestimate fair values when performing quantitative
impairment review of goodwill for allassessments are highly subjective judgments based on our experience and knowledge of our
reporting units.operations. Significant changes in the
estimatesassumptions used in our analysis
such as system-wide sales, cash flows and discount rates, could result in an impairment charge related to goodwill
and/or
intangible assetsthe Brands. Circumstances that could result in changes to future estimates and assumptions include, but are not
subjectlimited to,
amortization.See Note 3 toexpectations of lower system-wide sales growth, which can be caused by a variety of factors, increases in income tax rates and increases in discount rates. Based on the accompanying consolidated financial statements includedannual impairment tests performed in Part II, Item 8 “Financial Statements and Supplementary Data”2018, the fair values of all of our Annual Report for additional information about goodwillreporting units and intangible assets not subject to amortization.
Brands were substantially in excess of their carrying amounts.
Long-lived assets (including intangible assets subject to amortization) are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets.
Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited to:
bankruptcy proceedings or other significant financial distress of a lessee;
significant negative industry or economic trends;
knowledge of transactions involving the sale of similar property at amounts below our carrying value; or
�� | • | | our expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not meet the criteria to be classified as “held for sale.” |
The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value.
When assessing the recoverability of our long-lived assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of rental income, capital requirements for maintaining property and residual values of asset groups. We formulate estimates from historical experience and assumptions of future performance, based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge.
See Note 3 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data”
Accounting for Income Taxes
We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carry-forwards. When considered necessary, we record a valuation allowance to reduce deferred tax assets to the balance that is
more likely than notmore-likely-than-not to be realized. We must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine the proper valuation allowance. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflect the change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments that are involved in determining the proper valuation allowance, differences between actual future events and prior estimates and judgments could result in adjustments to this valuation allowance.
During 2017, we recorded provisional estimates for the income tax effects of the Tax Act in accordance with SAB 118, which established a one-year measurement period where a provisional amount could be subject to adjustment. We finalized these provisional estimates during 2018 and reflected such refinements as discrete items along with the 2018 income tax effects of the Tax Act based on applicable regulations and guidance issued to date. Given the complexity of the changes in the tax law resulting from the Tax Act, additional regulations and guidance are expected to be issued by applicable authorities (e.g., Treasury, IRS, SEC, FASB, state taxing authorities) subsequent to the date of filing. Accordingly, it is possible that the 2018 amounts recorded may be impacted by such developments. Adjustments to the amounts recorded will be reflected as discrete items in the provision for income taxes in the period in which those adjustments become reasonably estimable.
We file income tax returns, including returns for our subsidiaries, with federal, provincial, state, local and foreign jurisdictions. We are subject to routine examination by taxing authorities in these jurisdictions. We apply a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate available evidence to determine if it appears
more likely than notmore-likely-than-not that an uncertain tax position will be sustained on an audit by a taxing authority, based solely on the technical merits of the tax position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settling the uncertain tax position.
Although we believe we have adequately accounted for our uncertain tax positions, from time to time, audits result in proposed assessments where the ultimate resolution may result in us owing additional taxes. We adjust our uncertain tax positions in light of changing facts and circumstances, such as the completion of a tax audit, expiration of a statute of limitations, the refinement of an estimate, and interest accruals associated with uncertain tax positions until they are resolved. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters. However, to the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.
In prior periods, we provided deferred taxes on certain undistributed foreign earnings. Under our transition to a modified territorial tax system whereby all previously untaxed undistributed foreign earnings are subject to a transition tax charge at reduced rates and future repatriations of foreign earnings will generally be exempt from U.S. tax, we wrote off the existing deferred tax liability on undistributed foreign earnings and recorded the impact of the new transition tax charge on foreign earnings. We will continue to monitor available evidence and our plans for foreign earnings and expect to continue to provide any applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of amounts not considered permanently reinvested.
We use an estimate of the annual effective
income tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective
income tax rate is calculated at year-end.
See Note
1411 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for additional information about accounting for income taxes.
Investments in Unconsolidated Entities
We evaluate the recoverability of the carrying amount of our equity investments accounted for using the equity method when there is an indication of potential impairment. When an indication of potential impairment is present, we record a write-down of the equity investment if and when the amount of its estimated realizable value falls below the carrying amount and we determine that this shortfall is other-than-temporary. Indications of a potential impairment that would cause us to perform this evaluation include, but are not necessarily limited to, an inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment or a quoted market price per share that remains significantly below our carrying amount per share for a sustained period of time. In determining whether a decline in the investment’s estimated realizable value is other-than-temporary, we consider the length of time and the extent to which such value has been less than the carrying amount, the financial condition and prospects of the investee, and our ability and intent to retain our equity investment for a period of time sufficient to allow for any anticipated recovery in value. In the event that we determine that a decline in value is other-than-temporary, we recognize an impairment charge for the reduction in the value of the equity investment.
If we need to assess the recoverability of our equity method investments, we will make assumptions regarding estimated future cash flows and other factors. Some of these assumptions will involve a high degree of judgment and also bear a significant impact on the assessment conclusions. We will formulate estimates from historical experience and assumptions of future performance, based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge.
New Accounting Pronouncements
See Note 3, “Summary of 2, “Significant Accounting Policies – New Accounting Pronouncements,” in the Notes to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for a discussion of new accounting pronouncements.Item 7A. |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk |
Market Risk
Market Risk
We are exposed to market risks associated with currency exchange rates, interest rates, commodity prices and inflation. In the normal course of business and in accordance with our policies, we manage these risks through a variety of strategies, which may include the use of derivative financial instruments to hedge our underlying exposures. Our policies prohibit the use of derivative instruments for speculative purposes, and we have procedures in place to monitor and control their use.
We report our results in U.S. dollars, which is our reporting currency. The operations of each of TH,
BK, and
BKPLK that are denominated in currencies other than the U.S. dollar are impacted by fluctuations in currency exchange rates and changes in currency regulations. The majority of TH’s operations, income, revenues, expenses and cash flows are denominated in Canadian dollars, which we translate to U.S. dollars for financial reporting purposes. Royalty payments from BK franchisees in our European markets and in certain other countries are denominated in currencies other than U.S. dollars. Furthermore, franchise royalties from each of TH’s,
BK’s, and
BK’sPLK's international franchisees are calculated based on local currency sales; consequently franchise revenues are still impacted by fluctuations in currency exchange rates. Each of their respective revenues and expenses are translated using the average rates during the period in which they are recognized and are impacted by changes in currency exchange rates.
We have numerous investments in our foreign subsidiaries, the net assets of which are exposed to volatility in foreign currency exchange rates. We have entered into cross-currency rate swaps to hedge a portion of our net investment in such foreign operations against adverse movements in foreign currency exchange rates. We designated cross-currency rate swaps with a notional value of
$5,000.0$5,000 million between Canadian dollar and U.S. dollar and cross-currency rate swaps with a notional value of
$1,200.0$1,600 million between the Euro and U.S. dollar, as net investment hedges of a portion of our equity in foreign operations in those currencies. The fair value of the cross-currency rate swaps is calculated each period with changes in the fair value of these instruments reported in
accumulated other comprehensive income (loss)AOCI to economically offset the change in the value of the net investment in these designated foreign operations driven by changes in foreign currency exchange rates. The net fair value of these derivative instruments
totaled $824.6was a liability of $48 million as of December 31,
2015.2018. The
net unrealized
gains,losses, net of tax, related to these derivative instruments included in
accumulated other comprehensive income (loss)AOCI totaled
$684.8$36 million as of December 31,
2015.2018. Such amounts will remain in
accumulated other comprehensive income (loss)AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations.
We
enter intouse forward
currency contracts to
reducemanage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee and certain intercompany purchases, made by our
exposure to volatility from foreign currency fluctuations associated with certain foreign currency-denominated assets.TH Canadian operations. However, for a variety of reasons, we do not hedge our revenue exposure in other currencies. Therefore, we are exposed to volatility in those other currencies, and this volatility may differ from period to period. As a result, the foreign currency impact on our operating results for one period may not be indicative of future results.
We also use forward currency contracts to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee and certain intercompany purchases, made by our TH Canadian operations.During
2015,2018, income from operations would have decreased or increased approximately
$93.0$119 million if all foreign currencies uniformly weakened or strengthened 10% relative to the U.S. dollar, holding other variables constant, including sales volumes. The effect of a uniform movement of all currencies by 10% is provided to illustrate a hypothetical scenario and related effect on operating income. Actual results will differ as foreign currencies may move in uniform or different directions and in different magnitudes.
We are exposed to changes in interest rates related to our
2014 Term Loan Facility and
2014 Revolving Credit Facility, which bear interest at LIBOR/EURIBOR plus a spread, subject to a LIBOR/EURIBOR floor. Generally, interest rate changes could impact the amount of our interest paid and, therefore, our future earnings and cash flows, assuming other factors are held constant. To mitigate the impact of changes in LIBOR/EURIBOR on interest expense for a portion of our variable rate debt, we have entered into interest rate swaps. We account for these derivatives as cash flow hedges, and as such, the
effective portion of unrealized changes in market
value has beenare recorded in accumulated other comprehensive income (loss)AOCI and is reclassified tointo earnings during the period in which the hedgehedged forecasted transaction affects earnings. At December 31, 2015,2018, we had a series of receive-variable, pay-fixed interest rate swaps to hedge the variability in the interest payments on $2,500.0$3,500 million of our 2014 Term Loan Facility beginning May 28, 2015, through the expiration of the final swap on March 31, 2021.February 17, 2024. The notional value of the swaps is $2,500.0$3,500 million. There are six sequential interest rate swaps to achieve the hedged position. Each year on March 31, the existing interest rate swap is scheduled to expire and be immediately replaced with a new interest rate swap until the expiration of the final swap on March 31, 2021. At inception, these interest rate swaps were designated as a cash flow hedge for hedge accounting, and as such, the effective portion of unrealized changes in market value are recorded in accumulated other comprehensive income (loss) and reclassified to earnings during the period in which the hedged forecasted transaction affects earnings. Gains and losses from hedge ineffectiveness are recognized in current earnings.
Based on the portion of our variable rate debt balance in excess of the notional amount of the interest rate swaps and LIBOR as of December 31,
2015,2018, a hypothetical 1.00% increase in
the three-month LIBOR would increase our annual interest expense by approximately
$15.9$28 million.
We purchase certain products,
including beef, chicken, cheese, French fries, tomatoes, coffee, wheat, edible oils, sugar and other commodities, which are subject to price volatility that is caused by weather, market conditions and other factors that are not considered predictable or within our control. However, in our TH business, we employ various purchasing and pricing contract techniques, such as setting fixed prices for periods of up to one year with suppliers, in an effort to minimize volatility of certain of these commodities. Given that we purchase a significant amount of green coffee, we typically have purchase commitments fixing the price for a minimum of six to twelve months depending upon prevailing market conditions. We also typically hedge against the risk of foreign exchange on green coffee
prices at the same time.Additionally, our ability to recover increased costs is typically limited by the competitive environment in which we operate. prices.
We occasionally take forward pricing positions through our suppliers to manage commodity prices. As a result, we purchase
beefcommodities and other
commoditiesproducts at market prices, which fluctuate on a daily basis and may differ between different geographic regions, where local regulations may affect the volatility of commodity prices.
We do not make use of financial instruments to hedge commodity prices. As we make purchases beyond our current commitments, we may be subject to higher commodity prices depending upon prevailing market conditions at such time. Generally, increases and decreases in commodity costs are largely passed through to
franchiseesfranchisee owners, resulting in higher or lower revenues and higher or lower costs of sales from our business. These changes may impact margins as many of these products are typically priced based on a fixed-dollar mark-up. We and our franchisees have some ability to increase product pricing to offset a rise in commodity prices, subject to acceptance by franchisees and guests.
We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation did not have a material impact on our operations in
2015, 20142018, 2017 or
2013. Several factors tend to reduce the impact of inflation for our business: inventories approximate current market prices, property holdings at fixed costs are substantial, and there is some ability to adjust prices.2016. However, severe increases in inflation could affect the global, Canadian and U.S. economies and could have an adverse impact on our business, financial condition and results of operations. If several of the various costs in our business experience inflation at the same time, such as commodity price increases beyond our ability to control and increased labor costs, we and our franchisees may not be able to adjust prices to sufficiently offset the effect of the various cost increases without negatively impacting consumer demand.
Disclosures Regarding Partnership Pursuant to Canadian Exemptive
Relief.Relief
RBI is the sole general partner of Partnership. To address certain disclosure conditions to the exemptive relief that Partnership received from the Canadian securities regulatory authorities, RBI provides a summary of certain terms of the Partnership exchangeable units in its annual report on Form 10-K. The same summary is provided below. This summary is not complete and is qualified in its entirety by the complete text of the Amended and Restated Limited Partnership Agreement, dated December 11, 2014, between RBI, 8997896 Canada Inc. and each person who is admitted as a Limited Partner in accordance with the terms of the agreement (the “partnership agreement”) and the Voting Trust Agreement, dated December 12, 2014, between RBI, Partnership and Computershare Trust Company of Canada (the “voting trust agreement”), copies of which are available on SEDAR at www.sedar.com and at www.sec.gov.
The Partnership Exchangeable Units
The capital of Partnership consists of three classes of units: the Partnership Class A common units, the Partnership preferred units and the Partnership exchangeable units. The interest of RBI, as the sole general partner of Partnership, is represented by Class A common units and preferred units. The interests of the limited partners is represented by the Partnership exchangeable units.
Summary of Economic and Voting Rights
The Partnership exchangeable units are intended to provide economic rights that are substantially equivalent, and voting rights with respect to RBI that are equivalent, to the corresponding rights afforded to holders of RBI common shares. Under the terms of the partnership agreement, the rights, privileges, restrictions and conditions attaching to the Partnership exchangeable units include the following:
The Partnership exchangeable units are exchangeable at any time, at the option of the holder (the “exchange right”), on a one-for-one basis for common shares of RBI (the “exchanged shares”), subject to RBI’s right as the general partner (subject to the approval of the conflicts committee in certain circumstances) to determine to settle any such exchange for a cash payment in lieu of RBI common shares. If RBI elects to make a cash payment in lieu of issuing common shares, the amount of the cash payment will be the weighted average trading price of the common shares on the NYSE for the 20 consecutive trading days ending on the last business day prior to the exchange date (the “exchangeable units cash amount”). Written notice of the determination of the form of consideration shall be given to the holder of the Partnership exchangeable units exercising the exchange right no later than ten business days prior to the exchange date.
If a dividend or distribution has been declared and is payable in respect of a common share of RBI, Partnership will make a distribution in respect of each Partnership exchangeable unit in an amount equal to the dividend or distribution in respect of a common share. The record date and payment date for distributions on the Partnership exchangeable units will be the same as the relevant record date and payment date for the dividends or distributions on RBI common shares.
If RBI issues any common shares in the form of a dividend or distribution on the RBI common shares, Partnership will issue to each holder of Partnership exchangeable units, in respect of each exchangeable unit held by such holder, a number of Partnership exchangeable units equal to the number of common shares issued in respect of each common share.
If RBI issues or distributes rights, options or warrants or other securities or assets of RBI to all or substantially all of the holders of its common shares, Partnership is required to make a corresponding distribution to holders of the Partnership exchangeable units.
No subdivision or combination of RBI’s outstanding common shares is permitted unless a corresponding subdivision or combination of Partnership exchangeable units is made.
RBI and its board of directors are prohibited from proposing or recommending an offer for its common shares or for the Partnership exchangeable units unless the holders of the Partnership exchangeable units and the holders of common shares are entitled to participate to the same extent and on equitably equivalent basis.
Upon a dissolution and liquidation of Partnership, if Partnership exchangeable units remain outstanding and have not been exchanged for RBI common shares, then the distribution of the assets of Partnership between holders of RBI common shares and holders of Partnership exchangeable units will be made on a pro rata basis based on the numbers of common shares and Partnership exchangeable units outstanding. Assets distributable to holders of Partnership exchangeable units will be distributed directly to such holders. Assets distributable in respect of RBI common shares will be distributed to RBI. Prior to this pro rata distribution, Partnership is required to pay to RBI sufficient amounts to fund RBI’s expenses or other obligations (to the extent related to RBI’s role as the general partner or its business and affairs that are conducted through Partnership or its subsidiaries) to ensure that any property and cash distributed to RBI in respect of the common shares will be available for distribution to holders of common shares in an amount per share equal to distributions in respect of each Partnership exchangeable unit. The terms of the Partnership exchangeable units do not provide for an automatic exchange of Partnership exchangeable units into common shares upon a dissolution or liquidation of Partnership or RBI.
Approval of holders of the Partnership exchangeable units is required for an action (such as an amendment to the Partnershippartnership agreement) that would affect the economic rights of ana Partnership exchangeable unit relative to a common share.share of RBI.
The holders of Partnership exchangeable units are indirectly entitled to vote in respect of matters on which holders of RBI common shares are entitled to vote, including in respect of the election of RBI’s directors, through a special voting share of RBI. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. The trustee will exercise each vote attached to the special voting share only as directed by the relevant holder of Partnership exchangeable units and, in the absence of instructions from a holder of an exchangeable unit as to voting, will not exercise those votes. Except as otherwise required by the partnership agreement, voting trust agreement or applicable law, the holders of the Partnership exchangeable units are not directly entitled to receive notice of or to attend any meeting of the unitholders of Partnership or to vote at any such meeting.
Exercise of Optional Exchange Right
In order to exercise the exchange right referred to above, a holder of Partnership exchangeable units must deliver to Partnership’s transfer agent a duly executed exchange notice together with such additional documents and instruments as the transfer agent and Partnership may reasonably require. The exchange notice must (i) specify the number of Partnership exchangeable units in respect of which the holder is exercising the exchange right and (ii) state the business day on which the holder desires to have Partnership exchange the subject units, provided that the exchange date must not be less than 15 business days nor more than 30 business days after the date on which the exchange notice is received by Partnership. If no exchange date is specified in an exchange notice, the exchange date will be deemed to be the 15th business day after the date on which the exchange notice is received by Partnership. An exercise of the exchange right may be revoked by the exercising holder by notice in writing given to Partnership before the close of business on the fifth business day immediately preceding the exchange date. On the exchange date, Partnership will deliver or cause the transfer agent to deliver to the relevant holder, as applicable (i) the applicable number of exchanged shares, or (ii) a cheque representing the applicable exchangeable units cash amount, in each case, less any amounts withheld on account of tax.
Offers for Units or Shares
The partnership agreement contains provisions to the effect that if a take-over bid is made for all of the outstanding Partnership exchangeable units and not less than 90% of the Partnership exchangeable units (other than units of Partnership held at the date of the take-over bid by or on behalf of the offeror or its associates or associates) are taken up and paid for by the offeror, the offeror will be entitled to acquire the Partnership exchangeable units held by unitholders who did not accept the offer on the terms offered by the offeror. The partnership agreement further provides that for so long as Partnership exchangeable units remain outstanding, (i) RBI will not propose or recommend a formal bid for RBI common shares, and no such bid will be effected with the consent or approval of RBI’s board of directors, unless holders of Partnership exchangeable units are entitled to participate in the bid to the same extent and on an equitably equivalent basis as the holders of RBI’s common shares, and (ii) RBI will not propose or recommend a formal bid for Partnership exchangeable units, and no such bid will be effected with the consent or approval of RBI’s board of directors, unless holders of the RBI common shares are entitled to participate in the bid to the same extent and on an equitably equivalent basis as the holders of Partnership exchangeable units.
A holder of Partnership exchangeable units will not be entitled to exchange its Partnership exchangeable units into RBI common shares pursuant to the exchange right (described above) prior to the one year anniversary of the date of the effective time of the Merger. As a result, if a bid with respect to common shares of RBI was made in that one year period, a holder of Partnership exchangeable units could not participate in that bid unless it was proposed or recommended by RBI’s board of directors or was otherwise effected with the consent or approval of RBI’s board of directors. Canadian securities regulatory authorities may intervene in the public interest (either on application by an interested party or by staff of a Canadian securities regulatory authority) to prevent an offer to holders of RBI common shares, Preferred Shares or Partnership exchangeable units being made or completed where such offer is abusive of the holders of one of those security classes that are not subject to that offer.
Merger, Sale or Other Disposition of Assets
As long as any Partnership exchangeable units are outstanding, RBI cannot consummate a transaction in which all or substantially all of its assets would become the property of any other person or entity. This does not apply to a transaction if such other person or entity becomes bound by the partnership agreement and assumes RBI’s obligations, as long as the transaction does not impair in any material respect the rights, duties, powers and authorities of other parties to the partnership agreement.
Partnership may cause a mandatory exchange of the outstanding Partnership exchangeable units into the RBI common shares in the event that (1) at any time there remain outstanding fewer than 5% of the number of Partnership exchangeable units outstanding as of the effective time of the Merger (other than Partnership exchangeable units held by RBI and its subsidiaries and as such number of Partnership exchangeable units may be adjusted in accordance with the partnership agreement); (2) any one of the following occurs: (i) any person, firm or corporation acquires directly or indirectly any voting security of RBI and immediately after such acquisition, the acquirer has voting securities representing more than 50% of the total voting power of all the then outstanding voting securities of RBI on a fully diluted basis, (ii) the shareholders of RBI shall approve a merger, consolidation, recapitalization or reorganization of RBI, other than any transaction which would result in the holders of outstanding voting securities of RBI immediately prior to such transaction having at least a majority of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction, with the voting power of each such continuing holder relative to other continuing holders not being altered substantially in the transaction; or (iii) the shareholders of RBI shall approve a plan of complete liquidation of RBI or an agreement for the sale or disposition of RBI of all or substantially all of RBI’s assets, provided that, in each case, RBI, in its capacity as the general partner of Partnership, determines, in good faith and in its sole discretion, that such transaction involves a bona fide third party and is not for the primary purpose of causing the exchange of the exchangeable units in connection with such transaction; or (3) a matter arises in respect of which applicable law provides holders of Partnership exchangeable units with a vote as holders of units of Partnership in order to approve or disapprove, as applicable, any change to, or in the rights of the holders of, the Partnership exchangeable units, where the approval or disapproval, as applicable, of such change would be required to maintain the economic equivalence of the Partnership exchangeable units and the RBI common shares, and the holders of the Partnership exchangeable units fail to take the necessary action at a meeting or other vote of holders of Partnership exchangeable units to approve or disapprove, as applicable, such matter in order to maintain economic equivalence of the Partnership exchangeable units and the RBI common shares.
Special Note Regarding Forward-Looking Statements
Certain information contained in our Annual Report, including information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of
the Canadian securities laws. We refer to all of these as forward-looking statements. Forward-looking statements are forward-looking in nature and, accordingly, are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions and include, without limitation, statements regarding our expectations or beliefs regarding (i)
our ability to become one of the most efficient franchised QSR operators in the world; (ii) the benefits of our fully franchised business model;
(ii)(iii) the domestic and international growth opportunities for the Tim Hortons,
and Burger King
and Popeyes brands, both in existing and new
markets, including through area representative and area development agreements; (iii)markets; (iv) our ability to accelerate international development through joint venture structures and master franchise and development
agreements; (iv)agreements and the impact on future growth and profitability of our brands; (v) our continued use of joint ventures structures and master franchise and development agreements in connection with our domestic and international expansion; (vi) the impact of our
four pillar strategystrategies on
same store sales, the growth of our
Tim Hortons, Burger King and
Tim HortonsPopeyes brands and our profitability;
(v) the success of(vii) our
strategy for the Burger King brand of launching fewer more impactful productscommitment to
simplify in-restaurant operationstechnology and
reduce waste, focus the innovation pipeline and spend media dollars more wisely in a few high-impact areas and our continued focus on this strategy; (vi) our financial strength based on our combined brands and potential for future growth and operating efficiencies; (vii)innovation; (viii) the correlation between our sales, guest traffic and profitability to consumer discretionary spending and the factors that influence spending;
(viii) the amount and timing of additional G&A expenses associated with restructuring activities following the consummation of the Transactions and the anticipated benefits that we will recognize from such restructuring; (ix) our
focus with respectability to
drive traffic, expand our
customer base and allow restaurants to expand into new dayparts through new product
offerings and emphasis on streamlining restaurant execution and reducing operational complexity;innovation; (x) the benefits accrued from sharing and leveraging best practices among our
Tim Hortons, Burger King and
Tim HortonsPopeyes brands; (xi) the drivers of the long-term success for
bothand competitive position of each of our brands as well as increased sales and profitability of our franchisees; (xii) the impact of our
implementationcost management initiatives at each of our
Zero Based Budgeting (ZBB) initiative at TH;brands; (xiii) the continued use of certain franchise incentives and their impact on our financial results; (xiv)
the impact of our modern image remodel initiative; (xv) our future financial obligations, including annual debt service requirements, capital expenditures and
dividend payments,distributions, the source of liquidity needed to satisfy such obligations, and our ability to meet such obligations;
(xv)(xvi) future PLK Transaction costs and Corporate restructuring and tax advisory fees; (xvii) our plans to build new warehouses and renovate existing warehouses and the anticipated timing for completion; (xviii) our exposure to changes in interest rates and foreign currency exchange rates and the impact of changes in interest rates and foreign currency exchange rates on the amount of our interest payments, future earnings and cash flows;
(xvi)(xix) our tax positions and their compliance with applicable tax laws;
(xvii)(xx) certain accounting
matters, including the impact of changes in accounting standards and
our transition to ASC 606; (xxi) certain tax
matters; (xviii)matters, such as our estimates with respect to tax matters as a result of the Tax Act, including our effective tax rate for 2019 and the impacts of the Tax Act; (xxii) the impact of inflation on our results of operations;
(xxiii) the impact of governmental regulation, both domestically and
(xix)internationally, on our business and financial and operational results; (xxiv) the adequacy of our facilities to meet our current requirements; (xxv) our future financial and operational
results.results; (xxvi) certain litigation matters; and (xxvii) our target total distributions for 2019.
These forward looking statements represent management’s expectations as of the date hereof. These forward-looking statements are based on certain assumptions and analyses
that we made
by Partnership in light of
itsour experience and
itsour perception of historical trends, current conditions and expected future developments, as well as other factors
it believeswe believe are appropriate in the circumstances. However, these forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, among other things, risks related to: (1) our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations; (2) global economic or other business conditions that may affect the desire or ability of our customers to purchase our products such as inflationary pressures, high unemployment levels, declines in median income growth, consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety; (3) our relationship with, and the success of, our franchisees and risks related to our
restaurant ownership mix;fully franchised business model; (4) the effectiveness of our marketing and advertising programs and franchisee support of these programs; (5) significant and rapid fluctuations in interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (6) our ability to successfully implement our domestic and international growth strategy for
botheach of our brands and risks related to our international operations; (7) our reliance on master franchisees and subfranchisees to accelerate restaurant growth; (8) the ability of
the counterparties to our credit facilities’ and derivatives’
counterparties to fulfill their commitments and/or obligations; (9)
our ability to successfully apply the ZBB model to the TH’s operations and to achieve the anticipated synergies through shared services; (10) the restructuring activities that we have and will continue to implement in connection with the Transactions; and (11) changes in applicable tax laws or interpretations
thereof.thereof; and risks related to the complexity of the Tax Act and our ability to accurately interpret and predict its impact on our financial condition and results.
Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in the section entitled “Item 1A - Risk Factors” of our Annual Report as well as other materials that we from time to time file with, or furnish to, the SEC or file with Canadian securities regulatory authorities on SEDAR. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this annual report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
Item 8. | Financial Statements and Supplementary Data |
Item 8.Financial Statements and Supplementary Data
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting
Management of Restaurant Brands International Inc. (“RBI”), the sole general partner of Restaurant Brands International Limited Partnership (the “Partnership”), is responsible for the preparation, integrity and fair presentation of the consolidated financial statements, related notes and other information included in this annual report. The
consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include certain amounts based on management’s estimates and assumptions. Other financial information presented in the annual report is derived from the
consolidated financial statements.
Management is also responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31,
2015.2018. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Partnership; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Partnership are being made only in accordance with authorizations of management and directors of RBI; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Partnership’s assets that could have a material effect on the
consolidated financial statements.
Management performed an assessment of the effectiveness of Partnership’s internal control over financial reporting as of December 31, 20152018 based on criteria established inInternal Control — Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management determined that Partnership’s internal control over financial reporting was effective as of December 31, 2015.2018.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of Partnership’s internal control over financial reporting as of December 31,
20152018 has been audited by KPMG LLP, Partnership’s independent registered public accounting firm, as stated in its report which is included herein.
Report of Independent Registered Public Accounting Firm
Restaurant Brands International Inc., the sole general partner of Restaurant Brands International Limited Partnership:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Restaurant Brands International Limited Partnership and subsidiaries (the Partnership)“Partnership”) as of December 31, 20152018 and 2014, and2017, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2015. 2018, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Partnership’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2019 expressed an unqualified opinion on the effectiveness of the Partnership’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Partnership has changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of the new revenue standard.
Basis for Opinion
These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
supportingregarding the amounts and disclosures in the
consolidated financial statements.
An auditOur audits also
includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial
statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,
(signed) KPMG LLP
We have served as the consolidated financial statements referred to above present fairly, in all material respects,Partnership's auditor since 1989.
Miami, Florida
February 22, 2019
Report of Independent Registered Public Accounting Firm
The Board of Directors
Restaurant Brands International Inc., the financial positionsole general partner of Restaurant Brands International Limited Partnership:
Opinion on Internal Control over Financial Reporting
We have audited Restaurant Brands International Limited Partnership and subsidiariessubsidiaries’ (the “Partnership”) internal control over financial reporting as of December 31, 2015 and 2014, and2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the resultsCommittee of their operations and their cash flows for eachSponsoring Organizations of the yearsTreadway Commission. In our opinion, the Partnership maintained, in the three-year period endedall material respects, effective internal control over financial reporting as of December 31, 2015,2018, based on criteria established in conformity with U.S. generally accepted accounting principles.Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”),
Restaurant Brands International Limited Partnership’s internal control over financial reportingthe consolidated balance sheets of the Partnership as of December 31,
2015, based on criteria established inInternal Control– Integrated Framework (2013) issued by2018 and 2017, the
Committeerelated consolidated statements of
Sponsoring Organizationsoperations, comprehensive income (loss), equity, and cash flows for each of the
Treadway Commission (COSO)years in the three-year period ended December 31, 2018, and the related notes (collectively, the “consolidated financial statements”), and our report dated February
26, 201622, 2019 expressed an unqualified opinion on
the effectiveness of the Company’s internal control overthose consolidated financial
reporting.(signed) KPMG LLP
Miami, Florida
February 26, 2016
Certified Public Accountants
Report of Independent Registered Public Accounting Firm
statements.
Basis for Opinion
The
Board of DirectorsRestaurant Brands International Inc., the sole general partner of Restaurant Brands International Limited Partnership:
We have audited Restaurant Brands International Limited Partnership and subsidiaries’ (the Partnership) internal control over financial reporting as of December 31, 2015, based on the criteria established inInternal Control– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Partnership’sPartnership's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying ManagementManagement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Partnership’sPartnership's internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Restaurant Brands International Limited Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established inInternal Control– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Restaurant Brands International Limited Partnership and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2015 and our report dated February 26, 2016 expressed an unqualified opinion on those consolidated financial statements.
February 26, 2016Certified Public Accountants
22, 2019
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions of U.S. dollars, except
unit/shareunit data)
| | | | | | | | |
| | | As of | |
| | | December 31, | | | December 31, | |
| | | 2015 | | | 2014 | |
| ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 753.7 | | | $ | 1,803.2 | |
Restricted cash and cash equivalents | | | — | | | | 84.5 | |
Trade and notes receivable, net of allowance of $14.2 million and $20.1 million, respectively | | | 421.7 | | | | 441.2 | |
Inventories and other current assets, net | | | 132.2 | | | | 171.2 | |
Advertising fund restricted assets | | | 57.5 | | | | 53.0 | |
Deferred income taxes, net | | | — | | | | 86.6 | |
| | | | | | | | |
Total current assets | | | 1,365.1 | | | | 2,639.7 | |
| | |
Property and equipment, net of accumulated depreciation of $339.3 million and $225.1 million, respectively | | | 2,150.6 | | | | 2,436.5 | |
Intangible assets, net | | | 9,147.8 | | | | 10,445.1 | |
Goodwill | | | 4,574.4 | | | | 5,235.7 | |
Net investment in property leased to franchisees | | | 117.2 | | | | 140.5 | |
Other assets, net | | | 1,053.4 | | | | 445.5 | |
| | | | | | | | |
Total assets | | $ | 18,408.5 | | | $ | 21,343.0 | |
| | | | | | | | |
| LIABILITIES, PARTNERSHIP PREFERRED UNITS AND EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts and drafts payable | | $ | 361.5 | | | $ | 223.0 | |
Accrued advertising | | | 45.2 | | | | 25.9 | |
Other accrued liabilities | | | 438.3 | | | | 335.2 | |
Gift card liability | | | 168.5 | | | | 187.0 | |
Advertising fund liabilities | | | 48.4 | | | | 45.5 | |
Current portion of long term debt and capital leases | | | 56.1 | | | | 1,128.8 | |
| | | | | | | | |
Total current liabilities | | | 1,118.0 | | | | 1,945.4 | |
| | |
Term debt, net of current portion | | | 8,462.3 | | | | 8,826.5 | |
Capital leases, net of current portion | | | 203.4 | | | | 243.7 | |
Other liabilities, net | | | 795.9 | | | | 707.8 | |
Deferred income taxes, net | | | 1,618.8 | | | | 1,982.8 | |
| | | | | | | | |
Total liabilities | | | 12,198.4 | | | | 13,706.2 | |
| | | | | | | | |
Commitments and Contingencies (Note 24) | | | | | | | | |
Partnership preferred units; $43.775848 par value; 68,530,939 shares authorized, issued and outstanding at December 31, 2015 and December 31, 2014 | | | 3,297.0 | | | | 3,297.0 | |
| | |
Partners’ capital: | | | | | | | | |
Class A common units - 202,006,067 units issued and outstanding at December 31, 2015 and December 31, 2014 | | | 2,876.7 | | | | 1,986.1 | |
Partnership exchangeable units - 233,739,648 issued and outstanding at December 31, 2015; 265,041,783 units issued and outstanding at December 31, 2014 | | | 1,503.5 | | | | 2,600.9 | |
Accumulated other comprehensive income (loss) | | | (1,467.8 | ) | | | (248.5 | ) |
| | | | | | | | |
Total Partners’ capital | | | 2,912.4 | | | | 4,338.5 | |
Noncontrolling interests | | | 0.7 | | | | 1.3 | |
| | | | | | | | |
Total equity | | | 2,913.1 | | | | 4,339.8 | |
| | | | | | | | |
Total liabilities, Partnership preferred units and equity | | $ | 18,408.5 | | | $ | 21,343.0 | |
| | | | | | | | |
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 913 |
| | $ | 1,097 |
|
| Accounts and notes receivable, net of allowance of $14 and $16, respectively | 452 |
| | 489 |
|
| Inventories, net | 75 |
| | 78 |
|
| Prepaids and other current assets | 60 |
| | 86 |
|
| Total current assets | 1,500 |
| | 1,750 |
|
| Property and equipment, net of accumulated depreciation and amortization of $704 and $623, respectively | 1,996 |
| | 2,133 |
|
| Intangible assets, net | 10,463 |
| | 11,062 |
|
| Goodwill | 5,486 |
| | 5,782 |
|
| Net investment in property leased to franchisees | 54 |
| | 71 |
|
| Other assets, net | 642 |
| | 426 |
|
| Total assets | $ | 20,141 |
| | $ | 21,224 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts and drafts payable | $ | 513 |
| | $ | 496 |
|
| Other accrued liabilities | 637 |
| | 866 |
|
| Gift card liability | 167 |
| | 215 |
|
| Current portion of long term debt and capital leases | 91 |
| | 78 |
|
| Total current liabilities | 1,408 |
| | 1,655 |
|
| Term debt, net of current portion | 11,823 |
| | 11,801 |
|
| Capital leases, net of current portion | 226 |
| | 244 |
|
| Other liabilities, net | 1,547 |
| | 1,455 |
|
| Deferred income taxes, net | 1,519 |
| | 1,508 |
|
| Total liabilities | 16,523 |
| | 16,663 |
|
| Commitments and contingencies (Note 18) |
| |
|
| Partners’ capital: | | | |
| Class A common units - 202,006,067 units issued and outstanding at December 31, 2018 and December 31, 2017 | 4,323 |
| | 4,168 |
|
| Partnership exchangeable units - 207,523,591 units issued and outstanding at December 31, 2018; 217,708,924 units issued and outstanding at December 31, 2017 | 730 |
| | 1,276 |
|
| Accumulated other comprehensive income (loss) | (1,437 | ) | | (884 | ) |
| Total Partners’ capital | 3,616 |
| | 4,560 |
|
| Noncontrolling interests | 2 |
| | 1 |
|
| Total equity | 3,618 |
| | 4,561 |
|
| Total liabilities and equity | $ | 20,141 |
| | $ | 21,224 |
|
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board of Directors of Restaurant Brands International Inc., as general partner of Restaurant Brands International Limited Partnership:
| |
| | | | | | |
| By: | | /s/ Alexandre Behring | | | | By: | | /s/ Paul J. Fribourg |
| | Alexandre Behring, Executive ChairmanCo-Chairman of Restaurant Brands International Inc. | | | | | | Paul J. Fribourg, Director of |
| | Restaurant Brands International Inc. | | | | | | Restaurant Brands International Inc. |
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Operations
(In millions of U.S. dollars, except
per unit/shareunit data)
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Revenues: | | | | | | | | | | | | |
Sales | | $ | 2,169.0 | | | $ | 167.4 | | | $ | 222.7 | |
Franchise and property revenues | | | 1,883.2 | | | | 1,031.4 | | | | 923.6 | |
| | | | | | | | | | | | |
Total revenues | | | 4,052.2 | | | | 1,198.8 | | | | 1,146.3 | |
Cost of sales | | | 1,809.5 | | | | 156.4 | | | | 195.3 | |
Franchise and property expenses | | | 503.2 | | | | 179.0 | | | | 152.4 | |
Selling, general and administrative expenses | | | 437.7 | | | | 345.4 | | | | 242.4 | |
(Income) loss from equity method investments | | | 4.1 | | | | 9.5 | | | | 12.7 | |
Other operating expenses (income), net | | | 105.5 | | | | 327.4 | | | | 21.3 | |
| | | | | | | | | | | | |
Total operating costs and expenses | | | 2,860.0 | | | | 1,017.7 | | | | 624.1 | |
| | | | | | | | | | | | |
Income from operations | | | 1,192.2 | | | | 181.1 | | | | 522.2 | |
Interest expense, net | | | 478.3 | | | | 279.7 | | | | 200.0 | |
Loss on early extinguishment of debt | | | 40.0 | | | | 155.4 | | | | — | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | 673.9 | | | | (254.0 | ) | | | 322.2 | |
Income tax expense | | | 162.2 | | | | 14.9 | | | | 88.5 | |
| | | | | | | | | | | | |
Net income (loss) | | | 511.7 | | | | (268.9 | ) | | | 233.7 | |
| | | | | | | | | | | | |
Net income (loss) attributable to noncontrolling interests (Note 19) | | | 3.4 | | | | 0.2 | | | | — | |
Partnership preferred unit distributions | | | 271.2 | | | | 13.8 | | | | — | |
Accretion of Partnership preferred units | | | — | | | | 546.4 | | | | — | |
| | | | | | | | | | | | |
Net income (loss) attributable to common unitholders / shareholders | | $ | 237.1 | | | $ | (829.3 | ) | | $ | 233.7 | |
| | | | | | | | | | | | |
Earnings (loss) per unit / share - basic (Note 4): | | | | | | | | | | | | |
Class A common units | | $ | 0.51 | | | $ | (1.63 | ) | | | — | |
Partnership exchangeable units | | $ | 0.51 | | | $ | (1.63 | ) | | | — | |
Common shares | | | — | | | $ | (0.20 | ) | | $ | 0.67 | |
Earnings (loss) per unit / share - diluted (Note 4): | | | | | | | | | | | | |
Class A common units | | $ | 0.51 | | | $ | (1.63 | ) | | | — | |
Partnership exchangeable units | | $ | 0.51 | | | $ | (1.63 | ) | | | — | |
Common shares | | | — | | | $ | (0.20 | ) | | $ | 0.65 | |
Weighted average units / shares outstanding - basic (Note 4): | | | | | | | | | | | | |
Class A common units | | | 202.0 | | | | 202.0 | | | | — | |
Partnership exchangeable units | | | 263.5 | | | | 265.0 | | | | — | |
Common shares | | | — | | | | 351.9 | | | | 351.0 | |
Weighted average units / shares outstanding - diluted (Note 4): | | | | | | | | | | | | |
Class A common units | | | 202.0 | | | | 202.0 | | | | — | |
Partnership exchangeable units | | | 263.5 | | | | 265.0 | | | | — | |
Common shares | | | — | | | | 351.9 | | | | 357.8 | |
Dividends per common unit/share | | $ | 0.44 | | | $ | 0.30 | | | $ | 0.24 | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Revenues: | | | | | |
| Sales | $ | 2,355 |
| | $ | 2,390 |
| | $ | 2,205 |
|
| Franchise and property revenues (Note 16) | 3,002 |
| | 2,186 |
| | 1,941 |
|
| Total revenues | 5,357 |
| | 4,576 |
| | 4,146 |
|
| Operating costs and expenses: | | | | | |
| Cost of sales | 1,818 |
| | 1,850 |
| | 1,727 |
|
| Franchise and property expenses | 422 |
| | 478 |
| | 454 |
|
| Selling, general and administrative expenses (Note 16) | 1,214 |
| | 416 |
| | 319 |
|
| (Income) loss from equity method investments | (22 | ) | | (12 | ) | | (20 | ) |
| Other operating expenses (income), net | 8 |
| | 109 |
| | (1 | ) |
| Total operating costs and expenses | 3,440 |
| | 2,841 |
| | 2,479 |
|
| Income from operations | 1,917 |
| | 1,735 |
| | 1,667 |
|
| Interest expense, net | 535 |
| | 512 |
| | 467 |
|
| Loss on early extinguishment of debt | — |
| | 122 |
| | — |
|
| Income before income taxes | 1,382 |
| | 1,101 |
| | 1,200 |
|
| Income tax (benefit) expense | 238 |
| | (134 | ) | | 244 |
|
| Net income | 1,144 |
| | 1,235 |
| | 956 |
|
| Net income attributable to noncontrolling interests | 1 |
| | 2 |
| | 3 |
|
| Partnership preferred unit distributions | — |
| | 256 |
| | 270 |
|
| Gain on redemption of Partnership preferred units (Note 13) | — |
| | (234 | ) | | — |
|
| Net income attributable to common unitholders | $ | 1,143 |
| | $ | 1,211 |
| | $ | 683 |
|
| Earnings per unit - basic and diluted (Note 4): | | | | | |
| Class A common units | $ | 3.03 |
| | $ | 3.10 |
| | $ | 1.71 |
|
| Partnership exchangeable units | $ | 2.46 |
| | $ | 2.59 |
| | $ | 1.48 |
|
| Weighted average units outstanding - basic and diluted (Note 4): | | | | | |
| Class A common units | 202 |
| | 202 |
| | 202 |
|
| Partnership exchangeable units | 216 |
| | 226 |
| | 228 |
|
See accompanying notes to consolidated financial statements.
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In millions of U.S. dollars)
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Net income (loss) | | $ | 511.7 | | | $ | (268.9 | ) | | $ | 233.7 | |
| | | |
Foreign currency translation adjustment | | | (1,830.8 | ) | | | (219.1 | ) | | | 50.1 | |
Reclassification of foreign currency translation adjustment into net income | | | — | | | | — | | | | (3.0 | ) |
Net change in fair value of net investment hedges, net of tax of $(111.7), $(20.9), and $5.7 | | | 686.8 | | | | 45.4 | | | | (9.1 | ) |
Net change in fair value of cash flow hedges, net of tax of $29.0, $57.6, and $(65.8) | | | (81.0 | ) | | | (98.7 | ) | | | 103.3 | |
Amounts reclassified to earnings of cash flow hedges, net of tax of $(7.5), $2.7, and $(2.3) | | | 19.8 | | | | (4.1 | ) | | | 3.8 | |
Pension and post-retirement benefit plans, net of tax of $7.0, $12.3, and $(10.7) | | | (13.8 | ) | | | (23.8 | ) | | | 20.8 | |
Amortization of prior service (credits) costs, net of tax of $1.1, $1.1, $1.2 | | | (1.8 | ) | | | (1.8 | ) | | | (1.8 | ) |
Amortization of actuarial (gains) losses, net of tax of $(1.1), $0.0, $(0.4) | | | 1.5 | | | | (1.0 | ) | | | 0.8 | |
| | | | | | | | | | | | |
Other comprehensive income (loss) | | | (1,219.3 | ) | | | (303.1 | ) | | | 164.9 | |
| | | | | | | | | | | | |
Comprehensive income (loss) | | $ | (707.6 | ) | | $ | (572.0 | ) | | $ | 398.6 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Net income | $ | 1,144 |
| | $ | 1,235 |
| | $ | 956 |
|
| | | | | | |
| Foreign currency translation adjustment | (831 | ) | | 824 |
| | 223 |
|
| Net change in fair value of net investment hedges, net of tax of $(101), $13, and $(12) | 282 |
| | (371 | ) | | (99 | ) |
| Net change in fair value of cash flow hedges, net of tax of $7, $4, and $7 | (19 | ) | | (11 | ) | | (20 | ) |
| Amounts reclassified to earnings of cash flow hedges, net of tax of $(5), $(9), and $(6) | 14 |
| | 25 |
| | 16 |
|
| Gain (loss) recognized on defined benefit pension plans, net of tax of $0, $2, and $2 | 1 |
| | 4 |
| | (8 | ) |
| Other comprehensive income (loss) | (553 | ) | | 471 |
| | 112 |
|
| Comprehensive income (loss) | 591 |
| | 1,706 |
| | 1,068 |
|
| Comprehensive income (loss) attributable to noncontrolling interests | 1 |
| | 2 |
| | 3 |
|
| Comprehensive income (loss) attributable to preferred unitholders | — |
| | 22 |
| | 270 |
|
| Comprehensive income (loss) attributable to common unitholders | $ | 590 |
| | $ | 1,682 |
| | $ | 795 |
|
See accompanying notes to consolidated financial statements.
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Equity
(In millions of U.S. dollars, except
per unit/shareunit data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Class A Common
Units | | | Partnership
Exchangeable
units | | | Issued Common
Shares | | | Additional
Paid-In Capital | | | Retained
Earnings
(Accumulated
Deficit) | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Treasury
Stock | | | Noncontrolling
Interests | | | Total | |
| | | Units | | | Amount | | | Units | | | Amount | | | Shares | | | Amount | | | | | | | |
Balances at December 31, 2012 | | | — | | | $ | — | | | | — | | | $ | — | | | | 350.2 | | | $ | 3.5 | | | $ | 1,205.7 | | | $ | 76.1 | | | $ | (110.3 | ) | | $ | — | | | $ | — | | | $ | 1,175.0 | |
Stock option exercises | | | — | | | | — | | | | — | | | | — | | | | 1.7 | | | | — | | | | 6.0 | | | | — | | | | — | | | | — | | | | — | | | | 6.0 | |
Stock option tax benefits | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 10.1 | | | | — | | | | — | | | | — | | | | — | | | | 10.1 | |
Share-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 14.6 | | | | — | | | | — | | | | — | | | | — | | | | 14.6 | |
Issuance of shares | | | — | | | | — | | | | — | | | | — | | | | 0.3 | | | | — | | | | 3.5 | | | | — | | | | — | | | | — | | | | — | | | | 3.5 | |
Treasury stock purchases | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (7.3 | ) | | | — | | | | (7.3 | ) |
Dividends paid on common shares ($0.24 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (84.3 | ) | | | — | | | | — | | | | — | | | | (84.3 | ) |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 233.7 | | | | — | | | | — | | | | — | | | | 233.7 | |
Other comprehensive income (loss) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 164.9 | | | | — | | | | — | | | | 164.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2013 | | | — | | | $ | — | | | | — | | | $ | — | | | | 352.2 | | | $ | 3.5 | | | $ | 1,239.9 | | | $ | 225.5 | | | $ | 54.6 | | | $ | (7.3 | ) | | $ | — | | | $ | 1,516.2 | |
Stock option exercises | | | — | | | | — | | | | — | | | | — | | | | 0.1 | | | | — | | | | 0.4 | | | | — | | | | — | | | | — | | | | — | | | | 0.4 | |
Share-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25.8 | | | | — | | | | — | | | | — | | | | — | | | | 25.8 | |
Issuance of shares | | | — | | | | — | | | | — | | | | — | | | | 0.1 | | | | — | | | | 3.3 | | | | — | | | | — | | | | — | | | | — | | | | 3.3 | |
Dividends paid on common shares ($0.30 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (105.6 | ) | | | — | | | | — | | | | — | | | | (105.6 | ) |
Retirement of treasury stock | | | — | | | | — | | | | — | | | | — | | | | (0.3 | ) | | | — | | | | (7.3 | ) | | | — | | | | — | | | | 7.3 | | | | — | | | | — | |
Transfer of additional paid-in capital balance to common shares | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,262.1 | | | | (1,262.1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
BKW reorganization into Partnership | | | 87.0 | | | | 569.8 | | | | 265.0 | | | | 746.1 | | | | (352.1 | ) | | | (1,265.6 | ) | | | — | | | | (50.3 | ) | | | — | | | | — | | | | — | | | | — | |
Issuance of Class A Common units to RBI for acquisition of Tim Hortons | | | 106.6 | | | | 3,783.1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,783.1 | |
Issuance of Class A Common units to RBI for issuance and exercise of Warrant | | | 8.4 | | | | 247.6 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 247.6 | |
Allocation of Partnership equity interests | | | — | | | | (2,285.5 | ) | | | — | | | | 2,285.5 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Accretion of Partnership preferred units | | | — | | | | (236.6 | ) | | | — | | | | (309.8 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (546.4 | ) |
Preferred unit distributions | | | — | | | | (6.0 | ) | | | — | | | | (7.8 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (13.8 | ) |
Capital contribution from RBI Inc. | | | — | | | | 0.1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.1 | |
Noncontrolling interest from acquisition of Tim Hortons | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1.1 | | | | 1.1 | |
Net income (loss) | | | — | | | | (86.4 | ) | | | — | | | | (113.1 | ) | | | — | | | | — | | | | — | | | | (69.6 | ) | | | — | | | | — | | | | 0.2 | | | | (268.9 | ) |
Other comprehensive income (loss) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (303.1 | ) | | | — | | | | — | | | | (303.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2014 | | | 202.0 | | | $ | 1,986.1 | | | | 265.0 | | | $ | 2,600.9 | | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (248.5 | ) | | $ | — | | | $ | 1.3 | | | $ | 4,339.8 | |
Distributions declared on Class A common units ($0.44 per unit) | | | — | | | | (89.1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (89.1 | ) |
Distributions declared on partnership exchangeable units ($0.44 per unit) | | | — | | | | — | | | | — | | | | (116.6 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (116.6 | ) |
Preferred unit distributions | | | — | | | | (118.2 | ) | | | — | | | | (153.0 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (271.2 | ) |
Repurchase of Partnership exchangeable units | | | — | | | | — | | | | (8.1 | ) | | | (293.7 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (293.7 | ) |
Exchange of Partnership exchangeable units for RBI common shares | | | — | | | | 820.3 | | | | (23.2 | ) | | | (820.3 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Capital contribution from RBI Inc. | | | — | | | | 55.5 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 55.5 | |
Restaurant VIE distributions | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (4.0 | ) | | | (4.0 | ) |
Net income (loss) | | | — | | | | 222.1 | | | | — | | | | 286.2 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3.4 | | | | 511.7 | |
Other comprehensive income (loss) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,219.3 | ) | | | — | | | | — | | | | (1,219.3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2015 | | | 202.0 | | | $ | 2,876.7 | | | | 233.7 | | | $ | 1,503.5 | | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (1,467.8 | ) | | $ | — | | | $ | 0.7 | | | $ | 2,913.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A
Common Units | | Partnership
Exchangeable units | | Accumulated
Other
Comprehensive
Income (Loss) | | Noncontrolling
Interests | | Total |
| | Units | | Amount | | Units | | Amount | |
| Balances at Balances at December 31, 2015 | 202,006,067 |
| | $ | 2,878 |
| | 233,739,648 |
| | $ | 1,503 |
| | $ | (1,467 | ) | | $ | — |
| | $ | 2,914 |
|
| Distributions declared on Class A common units ($0.72 per unit) | — |
| | (145 | ) | | — |
| | — |
| | — |
| | — |
| | (145 | ) |
| Distributions declared on partnership exchangeable units ($0.62 per unit) | — |
| | — |
| | — |
| | (141 | ) | | — |
| | — |
| | (141 | ) |
| Preferred unit distributions | — |
| | (137 | ) | | — |
| | (133 | ) | | — |
| | — |
| | (270 | ) |
| Repurchase of Partnership exchangeable units | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Exchange of Partnership exchangeable units for RBI common shares | — |
| | 223 |
| | (6,744,244 | ) | | (223 | ) | | — |
| | — |
| | — |
|
| Capital contribution from RBI Inc. | — |
| | 63 |
| | — |
| | — |
| | — |
| | — |
| | 63 |
|
| Restaurant VIE distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income | — |
| | 482 |
| | — |
| | 471 |
| | — |
| | 3 |
| | 956 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 112 |
| | — |
| | 112 |
|
| Balances at Balances at December 31, 2016 | 202,006,067 |
| | $ | 3,364 |
| | 226,995,404 |
| | $ | 1,477 |
| | $ | (1,355 | ) | | $ | 3 |
| | $ | 3,489 |
|
| Distributions declared on Class A common units ($0.92 per unit) | — |
| | (186 | ) | | — |
| | — |
| | — |
| | — |
| | (186 | ) |
| Distributions declared on partnership exchangeable units ($0.78 per unit) | — |
| | — |
| | — |
| | (175 | ) | | — |
| | — |
| | (175 | ) |
| Preferred unit distributions | — |
| | (131 | ) | | — |
| | (125 | ) | | — |
| | — |
| | (256 | ) |
| Exchange of Partnership exchangeable units for RBI common shares | — |
| | 280 |
| | (4,286,480 | ) | | (280 | ) | | — |
| | — |
| | — |
|
| Repurchase of Partnership exchangeable units | — |
| | — |
| | (5,000,000 | ) | | (330 | ) | | — |
| | — |
| | (330 | ) |
| Gain on redemption of partnership preferred units | — |
| | 122 |
| | — |
| | 112 |
| | — |
| | — |
| | 234 |
|
| Capital contribution from RBI Inc. | — |
| | 83 |
| | — |
| | — |
| | — |
| | — |
| | 83 |
|
| Restaurant VIE distributions | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
| Net income | — |
| | 636 |
| | — |
| | 597 |
| | — |
| | 2 |
| | 1,235 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 471 |
| | — |
| | 471 |
|
| Balances at Balances at December 31, 2017 | 202,006,067 |
| | $ | 4,168 |
| | 217,708,924 |
| | $ | 1,276 |
| | $ | (884 | ) | | $ | 1 |
| | $ | 4,561 |
|
| Cumulative effect adjustment (Note 16) | — |
| | (132 | ) | | — |
| | (118 | ) | | — |
| | — |
| | (250 | ) |
| Distributions declared on Class A common units ($2.23 per unit) | — |
| | (452 | ) | | — |
| | — |
| | — |
| | — |
| | (452 | ) |
| Distributions declared on partnership exchangeable units ($1.80 per unit) | — |
| | — |
| | — |
| | (387 | ) | | — |
| | — |
| | (387 | ) |
| Exchange of Partnership exchangeable units for RBI common shares | — |
| | 11 |
| | (185,333 | ) | | (11 | ) | | — |
| | — |
| | — |
|
| Repurchase of Partnership exchangeable units | — |
| | — |
| | (10,000,000 | ) | | (561 | ) | | — |
| | — |
| | (561 | ) |
| Capital contribution from RBI Inc. | — |
| | 116 |
| | — |
| | — |
| | — |
| | — |
| | 116 |
|
| Net income | — |
| | 612 |
| | — |
| | 531 |
| | — |
| | 1 |
| | 1,144 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | (553 | ) | | — |
| | (553 | ) |
| Balances at December 31, 2018 | 202,006,067 |
| | $ | 4,323 |
| | 207,523,591 |
| | $ | 730 |
| | $ | (1,437 | ) | | $ | 2 |
| | $ | 3,618 |
|
See accompanying notes to consolidated financial statements.
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income (loss) | | $ | 511.7 | | | $ | (268.9 | ) | | $ | 233.7 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 182.0 | | | | 68.8 | | | | 65.8 | |
Loss on early extinguishment of debt | | | 40.0 | | | | 127.3 | | | | — | |
Amortization of deferred financing costs and debt issuance discount | | | 34.9 | | | | 60.2 | | | | 56.3 | |
(Income) loss from equity method investments | | | 4.1 | | | | 9.5 | | | | 12.7 | |
Loss (gain) on remeasurement of foreign denominated transactions | | | 37.0 | | | | (6.2 | ) | | | 0.3 | |
Amortization of defined benefit pension and postretirement items | | | (0.4 | ) | | | (3.9 | ) | | | (2.1 | ) |
Net losses (gains) on derivatives | | | 53.6 | | | | 297.5 | | | | 6.1 | |
Net losses (gains) on refranchisings and dispositions of assets | | | 5.4 | | | | 17.6 | | | | (3.9 | ) |
Bad debt expense (recoveries), net | | | 4.1 | | | | 1.9 | | | | 2.0 | |
Share-based compensation expense | | | 50.8 | | | | 43.1 | | | | 14.8 | |
Acquisition accounting impact on cost of sales | | | 0.5 | | | | 11.8 | | | | — | |
Deferred income taxes | | | (32.3 | ) | | | (61.9 | ) | | | 32.1 | |
Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | | | | | | | | | | |
Restricted cash and cash equivalents | | | 79.2 | | | | (36.4 | ) | | | — | |
Trade and notes receivable | | | (26.2 | ) | | | (24.5 | ) | | | (7.6 | ) |
Inventories and other current assets | | | 9.2 | | | | (23.0 | ) | | | (7.8 | ) |
Accounts and drafts payable | | | 191.2 | | | | (17.9 | ) | | | (30.6 | ) |
Accrued advertising | | | 32.9 | | | | (35.9 | ) | | | (10.6 | ) |
Other accrued liabilities | | | 53.2 | | | | 122.7 | | | | (5.4 | ) |
Other long-term assets and liabilities | | | (30.2 | ) | | | (22.5 | ) | | | (30.6 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 1,200.7 | | | | 259.3 | | | | 325.2 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Payments for property and equipment | | | (115.3 | ) | | | (30.9 | ) | | | (25.5 | ) |
(Payments) proceeds from refranchisings, disposition of assets and restaurant closures | | | 19.6 | | | | (7.8 | ) | | | 64.8 | |
Net payments for acquired and disposed franchisee operations, net of cash acquired | | | — | | | | (3.9 | ) | | | (11.9 | ) |
Net payment for purchase of Tim Hortons, net of cash acquired | | | — | | | | (7,374.7 | ) | | | — | |
Return of investment on direct financing leases | | | 16.3 | | | | 15.5 | | | | 15.4 | |
Settlement/sale of derivatives, net | | | 14.2 | | | | (388.9 | ) | | | — | |
Other investing activities, net | | | 3.7 | | | | (0.1 | ) | | | 0.2 | |
| | | | | | | | | | | | |
Net cash provided by (used for) investing activities | | | (61.5 | ) | | | (7,790.8 | ) | | | 43.0 | |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Proceeds from term debt | | | — | | | | 6,682.5 | | | | — | |
Proceeds from Senior Notes | | | 1,250.0 | | | | 2,250.0 | | | | — | |
Proceeds from issuance of preferred units, net | | | — | | | | 2,998.2 | | | | — | |
Repayments of term debt, Senior Notes, Discount Notes and capital leases | | | (2,627.8 | ) | | | (3,102.0 | ) | | | (57.2 | ) |
Payment of financing costs | | | (81.3 | ) | | | (158.0 | ) | | | — | |
Dividends paid on common units/shares | | | (362.4 | ) | | | (105.6 | ) | | | (84.3 | ) |
Repurchase of Partnership exchangeable units | | | (293.7 | ) | | | — | | | | — | |
Proceeds from stock option/warrant exercises | | | 3.0 | | | | 0.5 | | | | 6.0 | |
Proceeds from issuance of shares | | | 2.1 | | | | — | | | | — | |
Excess tax benefits from equity-based compensation | | | 0.5 | | | | — | | | | 10.1 | |
Repurchases of common stock | | | — | | | | — | | | | (7.3 | ) |
Other financing activities, net | | | (5.6 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash provided by (used for) financing activities | | | (2,115.2 | ) | | | 8,565.6 | | | | (132.7 | ) |
| | | | | | | | | | | | |
Effect of exchange rates on cash and cash equivalents | | | (73.5 | ) | | | (17.8 | ) | | | 4.7 | |
Increase (decrease) in cash and cash equivalents | | | (1,049.5 | ) | | | 1,016.3 | | | | 240.2 | |
Cash and cash equivalents at beginning of period | | | 1,803.2 | | | | 786.9 | | | | 546.7 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 753.7 | | | $ | 1,803.2 | | | $ | 786.9 | |
| | | | | | | | | | | | |
Supplemental cashflow disclosures: | | | | | | | | | | | | |
Interest paid | | $ | 408.3 | | | $ | 199.9 | | | $ | 139.1 | |
Income taxes paid | | $ | 208.3 | | | $ | 35.2 | | | $ | 35.6 | |
Non-cash investing and financing activities: | | | | | | | | | | | | |
Investments in unconsolidated affiliates | | $ | — | | | $ | — | | | $ | 17.8 | |
Acquisition of property with capital lease obligations | | $ | 16.7 | | | $ | — | | | $ | 1.0 | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 1,144 |
| | $ | 1,235 |
| | $ | 956 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 180 |
| | 182 |
| | 172 |
|
| Premiums paid and non-cash loss on early extinguishment of debt | — |
| | 119 |
| | — |
|
| Amortization of deferred financing costs and debt issuance discount | 29 |
| | 33 |
| | 39 |
|
| (Income) loss from equity method investments | (22 | ) | | (12 | ) | | (20 | ) |
| Loss (gain) on remeasurement of foreign denominated transactions | (33 | ) | | 77 |
| | (20 | ) |
| Net (gains) losses on derivatives | (40 | ) | | 31 |
| | 21 |
|
| Share-based compensation expense | 48 |
| | 48 |
| | 35 |
|
| Deferred income taxes | 29 |
| | (742 | ) | | 80 |
|
| Other | 5 |
| | 18 |
| | 4 |
|
| Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | | | |
| Accounts and notes receivable | 19 |
| | (30 | ) | | (16 | ) |
| Inventories and prepaids and other current assets | (7 | ) | | 19 |
| | (10 | ) |
| Accounts and drafts payable | 41 |
| | 14 |
| | 16 |
|
| Other accrued liabilities and gift card liability | (219 | ) | | 360 |
| | (1 | ) |
| Tenant inducements paid to franchisees | (52 | ) | | (20 | ) | | (19 | ) |
| Other long-term assets and liabilities | 43 |
| | 99 |
| | (23 | ) |
| Net cash provided by operating activities | 1,165 |
| | 1,431 |
| | 1,214 |
|
| Cash flows from investing activities: | | | | | |
| Payments for property and equipment | (86 | ) | | (37 | ) | | (34 | ) |
| Proceeds from disposal of assets, restaurant closures and refranchisings | 8 |
| | 26 |
| | 30 |
|
| Net payment for purchase of Popeyes, net of cash acquired | — |
| | (1,636 | ) | | — |
|
| Return of investment on direct financing leases | 16 |
| | 16 |
| | 17 |
|
| Settlement/sale of derivatives, net | 17 |
| | 772 |
| | 11 |
|
| Other investing activities, net | 1 |
| | 1 |
| | 3 |
|
| Net cash provided by (used for) investing activities | (44 | ) | | (858 | ) | | 27 |
|
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of long-term debt | 75 |
| | 5,850 |
| | — |
|
| Repayments of long-term debt and capital leases | (74 | ) | | (2,742 | ) | | (70 | ) |
| Distributions to RBI for payments in connection with redemption of preferred shares | (60 | ) | | (3,006 | ) | | — |
|
| Payment of financing costs | (3 | ) | | (63 | ) | | — |
|
| Distributions paid on common, preferred and Partnership exchangeable units | (728 | ) | | (664 | ) | | (538 | ) |
| Repurchase of Partnership exchangeable units | (561 | ) | | (330 | ) | | — |
|
| Capital contribution from RBI Inc. | 61 |
| | 29 |
| | 14 |
|
| Excess tax benefits from share-based compensation | — |
| | — |
| | 8 |
|
| Other financing activities, net | 5 |
| | (10 | ) | | (5 | ) |
| Net cash provided by (used for) financing activities | (1,285 | ) | | (936 | ) | | (591 | ) |
| Effect of exchange rates on cash and cash equivalents | (20 | ) | | 24 |
| | (2 | ) |
| Increase (decrease) in cash and cash equivalents | (184 | ) | | (339 | ) | | 648 |
|
| Cash and cash equivalents at beginning of period | 1,097 |
| | 1,436 |
| | 788 |
|
| Cash and cash equivalents at end of period | $ | 913 |
| | $ | 1,097 |
| | $ | 1,436 |
|
| Supplemental cashflow disclosures: | | | | | |
| Interest paid | $ | 561 |
| | $ | 447 |
| | $ | 407 |
|
| Income taxes paid | $ | 433 |
| | $ | 200 |
| | $ | 159 |
|
See accompanying notes to consolidated financial statements.
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Description of Business and Organization
Restaurant Brands International Limited Partnership (“Partnership,” “we,”Partnership”, “we”, “us” or “our”) was formed on August 25, 2014 as a general partnership and was registered on October 27, 2014 as a limited partnership in accordance with the laws of the Province of Ontario. Pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended, Partnership is a successor issuer to Burger King Worldwide, Inc. Partnership is the indirect parent of The TDL Group Corp. (f/k/a Tim Hortons ULCWe franchise and Tim Hortons Inc.), a limited company existing under the laws of British Columbia that franchises and operatesoperate quick service restaurants serving premium coffee and other beverage and food products under theTim Hortons® brand (“Tim Hortons” or “TH”), and Burger King Worldwide, Inc., a Delaware corporation that franchises and operates fast food hamburger restaurantshamburgers principally under theBurger King® brand (“Burger King Worldwide”, “Burger King” or “BK”), and chicken under the Popeyes® brand (“Popeyes” or “PLK”). We are one of the world’s largest quick service restaurant, or QSR, chainscompanies as measured by total number of restaurants. As of December 31, 2015,2018, we franchised or owned 4,846 Tim Hortons restaurants, 17,796 Burger King restaurants, and 3,102 Popeyes restaurants, for a total of 19,41625,744 restaurants, and operate in approximatelymore than 100 countries and U.S. territories worldwide.territories. Approximately 100% of current Tim Hortons and Burger King system-wide restaurants are franchised. We are
a limited partnership organized under the laws of Ontario and a subsidiary of Restaurant Brands International Inc. (“RBI”). RBI is our sole general
partner. As our general partner,
and as such, RBI has 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 in accordance with the partnership agreement of Partnership (“partnership agreement”) and applicable laws.
There is no board of directors of Partnership. RBI has established a conflicts committee composed entirely of “independent directors” (as such term is defined in the partnership agreement) in order to consent to, approve or direct various enumerated actions on behalf of RBI (in its capacity as our general partner) in accordance with the terms of the partnership agreement.The following table outlines our restaurant count, by brand and consolidated, and restaurant activity for the periods indicated.
| | | | | | | | |
| | | 2015 | | | 2014 | |
Tim Hortons Restaurants | | | | | | | | |
Total restaurants – beginning of period | | | 4,258 | | | | | |
Openings | | | 227 | | | | | |
Closures | | | (72 | ) | | | | |
| | | | | | | | |
Total systemwide restaurants – end of period | | | 4,413 | | | | 4,258 | |
| | | | | | | | |
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Burger King Restaurants | | | | | | | | | | | | |
Total restaurants – beginning of period | | | 14,372 | | | | 13,667 | | | | 12,991 | |
Openings | | | 999 | | | | 999 | | | | 882 | |
Closures | | | (368 | ) | | | (294 | ) | | | (206 | ) |
| | | | | | | | | | | | |
Total restaurants – end of period | | | 15,003 | | | | 14,372 | | | | 13,667 | |
| | | | | | | | | | | | |
| | | | | | | | |
| | | 2015 | | | 2014 | |
System Wide Restaurants | | | | | | | | |
Total restaurants – beginning of period | | | 18,630 | | | | | |
Openings | | | 1,226 | | | | | |
Closures | | | (440 | ) | | | | |
| | | | | | | | |
Total systemwide restaurants – end of period | | | 19,416 | | | | 18,630 | |
| | | | | | | | |
Excluded from the table above are 398 and 413 of Tim Hortons limited service kiosks in Canada and the U.S. as of December 31, 2015 and 2014, respectively, and licensed Tim Hortons locations in the Republic of Ireland and the United Kingdom. Commencing in the fourth quarter of 2015, we revised our presentation of restaurant counts to exclude limited service kiosks, with the revision applied retrospectively to the earliest period presented to provide period-to-period comparability.
All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to
Canadian dollars“Canadian dollars” or
C$“C$” are to the currency of Canada unless otherwise indicated.
Note 2.
The TransactionsOn December 12, 2014 (the “Closing Date”), pursuant to the Arrangement Agreement and Plan of Merger (the “Arrangement Agreement”), dated as of August 26, 2014, by and among Tim Hortons, Burger King Worldwide, RBI, Partnership, Blue Merger Sub, Inc., a wholly owned subsidiary of Partnership (“Merger Sub”), and 8997900 Canada Inc., a wholly owned subsidiary of Partnership (“Amalgamation Sub”), Amalgamation Sub acquired all of the outstanding shares of Tim Hortons pursuant to a plan of arrangement under Canadian law, which resulted in Tim Hortons becoming an indirect subsidiary of both RBI and Partnership (the “Arrangement”) and Merger Sub merged with and into Burger King Worldwide, with Burger King Worldwide surviving the merger as an indirect subsidiary of both RBI and Partnership (the “Merger” and, together with the Arrangement, the “Transactions”). The Arrangement was accounted for as a business combination using the acquisition method of accounting and Burger King Worldwide was determined to be the accounting acquirer. The primary reason for the acquisition was to create one of the world’s largest quick service restaurant companies.
Upon completion of the Transactions, we issued to RBI 202.0 million Class A common units, which are entitled to receive common distributions from Partnership that correspond to the aggregate common dividends payable by RBI on its common shares, and 68,530,939 Partnership preferred units, which are entitled to preferred distributions from Partnership that correspond to RBI’s distributions and redemption requirements with respect to its preferred shares (see Notes 18 and 19). In connection with the Transactions, Partnership also issued 265.0 million Class B exchangeable limited partnership units of Partnership (“Partnership exchangeable units”) to the former holders of Burger King Worldwide common stock. Pursuant to the terms of the partnership agreement, each Partnership exchangeable unit is entitled to distributions from Partnership in an amount equal to any dividends or distributions that RBI declares and pays with respect to an RBI common share. Additionally, each holder of a Partnership exchangeable unit has voting rights with respect to RBI that are equivalent to the corresponding rights afforded to a holder of an RBI common share. Since December 12, 2015, the holder of Partnership exchangeable units has the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for RBI common shares at a ratio of one RBI common share for each Partnership exchangeable unit, subject to RBI’s right as the general partner of Partnership, in RBI’s sole discretion, to deliver a cash payment in lieu of RBI common shares. The Partnership exchangeable units trade on the Toronto Stock Exchange under the ticker symbol “QSP”.
In 2014, fees and expenses related to the Transactions and related financings totaled $238.4 million, including (1) $70.0 million consisting principally of investment banking fees and legal fees (which are classified as selling, general and administrative expenses), (2) compensation related expenses of $55.0 million (which are classified as selling, general and administrative expenses) (3) commitment fees of $28.1 million associated with the bridge loan available at the closing of the Transactions (which are classified as loss on early extinguishment of debt) and (4) the payment of premiums of $85.3 million to redeem the Burger King Worldwide notes (which are classified as loss on early extinguishment of debt). Debt issuance costs capitalized in connection with the issuance of debt to fund the Transactions and refinancing of Burger King Worldwide indebtedness (see Note 12,Long-term debt) totaled $160.2 million and are classified as a reduction to term debt, net of current portion.
The total consideration paid in connection with the acquisition of Tim Hortons was approximately $11.3 billion. This consideration paid, along with repayment of Burger King Worldwide indebtedness (see Note 12,Long-term debt) and the payment of transaction expenses was funded through (i) RBI’s issuance of 106.6 million of RBI common shares to Tim Hortons shareholders, (ii) $6,750.0 million of proceeds from borrowings by subsidiaries of Partnership under a new term loan credit facility (the “Term Loan Facility”), (iii) $2,250.0 million of proceeds from the issuance of second lien secured senior notes by subsidiaries of Partnership, and (iv) $3,000.0 million of proceeds from RBI’s issuance of the Preferred Shares and the Warrant.
As discussed in Note 20,Equity-based Compensation, at the time of the Transactions, we assumed the obligation for all outstanding Burger King Worldwide stock options and RSUs. Additionally, pursuant to the Arrangement Agreement, we assumed the obligation for each vested and unvested Tim Hortons stock option with tandem SARs that was not surrendered in connection with the Arrangement on the same terms and conditions of the original awards, adjusted by an exchange ratio of 2.41.
The computation of consideration paid and the final allocation of consideration to the net tangible and intangible assets acquired are presented in the tables that follow (in millions).
| | | | |
Cash consideration (a) | | $ | 7,516.7 | |
Share consideration (b) | | | 3,778.2 | |
| | | | |
Total consideration paid | | $ | 11,294.9 | |
| | | | |
(a) | Includes $13.9 million for the settlement of share-based compensation. |
(b) | Calculated as 106,565,335 shares issued to former holders of Tim Hortons common shares, multiplied by $35.50, which was the closing price of a share of Burger King Worldwide common stock on the Closing Date, reduced by post-combination expense of approximately $4.9 million associated with accelerated vesting and recognition of certain Tim Hortons share-based compensation. |
| | | | |
| | | December 12, 2014 | |
Total current assets | | $ | 654.7 | |
Property and equipment | | | 1,672.3 | |
Tim Hortons Brand | | | 7,255.0 | |
Other intangible assets | | | 564.3 | |
Other assets, net | | | 146.2 | |
Accounts payable | | | (228.2 | ) |
Advertising fund liabilities | | | (49.7 | ) |
Other accrued liabilities | | | (223.0 | ) |
Total debt and capital lease obligations | | | (1,346.0 | ) |
Other liabilities, net | | | (375.3 | ) |
Deferred income taxes, net | | | (1,415.2 | ) |
| | | | |
Total identifiable net assets | | | 6,655.1 | |
Noncontrolling interest | | | (1.1 | ) |
Goodwill | | | 4,640.9 | |
| | | | |
Total | | $ | 11,294.9 | |
| | | | |
All final purchase price allocation adjustments have been reflected on a retrospective basis as of the Closing Date. Additionally, our statements of operations, comprehensive income (loss), equity and cash flows were retrospectively adjusted to reflect the effects of the measurement period adjustments.
The Tim Hortons brand has been assigned an indefinite life and, therefore, will not be amortized, but tested annually for impairment. Other intangible assets include $228.0 million related to franchise agreements and $336.3 million related to favorable leases. Franchise agreements have a weighted average amortization period of 28 years. Favorable leases have a weighted average amortization period of 11 years.
All of the goodwill from the Transactions was assigned to our TH operating segment. The goodwill attributable to the Transactions will not be amortizable or deductible for tax purposes. Goodwill is considered to represent the value associated with the workforce and synergies the two companies anticipate realizing as a combined company.
The following unaudited consolidated pro forma summary has been prepared by adjusting our historical data to give effect to the Transactions as if they had occurred on January 1, 2013 (in millions, except per share amounts):
| | | | | | | | |
| | | Pro Forma - Unaudited | |
| | | 2014 | | | 2013 | |
Total Revenues | | $ | 4,221.6 | | | $ | 4,316.2 | |
Net income | | | 301.7 | | | | 32.4 | |
Net income (loss) attributable to non-controlling interests | | | 20.7 | | | | (451.6 | ) |
| | | | | | | | |
Net income attributable to Restaurant Brands International Inc. | | | 281.0 | | | | 484.0 | |
| | | | | | | | |
Preferred shares dividends | | | 270.0 | | | | 270.0 | |
Accretion of preferred shares to redemption value | | | — | | | | 546.4 | |
| | | | | | | | |
Net income (loss) attributable to common shareholders | | $ | 11.0 | | | $ | (332.4 | ) |
| | | | | | | | |
Earnings (loss) per common share: | | | | | | | | |
Basic | | $ | 0.06 | | | $ | (1.72 | ) |
Diluted | | $ | 0.06 | | | $ | (1.72 | ) |
The unaudited consolidated pro forma financial information was prepared in accordance with the acquisition method of accounting under existing standards and is not necessarily indicative of the results of operations that would have occurred if the Transactions had been completed on the date indicated, nor is it indicative of our future operating results. The unaudited consolidated pro forma information for 2013 includes certain non-recurring costs as a result of the Transactions, consisting primarily of transaction costs of approximately $223.0 million, loss on early extinguishment of debt of approximately $155.0 million and transaction related derivative losses of approximately $148.0 million. These costs were recorded net of tax, utilizing a tax rate of 26.5%.
The unaudited pro forma results do not reflect future events that either have occurred or may occur after the Transactions, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods. They also do not give effect to certain charges that we incurred in 2015 related to a strategic realignment of our global structure to better accommodate the needs of the combined business and support successful global growth.
Note 3. Summary of Significant Accounting Policies
Fiscal Year
We operate on a monthly calendar, with a fiscal year that ends on December 31. Prior to December 31, 2015, the fiscal year of our Tim Hortons subsidiaries ended on the Sunday nearest to December 31 which was December 28 in 2014. The effect of changing the fiscal year of our Tim Hortons subsidiaries during 2015 did not have a material impact on our consolidated results of operations, financial position or cash flows.
Basis of Presentation
and ConsolidationThe
preparation of consolidated financial statements
were prepared in
accordanceconformity with accounting principles generally accepted in the United States
of America (“
U.S. GAAP”) and related rules and regulations of the U.S. Securities and Exchange
Commission. All material intercompany balancesCommission requires our management to make estimates and
transactions have been eliminated in consolidation.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.
Principles of Consolidation
The consolidated financial statements include our accounts and the accounts of
our wholly-owned subsidiaries. We consolidate 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 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. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our
most significant variable interests are in entities that operate restaurants under our subsidiaries’ franchise arrangements and certain equity method investees that operate as master franchisees. Our maximum exposure to loss resulting from involvement with
potential VIEs is attributable to
tradeaccounts and notes receivable balances, outstanding loan guarantees and future lease payments, where applicable.
We
As our 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 haveconsider ourselves the primary beneficiary of any ownership interests in our franchisees’ businesses, except for investments in various entitiessuch entity that are accounted for under the equity method. might be a VIE.
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. In these arrangements, Tim Hortons has the ability to determine which operators manage the restaurants and for what duration. Tim Hortons previously also entered into interest-free financing in connection with a Franchise Incentive Program (“FIP”) with certain U.S. restaurant owners whereby restaurant owners finance the initial franchise fee and purchase of restaurant assets. In both operator and FIP arrangements (“FIP Notes”), weWe 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”). Additionally, Tim Hortons participates in advertising funds which, on behalfAs of Tim Hortons CompanyDecember 31, 2018 and franchise restaurants, collect contributions and administer funds for advertising and promotional programs. Tim Hortons is the sole shareholder (Canada) and sole member (U.S.) in these funds, and is2017, we determined that we are the primary beneficiary of 17 and 31 Restaurant VIEs, respectively, and accordingly, have consolidated the results of operations, assets and liabilities, and cash flows of these funds (the “Advertising VIEs”). As Burger King franchiseRestaurant VIEs in our consolidated financial statements. Material intercompany accounts and master franchise arrangements provide the franchisetransactions have been eliminated in consolidation.
Assets and
master franchise entities the powerliabilities related to
direct the activities that most significantly impact their economic performance, weconsolidated VIEs are not significant to our total consolidated assets and liabilities. Liabilities recognized as a result of consolidating these VIEs do not
consider ourselvesnecessarily represent additional claims on our general assets; rather, they represent claims against the
primary beneficiaryspecific assets of
any such entitythe consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that
mightcould be
a VIE.used to satisfy claims by our creditors as they are not legally included within our general assets.
Reclassifications
Certain prior year amounts in the accompanying consolidated financial statements and notes to the consolidated financial statements
(the “Notes”) have been reclassified in order to be comparable with the current year classifications. These
consist of the reclassification of $20 million and $19 million for the years ended December 31, 2017 and 2016, respectively, from changes in Other long-term assets and liabilities to Tenant inducements paid to franchisees in the Consolidated Statement of Cash Flows and the December 31, 2017 reclassification of Advertising fund restricted assets to Cash and cash equivalents, Accounts and notes receivable, net and Prepaids and other current assets and the reclassification of Advertising fund liabilities to Accounts and drafts payable and Other accrued liabilities as detailed below (in millions). These reclassifications had no effect on previously reported net income.
Concentrations of Risk
As of December 31, 2015, we franchised or owned a total of 19,416 restaurants in approximately 100 countries and U.S. territories worldwide. Approximately 100% of current Tim Hortons and Burger King system-wide restaurants are franchised.
Four distributors currently service approximately 88.7% of our U.S. Burger King system restaurants and the loss of any one of these distributors would likely adversely affect our business. In many of our international markets, a single distributor services all the Burger King restaurants in the market. The loss of any of one of these distributors would likely have an adverse effect on the market impacted, and depending on the market, could have an adverse impact on our financial results. In addition, we have moved to a business model in our international markets (for both TH and BK) and our U.S. market (for TH) in which we enter into exclusive agreements with master franchisees and area developers to develop and operate restaurants, and, in the case of our international markets, subfranchise to third parties the right to develop and operate restaurants in defined geographic areas. The termination of an arrangement with a master franchisee or a lack of expansion by certain master franchisees could result in the delay or discontinuation of the development of franchise restaurants, or an interruption in the operation of our brand in a particular market or markets.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and notes to the financial statements. Management adjusts such estimates and assumptions when facts and circumstances dictate. Such estimates and assumptions may be affected by volatile credit, equity, foreign currency, energy markets and declines in consumer spending. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
|
| | | | | | | | | | | |
| | December 31, 2017 | | | | December 31, 2017 |
| | As Reported | | Reclassification | | As Adjusted |
| Current assets: | | | | | |
| Cash and cash equivalents | $ | 1,073 |
| | $ | 24 |
| | $ | 1,097 |
|
| Accounts and notes receivable, net | 456 |
| | 33 |
| | 489 |
|
| Inventories, net | 78 |
| | — |
| | 78 |
|
| Advertising fund restricted assets | 83 |
| | (83 | ) | | — |
|
| Prepaids and other current assets | 60 |
| | 26 |
| | 86 |
|
| Total current assets | $ | 1,750 |
| | $ | — |
| | $ | 1,750 |
|
| | | | | | |
| Current liabilities: | | | | | |
| Accounts and drafts payable | $ | 413 |
| | $ | 83 |
| | $ | 496 |
|
| Other accrued liabilities | 838 |
| | 28 |
| | 866 |
|
| Gift card liability | 215 |
| | — |
| | 215 |
|
| Advertising fund liabilities | 111 |
| | (111 | ) | | — |
|
| Current portion of long term debt and capital leases | 78 |
| | — |
| | 78 |
|
| Total current liabilities | $ | 1,655 |
| | $ | — |
| | $ | 1,655 |
|
Foreign Currency Translation
and Transaction Gains and Losses
Our functional currency is the U.S. dollar,
as our Partnership preferred units and related preferred distributions,since our term loan
first lien senior secured notes, and
second lien senior secured notes are denominated in U.S. dollars. The functional currency of each of our operating subsidiaries is generally the
local currency. Foreign currency
balance sheetsof the economic environment in which the subsidiary primarily does business. Our foreign subsidiaries’ financial statements are translated into U.S. dollars using the foreign exchange rates applicable to the dates of the financial statements. Assets and liabilities are translated using the end-of-period
spot foreign exchange
rates,rates. Income, expenses and
statements of operations and statements of cash flows are translated at the average
foreign exchange rates for each period.
Equity accounts are translated at historical foreign exchange rates. The
effects of these translation adjustments
resulting from the translationare reported as a component of
foreign currency financial statements are recorded inaccumulated other comprehensive income (loss)
(“AOCI”) in the consolidated statements of
comprehensive income (loss).Foreign Currency Transaction Gains or Losses
Foreignequity.
For any transaction that is denominated in a currency
transaction gains or losses resultingdifferent from the
re-measurement of our foreign-denominated assetsentity’s functional currency, we record a gain or loss based on the difference between the foreign exchange rate at the transaction date and
liabilities or our subsidiaries are reflected in earnings in the
foreign exchange rate at the transaction settlement date (or rate at period
when the exchange rates change and areend, if unsettled) which is included within other operating
expenses (income)
expenses,, net in the consolidated statements of operations.
Cash and Cash Equivalents
Cash and cash equivalents include short-term,
All highly liquid investments with original maturities of three months or less and credit card
receivables.Restricted Cash and Cash Equivalents
During the year ended December 31, 2015, amounts classified as restricted cash as of December 31, 2014 were reclassified to cash and cash equivalents as a result of the restructuring of banking arrangements and our intent to no longer classify this cash as restricted. This reclassification is reflected as a source of cash provided by operating activities in the consolidated statement of cash flows for the year ended December 31, 2015.
As of December 31, 2014, proceeds from the initial sale or reloading of the Tim Hortons Tim Card® quick-pay cash card program (“Tim Card”) were classified as restricted cash and cash equivalents in the consolidated balance sheets along with a corresponding obligation.
Notes Receivable
Notes receivable represent loans made to franchisees arising from refranchisings of Company restaurants, sales of property and FIP Notes. In certain cases, past due trade receivables from franchisees are restructured into an interest-bearing note, which are generally already fully reserved, and as a result, are transferred to notes receivable at a net carrying value of zero. Notes receivable with a carrying value greater than zero are written down to net realizable value when it is likely that we are unable to collect all amounts due under the contractual terms of the loan agreement.
Allowance for Doubtful Accounts
We evaluate the collectability of our trade accounts receivable from franchisees based on a combination of factors, including the length of time the receivables are past due and the probabilityconsidered cash equivalents.
Inventories are carried at the lower of cost or net realizable value and consist primarily of raw materials such as green coffee beans and finished goods such as new equipment, parts, paper supplies and restaurant food items. The moving average method is used to determine the cost of raw material
inventories and finished goods inventories held for sale to Tim Hortons franchisees.
Property and Equipment, net
We record property and equipment at historical cost less accumulated depreciation and
amortization. Depreciation and amortization,
are computedwhich is recognized using the straight-line method over the following estimated useful
lives of the assets. | | |
| | Depreciation Periods |
Land
| | |
Buildings and improvements
| | (up to 40 years) |
Restaurant equipment
| | (up to 18 years) |
Furniture, fixtures, and other
| | (up to 10 years) |
Manufacturing equipment
| | (up to 30 years) |
Capital leases
| | (up to 40 years or lease term) |
lives: (i) buildings and improvements – up to 40 years; (ii) restaurant equipment – up to 17 years; (iii) furniture, fixtures and other – up to 10 years; (iv) manufacturing equipment – up to 25 years; and (v) capital leases – up to 40 years or lease term. Leasehold improvements to properties where we are the lessee are amortized over the lesser of the remaining term of the lease or the estimated useful life of the improvement.
We are considered to be the owner of certain restaurants leased from
an unrelated
lessorlessors because Tim Hortons constructed some of the structural elements of those restaurants. Accordingly,
we have included these restaurant properties in Property and equipment, net in the consolidated balance sheet and recognized the lessor’slessors’ contributions to the construction costs
forof these restaurants
was recognized as other
debt.debt and was $71 million and $83 million at December 31, 2018 and 2017, respectively.
Major improvements are capitalized, while maintenance and repairs are expensed when incurred.
Assets Held For Sale
We classify assets as held for sale when we commit to a plan to dispose of the assets in their current condition at a price that is reasonable, and we believe completing the plan of sale within one year is probable without significant changes. Assets held for sale are recorded at the lower of their carrying value or fair value, less costs to sell and we cease depreciation on assets at the time they are classified as held for sale. We classify impairment losses associated with restaurants held for sale as losses on refranchisings.
If we subsequently decide to retain assets previously classified as held for sale, the assets would be reclassified from assets held for sale at the lower of (a) their then-current fair value or (b) the carrying value at the date the assets were classified as held for sale, less the depreciation that would have been recorded since that date.
We define
a lease term as the initial term of
thea lease plus any renewals covered by bargain renewal options or that are reasonably assured of exercise because non-renewal would create an economic penalty, plus any periods that
we havethe lessee has use of the property but is not charged rent by a landlord
(“rent holiday”)(rent holiday).
We record rental income and rental expense for operating leases on a straight-line basis over the lease term, net of any applicable lease incentive amortization. Contingent rental income is recognized on an accrual basis as earned.
Assets we acquire as lessee under capital leases are stated at the lower of the present value of future minimum lease payments or fair market value at the date of inception of the lease. Capital lease assets are depreciated using the straight-line method over the shorter of the useful life of the asset or the underlying lease term.
We also have net investments in properties leased to franchisees, which meet the criteria of direct financing leases. Investments in direct financing leases are recorded on a net basis, consisting of the gross investment and residual value in the lease, less
the unearned income.
Earned income on direct financing leases is recognized when earned and collectability is reasonably assured. Unearned income is recognized over the lease term yielding a constant periodic rate of return on the net investment in the lease. Direct financing leases are reviewed for impairment whenever events or circumstances indicate that the carrying amount of
anthe asset may not be recoverable based on the payment history under the lease.
We
record rent expense and income from operating leases that contain rent holidays or scheduled rent increases on a straight-line basis over the lease term. Contingent rentals are generally based on a percentage of restaurant sales or as a percentage of restaurant sales in excess of stipulated amounts, and thus are not considered minimum lease payments at lease inception.Favorablehave recorded favorable and unfavorable operating leases are recorded in connection with the acquisition method of accounting. We amortize favorable and unfavorable leases on a straight-line basis over the remaining term of the leases, as determined at the acquisition date. Upon early termination of a lease, the write-off of the favorable or unfavorable lease carrying value associated with the lease is recognized as a loss or gain within other operating (income) expense, net in the consolidated statements of operations. Amortization of favorable and unfavorable leases on Company restaurants is included in costs of sales in the consolidated statements of operations. Amortization of favorable and unfavorable income leases is included in franchise and property revenues in the consolidated statements of operations. Amortization of favorable and unfavorable commitment leases for franchise restaurants is included in franchise and property expenses in the consolidated statements of operations.
Lease incentives we provide to our lessees are recorded as a lease incentive asset and amortized as a reduction of rental income on a straight-line basis over the lease term. Lease incentives we receive from a landlord are recognized as a liability and amortized as a reduction of rent expense over the lease term.
We recognize a loss on leases and subleases and a related lease liability when expenses to be recorded under the lease exceed future minimum rents to us under the lease or sublease. The lease liability is amortized on a straight-line basis over the lease term as a reduction of property expense.
Goodwill and Intangible Assets Not Subject to Amortization
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in connection with the Transactionsacquisition of Popeyes in 2017, the acquisition of Tim Hortons in 2014 and the 2010 acquisition of Burger King Holdings, Inc. by 3G.3G Capital Partners Ltd. Our indefinite-lived intangible assets consist of theTim Hortons brand, the Burger King brand, and theBurger KingPopeyesbrand (each a “Brand” and together, the “Brands”). Goodwill and the Brands are tested for impairment at least annually as of October 1 of each year and more often if an event occurs or circumstances change which indicate impairment might exist. Our annual impairment tests of goodwill and the Brands may be completed through qualitative assessments, as further described below.assessments. We may elect to bypass the qualitative assessment and proceed directly to a two-step quantitative impairment test for any reporting unit or either Brand in any period. We can resume the qualitative assessment for any reporting unit or Brand in any subsequent period. Under a qualitative approach, our impairment review for goodwill consists of an assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for any reporting unit, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a reporting unit exceeds its fair value, we perform a two-step quantitative goodwill impairment test. The first step requires us to estimate the fair value of the reporting unit. If the fair value of the reporting unit is less than its carrying amount, the estimated fair value of the reporting unit is
allocated to all its underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair value. If necessary, goodwill is then written down to its implied fair value.
Under a qualitative approach, our impairment review for the Brands consists of an assessment of whether it is more-likely-than-not that a Brand’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for
eithera Brand, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a Brand exceeds its fair value, we estimate the fair value of the Brand and compare it to its carrying amount. If the carrying amount exceeds fair value, an impairment loss is recognized in an amount equal to that excess.
We completed our impairment tests for goodwill and the Brands as of October 1,
2015, 20142018, 2017 and
20132016 and no impairment resulted.
During 2015, we elected to perform a quantitative impairment review of goodwill for all of our reporting units and the Brands.When we dispose of a restaurant business within six months of acquisition, the goodwill recorded in connection with the acquisition is written off. Otherwise, goodwill is written off based on the relative fair value of the business sold to the reporting unit when disposals occur more than six months after acquisition. The sale of Company restaurants to franchisees is referred to as a “refranchising.”
Long-lived assets, such as property and equipment and intangible assets subject to amortization, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of
anthe asset
or asset group may not be recoverable. Some of the events or changes in circumstances that would trigger an impairment review include, but are not limited to, bankruptcy proceedings or other significant financial distress of a lessee; significant negative industry or economic trends; knowledge of transactions involving the sale of similar property at amounts below the carrying value; or our expectation to dispose of long-lived assets before the end of their estimated useful lives. The impairment test for long-lived assets requires us to assess the recoverability of long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from use and eventual disposition of the
assets.assets or asset group. Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we
must record an impairment charge equal to the excess, if any, of
the net carrying value over fair value.
Equity Method Investments
Equity investments in which we have significant influence but not control are accounted for using the equity method and are included in other assets, net in our consolidated balance sheets. Our share of investee net income or loss is classified as (income) loss from equity method investments in our consolidated statements of operations. The difference between the carrying value of our equity investment and the underlying equity in the historical net assets of the investee is accounted for as if the investee were a consolidated subsidiary. Accordingly, the carrying value difference is amortized over the estimated lives of the assets of the investee to which such difference would have been allocated if the equity investment were a consolidated subsidiary. To the extent the carrying value difference represents goodwill or indefinite lived assets, it is not amortized. During 2015, we recorded $3.6 million of basis difference amortization related to equity method investments. We did not record basis difference amortization related to equity method investments for 2014 and 2013. We evaluate our investments in equity method investments for impairment whenever events occur or circumstances change in a manner that indicates our investment may not be recoverable. We did not record impairment charges related to equity method investments for 2015, 2014 and 2013.
Other Comprehensive Income (Loss)
Other comprehensive income (loss)
(“OCI”) refers to revenues, expenses, gains and losses that are included in comprehensive income (loss), but are excluded from net income (loss) as these amounts are recorded directly as an adjustment to equity, net of tax. Our other comprehensive income (loss) is
primarily comprised of unrealized gains and losses on foreign currency translation adjustments
and unrealized gains and losses on hedging activity, net of
tax, and minimum pension liability adjustments, net of tax.
Derivative Financial Instruments
We recognize and measure all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. We may enter into derivatives that are not initially designated as hedging instruments for accounting purposes, but which largely offset the economic impact of certain transactions.
Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income (loss) and recognized in the consolidated statements of operations when the hedged item affects earnings, depending on the purpose of the derivatives and whether they qualify for, and we have applied, hedge accounting treatment.
The ineffective portion of gains or losses on derivatives is reported in current earnings.When applying hedge accounting,
our policy is towe designate at a derivative’s inception, the specific assets, liabilities or future commitments being hedged, and
to assess the hedge’s effectiveness at inception and on an ongoing basis. We discontinue hedge accounting when: (i) we determine that the cash flow derivative is no longer effective in offsetting changes in the cash flows of a hedged item; (ii) the derivative expires or is sold, terminated or exercised; (iii) it is no longer probable that the forecasted transaction will occur; or (iv) management determines that designation of the derivatives as a hedge instrument is no longer appropriate. We do not enter into or hold derivatives for speculative purposes.
Disclosures
Aboutabout Fair Value
Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustment in certain circumstances. These items primarily include: (i) assets acquired and liabilities assumed initially measured at fair value in connection with the application of acquisition accounting; (ii) long-lived assets, reporting units with goodwill and intangible assets for which fair value is determined as part of the related impairment tests; and (iii) asset retirement obligations initially measured at fair value. At December 31, 2015 and December 31, 2014, there were no significant adjustments to fair value or fair value measurements required for non-financial assets or liabilities.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market, or if none exists, the most advantageous market, for the specific asset or liability at the measurement date (the exit price). The fair value is based on assumptions that market participants would use when pricing the asset or liability. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the calculation, as follows:
Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.
Level 3 Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.Certain
The carrying amounts for cash and equivalents, accounts and notes receivable and accounts and drafts payable approximate fair value based on the short-term nature of these amounts.
We carry all of our derivatives are valuedat fair value and value them using various pricing models or discounted cash flow analysesanalysis that incorporate observable market parameters, such as interest rate yield curves and currency rates, classified aswhich are Level 2 within the valuation hierarchy.inputs. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or us.The carrying amounts for cash and equivalents, trade accounts and notes receivable and accounts and drafts payable approximate For disclosures about the fair value based onmeasurements of our derivative instruments, see Note 12,
Derivative Instruments. The following table presents the
short-term nature of these amounts.Restricted investments, consisting of investment securities held in a rabbi trust to invest compensation deferred under our Executive Retirement Plan and fund future deferred compensation obligations, are carried at fair value, with net unrealized gains and losses recorded in our consolidated statements of operations. The fair value of these investment securities are determined using quoted market prices in active markets classified as Level 1 within the fair value hierarchy.
Fair value ofour variable rate term debt wasand senior notes, estimated using inputs based on bid and offer prices andthat are Level 2 inputs, within the fair value hierarchy.
and principal carrying amount (in billions):
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Fair value of our variable term debt and senior notes | $ | 11 |
| | $ | 12 |
|
| Principal carrying amount of our variable term debt and senior notes | 12 |
| | 12 |
|
The determinations of fair values of certain tangible and intangible assets for purposes of the application of the acquisition method of accounting to the acquisition of
Tim HortonsPopeyes were based upon Level 3 inputs. The determination of fair values of our reporting units and the determination of the fair value of the Brands for
our 2015impairment testing using a quantitative approach during 2018 and
2014 annual impairment evaluations of goodwill and brand intangible assets, respectively,2017 were based upon Level 3 inputs.
We transitioned to FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts with Customers (“ASC 606”), from ASC Topic 605, Revenue Recognition and ASC Subtopic 952-605, Franchisors - Revenue Recognition (together, the “Previous Standards”) on January 1, 2018 using the modified retrospective transition method. Our Financial Statements reflect the application of ASC 606 guidance beginning in 2018, while our consolidated financial statements for prior periods were prepared under the guidance of the Previous Standards. See Note 16, Revenue Recognition, for further information about our transition to this new revenue recognition model using the modified retrospective transition method.
Sales
Sales includeconsist primarily of supply chain sales, and sales from Company restaurants. Supply chain saleswhich represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers other than equipmentand are presented net of any related sales relatedtax. Orders placed by customers specify the goods to initial restaurant establishment or renovations that are shipped directly from our warehouses or by third-party distributorsbe delivered and transaction prices for supply chain sales. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to restaurants or retailers. Revenues fromthe customer, which is when the customer obtains physical possession of the goods, legal title is transferred, the customer has all risks and rewards of ownership and an obligation to pay for the goods is created. Shipping and handling costs associated with outbound freight for supply chain sales are recognized upon delivery.accounted for as fulfillment costs and classified as cost of sales.
Commencing on January 1, 2018, we classify all sales of restaurant equipment to franchisees as Sales
at Company restaurants (including Restaurant VIEs) represent restaurant-leveland related cost of equipment sold as Cost of sales. In periods prior to January 1, 2018, we classified sales
to our guests and are recognized at the point of
sale.Franchise and property revenues include franchise revenues, consisting primarily of royalties, initial and renewal franchise fees paid by franchisees, revenues derived fromrestaurant equipment sales at establishment of a restaurant and in connection with a restaurant renewal or renovation as Franchise and property revenues and related costs as Franchise and property expense.
To a much lesser extent, sales also include Company restaurant sales (including Restaurant VIEs), which consist of sales to restaurant guests. Revenue from propertiesCompany restaurant sales is recognized at the point of sale. Taxes assessed by a governmental authority that we lease or subleasecollect are excluded from revenue.
Franchise revenues
Franchise revenues consist primarily of royalties, advertising fund contributions, initial and renewal franchise fees and upfront fees from development agreements and master franchise and development agreements (“MFDAs”). Under franchise agreements, we provide franchisees with (i) a franchise license, which includes a license to
franchisees.use our intellectual property and, in those markets where our subsidiaries manage an advertising fund, advertising and promotion management, (ii) pre-opening services, such as training and inspections, and (iii) ongoing services, such as development of training materials and menu items and restaurant monitoring and
inspections. The services we provide under franchise agreements are highly interrelated and dependent upon the franchise license and we concluded the services do not represent individually distinct performance obligations. Consequently, we bundle the franchise license performance obligation and promises to provide services into a single performance obligation under ASC 606, which we satisfy by providing a right to use our intellectual property over the term of each franchise agreement.
Royalties, including franchisee contributions to advertising funds managed by our subsidiaries, are based oncalculated as a percentage of grossfranchise restaurant sales atover the term of the franchise restaurantsagreement. Under our franchise agreements, advertising contributions paid by franchisees must be spent on advertising, product development, marketing and related activities. Initial and renewal franchise fees are payable by the franchisee upon a new restaurant opening or renewal of an existing franchise agreement. Our franchise agreement royalties, inclusive of advertising fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and are recognized when earnedas franchise sales occur. Additionally, under ASC 606, initial and collectability is reasonably assured. Initialrenewal franchise fees and equipment sales are recognized as revenue on a straight-line basis over the term of the respective agreement. Under the Previous Standards, initial franchise fees were recognized as revenue when the related restaurant beginscommenced operations and our completion of all material services and conditions. Fees collected in advance are deferred until earned. Renewal franchise fees arewere recognized as revenue upon receipt of the non-refundable fee and execution of a new franchise agreement. UpfrontOur performance obligation under development agreements other than MFDAs generally consists of an obligation to grant exclusive development rights over a stated term. These development rights are not distinct from franchise agreements, so upfront fees paid by franchisees in connection withfor exclusive development agreementsrights are deferred when the development agreement includes a minimum number of restaurantsand apportioned to beeach franchise restaurant opened by the franchisee. The deferred amounts are recognized as franchise fee revenue on a pro rata amount apportioned to each restaurant is accounted for as an initial franchise fee.
We have a distinct performance obligation under our MFDAs to grant subfranchising rights over a stated term. Under the terms of MFDAs, we typically either receive an upfront fee paid in cash and/or receive noncash consideration in the form of an equity interest in the master franchisee or an affiliate of the master franchisee. Under the Previous Standards, we accounted for noncash consideration as a nonmonetary exchange and did not record revenue or a basis
asin the
franchisee opens each respective restaurant. The cost recovery accountingequity interest received in arrangements where we received noncash consideration. These transactions now fall within the scope of ASC 606, which requires us to record investments in the applicable equity method
is usedinvestee and recognize revenue in an amount equal to
recognize revenues forthe fair value of the equity interest received. In accordance with ASC 606, upfront fees from master franchisees,
for which collectability is not reasonably assured.Rental income for base rentals is recordedincluding the fair value of noncash consideration, are deferred and amortized over the MFDA term on a straight-line basis over the termbasis. We may recognize unamortized upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract.
The portion of gift cards sold to customers which are never redeemed is commonly referred to as gift card breakage. Under ASC 606, we recognize gift card breakage income proportionately as each gift card is redeemed using an estimated breakage rate based on our historical experience. Under the Previous Standards, we recognized gift card breakage income for each gift card's remaining balance when redemption of that balance was deemed remote.
Property revenues
Property revenues consists of rental income from properties we lease
or sublease to franchisees. Property revenues are accounted for in accordance with applicable accounting guidance for leases and
earned income on direct financing leases are
recognized when earned and collectability is reasonably assured. Contingent rent is recognized on an accrual basis as earned, and any amounts receivedexcluded from
lessees in advancethe scope of
achieving stipulated thresholds are deferred until such threshold is actually achieved.Our businesses are moderately seasonal. Our restaurant sales are typically higher in the spring and summer months when weather is warmer than in the fall and winter months. Because our businesses are moderately seasonal, results for any one quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
ASC 606.
Advertising and Promotional Costs
Company restaurants and franchise restaurants contribute to advertising funds that our subsidiaries manage in the United States and Canada and certain other international markets.
Under our franchise agreements, advertising contributions received from franchisees must be spent on advertising, product development, marketing and related activities. Since we act as an agent for these specifically designated contributions, the revenues and expenses of the advertising funds are generally netted in our consolidated statements of operations and cash flows.The advertising funds expense the production costs of advertising when the advertisements are first aired or displayed. All other advertising and promotional costs are expensed in the period incurred.
Under our franchise agreements, advertising contributions received from franchisees must be spent on advertising, product development, marketing and related activities. As a result of our transition to ASC 606, advertising contributions received from franchisees are included in franchise and property revenues and advertising expenses are included as selling, general and administrative expenses commencing on January 1, 2018. Advertising expense,expenses included in selling, general and administrative expenses totaled $793 million for 2018. Prior to January 1, 2018, since we were deemed to be acting as an agent for these specifically designated contributions in accordance with the Previous Standards, the revenues and expenses of the advertising funds were generally netted in our consolidated statements of operations.
Prior to our transition to ASC 606, advertising expenses, which primarily
consistsconsisted of advertising contributions by Company restaurants (including Restaurant VIEs) based on a percentage of gross sales, totaled
$13.7$7 million for
2015, $2.42017 and $6 million for
20142016 and
$6.2 million for 2013 and iswere included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
As a result of our transition to ASC 606, the advertising contributions by Company restaurants (including Restaurant VIEs) are eliminated in consolidation in 2018.
Deferred Financing Costs
Deferred financing costs are amortized over the term of the
balance sheet date, contributions received may not equal advertising and promotional expenditures forrelated debt agreement into interest expense using the
period due to the timing of advertising promotions. To the extent that contributions received exceed advertising and promotional expenditures, the excess contributions are accounted for as a deferred liability and are recorded in accrued advertising in the accompanying consolidated balance sheets. To the extent that advertising and promotional expenditures temporarily exceed contributions received, the excess expenditures are accounted for as a receivable from the fund and are recorded in prepaids and other current assets, net in the accompanying consolidated balance sheets.For our Burger King business, in Canada and most of our international markets, franchisees contribute to advertising funds that are not managed by us. Such contributions and related fund expenditures are not reflected in our results of operations or financial position.
Insurance Reserves
We carry insurance to cover claims such as workers’ compensation, general liability, automotive liability, executive risk and property, and we are self-insured for healthcare claims for eligible participating employees. Through the use of insurance program deductibles (up to $5.0 million) and self-insurance, we retain a significant portion of the expected losses under these programs. Insurance reserves have been recorded based on our estimates of the anticipated ultimate costs to settle all claims, on an undiscounted basis, both reported and incurred-but-not-reported (“IBNR”).
Litigation Accruals
From time to time, we are subject to proceedings, lawsuits and other claims related to competitors, customers, employees, franchisees, government agencies and suppliers. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these contingencies is made after careful analysis of each matter. The required accrual may change in the future due to new developments in settlement strategy in dealing with these matters.
Guarantees
We record a liability to reflect the estimated fair value of guarantee obligations at the inception of the guarantee. Expenses associated with the guarantee liability, including the effects of any subsequent changes in the estimated fair value of the liability, are classified as other operating expenses (income), net in our consolidated statements of operations.
effective interest method.
Amounts in the financial statements related to income taxes are calculated using the principles of Accounting Standards Codification (“ASC”)ASC Topic 740,Income Taxes.Taxes. Under these principles, deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes, as well as tax credit carryforwardscarry-forwards and loss carryforwards.carry-forwards. These deferred taxes are measured by applying currently enacted tax rates. A deferred tax asset is recognized when it is considered more-likely-than-not to be realized. The effects of changes in tax rates on deferred tax assets and liabilities are recognized in income in the year in which the law is enacted. A valuation allowance reduces deferred tax assets when it is more-likely-than-not that some portion or all of the deferred tax assets will not be recognized.Income tax benefits credited to equity relate to tax benefits associated with amounts that are deductible for income tax purposes but do not affect earnings. These benefits are principally generated from employee exercises of nonqualified stock options and settlement of restricted stock awards.
realized.
We recognize positions taken or expected to be taken in a tax return in the financial statements when it is more-likely-than-not (i.e., a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit with greater than 50% likelihood of being realized upon ultimate settlement.
Transaction
Translation gains and losses resulting from the remeasurement of foreign deferred tax assets or liabilities denominated in a currency other than the functional currency are classified as other operating expenses (income), net in the consolidated statements of operations.
Equity-based
Share-based Compensation
Subsequent
Compensation expense related to the
Transactions, equity-based compensation expense associated withissuance of share-based awards to our employees is measured at fair value on the
participation of Partnership and its subsidiaries in RBI’s share-based compensation plan is recognized in Partnership’s financial statements.grant date. We use the Black-Scholes option pricing model to value RBI stock options, which requires the use of observable and unobservable assumptions. These assumptions include the estimated length of time employees will retain their stock options before exercising them (the “expected term”), the expected volatility of RBI common share priceoptions. The compensation expense for awards that vest over a future service period is recognized over the requisite service period on a straight-line basis, adjusted for estimated forfeitures of awards that are not expected term,to vest. The compensation expense for awards that do not require future service is recognized immediately. Upon the risk-free interest rate,end of the dividend yield andservice period, compensation expense is adjusted to account for the actual forfeiture rate. With the exception of stock options issued with tandem stock appreciation rights (“SARs”) (see below), we recognize equity-based compensation cost based on the grant date estimated fair value of each award, net of estimated forfeitures.
In connection with the Transactions, RBI issued stock options with tandem SARs in exchange for historical vestedCash settled share-based awards are classified as liabilities and unvested Tim Hortons stock options issued with SARs not surrendered as part of the Transactions. These stock options with tandem SARs are accounted for as cash settled awards, as these tandem awards allow the employee to exercise the stock option to receive common shares or to exercise the SAR and receive a cash payment in an amount equal to the difference between the market price of the common share on the exercise date and the exercise price of the stock option. The accounting for stock options with tandem SARs results in a revaluation of the liability to fair valuere-measured at the end of each reporting period, which is generally classified as selling, general and administrative expenses in the consolidated statements of operations.
Equity-basedperiod. The compensation costexpense for awards that contain performance conditions is recognized overwhen it is probable that the employee’s requisite service period, which is generally the vesting period of the equity grant. For awards that have a cliff-vesting schedule, equity-based compensation cost is recognized ratably over the requisite service period.
performance conditions will be achieved.
The determination of when we accrue for employee involuntary termination benefits depends on whether the termination benefits are provided under an on-going benefit arrangement or under a one-time benefit arrangement. We record charges for ongoing benefit arrangements in accordance with ASC Topic 712,Nonretirement Postemployment Benefits. We record charges for one-time benefit arrangements in accordance with ASC Topic 420,Exit or Disposal Cost Obligations.Retirement Plans
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. We adopted this new guidance on January 1, 2018. See Note 16, Revenue Recognition, for further information about our transition to this new revenue recognition model using the modified retrospective transition method.
Lease Accounting – In February 2016, the FASB issued new guidance on leases. The funded statusnew 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, amends various other aspects of accounting for leases by lessees and lessors, and requires enhanced disclosures. The new guidance is effective commencing in 2019 and requires a modified retrospective transition approach with application in all comparative periods presented (the “comparative method”), or alternatively, as of the effective date as the date of initial application without restating comparative period financial statements (the “effective date method”). The new guidance also provides several practical expedients and policies that companies may elect under either transition method. We have elected to apply the effective date method and the package of practical expedients under which we will not reassess the classification of our defined benefit pension plansexisting leases, reevaluate whether any expired or existing contracts are or contain leases or reassess initial direct costs under the new guidance. Additionally, we have elected lessee and postretirement benefit planslessor practical expedients to not separate non-lease components from lease components. We did not elect the practical expedient that permits a reassessment of lease terms for existing leases.
We performed an analysis of the impact of the new lease guidance and are recognized in the process of completing the final phase of a comprehensive plan for our implementation of the new guidance, including implementation of a new lease accounting system. The project plan includes analyzing the impact of the new guidance on our current lease contracts, reviewing the completeness of our existing lease portfolio, comparing our accounting policies under current accounting guidance to the new accounting guidance and identifying potential differences from applying the requirements of the new guidance to our lease contracts. Upon our transition to the new guidance, we currently expect to recognize approximately $1.1 billion of operating lease liabilities. Additionally, we expect to record right-of-use assets in a corresponding amount, net of amounts reclassified from other assets and liabilities, as specified by the new lease guidance.
We also expect this guidance will result in the gross presentation of property tax and maintenance expenses and related lessee reimbursements as franchise and property expenses and franchise and property revenues, respectively. These expenses and reimbursements are presented on a net basis under current accounting guidance. Otherwise, we do not expect the adoption of this guidance will have a material impact on our consolidated balance sheets. The funded status isstatements of operations. We do not expect an impact to the amount or timing of our cash flows or liquidity.
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 be required to perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured asat the difference betweenamount by which the carrying value exceeds the fair value of plan assetsa reporting unit; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendment requires prospective adoption and is effective commencing in 2020 with early adoption permitted. The adoption of this new guidance will not have a material impact on our Financial Statements.
Hedge Accounting – In August 2017, the FASB issued guidance to improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities and to simplify the application of hedge accounting by preparers. We adopted this guidance on January 1, 2018 (the “Adoption Date”).
The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness for cash flow and net investment hedges that are deemed effective. Most notably, for our cross-currency swaps designated as net investment hedges, the new guidance permits the exclusion of the interest component (the “Excluded Component”) from the accounting hedge without affecting net investment hedge designation. The initial value of the Excluded Component may be recognized in earnings on a systematic and rational basis over the life of the derivative instrument.
Subsequent to the Adoption Date, we changed the method of assessing effectiveness for net investment hedges using derivatives from the forward method to the spot method. We de-designated the cross-currency swaps and re-designated them as of March 15, 2018 (the “Re-designation Date”). As a result of adopting the new guidance and the
re-designation of our cross-currency swaps, we will recognize a benefit
obligation at December 31,from the
measurement date. The fairamortization of the initial value of
plan assets represents the
current market valueExcluded Component as a component of
contributions made to irrevocable trust funds, held for the sole benefitInterest expense, net in our consolidated statements of
participants, which are invested by the trust funds. For defined benefit pension plans, the benefit obligation represents the actuarial present value of benefits expected to be paid upon retirement. For postretirement benefit plans, the benefit obligation represents the actuarial present value of postretirement benefits attributed to employee services already rendered. Gains or losses and prior service costs or credits related to our pension plans are being recognized as they ariseoperations rather than as a component of other comprehensive
income (loss) to the extent they have not been recognized as a component of net periodic benefit cost.We sponsor a pension plan for employees of Tim Hortons (the “Canadian Plan”), a defined contribution pension plan under the provisionsincome. All changes in fair value of the Income Tax Act (Canada) and the Ontario Pension Benefits Act. Allinstruments related to currency fluctuations will continue to be recognized within other comprehensive income.
The impact of
adoption did not have a material effect on our
Tim Hortons Canadian employees meeting the eligibility requirements, including executives, are required to participate. A participant contributes 2% of their base salary, while we contribute an amount equal to 5% of their base salary. Participants can make voluntary additional contributions, which we match up to an additional 1% of base salary, subject to legislative maximum limits.We also sponsor two defined contribution benefit plans for U.S. employees of Tim Hortons (the “U.S. Plans”), under the provisions of Section 401(k)Financial Statements as of the U.S. Internal Revenue Code. The U.S. Plans are voluntary and providedAdoption Date. We recorded a $60 million net benefit to all our Tim Hortons U.S. employees who meetInterest expense, net from the eligibility requirements. The participant can contribute up to 75% of their base salary, subject to IRS limits, and we contribute a specified percentage and match a specified percentage of employees contributions, based on their eligibility under the specific plan.
We also sponsor the Burger King Savings Plan (the “Savings Plan”), a defined contribution plan under the provisions of Section 401(k) of the U.S. Internal Revenue Code. The Savings Plan is voluntary and is provided to all employees who meet the eligibility requirements. A participant can elect to contribute up to 50% of their compensation, subject to IRS limits, and we match 100% of the first 4% of employee compensation.
Aggregate amounts recorded in the consolidated statements of operations representing our contributions to the Canadian Plan, U.S. Plans and Savings Plan on behalf of restaurant and corporate employees was $6.9 million for 2015, $1.3 million for 2014 and $1.0 million for 2013. Our contributions made on behalf of restaurant employees are classified as cost of salesRe-designation Date through December 31, 2018 in our consolidated statements of operations for the amortization of the initial value of the Excluded Component, as described above. We believe the new guidance better portrays the economic results of our risk management activities and net investment hedges in our Financial Statements.
Reclassification of Certain Tax Effects – In February 2018, the FASB issued guidance which allows a reclassification from accumulated other comprehensive income to retained earnings for the tax effects of certain items within accumulated other comprehensive income. The amendment is effective commencing in 2019 with early adoption permitted. The adoption of this new guidance will not have a material impact on our Financial Statements.
Share-based payment arrangements with nonemployees – In June 2018, the FASB issued guidance which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The amendment is effective commencing in 2019 with early adoption permitted. The adoption of this new guidance will not have a material impact on our Financial Statements.
Note 3. 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 our other brands, the Popeyes brand is
managed independently, while benefiting from our contributions madeglobal scale and resources. 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 $1,655 million, which includes $33 million for the settlement of equity awards. The consideration was funded through (1) cash on behalfhand of corporate employeesapproximately $355 million, and (2) $1,300 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 million consisting primarily of professional fees and compensation related expenses, all of which are classified as selling, general and administrative expenses in
ourthe accompanying consolidated statements of operations.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that amended accounting guidance These fees and expenses were funded through cash on revenue recognition. Under this guidance, an entity should recognize revenue to depict the transferhand.
The final allocation of promised goods or services to customers in an amount that reflects the consideration to which the entity expectsnet tangible and intangible assets acquired is presented in the table below (in millions):
|
| | | |
| | March 27, 2017 |
| Total current assets | $ | 64 |
|
| Property and equipment | 114 |
|
| Intangible assets | 1,405 |
|
| Other assets | 1 |
|
| Total current liabilities | (73 | ) |
| Total debt and capital lease obligations | (159 | ) |
| Deferred income taxes | (523 | ) |
| Other liabilities | (20 | ) |
| Total identifiable net assets | 809 |
|
| Goodwill | 846 |
|
| Total consideration | $ | 1,655 |
|
Intangible assets include $1,355 million related to the Popeyes brand, $41 million related to franchise agreements and $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 entitled in exchange for those goods or services. An entity should disclose sufficient informationrealized as a combined company.
The Popeyes Acquisition is not material to
enable users of financial statements to understand the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued an accounting standards update which deferred the effective date for adoption of the new revenue standard by one year. As such, this standard will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption of the accounting standard is allowed as of the original effective date, which is for fiscal years, and interim periods within those years, beginning after December 15, 2016. The accounting standards update permits the use of either the retrospective or cumulative effect transition method. We are evaluating the impact of this accounting standards update on our consolidated financial statements, and
related disclosures. We have not yet selected a transition method nor have we determined the effect of the accounting standards update on our ongoingtherefore, supplemental pro forma financial
reporting.In February 2015, the FASB issued an accounting standards update that changed the analysis that a reporting entity must perform to determine whether it should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. We expect the adoption of this guidance to have no significant impact on our consolidated financial position or results of operations.
In April 2015, the FASB issued an accounting standards update that changed the presentation of debt issuance costs in financial statements. Under the new guidance, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. During 2015 we adopted this updated standard, which required retrospective application and resulted in the reclassification of debt issuance costs of $20.5 million from Inventories and other current assets, net and $129.6 million from Other assets, net to a reduction of $150.1 million in Term debt, net of current portion in our consolidated balance sheet as of December 31, 2014. Other than this change in presentation, this accounting standards update did not have an impact on our consolidated financial position, results of operations or cash flows. See Note 12,Long-term debt for more information.
In July 2015, the FASB issued an accounting standards update to simplify the measurement of inventory and to change the measurement from lower of cost or market to lower of cost or net realizable value. The update does not apply to inventory that is measured using last-in, first out (“LIFO”) or the retail inventory method. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We expect the adoption of this guidance to have no significant impact on our consolidated financial position or results of operations.
In September 2015, the FASB issued an accounting standards update that amended accounting guidanceinformation related to restating prior periods to reflect adjustments made to provisional amounts recognized in a business combination. The update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. The new guidance must be applied prospectively to adjustments to provisional amounts that occur after the effective date. The adoption is not expected to have a significant impact on our consolidated financial position or results of operations.
In November 2015, the FASB issued an accounting standards update to simplify the presentation of deferred income taxes. Under the new guidance, an entity presents all deferred tax assets and liabilities as noncurrent in a classified statement of financial position. The requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not affected by the update. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We adopted this updated standard during the three months ended December 31, 2015. The guidance allows for prospective application of this change in accounting principle. As such, prior periods’ balances have not been adjusted.
included herein.
Note 4. Earnings Per
Unit/ShareAs a result of the reorganization of Burger King Worldwide into Partnership described in Note 19,Equity, following the Transactions, Unit
Partnership uses the two-class method in the computation of earnings per unit. Pursuant to the terms of the partnership agreement, RBI, as the holder of the Class A common units, is entitled to receive distributions from Partnership in an amount equal to the aggregate dividends payable by RBI to holders of RBI common shares, and the holders of
PartnershipClass B exchangeable
limited partnership units
(the “Partnership exchangeable units”) are entitled to receive distributions from Partnership in an amount per unit equal to the dividends payable by RBI on each RBI common share. Partnership’s net income available to common unitholders
/ shareholders is allocated between
RBI common shares, the Class A common units and Partnership exchangeable units on a fully-distributed basis and reflects residual net income after noncontrolling interests, Partnership preferred unit distributions and
accretiongain on redemption of Partnership preferred units. Basic and diluted earnings per Class A common unit is determined by dividing net income allocated to Class A common
unit holdersunitholders by the weighted average number of Class A common units outstanding for the period. Basic and diluted earnings per Partnership exchangeable unit is determined by dividing net income allocated to the Partnership exchangeable units by the weighted average number of Partnership exchangeable units outstanding during the period.
During 2014, the net income (loss) allocated to Class A units was calculated as 43.3% of net income (loss) attributable to common unitholders for the period December 12, 2014 through December 31, 2014, and the net income (loss) allocated to Partnership exchangeable units was calculated as 56.7% of net income (loss) attributable to common unitholders for the period December 12, 2014 through December 31, 2014. The calculation of weighted average Class A common units outstanding for 2014 reflects (i) the 87.0 million Class A common units issued to correspond to the Burger King Worldwide common shares exchanged for RBI common shares, as outstanding for the period December 12, 2014 through December 31, 2014 and (ii) the 115.0 million Class A common units issued to RBI in connection with the issuance of common shares by RBI for the acquisition of Tim Hortons and exercise of the warrant discussed above, which were outstanding for the period December 12, 2014 through December 31, 2014. The weighted average Partnership exchangeable units for 2014 reflects the 265.0 million Partnership exchangeable units received in exchange for Burger King Worldwide common shares, which were outstanding for the period December 12, 2014 through December 31, 2014.
Prior to the Transactions, our equity reflected 100% ownership by Burger King Worldwide shareholders. Basic and diluted earnings (loss) per common share for the period January 1, 2014 through December 11, 2014, and the calendar year 2013 is computed by dividing net income (loss) allocated to common shareholders by the weighted average number of shares outstanding for Burger King Worldwide shareholders during this period.
Since December 12, 2015, the one year anniversary of the effective date of the Transactions, the holders of Partnership exchangeable units each have the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units on a one-for-one basis for RBI common shares, subject to RBI’s right as the general partner of Partnership, in RBI’s sole discretion, to deliver a cash payment in lieu of RBI common shares. The allocation of net income attributable to common unitholders between Partnership’s Class A common units and Partnership exchangeable units is affected by the exchange of Partnership exchangeable units.
We apply the treasury stock method to determine the dilutive weighted average common shares represented by Burger King Worldwide outstanding stock options prior to the date of the Transactions, unless the effect of their inclusion was anti-dilutive. Subsequent to the Transactions, since all stock options were issued by RBI, there
There are no dilutive securities for Partnership as the exercise of stock options will not affect the numbers of Class A common units or Partnership exchangeable units outstanding. However, the issuance of shares by RBI in future periods will affect the allocation of net income attributable to common unitholders between Partnership’s Class A common units and Partnership exchangeable units.
The following table summarizes the basic and diluted earnings per
unit/shareunit calculations
for the periods indicated (in millions, except per
unit/shareunit amounts):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Numerator - Basic and Diluted: | | | | | | | | | | | | |
Net income (loss) attributable to common unitholders/shareholders | | $ | 237.1 | | | $ | (829.3 | ) | | $ | 233.7 | |
| | | | | | | | | | | | |
Allocation of net income (loss) among partner interests and common shareholders: | | | | | | | | | | | | |
Net income (loss) allocated to Class A common unitholders | | $ | 103.9 | | | $ | (329.0 | ) | | $ | — | |
Net income (loss) allocated to Partnership exchangeable unitholders | | | 133.2 | | | | (430.7 | ) | | | — | |
Net income (loss) allocated to common shareholders | | | — | | | | (69.6 | ) | | | 233.7 | |
| | | | | | | | | | | | |
Net income (loss) attributable to common unitholders / shareholders | | $ | 237.1 | | | $ | (829.3 | ) | | $ | 233.7 | |
| | | | | | | | | | | | |
Denominator - Basic and Diluted partnership units: | | | | | | | | | | | | |
Weighted average Class A common units | | | 202.0 | | | | 202.0 | | | | — | |
Weighted average Partnership exchangeable units | | | 263.5 | | | | 265.0 | | | | — | |
| | | | | | | | | | | | |
Total weighted average basic and diluted units outstanding | | | 465.5 | | | | 467.0 | | | | — | |
| | | | | | | | | | | | |
Denominator - common shares: | | | | | | | | | | | | |
Weighted average common shares - basic | | | — | | | | 351.9 | | | | 351.0 | |
Effect of other dilutive securities (a) | | | — | | | | — | | | | 6.8 | |
| | | | | | | | | | | | |
Weighted average common shares - diluted | | | — | | | | 351.9 | | | | 357.8 | |
| | | | | | | | | | | | |
Earnings (loss) per unit / share - basic: | | | | | | | | | | | | |
Class A common units | | $ | 0.51 | | | $ | (1.63 | ) | | | — | |
Partnership exchangeable units | | $ | 0.51 | | | $ | (1.63 | ) | | | — | |
Common shares | | $ | — | | | $ | (0.20 | ) | | $ | 0.67 | |
Earnings (loss) per unit / share - diluted: | | | | | | | | | | | | |
Class A common units | | $ | 0.51 | | | $ | (1.63 | ) | | | — | |
Partnership exchangeable units | | $ | 0.51 | | | $ | (1.63 | ) | | | — | |
Common shares | | $ | — | | | $ | (0.20 | ) | | $ | 0.65 | |
| | | |
Anti-dilutive stock options outstanding | | | — | | | | — | | | | 2.9 | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Allocation of net income among partner interests: | | | | | |
| Net income allocated to Class A common unitholders | $ | 612 |
| | $ | 626 |
| | $ | 346 |
|
| Net income allocated to Partnership exchangeable unitholders | 531 |
| | 585 |
| | 337 |
|
| Net income attributable to common unitholders | $ | 1,143 |
| | $ | 1,211 |
| | $ | 683 |
|
| Denominator - basic and diluted partnership units: | | | | | |
| Weighted average Class A common units | 202 |
| | 202 |
| | 202 |
|
| Weighted average Partnership exchangeable units | 216 |
| | 226 |
| | 228 |
|
| Earnings per unit - basic and diluted: | | | | | |
| Class A common units (a) | $ | 3.03 |
| | $ | 3.10 |
| | $ | 1.71 |
|
| Partnership exchangeable units (a) | $ | 2.46 |
| | $ | 2.59 |
| | $ | 1.48 |
|
| |
| (a) | ThereEarnings per unit may not recalculate exactly as it is no effect of other dilutive securities for the period January 1, 2014 through December 11, 2014 because a net loss was reported during this period causing any potentially dilutive securities to be anti-dilutive. Therefore, 21.3 million shares of potentially dilutive securities were excluded in the calculation of diluted earnings (loss) per share since their impact would have been anti-dilutive.calculated based on unrounded numbers. |
Note 5.
Trade and Notes Receivable, netTrade and notes receivable, net, consists of the following (in millions):
| | | | | | | | |
| | | As of December 31, | |
| | | 2015 | | | 2014 | |
Trade accounts receivable | | $ | 434.2 | | | $ | 448.1 | |
Notes receivable, current portion | | | 1.7 | | | | 13.2 | |
| | | | | | | | |
| | | 435.9 | | | | 461.3 | |
Allowance for doubtful accounts | | | (14.2 | ) | | | (20.1 | ) |
| | | | | | | | |
Total, net | | $ | 421.7 | | | $ | 441.2 | |
| | | | | | | | |
The change in allowances for doubtful accounts is as follows (in millions):
| | | | | | | | |
| | | As of December 31, | |
| | | 2015 | | | 2014 | |
Beginning balance | | $ | 20.1 | | | $ | 15.8 | |
Bad debt expense, net | | | 4.1 | | | | 1.9 | |
Write-offs and other, net | | | (10.0 | ) | | | 2.4 | |
| | | | | | | | |
Ending balance | | $ | 14.2 | | | $ | 20.1 | |
| | | | | | | | |
Note 6. Inventories and Other Current Assets, net
Inventories and other current assets, net consist of the following (in millions):
| | | | | | | | |
| | | As of | |
| | | December 30, | | | December 31, | |
| | | 2015 | | | 2014 | |
Raw materials | | $ | 22.7 | | | $ | 26.3 | |
Finished goods | | | 58.6 | | | | 71.5 | |
| | | | | | | | |
Total Inventory | | | 81.3 | | | | 97.8 | |
Refundable and prepaid income taxes | | | 21.5 | | | | 18.3 | |
Prepaid rent | | | 10.6 | | | | 13.4 | |
Prepaids and other current assets | | | 18.8 | | | | 41.7 | |
| | | | | | | | |
Inventories and other current assets, net | | $ | 132.2 | | | $ | 171.2 | |
| | | | | | | | |
Note 7. Property and Equipment, net
Property and equipment, net, consist of the following (in millions):
| | | | | | | | |
| | | As of December 31, | |
| | | 2015 | | | 2014 | |
Land | | $ | 969.6 | | | $ | 1,040.0 | |
Buildings and improvements | | | 1,055.6 | | | | 1,115.5 | |
Restaurant equipment | | | 118.8 | | | | 156.1 | |
Furniture, fixtures, and other | | | 91.4 | | | | 81.2 | |
Manufacturing equipment | | | 28.9 | | | | 32.8 | |
Capital leases | | | 180.3 | | | | 199.2 | |
Construction in progress | | | 45.3 | | | | 36.8 | |
| | | | | | | | |
| | | 2,489.9 | | | | 2,661.6 | |
Accumulated depreciation and amortization | | | (339.3 | ) | | | (225.1 | ) |
| | | | | | | | |
Property and equipment, net | | $ | 2,150.6 | | | $ | 2,436.5 | |
| | | | | | | | |
Construction in progress represents new restaurant and equipment construction, reimaging of restaurants and software.
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Land | $ | 998 |
| | $ | 1,020 |
|
| Buildings and improvements | 1,145 |
| | 1,172 |
|
| Restaurant equipment | 99 |
| | 122 |
|
| Furniture, fixtures, and other | 182 |
| | 171 |
|
| Capital leases | 257 |
| | 256 |
|
| Construction in progress | 19 |
| | 15 |
|
| | 2,700 |
| | 2,756 |
|
| Accumulated depreciation and amortization | (704 | ) | | (623 | ) |
| Property and equipment, net | $ | 1,996 |
| | $ | 2,133 |
|
Depreciation and amortization expense on property and equipment totaled
$154.9$148 million for
2015, $51.22018, $150 million for
20142017 and
$49.7$144 million for
2013.Assets2016.
Included in our property and equipment, net at December 31, 2018 and 2017 are $180 million and $193 million, respectively, of assets leased under capital leases
(mostly buildings and
included in propertyimprovements), net of accumulated depreciation and
equipment, net consistamortization of
the following (in million): | | | | | | | | |
| | | As of December 31, | |
| | | 2015 | | | 2014 | |
Buildings and improvements | | $ | 174.3 | | | $ | 190.5 | |
Other | | | 6.0 | | | | 8.7 | |
| | | | | | | | |
| | | 180.3 | | | | 199.2 | |
Accumulated depreciation | | | (27.5 | ) | | | (15.9 | ) |
| | | | | | | | |
Assets leased under capital leases, net | | $ | 152.8 | | | $ | 183.3 | |
| | | | | | | | |
$77 million and $63 million, respectively.
Note
8.6. Intangible Assets, net and Goodwill
Intangible assets, net and goodwill consist of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | | | Weighted
Average Life as
of December 31,
2015 | |
| | | 2015 | | | 2014 | | |
| | | Gross | | | Accumulated
Amortization | | | Net | | | Gross | | | Accumulated
Amortization | | | Net | | |
Identifiable assets subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Franchise agreements | | $ | 653.0 | | | $ | (106.8 | ) | | $ | 546.2 | | | $ | 696.8 | | | $ | (83.1 | ) | | $ | 613.7 | | | | 21.5 Years | |
Favorable leases | | | 436.5 | | | | (107.5 | ) | | | 329.0 | | | | 490.7 | | | | (62.8 | ) | | | 427.9 | | | | 10.4 Years | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal | | | 1,089.5 | | | | (214.3 | ) | | | 875.2 | | | | 1,187.5 | | | | (145.9 | ) | | | 1,041.6 | | | | 17.1 Years | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Indefinite lived intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tim Hortons brand | | $ | 6,175.4 | | | $ | — | | | $ | 6,175.4 | | | $ | 7,236.5 | | | $ | — | | | $ | 7,236.5 | | | | | |
Burger King brand | | | 2,097.2 | | | | — | | | | 2,097.2 | | | | 2,167.0 | | | | — | | | | 2,167.0 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal | | | 8,272.6 | | | | — | | | | 8,272.6 | | | | 9,403.5 | | | | — | | | | 9,403.5 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Intangible assets, net | | | | | | | | | | $ | 9,147.8 | | | | | | | | | | | $ | 10,445.1 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | 4,574.4 | | | | | | | | | | | $ | 5,235.7 | | | | | | | | | | | | | |
We recorded amortization
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| Identifiable assets subject to amortization: | | | | | | | | | | | |
| Franchise agreements | $ | 705 |
| | $ | (194 | ) | | $ | 511 |
| | $ | 725 |
| | $ | (168 | ) | | $ | 557 |
|
| Favorable leases | 407 |
| | (200 | ) | | 207 |
| | 456 |
| | (194 | ) | | 262 |
|
| Subtotal | 1,112 |
| | (394 | ) | | 718 |
| | 1,181 |
| | (362 | ) | | 819 |
|
| Indefinite lived intangible assets: | | | | | | | | | | | |
| Tim Hortons brand | $ | 6,259 |
| | $ | — |
| | $ | 6,259 |
| | $ | 6,727 |
| | $ | — |
| | $ | 6,727 |
|
| Burger King brand | 2,131 |
| | — |
| | 2,131 |
| | 2,161 |
| | — |
| | 2,161 |
|
| Popeyes brand | 1,355 |
| | — |
| | 1,355 |
| | 1,355 |
| | — |
| | 1,355 |
|
| Subtotal | 9,745 |
| | — |
| | 9,745 |
| | 10,243 |
| | — |
| | 10,243 |
|
| Intangible assets, net | | | | | $ | 10,463 |
| | | | | | $ | 11,062 |
|
| | | | | | | | | | | | |
| Goodwill | | | | | | | | | | | |
| Tim Hortons segment | $ | 4,038 |
| | | | | | $ | 4,326 |
| | | | |
| Burger King segment | 602 |
| | | | | | 610 |
| | | | |
| Popeyes segment | 846 |
| | | | | | 846 |
| | | | |
| Total | $ | 5,486 |
| | | | | | $ | 5,782 |
| | | | |
Amortization expense on intangible assets
of $78.3totaled $70 million for
2015, $35.92018, $72 million for
20142017, and
$36.3$72 million for
2013. The increase in amortization expense during 2015 from the prior year was due to amortization recorded on intangible assets acquired in connection with the Acquisition. Identifiable assets subject to amortization also decreased as a result of foreign currency translation effect.2016. The change in the
Brandsbrands and goodwill balances
for the year ended December 31, 2015during 2018 was due
principally to
the impact of foreign currency
translation effect.translation.
As of December 31,
2015,2018, the estimated future amortization expense on identifiable assets subject to amortization is as follows (in millions):
| | | | |
Twelve-months ended December 31, | | Amount | |
2016 | | $ | 70.5 | |
2017 | | | 67.8 | |
2018 | | | 64.4 | |
2019 | | | 61.0 | |
2020 | | | 56.1 | |
Thereafter | | | 555.4 | |
| | | | |
Total | | $ | 875.2 | |
| | | | |
The changes in the carrying amount
|
| | | |
| Twelve-months ended December 31, | Amount |
| 2019 | $ | 64 |
|
| 2020 | 59 |
|
| 2021 | 55 |
|
| 2022 | 51 |
|
| 2023 | 48 |
|
| Thereafter | 441 |
|
| Total | $ | 718 |
|
Table of goodwill during 2015 and 2014 by operating segment (Tim Hortons, “TH” and Burger King, “BK”) are as follows (in millions): | | | | | | | | | | | | |
| | | TH | | | BK | | | Total | |
Balances at December 31, 2013 | | $ | — | | | $ | 630.0 | | | $ | 630.0 | |
Purchase of Tim Hortons | | | 4,640.9 | | | | — | | | | 4,640.9 | |
Effects of foreign currency adjustments | | | (10.1 | ) | | | (25.1 | ) | | | (35.2 | ) |
| | | | | | | | | | | | |
Balances at December 31, 2014 | | | 4,630.8 | | | | 604.9 | | | | 5,235.7 | |
| | | | | | | | | | | | |
Effects of foreign currency adjustments | | | (642.7 | ) | | | (18.6 | ) | | | (661.3 | ) |
| | | | | | | | | | | | |
Balances at December 31, 2015 | | $ | 3,988.1 | | | $ | 586.3 | | | $ | 4,574.4 | |
| | | | | | | | | | | | |
Contents
Note
9. Other Assets, netOther assets, net consist of the following (in millions):
| | | | | | | | |
| | | As of | |
| | | December 31, | | | December 31, | |
| | | 2015 | | | 2014 | |
Derivative assets - noncurrent | | $ | 830.9 | | | $ | 164.8 | |
Equity method investments | | | 139.0 | | | | 169.7 | |
Other assets | | | 83.5 | | | | 111.0 | |
| | | | | | | | |
Other assets, net | | $ | 1,053.4 | | | $ | 445.5 | |
| | | | | | | | |
Note 10.7. Equity Method Investments
The aggregate carrying amount of our equity method investments was $139.0$259 million and $155 million as of December 31, 20152018 and $169.7 million as of December 31, 20142017, respectively, and is included as a component of Other assets, net in our consolidated balance sheets. Below areThe increase in the namescarrying amount of the entities, country of operation and our equity interest in our significant equity method investments based on the carrying value as of December 31, 2015. | | | | |
Entity
| | Country | | Equity
Interest |
Carrols Restaurant Group, Inc.
| | United States | | 21.35% |
Operadora de Franquicias Alsea S.A.P.I. de C.V.
| | Mexico | | 20.00% |
Pangaea Foods (China) Holdings, Ltd.
| | China | | 27.50% |
TIMWEN Partnership
| | Canada | | 50.00% |
2018 compared to December 31, 2017 is primarily attributable to the recognition of investments received in connection with master franchise and development arrangements as a result of our transition to ASC 606. See Note 2,
Significant Accounting Policies. TH and BK both have equity method investments. PLK does not have any equity method investments. With respect to our TH business, the most significant equity method investment is our 50.0% 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 $13 million, $12 million and $11 million during 2018, 2017 and 2016, respectively.
The aggregate market value of our
20.5% equity interest in Carrols Restaurant Group, Inc. (“Carrols”)
, based on the quoted market price on December 31,
2015,2018 is approximately
$110.5$93 million. The aggregate market value of our 10.1% equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on December 31, 2018 is approximately $120 million. No quoted market prices are available for our
remainingother equity method investments.
With respect to our BK operations, most of the
We have equity interests in entities
in which we have an equity interestthat own or franchise
Tim Hortons or Burger King restaurants. Franchise and property revenue
we recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Revenues from affiliates: | | | | | | | | | | | | |
Franchise royalties | | $ | 93.2 | | | $ | 88.5 | | | $ | 57.2 | |
Property revenues | | | 27.7 | | | | 29.2 | | | | 26.3 | |
Franchise fees and other revenue | | | 13.1 | | | | 11.3 | | | | 6.6 | |
| | | | | | | | | | | | |
Total | | $ | 134.0 | | | $ | 129.0 | | | $ | 90.1 | |
| | | | | | | | | | | | |
With respect to our TH business, the most significant equity investment is our 50% joint-venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. During 2015, TH received $12.7
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Revenues from affiliates: | | | | | |
| Royalties | $ | 310 |
| | $ | 175 |
| | $ | 132 |
|
| Property revenues | 36 |
| | 27 |
| | 28 |
|
| Franchise fees and other revenue | 11 |
| | 26 |
| | 19 |
|
| Total | $ | 357 |
| | $ | 228 |
| | $ | 179 |
|
We recognized $20 million
in distributions and recognized $20.8 million of
contingent rent expense associated with
this joint venture.the TIMWEN Partnership during each of 2018, 2017 and 2016.
At December 31,
20152018 and
December 31, 2014,2017, we had
$23.9$41 million and
$22.6$32 million, respectively, of accounts receivable from our equity method investments which were recorded in
Tradeaccounts and notes receivable, net in our consolidated balance sheets.
(Income) loss from equity method investments reflects our share of investee net income or loss. During 2015, we recorded a $10.9 million noncashloss, non-cash dilution gain includedgains or losses from changes in (Income) loss fromour ownership interests in equity method investments oninvestees and basis difference amortization. We recorded increases to the carrying value of our equity method investment balances and non-cash dilution gains in the amounts of $20 million and $12 million during 2018 and 2016, respectively. No non-cash dilution gains were recorded during 2017. The dilution gains resulted from the issuance of capital stock by BK Brasil Operacao E Assesoria A Restaurantes S.A. (“Brazil JV”), one of our equity method investees. Thisinvestees, which reduced our ownership interests in these equity method investments. The dilution gains we recorded in connection with the issuance of capital stock reduced our ownership interest in the Brazil JV. The dilution gain reflects an adjustmentreflect adjustments to the differencedifferences between the amount of our underlying equity in the net assets of the Brazil JVequity method investees before and after thetheir issuance of capital stock. During 2014, we recorded a $5.8 million noncash dilution gain included in (Income) loss from equity method investments on the issuance
Note
11.8. Other Accrued Liabilities and Other Liabilities
Other accrued liabilities (current) and
Otherother liabilities, net (non-current) consist of the following (in millions):
| | | | | | | | |
| | | As of December 31, | |
| | | 2015 | | | 2014 | |
Current: | | | | | | | | |
Taxes payable - current | | $ | 46.9 | | | $ | 78.8 | |
Accrued compensation and benefits | | | 61.6 | | | | 39.4 | |
Interest payable | | | 63.1 | | | | 36.3 | |
Restructuring and other provisions | | | 13.5 | | | | 29.5 | |
Deferred income - current | | | 33.5 | | | | 19.8 | |
Closed property reserve | | | 14.0 | | | | 15.2 | |
Dividend payable | | | 128.3 | | | | 13.8 | |
Other | | | 77.4 | | | | 102.4 | |
| | | | | | | | |
Other accrued liabilities | | $ | 438.3 | | | $ | 335.2 | |
| | | | | | | | |
Non-current: | | | | | | | | |
Unfavorable leases | | $ | 322.0 | | | $ | 428.5 | |
Accrued pension | | | 80.2 | | | | 62.9 | |
Taxes payable - noncurrent | | | 236.7 | | | | 50.3 | |
Lease liability - noncurrent | | | 29.5 | | | | 35.2 | |
Share-based compensation liability | | | 5.5 | | | | 34.8 | |
Deferred income - noncurrent | | | 23.7 | | | | 18.9 | |
Derivatives liabilities - noncurrent | | | 47.3 | | | | 25.6 | |
Other | | | 51.0 | | | | 51.6 | |
| | | | | | | | |
Other liabilities, net | | $ | 795.9 | | | $ | 707.8 | |
| | | | | | | | |
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Current: | | | |
| Dividend payable | $ | 207 |
| | $ | 97 |
|
| Interest payable | 87 |
| | 89 |
|
| Accrued compensation and benefits | 69 |
| | 67 |
|
| Taxes payable | 113 |
| | 401 |
|
| Deferred income | 27 |
| | 43 |
|
| Accrued advertising expenses | 30 |
| | 27 |
|
| Closed property reserve | 9 |
| | 11 |
|
| Restructuring and other provisions | 11 |
| | 12 |
|
| Other | 84 |
| | 119 |
|
| Other accrued liabilities | $ | 637 |
| | $ | 866 |
|
| Non-current: | | | |
| Derivatives liabilities | $ | 179 |
| | $ | 499 |
|
| Taxes payable | 493 |
| | 496 |
|
| Contract liabilities, net | 486 |
| | 10 |
|
| Unfavorable leases | 192 |
| | 252 |
|
| Accrued pension | 64 |
| | 72 |
|
| Accrued lease straight-lining liability | 69 |
| | 46 |
|
| Deferred income | 22 |
| | 27 |
|
| Other | 42 |
| | 53 |
|
| Other liabilities, net | $ | 1,547 |
| | $ | 1,455 |
|
Note
12. Long-term9. Long-Term Debt
Long-term debt
is comprisedconsist of the following (in millions):
| | | | | | | | | | |
| | | | | As of | |
| | | Maturity dates | | December 31,
2015 | | | December 31,
2014 | |
2014 Term Loan Facility | | December 12, 2021 | | $ | 5,097.7 | | | $ | 6,750.0 | |
2015 Senior Notes | | January 15, 2022 | | | 1,250.0 | | | | — | |
2014 Senior Notes | | April 1, 2022 | | | 2,250.0 | | | | 2,250.0 | |
Tim Hortons Notes | | various | | | 39.4 | | | | 1,044.8 | |
Other | | N/A | | | 88.5 | | | | 107.9 | |
Less: unamortized discount and deferred financing costs | | | | | (224.3 | ) | | | (217.3 | ) |
| | | | | | | | | | |
Total debt, net | | | | | 8,501.3 | | | | 9,935.4 | |
Less: current maturities of debt | | | | | (39.0 | ) | | | (1,108.9 | ) |
| | | | | | | | | | |
Total long-term debt | | | | $ | 8,462.3 | | | $ | 8,826.5 | |
| | | | | | | | | | |
As
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Term Loan Facility (due February 17, 2024) | $ | 6,338 |
| | $ | 6,389 |
|
| 2017 4.25% Senior Notes (due May 15, 2024) | 1,500 |
| | 1,500 |
|
| 2015 4.625% Senior Notes (due January 15, 2022) | 1,250 |
| | 1,250 |
|
| 2017 5.00% Senior Notes (due October 15, 2025) | 2,800 |
| | 2,800 |
|
| Other | 150 |
| | 89 |
|
| Less: unamortized deferred financing costs and deferred issuance discount | (145 | ) | | (170 | ) |
| Total debt, net | 11,893 |
| | 11,858 |
|
| Less: current maturities of debt | (70 | ) | | (57 | ) |
| Total long-term debt | $ | 11,823 |
| | $ | 11,801 |
|
Table of December 31, 2015 and 2014, unamortized discount included $43.2 million and $67.2 million, respectively, related to the 2014 Term Loan Facility.As of December 31, 2015, deferred financing costs included $131.3 million related to the 2014 Term Loan Facility (as defined below), $9.0 million related to the 2015 Senior Notes (as defined below) and $40.8 million related to the 2014 Senior Notes (as defined below). As of December 31, 2014, deferred financing costs included $104.1 million related to the 2014 Term Loan Facility and $46.0 million related to the 2014 Senior Notes. Deferred financing costs are amortized over the term of the debt into interest expense using the effective interest method. The amortization of deferred financing costs included in Interest expense, net was $26.8 million for 2015, $9.7 million for 2014 and $8.9 million for 2013.
2015 Amended Contents
Credit
AgreementFacilities
On
May 22, 2015,February 17, 2017, two of our subsidiaries (the “Borrowers”) entered into a
firstsecond amendment (the
“2015 Amended Credit Agreement”“Second Amendment”) to the credit agreement
dated as of October 27, 2014. Under the 2015 Amended Credit Agreement, the aggregate principal amount ofgoverning our senior secured term
loansloan facility (the
“2014 Term“Term Loan Facility”)
was decreased to $5,140.4 million as a result of the repayment of $1,550.0 million from the net proceeds from the offering of the 2015 Senior Notes (as defined below) and
cash on hand, and the interest rate applicable to the 2014 Term Loan Facility was reduced to, at the Borrowers’ option, either (i) a base rate plus an applicable margin equal to 1.75% or (ii) a Eurocurrency rate plus an applicable margin equal to 2.75%. The 2015 Amended Credit Agreement also provides for aour senior secured revolving credit facility
forof up to
$500.0$500 million of revolving extensions of credit outstanding at any time (including revolving loans, swingline loans and letters of credit)
, the amount of which was unchanged by the May 22, 2015 amendment (the
“2014 Revolving“Revolving Credit
Facility,”Facility” and together with the
2014 Term Loan Facility, the
“2014“Credit Facilities”). Under the Second Amendment, (i) the outstanding aggregate principal amount under our Term Loan Facility was decreased to $4,900 million as a result of a repayment of $146 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”).Facilities.
In connection with the Second Amendment, we capitalized approximately $11 million in debt issuance costs and recorded a loss on early extinguishment of debt of $20 million during 2017. The obligationsloss 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 million (the “Incremental Term Loan No. 1”) under our Term Loan Facility. Also, simultaneously and in connection with the issuance of the 2017 4.25% Senior Notes (described below), we obtained an additional incremental term loan in the aggregate principal amount of $250 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 Louisiana Kitchen, Inc. was included as loan guarantor and its assets as collateral under the 2014Credit 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 million.
Revolving Credit Facility
As of December 31, 2018, 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 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 December 31, 2018, we had $20 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability was $480 million.
During 2017, the Borrowers extended the maturity date of the Revolving Credit Facility from December 12, 2019 to October 13, 2022. The extension was effected through the termination of the existing revolving credit commitments and the entry into Incremental Facility Amendment No. 3 (the “Third Amendment”) to the credit agreement. The Third Amendment maintained the same $500 million in aggregate principal amount of the commitments under the Revolving Credit Facility but reduced interest rates and commitment fees. As amended, the Revolving Credit Facility matures on October 13, 2022, provided that if, on October 15, 2021, more than an aggregate of $150 million of the 2015 4.625% Senior Notes (as defined below) are outstanding, then the maturity date of the Revolving Credit Facility shall be October 15, 2021. Except as described herein, there were no other material changes to the Revolving Credit Facility. In connection with the Third Amendment we capitalized approximately $1 million in debt issuance costs.
Interest Rate Applicable to the Credit Facilities
The interest rate applicable to the Credit Facilities is, at our option, either (i) a base rate plus an applicable margin equal to 1.25% in respect of the Term Loan Facility and ranging from 0.25% to 1.00%, depending on our leverage ratio, in respect of the Revolving Credit Facility, or (ii) a Eurocurrency rate plus an applicable margin equal to 2.25% in respect of the Term Loan Facility and ranging from 1.25% to 2.00%, depending on our leverage ratio, in respect of the Revolving Credit Facility. Borrowings are subject to a floor of 2.00% in the case of the base rate and a floor of 1.00% in the case of Eurocurrency rate. Amounts drawn under each letter of credit that is issued and outstanding under this facility bear interest ranging from 1.25% to 2.00%, depending on our leverage ratio. The unused portion of the Revolving Credit Facility is subject to a commitment fee of 0.25%. We are also required to pay (i) letters of credit fees on the aggregate face amounts of outstanding letters of credit plus a fronting fee to the issuing bank and (ii) administration fees. As of December 31, 2018, the weighted average interest rate on our Term Loan Facility was 4.77%. The principal amount of the Term Loan Facility amortizes in quarterly installments equal to $16 million, with the balance payable at maturity.
Obligations under the Credit Facilities are guaranteed on a senior secured basis, jointly and severally, by the direct parent company of one of the Borrowers and substantially all of its Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger
King Worldwide,
Tim HortonsInc., Popeyes Louisiana Kitchen, Inc. and substantially all of their respective Canadian and U.S. subsidiaries (the “Credit Guarantors”). Amounts borrowed under the
2014 Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future property (subject to certain exceptions) of each Borrower and Credit Guarantor.
The 2014 Term Loan Facility matures on December 12, 2021 and
2017 4.25% Senior Notes
During 2017, the 2014 Revolving Credit Facility matures on December 12, 2019. The principal amount of the 2014 Term Loan Facility amortizes in quarterly installments equal to 0.25% of the aggregate principal amount of the 2014 Term Loan Facility as of May 22, 2015, with the balance payable at maturity. Any prepayments made on the 2014 Term Loan Facility will reduce the quarterly installments.We may prepay the 2014 Term Loan Facility in whole or in part at any time. Additionally, subject to certain exceptions, the 2014 Term Loan Facility is subject to mandatory prepayments in amounts equal to (1) a percentage, as defined in the Credit Agreement, of the net cash proceeds from any non-ordinary course sale or other disposition of assets (including as a result of casualty or condemnation); (2) 100% of the net cash proceeds from issuances or incurrences of debt by Partnership or any of its restricted subsidiaries (other than indebtedness permitted by the 2014 Credit Facilities); and (3) 50% (with stepdowns to 25% and 0% based upon achievement of specified first lien senior secured leverage ratios) of annual excess cash flow of Partnership and its subsidiaries.
Under the 2015 Amended Credit Agreement, at the Borrowers’ option, the interest rate per annum applicable to the 2014 Credit Facilities is based on a fluctuating interest rate determined by reference to either (i) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the federal funds effective rate plus 0.50%, (c) the Eurocurrency rate applicable for an interest period of one month plus 1.00% and (d) in respect of the 2014 Term Loan Facility, 2.00% per annum (“Base Rate Loans”), plus an applicable margin equal to 1.75% for the 2014 Term Loan Facility and 2.00% for loans under the 2014 Revolving Credit Facility, or (ii) a Eurocurrency rate determined by reference to LIBOR, adjusted for statutory reserve requirements (“Eurocurrency Rate Loans”), plus an applicable margin equal to 2.75% for any 2014 Term Loan Facility and 2.50% to 3.00% for loans under the 2014 Revolving Credit Facility. Borrowings under the 2014 Credit Facilities will be subject to a floor of 1.00% in the case of Eurocurrency Rate Loans and 2.00% in the case of Base Rate Loans. We have elected our applicable rate per annum as Eurocurrency rate determined by reference to LIBOR. As of December 31, 2015, the interest rate on our 2014 Term Loan Facility was 3.75%.
We are required to pay certain recurring fees with respect to the 2015 Amended Credit Facilities, including (i) fees on the unused commitments of the lenders under the revolving facility, (ii) letters of credit fees on the aggregate face amounts of outstanding letters of credit plus a fronting fee to the issuing bank and (iii) administration fees. Amounts outstanding under the 2014 Revolving Credit Facility bear interest at a rate of LIBOR plus an applicable margin equal to 2.5% to 3.0%, depending on our leverage ratio, on the amount drawn under each letter of credit that is issued and outstanding under the 2014 Revolving Credit Facility. The interest rate on the unused portion of the 2014 Revolving Credit Facility ranges from 0.375% to 0.50%, depending on our leverage ratio, and our current rate is 0.50%.
As of December 31, 2015, we had no amounts outstanding under the 2014 Revolving Credit Facility. Funds available under the 2014 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 2014 Revolving Credit Facility, which reduces our borrowing availability under this facility by the cumulative amount of outstanding letters of credit. As of December 31, 2015, we had $3.8 million of letters of credit issued against the 2014 Revolving Credit Facility and our borrowing availability was $496.2 million.
2015 Senior Notes
The Borrowers are party toentered into an indenture dated as of May 22, 2015 (the “2015“2017 4.25% Senior Notes Indenture”) in connection with the issuance of $1,250.0$1,500 million of 4.625%4.25% first lien senior secured notes due JanuaryMay 15, 20222024 (the “2015“2017 4.25% Senior Notes”). The 2015 Senior Notes bear interest at a rate of 4.625% per annum, payable semi-annually on January 15 and July 15 of each year. No principal payments are due until maturity.maturity and interest is paid semi-annually. The net proceeds from the offering of the 20152017 4.25% Senior Notes, together with cash on hand,other sources of liquidity, were used to repay $1,550.0 millionredeem all of the outstanding borrowingsRBI Class A 9.0% cumulative compounding perpetual voting preferred shares (see Note 13,
Partnership Preferred Units) and for other general corporate purposes. In connection with the issuance of the 2017 4.25% Senior Notes, we capitalized approximately $13 million in debt issuance costs. Obligations under
our 2014 Term Loan Facility and to pay related premiums, fees and expenses.The 2015the 2017 4.25% Senior Notes are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of theirthe Borrowers' Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Worldwide, Tim HortonsInc., Popeyes Louisiana Kitchen, Inc. and substantially all of their respective Canadian and U.S. subsidiaries (the “Note Guarantors”).
The 20152017 4.25% Senior Notes are first lien senior secured obligations and rank (i) equal in right of payment with all of the existing and future senior debt of the Borrowers and Note Guarantors, including borrowings under and guarantees of the Credit Facilities.
Our 2017 4.25% 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 4.25% Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 2017 4.25% Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others.
2017 5.00% Senior Notes
During 2017, the Borrowers entered into an indenture (the “2017 5.00% Senior Notes Indenture”) in connection with the issuance of $2,800 million of 5.00% second lien senior notes due October 15, 2025 (the “2017 5.00% Senior Notes”). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 2017 5.00% Senior Notes were used to redeem the entire outstanding principal balance of $2,250 million of 6.00% second lien secured notes due April 1, 2022 (the “2014 6.00% Senior Notes”), pay related redemption premiums, fees and expenses, and for general corporate purposes. In connection with the issuance of the 2017 5.00% Senior Notes, we capitalized approximately $15 million in debt issuance costs. In connection with the full redemption of the 2014 Credit Facilities6.00% Senior Notes, we recorded a loss on early extinguishment of debt of $102 million that primarily reflects the payment of premiums to redeem the notes and the 2014write-off of unamortized debt issuance costs.
Obligations under the 2017 5.00% Senior Notes (as defined below); (ii)are guaranteed on a second priority senior secured basis, jointly and severally, by the Note Guarantors. The 2017 5.00% Senior Notes are second lien senior secured obligations and rank equal in right of payment with all of the existing and future first-priority senior secured debt of the Borrowers and Note Guarantors, including the borrowings under and guarantees of the 2014 Credit Facilities, to the extent of the value of the collateral securing such debt; (iii) equal in right of payment with the Tim Hortons Notes (as defined below) to the extent of the value of the Tim Hortons collateral securing such debt; (iv) effectively senior in the right of payment to all of the existing and future unsecured senior debt and junior lien debt of Borrowers and Note Guarantors, including the 2014Facilities.
Our 2017 5.00% Senior Notes
to the extent of the value of collateral securing the 2015 Senior Notes; (v) senior in right of payment to all of the existing and future subordinated debt of Borrowers and Note Guarantors; and (vi) structurally subordinated to all existing and future liabilities of the Borrowers’ non-guarantor subsidiaries.The Borrowers may redeem some or all of the 2015 Senior Notes at any time prior to October 1, 2017 at a price equal to 100% of the principal amountbe redeemed plus a “make whole” premium and accrued and unpaid interest, if any. The 2015 Senior Notes are redeemable at our option, in whole or in part, at any time during the twelve-month period beginning on October 1, 2017 at 102.313% of the principal amount redeemed, at any time during the twelve-month period beginning on October 1, 2018 at 101.156% of the principal amount redeemed or at any time on or after October 1, 201915, 2020 at 100.0% of the principal amount redeemed. In addition, at any time prior to October 1,redemption prices set forth in the 2017 up to 40% of the aggregate principal amount of the 20155.00% Senior Notes may be redeemed with the net proceeds of certain equity offerings, at a redemption price equal to 104.625% of the principal amount of the 2015 Senior NotesIndenture, plus accrued and unpaid interest, if any, toat the redemption date. In connection with any tender offer for the 2015date of redemption. The 2017 5.00% Senior Notes including aIndenture also contains optional redemption provisions related to tender offers, change of control offer or an asset sale offer, the Borrowers will have the right to redeem the and equity offerings, among others.
2015
4.625% Senior Notes
at a redemption price equal to the amount offered in that tender offer if not less than 90% in aggregate principal amount of the outstanding 2015 Senior Notes validly tender and do not withdraw such 2015 Senior Notes in such tender offer. If the Borrowers experience a change of control, the holders of the 2015 Senior Notes will have the right to require the Borrowers to repurchase the 2015 Senior Notes at a purchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest and Additional Amounts (as defined in the 2015 Senior Notes Indenture), if any, to the date of such repurchase.2014 Senior Notes
The Borrowers are
also party to an indenture
dated as of October 8, 2014 (the
“2014“2015 4.625% Senior Notes Indenture”) in connection with the issuance of
$2,250.0$1,250 million of
6.00% second4.625% first lien senior
secured notes due
April 1,January 15, 2022 (the
“2014“2015 4.625% Senior Notes”).
The 2014 Senior Notes bear interest at a rate of 6.00% per annum, payable semi-annually on April 1 and October 1 of each year. No principal payments are due until
maturity.The 2014maturity and interest is paid semi-annually.
Obligations under the 2015 4.625% Senior Notes are guaranteed on a senior secured basis, jointly and severally, by the Note Guarantors. The
20142015 4.625% Senior Notes are
first lien senior secured
by a second-priority lien, subject to certain exceptionsobligations and
permitted liens, onrank equal in right of payment with all of the
Borrowers’ and the Note Guarantors’ presentexisting and future
property that securessenior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit
Facilities and any outstanding Tim Hortons Notes, to the extent of the value of the collateral securing such first-priority senior secured debt.The Borrowers may redeem some or all of the 2014Facilities.
Our 2015 4.625% Senior Notes
at any time prior to October 1, 2017 at a price equal to 100% of the principal amount of the 2014 Senior Notesmay be redeemed
plus a “make whole” premium and, at any timein whole or in part, on or after October 1, 2017, at the redemption prices set forth in the
2014 Senior Notes Indenture. In addition, at any time prior to October 1, 2017, up to 40% of the aggregate principal amount of the 2014 Senior Notes may be redeemed with the net proceeds of certain equity offerings, at the redemption price specified in the Indenture. In connection with any tender offer for the 2014 Senior Notes, including a change of control offer or an asset sale offer, the Borrowers will have the right to redeem the 2014 Senior Notes at a redemption price equal to the amount offered in that tender offer if not less than 90% in aggregate principal amount of the outstanding 2014 Senior Notes validly tender and do not withdraw such 2014 Senior Notes in such tender offer. If the Borrowers experience a change of control, the holders of the 2014 Senior Notes will have the right to require the Borrowers to repurchase the 2014 Senior Notes at a purchase price equal to 101% of their aggregate principal amountcorresponding indenture, plus accrued and unpaid interest,
and Additional Amounts (as defined in the Indenture), if any,
toat the date of
such repurchase.2012 Credit Agreement
On September 28, 2012, Burger King Corporation (“BKC”) and Burger King Holdings, Inc. (“Holdings”) entered into a Credit Agreement (the “2012 Credit Agreement”) to refinance amounts borrowed under the 2011 Amended Credit Agreement (as defined below).redemption. The 2012 Credit Agreement provided for (i) tranche A term loans in the aggregate principal amount of $1,030.0 million (the “Tranche A Term Loans”), (ii) tranche B term loans in the aggregate principal amount of $705.0 million (the “Tranche B Term Loans”), in each case under the senior secured term loan facility (the “2012 Term Loan Facility”), and (iii) a senior secured revolving credit facility for up to $130.0 million of revolving extensions of credit outstanding at any time (including revolving loans, swingline loans and letters of credit) (the “2012 Revolving Credit Facility” and, together with the 2012 Term Loan Facility, the “2012 Credit Facilities”). The Tranche A Term Loans had a maturity date of September 28, 2017, the Tranche B Term Loans had a maturity date of September 28, 2019 and the 2012 Revolving Credit Facility had a maturity date of October 19, 2015. Borrowings under the 2012 Credit Agreement were refinanced by the 2015 Amended Credit Agreement, as described above.
Under the 2012 Credit Agreement, BKC was required to comply with customary financial ratios and the 2012 Credit Agreement4.625% Senior Notes Indenture also contained a number of customary affirmative and negative covenants. BKC was in compliance with all 2012 Credit Agreement financial ratios and covenants at the time of the refinancing in December 2014.
Tim Hortons Notes
At the time of the Transactions, Tim Hortons had the following Canadian dollar denominated senior unsecured notes outstanding: (i) C$300.0 million aggregate principal amount of 4.20% Senior Unsecured Notes, Series 1, due June 1, 2017 (“Series 1 Notes”), (ii) C$450.0 million aggregate principal amount of 4.52% Senior Unsecured Notes, Series 2, due December 1, 2023 (“Series 2 Notes”) and (iii) C$450.0 million aggregate principal amount of 2.85% Senior Unsecured Notes, Series 3, due April 1, 2019 (“Series 3 Notes”) (collectively, the “Tim Hortons Notes”). During 2015, Tim Hortons accepted for purchase, and settled for cash, the following: (i) C$252.6 million principal amount of Series 1 Notes; (ii) C$447.4 million principal amount of Series 2 Notes and (iii) C$446.1 million principal amount of Series 3 Notes, pursuantcontains optional redemption provisions related to tender offers, made following the Transactions.
At December 31, 2014, the entire outstanding amountchange of the Tim Hortons Notes was classified within current liabilities, as we expected to fully redeem the Tim Hortons Notes during the first quarter of 2015. At December 31, 2015, the Tim Hortons Notes that remain outstanding,control and therefore not redeemed, are classified within long-term liabilities, as we intend to leave these outstanding until maturity.
On March 12, 2015, we made a mandatory prepayment on the 2014 Term Loan Facility of $42.7 million equal to the U.S. dollar equivalent of the principal amount of Tim Hortons Notes that remained outstanding after 90 days following the Closing Date.
equity offerings, among others.
Restrictions and Covenants
The 2014
Our Credit Facilities, 2017 4.25% Senior Notes Indenture, 2017 5.00% Senior Notes Indenture and 2015 4.625% Senior Notes Indenture contain a number of customary affirmative and negative covenants that, among other things, will limit or restrict our ability and
the ability of
the Borrowers and certain of
theirour subsidiaries to: incur additional indebtedness; incur liens; engage in mergers, consolidations, liquidations and dissolutions; sell assets; pay dividends and make other payments in respect of capital stock; make investments, loans and advances; pay or modify the terms of certain indebtedness; engage in certain transactions with affiliates. In addition, the Borrowers are not permitted to exceed a
specified first lien senior secured leverage ratio
when the sum of
the amount of letters of credit in excess of $50,000,000 (other than those that are cash collateralized), any loans under the 2014 Revolving Credit Facility and any swingline loans outstanding6.50 to 1.00 when, as of the end of any fiscal quarter,
the sum of (i) the amount of letters of credit outstanding exceeding $50 million (other than those that are cash collateralized); (ii) outstanding amounts under the Revolving Credit Facility and (iii) outstanding amounts of swing line loans, exceeds
30%30.0% of the commitments under the
2014 Revolving Credit Facility.
The
terms ofrestrictions under the
2015Credit Facilities, the 2017 4.25% Senior Notes Indenture,
and 2014the 2017 5.00% Senior Notes Indenture,
among other things, limit the ability of the Borrowers and their restricted subsidiaries to: incur additional indebtedness; create liens or use assets as security in other transactions; declare or pay dividends, redeem stock or make other distributions to stockholders; make investments; merge or consolidate, or sell, transfer, lease or dispose of substantially of the Borrowers’ assets; enter into transactions with affiliates; sell or transfer certain assets; and agree to certain restrictions of the ability of restricted subsidiaries to make payments to us. These covenants are subject to a number of important qualifications, limitations and exceptions that are described in the 2015
4.625% Senior Notes Indenture
and 2014 Senior Notes Indenture.have resulted in substantially all of our consolidated assets being restricted.
As of December 31,
2015,2018, we were in compliance with all
debt covenants
ofunder the
2015 Amended Credit
Agreement, the 2015Facilities, 2017 4.25% Senior Notes Indenture,
the 20142017 5.00% Senior Notes Indenture and
the indenture governing the Tim Hortons2015 4.625% Senior Notes
Indenture and there were no limitations on our ability to draw on the remaining availability under our
2014 Revolving Credit Facility.
On October 11, 2018, one of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in other debt asa total aggregate principal amount of C$100 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40% or the Prime Rate plus an applicable margin equal to 0.40%, at our option. Obligations under the TH Facility are guaranteed by three of our subsidiaries, and amounts borrowed under the TH Facility are and will be secured by certain parcels of real estate. As of December 31, 2015 and 2014 is2018, we had drawn down the entire C$100 million available under the TH Facility with a weighted average interest rate of 3.64%.
On March 27, 2017, we repaid $156 million of debt
assumed in connection with the Popeyes Acquisition. Additionally, $36 million of
$85.2 million and $102.6 million, respectively, recognized in accordance with applicable lease accounting rules. We are considered to beTim Hortons Series 1 notes were repaid on June 1, 2017, the
owner of certain restaurants leased by us from an unrelated lessor because we constructed some of the structural elements of those restaurants, and records the lessor’s contributions to the construction costs for these restaurants as other debt.original maturity date.
Debt Issuance Costs
In connection with entering into the 2015 Amended Credit Agreement and issuing the 2015 Senior Notes,
During 2017, we incurred
an aggregate
of $80.3 million of costs that were recorded as deferred financing costs
and included as a component of
term debt, net of current portion within our consolidated balance sheets.In connection with the 2014 Credit Agreement and the 2014 Senior Notes, we incurred an aggregate of $160.2 million of$63 million. No significant deferred financing costs.
costs were incurred in 2018 and 2016.
Loss on Early Extinguishment of Debt
In connection with the 2015 Amended Credit Agreement and the related repayment of a portion of the 2014 Term Loan Facility,
During 2017, we recorded a
$40.0$122 million loss on early extinguishment of debt,
during 2015. The loss on early extinguishmentwhich primarily reflects the payment of
debt primarily reflectspremiums to redeem our 2014 6.00% Senior Notes and the write-off of unamortized debt issuance costs and
the write-off of unamortized discounts.Indiscounts in connection with the refinancing of term loans outstanding underour Term Loan Facility and the 2012 Credit Agreement, as well as the redemptionsredemption of our 2011 Discount Notes and 20102014 6.00% Senior Notes, we recorded a $155.4 million loss on early extinguishment of debt in 2014. The loss on early extinguishment of debt reflects the write-off of unamortized debt issuance costs, the write-off of unamortized discounts, commitment fees associated with the bridge loan available at the closing of the Transactions, and the payment of premiums to redeem the 2011 Discount Notes and 2010 Senior Notes.
The aggregate maturities of
our long-term debt as of December 31,
20152018 are as follows (in millions):
| | | | |
Year Ended December 31, | | Principal Amount | |
2016 | | $ | 38.9 | |
2017 | | | 90.6 | |
2018 | | | 56.9 | |
2019 | | | 60.1 | |
2020 | | | 57.6 | |
Thereafter | | | 8,421.5 | |
| | | | |
Total | | $ | 8,725.6 | |
| | | | |
|
| | | |
| Year Ended December 31, | Principal Amount |
| 2019 | $ | 70 |
|
| 2020 | 74 |
|
| 2021 | 72 |
|
| 2022 | 1,324 |
|
| 2023 | 78 |
|
| Thereafter | 10,420 |
|
| Total | $ | 12,038 |
|
Interest expense, net consists of the following (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
2014 Term Loan Facility | | $ | 250.3 | | | $ | 54.8 | | | $ | — | |
2015 Senior Notes | | | 35.2 | | | | — | | | | — | |
2014 Senior Notes | | | 135.0 | | | | 31.1 | | | | — | |
Tim Hortons Notes | | | 3.7 | | | | 1.8 | | | | — | |
2012 Term Loan Facility | | | — | | | | 47.5 | | | | 52.9 | |
Interest Rate Caps | | | — | | | | 7.1 | | | | 6.8 | |
2010 Senior Notes | | | — | | | | 74.3 | | | | 78.5 | |
2011 Discount Notes | | | — | | | | 48.5 | | | | 46.0 | |
Amortization of deferred financing costs and debt issuance discount | | | 34.9 | | | | 11.7 | | �� | | 10.3 | |
Capital lease obligations | | | 20.8 | | | | 5.7 | | | | 6.4 | |
Other | | | 2.6 | | | | 0.9 | | | | 1.7 | |
Interest income | | | (4.2 | ) | | | (3.7 | ) | | | (2.6 | ) |
| | | | | | | | | | | | |
Interest expense, net | | $ | 478.3 | | | $ | 279.7 | | | $ | 200.0 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Debt (a) | $ | 498 |
| | $ | 484 |
| | $ | 412 |
|
| Capital lease obligations | 23 |
| | 21 |
| | 20 |
|
| Amortization of deferred financing costs and debt issuance discount | 29 |
| | 33 |
| | 39 |
|
| Interest income | (15 | ) | | (26 | ) | | (4 | ) |
| Interest expense, net | $ | 535 |
| | $ | 512 |
| | $ | 467 |
|
| |
| (a) | Amount includes $60 million benefit during 2018 from our adoption of a new hedge accounting standard. See Note 2, Significant Accounting Policies – New Accounting Pronouncements, for further details of the effects of this change in accounting principle on Interest expense, net. |
Partnership as Lessor
As of December 31,
2015,2018, we leased or subleased
5,4125,284 restaurant properties to franchisees and
87129 non-restaurant properties to third parties under
direct financingoperating leases and
operatingdirect financing leases where we are the lessor. Initial lease terms generally range from 10 to 20 years. Most leases to franchisees provide for fixed monthly payments and many
of these leases provide for future rent escalations and renewal options. Certain leases also include provisions for contingent rent, determined as a percentage of sales, generally when annual sales exceed specific levels.
The lesseesLessees typically bear the cost of maintenance, insurance and property taxes.
Assets leased to franchisees and
other third partiesothers under operating leases where we are the lessor
thatand which are included within our
Propertyproperty and equipment, net
wasare as follows (in millions):
| | | | | | | | |
| | | As of December 31, | |
| | | 2015 | | | 2014 | |
Land | | $ | 888.7 | | | $ | 941.4 | |
Buildings and improvements | | | 1,066.3 | | | | 1,081.8 | |
Restaurant equipment | | | 24.7 | | | | 36.5 | |
| | | | | | | | |
Gross property and equipment leased | | | 1,979.7 | | | | 2,059.7 | |
Accumulated depreciation | | | (228.0 | ) | | | (153.5 | ) |
| | | | | | | | |
Net property and equipment leased | | $ | 1,751.7 | | | $ | 1,906.2 | |
| | | | | | | | |
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Land | $ | 906 |
| | $ | 931 |
|
| Buildings and improvements | 1,175 |
| | 1,215 |
|
| Restaurant equipment | 17 |
| | 17 |
|
| | 2,098 |
| | 2,163 |
|
| Accumulated depreciation and amortization | (475 | ) | | (407 | ) |
| Property and equipment leased, net | $ | 1,623 |
| | $ | 1,756 |
|
Our net investment in direct financing leases
wasis as follows (in millions):
| | | | | | | | |
| | | As of December 31, | |
| | | 2015 | | | 2014 | |
Future rents to be received | | | | | | | | |
Future minimum lease receipts | | $ | 126.6 | | | $ | 154.4 | |
Contingent rents(1) | | | 63.7 | | | | 78.1 | |
Estimated unguaranteed residual value | | | 20.7 | | | | 22.2 | |
Unearned income | | | (75.7 | ) | | | (97.1 | ) |
Allowance on direct financing leases | | | (0.3 | ) | | | (0.3 | ) |
| | | | | | | | |
| | | 135.0 | | | | 157.3 | |
Current portion included within trade receivables | | | (17.8 | ) | | | (16.8 | ) |
| | | | | | | | |
Net investment in property leased to franchisees | | $ | 117.2 | | | $ | 140.5 | |
| | | | | | | | |
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Future rents to be received: | | | |
| Future minimum lease receipts | $ | 60 |
| | $ | 77 |
|
| Contingent rents (a) | 29 |
| | 39 |
|
| Estimated unguaranteed residual value | 16 |
| | 17 |
|
| Unearned income | (35 | ) | | (45 | ) |
| | 70 |
| | 88 |
|
| Current portion included within accounts receivables | (16 | ) | | (17 | ) |
| Net investment in property leased to franchisees | $ | 54 |
| | $ | 71 |
|
(1) | |
| (a) | Amounts represent estimated contingent rents recorded in connection with the acquisition method of accounting. |
Property revenues are comprised primarily of rental income from operating leases and earned income on direct financing leases with franchisees as follows (in millions):
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Rental income: | | | | | |
| Minimum | $ | 454 |
| | $ | 464 |
| | $ | 451 |
|
| Contingent | 273 |
| | 284 |
| | 282 |
|
| Amortization of favorable and unfavorable income lease contracts, net | 8 |
| | 8 |
| | 9 |
|
| Total rental income | 735 |
| | 756 |
| | 742 |
|
| Earned income on direct financing leases | 9 |
| | 9 |
| | 11 |
|
| Total property revenues | $ | 744 |
| | $ | 765 |
| | $ | 753 |
|
Partnership as Lessee
In addition, we lease land, building, equipment, office space and warehouse space, including
710675 restaurant buildings under capital
leases.leases where we are the lessee. Land and building leases generally have an initial term of 10 to 30 years, while land-only lease terms can extend longer, and most leases provide for fixed monthly payments. Many of these leases provide for future rent escalations and renewal
options and certainoptions. Certain leases also include provisions for contingent rent, determined as a percentage of sales, generally when annual sales exceed specific levels. Most leases also obligate us to pay the cost of maintenance, insurance and property taxes.
As of December 31, 2015, future minimum lease receipts and commitments were as follows (in millions):
| | | | | | | | | | | | | | | | |
| | | Lease Receipts | | | Lease Commitments (a) | |
| | | Direct
Financing
Leases | | | Operating
Leases | | | Capital
Leases | | | Operating Leases | |
2016 | | $ | 21.6 | | | $ | 338.7 | | | $ | 31.0 | | | $ | 165.6 | |
2017 | | | 20.9 | | | | 313.4 | | | | 29.5 | | | | 156.4 | |
2018 | | | 19.6 | | | | 286.2 | | | | 27.9 | | | | 143.6 | |
2019 | | | 16.3 | | | | 258.8 | | | | 26.0 | | | | 127.9 | |
2020 | | | 9.7 | | | | 229.2 | | | | 24.0 | | | | 115.1 | |
Thereafter | | | 38.5 | | | | 1,461.0 | | | | 189.8 | | | | 794.8 | |
| | | | | | | | | | | | | | | | |
Total minimum payments | | $ | 126.6 | | | $ | 2,887.3 | | | $ | 328.2 | | | $ | 1,503.4 | |
| | | | | | | | | | | | | | | | |
Less amount representing interest | | | | | | | | | | | (107.7 | ) | | | | |
| | | | | | | | | | | | | | | | |
Present value of minimum capital lease payments | | | | | | | | | | | 220.5 | | | | | |
Current portion of capital lease obligation | | | | | | | | | | | (17.1 | ) | | | | |
| | | | | | | | | | | | | | | | |
Long-term portion of capital lease obligation | | | | | | | | | | $ | 203.4 | | | | | |
| | | | | | | | | | | | | | | | |
(a) | Lease commitments under operating leases have not been reduced by minimum sublease rentals of $1,636.7 million due in the future under noncancelable subleases. |
Property revenues are comprised primarily of rental income from operating leases and earned income on direct financing leases with franchisees as follows (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Rental income: | | | | | | | | | | | | |
Minimum | | $ | 453.9 | | | $ | 182.1 | | | $ | 165.9 | |
Contingent | | | 281.7 | | | | 38.1 | | | | 25.0 | |
Amortization of favorable and unfavorable income lease contracts, net | | | 11.0 | | | | 7.2 | | | | 5.6 | |
| | | | | | | | | | | | |
Total rental income | | | 746.6 | | | | 227.4 | | | | 196.5 | |
Earned income on direct financing leases | | | 13.6 | | | | 15.3 | | | | 17.2 | |
| | | | | | | | | | | | |
Total property revenues | | $ | 760.2 | | | $ | 242.7 | | | $ | 213.7 | |
| | | | | | | | | | | | |
Rent expense associated with
thethese lease commitments is as follows (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Rental expense: | | | | | | | | | | | | |
Minimum | | $ | 199.5 | | | $ | 109.1 | | | $ | 115.0 | |
Contingent | | | 73.1 | | | | 8.0 | | | | 4.9 | |
Amortization of favorable and unfavorable payable lease contracts, net | | | 10.1 | | | | 3.5 | | | | 0.9 | |
| | | | | | | | | | | | |
Total rental expense (a) | | $ | 282.7 | | | $ | 120.6 | | | $ | 120.8 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Rental expense: | | | | | |
| Minimum | $ | 201 |
| | $ | 198 |
| | $ | 193 |
|
| Contingent | 71 |
| | 71 |
| | 71 |
|
| Amortization of favorable and unfavorable payable lease contracts, net | 9 |
| | 10 |
| | 9 |
|
| Total rental expense (a) | $ | 281 |
| | $ | 279 |
| | $ | 273 |
|
| |
| (a) | Amounts include rental expense related to properties subleased to franchisees of $267.0$263 million for 2015, $103.32018, $263 million for 20142017, and $94.0$254 million for 2013.2016. |
The impact
As of
favorableDecember 31, 2018, future minimum lease receipts and
unfavorable lease amortization on operating income is as follows (in millions): | | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Franchise and property revenues | | $ | 11.0 | | | $ | 7.2 | | | $ | 5.6 | |
Cost of sales | | | — | | | | (0.3 | ) | | | (1.3 | ) |
Franchise and property expenses | | | 10.1 | | | | 3.8 | | | | 2.2 | |
Estimated future amortization of favorable and unfavorable lease contracts subject to amortizationcommitments are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cost of Sales | | | Franchise and Property Revenue | | | Franchise and Property Expenses | |
| | | Favorable | | | Unfavorable | | | Favorable | | | Unfavorable | | | Favorable | | | Unfavorable | |
2016 | | $ | 0.2 | | | $ | (0.2 | ) | | $ | 16.4 | | | $ | (25.3 | ) | | $ | 27.0 | | | $ | (18.4 | ) |
2017 | | | 0.2 | | | | (0.2 | ) | | | 15.5 | | | | (24.0 | ) | | | 25.3 | | | | (17.0 | ) |
2018 | | | 0.2 | | | | (0.1 | ) | | | 14.3 | | | | (22.5 | ) | | | 23.1 | | | | (15.6 | ) |
2019 | | | 0.2 | | | | (0.1 | ) | | | 13.1 | | | | (20.6 | ) | | | 20.8 | | | | (13.7 | ) |
2020 | | | 0.2 | | | | (0.1 | ) | | | 11.6 | | | | (17.6 | ) | | | 17.5 | | | | (12.1 | ) |
Thereafter | | | 2.1 | | | | (0.4 | ) | | | 55.4 | | | | (75.9 | ) | | | 85.9 | | | | (58.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 3.1 | | | $ | (1.1 | ) | | $ | 126.3 | | | $ | (185.9 | ) | | $ | 199.6 | | | $ | (135.0 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Lease Receipts | | Lease Commitments (a) |
| | Direct
Financing
Leases | | Operating
Leases | | Capital
Leases | | Operating
Leases |
| 2019 | $ | 14 |
| | $ | 416 |
| | $ | 38 |
| | $ | 183 |
|
| 2020 | 10 |
| | 388 |
| | 36 |
| | 172 |
|
| 2021 | 7 |
| | 360 |
| | 34 |
| | 158 |
|
| 2022 | 5 |
| | 331 |
| | 33 |
| | 145 |
|
| 2023 | 5 |
| | 306 |
| | 30 |
| | 130 |
|
| Thereafter | 19 |
| | 1,704 |
| | 201 |
| | 831 |
|
| Total minimum receipts / payments | $ | 60 |
| | $ | 3,505 |
| | 372 |
| | $ | 1,619 |
|
| Less amount representing interest | | | | | (125 | ) | | |
| Present value of minimum capital lease payments | | | | | 247 |
| | |
| Current portion of capital lease obligation | | | | | (21 | ) | | |
| Long-term portion of capital lease obligation | | | | | $ | 226 |
| | |
| |
| (a) | Minimum lease payments have not been reduced by minimum sublease rentals of $2,290 million due in the future under non-cancelable subleases. |
Tax Act
In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that significantly revises the U.S. tax code generally effective January 1, 2018 by, among other changes, lowering the corporate income tax rate from 35% to 21%, limiting deductibility of interest expense and performance based incentive compensation and implementing a modified territorial tax system. As a Canadian entity, we generally would be classified as a foreign entity (and, therefore, a non-U.S. tax resident) under general rules of U.S. federal income taxation. However, we have subsidiaries subject to U.S. federal income taxation and therefore the Tax Act impacted our consolidated results of operations during 2017 and 2018, and is expected to continue to impact our consolidated results of operations in future periods.
The impacts to our consolidated statement of operations consist of the following (the “Tax Act Impact”):
A provisional benefit of $420 million recorded in our provision from income taxes for 2017 and a favorable adjustment of $9 million recorded for 2018, as a result of the Transactions enteredremeasurement of net deferred tax liabilities.
Provisional charges of $103 million recorded in December 2014, the tables below were prepared considering the following: (i) the Domestic figures represent Canada for 20152017 and 2014, and the U.S. for 2013; (ii) the statutory rate is the Canadian ratea favorable adjustment of 26.5% for 2015 and 2014, and the U.S. rate of 35.0% for 2013; and (iii) costs and taxes$3 million recorded in 2018, related to certain deductions allowed to be carried forward before the Tax Act, which potentially may not be carried forward and deductible under the Tax Act.
A provisional estimate for a one-time transitional repatriation tax on unremitted foreign operations consistsearnings (the “Transition Tax”) of non-Canadian$119 million recorded in 2017, most of which had been previously accrued with respect to certain undistributed foreign earnings, and a favorable adjustment of $15 million (primarily related to utilization of foreign tax credits) recorded in 2018.
In accordance with Staff Accounting Bulletin No. 118 issued by the staff of the SEC, adjustments to provisional amounts were recorded as discrete items in the provision for income taxes in 2018, the period in which those adjustments became reasonably estimable, as described above.
The ultimate impact of the Tax Act on our effective tax rate in future periods will depend on interpretations and regulatory changes from the Internal Revenue Service, the SEC, the FASB and various tax jurisdictions,
for 2015 and 2014, and non-U.S. jurisdictions for 2013.or actions we may take.
Income (loss) before income taxes, classified by source of income (loss), is as follows (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Domestic | | $ | 546.9 | | | $ | (261.7 | ) | | $ | 127.4 | |
Foreign | | | 127.0 | | | | 7.7 | | | | 194.8 | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 673.9 | | | $ | (254.0 | ) | | $ | 322.2 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Canadian | $ | 1,111 |
| | $ | 1,223 |
| | $ | 1,050 |
|
| Foreign | 271 |
| | (122 | ) | | 150 |
|
| Income before income taxes | $ | 1,382 |
| | $ | 1,101 |
| | $ | 1,200 |
|
Income tax
(benefit) expense
(benefit) attributable to income from continuing operations consists of the following (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Current: | | | | | | | | | | | | |
Canada | | $ | 107.2 | | | $ | 25.5 | | | $ | 0.5 | |
U.S. Federal | | | 46.1 | | | | 16.1 | | | | 29.9 | |
U.S. state, net of federal income tax benefit | | | 4.1 | | | | (0.3 | ) | | | 3.7 | |
Other Foreign | | | 37.1 | | | | 35.5 | | | | 22.3 | |
| | | | | | | | | | | | |
| | $ | 194.5 | | | $ | 76.8 | | | $ | 56.4 | |
| | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | |
Canada | | $ | (48.1 | ) | | $ | (29.8 | ) | | $ | (4.5 | ) |
U.S. Federal | | | 21.0 | | | | (28.4 | ) | | | 27.8 | |
U.S. state, net of federal income tax benefit | | | (7.5 | ) | | | (4.1 | ) | | | (1.2 | ) |
Other Foreign | | | 2.3 | | | | 0.4 | | | | 10.0 | |
| | | | | | | | | | | | |
| | $ | (32.3 | ) | | $ | (61.9 | ) | | $ | 32.1 | |
| | | | | | | | | | | | |
Total | | $ | 162.2 | | | $ | 14.9 | | | $ | 88.5 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Current: | | | | | |
| Canadian | $ | 25 |
| | $ | 438 |
| | $ | 79 |
|
| U.S. Federal | 95 |
| | 113 |
| | 45 |
|
| U.S. state, net of federal income tax benefit | 17 |
| | 3 |
| | 2 |
|
| Other Foreign | 72 |
| | 54 |
| | 38 |
|
| | $ | 209 |
| | $ | 608 |
| | $ | 164 |
|
| Deferred: | | | | | |
| Canadian | $ | 78 |
| | $ | (302 | ) | | $ | 49 |
|
| U.S. Federal | (65 | ) | | (473 | ) | | 37 |
|
| U.S. state, net of federal income tax benefit | 13 |
| | 34 |
| | (7 | ) |
| Other Foreign | 3 |
| | (1 | ) | | 1 |
|
| | $ | 29 |
| | $ | (742 | ) | | $ | 80 |
|
| Income tax (benefit) expense | $ | 238 |
| | $ | (134 | ) | | $ | 244 |
|
The statutory rate reconciles to the effective
income tax rate as follows:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Statutory rate | | | 26.5 | % | | | 26.5 | % | | | 35.0 | % |
U.S. state income taxes, net of U.S. federal income tax benefit | | | — | | | | — | | | | 0.5 | |
Costs and taxes related to foreign operations | | | 16.7 | | | | (9.8 | ) | | | 6.2 | |
Foreign exchange gain (loss) | | | (1.9 | ) | | | (2.2 | ) | | | — | |
Foreign tax rate differential (1) | | | (5.4 | ) | | | 29.8 | | | | (14.6 | ) |
Taxes provided on earnings due to Transactions | | | — | | | | (22.3 | ) | | | — | |
Change in valuation allowance | | | 4.7 | | | | (3.0 | ) | | | 0.6 | |
Change in accrual for tax uncertainties | | | 0.7 | | | | (0.3 | ) | | | 1.5 | |
Deductible FTC | | | — | | | | 3.7 | | | | (1.9 | ) |
Non deductible Transaction costs | | | — | | | | (4.9 | ) | | | 0.3 | |
Impact of Transactions | | | 0.7 | | | | (14.5 | ) | | | — | |
Capital gain (loss) rate differential | | | — | | | | (8.6 | ) | | | — | |
Intercompany financing | | | (20.2 | ) | | | — | | | | — | |
Other | | | 2.3 | | | | (0.3 | ) | | | (0.1 | ) |
| | | | | | | | | | | | |
Effective income tax rate | | | 24.1 | % | | | (5.9 | )% | | | 27.5 | % |
| | | | | | | | | | | | |
(1) | Amounts reflect statutory rates in jurisdictions in which we operate outside of Canada for 2015 and 2014 and outside of the U.S. for 2013. |
Our effective
|
| | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Statutory rate | 26.5 | % | | 26.5 | % | | 26.5 | % |
| Costs and taxes related to foreign operations | 4.2 |
| | 8.9 |
| | 9.6 |
|
| Foreign exchange gain (loss) | (0.1 | ) | | (7.7 | ) | | 0.1 |
|
| Foreign tax rate differential | (6.1 | ) | | (1.9 | ) | | (1.0 | ) |
| Change in valuation allowance | 3.2 |
| | 12.0 |
| | 0.2 |
|
| Change in accrual for tax uncertainties | 0.1 |
| | (0.4 | ) | | 1.0 |
|
| Intercompany financing | (4.4 | ) | | (19.5 | ) | | (16.0 | ) |
| Impact of Tax Act | (1.9 | ) | | (27.4 | ) | | — |
|
| Benefit from stock option exercises | (5.0 | ) | | (4.9 | ) | | — |
|
| Other | 0.7 |
| | 2.3 |
| | (0.1 | ) |
| Effective income tax rate | 17.2 | % | | (12.1 | )% | | 20.3 | % |
Income tax
rate was 24.1% for 2015, primarily due to the mix of income from multiple tax jurisdictions, partially offset by the favorable impact from intercompany financing. Our effective tax rate was (5.9)% for 2014, primarily due to the impact of theTransactions, including non-deductible transaction related costs, and the mix of income from multiple tax jurisdictions. Our effective tax rate was 27.5% for 2013, primarily as a result of the mix of income from multiple tax jurisdictions and the impact of non-deductible expenses related to our refranchisings, partially offset by a favorable impact from the sale of a foreign subsidiary and a reduction in the U.S. state effective tax rate related to our refranchisings.
The following table provides the amount of income tax(benefit) expense (benefit) allocated to continuing operations and amounts separately allocated to other items was (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Income tax expense from continuing operations | | $ | 162.2 | | | $ | 15.3 | | | $ | 88.5 | |
Cash flow hedge in accumulated other comprehensive income (loss) | | | (21.5 | ) | | | (60.3 | ) | | | 68.1 | |
Net investment hedge in accumulated other comprehensive income (loss) | | | 111.7 | | | | 20.9 | | | | (5.7 | ) |
Pension liability in accumulated other comprehensive income (loss) | | | (7.0 | ) | | | (13.4 | ) | | | 9.9 | |
Stock option tax benefit in additional paid-in capital | | | (0.5 | ) | | | — | | | | (10.1 | ) |
| | | | | | | | | | | | |
Total | | $ | 244.9 | | | $ | (37.5 | ) | | $ | 150.7 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Income tax (benefit) expense from continuing operations | $ | 238 |
| | $ | (134 | ) | | $ | 244 |
|
| Cash flow hedge in accumulated other comprehensive income (loss) | (2 | ) | | 5 |
| | (2 | ) |
| Net investment hedge in accumulated other comprehensive income (loss) | 101 |
| | (13 | ) | | 12 |
|
| Pension liability in accumulated other comprehensive income (loss) | — |
| | (2 | ) | | (2 | ) |
| Stock option tax benefit in common shares | — |
| | — |
| | (9 | ) |
| Total | $ | 337 |
| | $ | (144 | ) | | $ | 243 |
|
The significant components of deferred income tax
(benefit) expense
(benefit) attributable to income from continuing operations are as follows (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Deferred income tax (benefit) expense | | $ | (51.9 | ) | | $ | (71.9 | ) | | $ | 9.9 | |
Change in valuation allowance | | | 31.8 | | | | 6.7 | | | | 22.6 | |
Change in effective U.S. state income tax rate | | | (7.2 | ) | | | 3.0 | | | | (4.0 | ) |
Change in effective foreign income tax rate | | | (5.0 | ) | | | 0.3 | | | | 3.6 | |
| | | | | | | | | | | | |
Total | | $ | (32.3 | ) | | $ | (61.9 | ) | | $ | 32.1 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Deferred income tax (benefit) expense | $ | (14 | ) | | $ | (449 | ) | | $ | 78 |
|
| Change in valuation allowance | 43 |
| | 133 |
| | 2 |
|
| Change in effective Canadian income tax rate | (3 | ) | | — |
| | — |
|
| Change in effective U.S. federal income tax rate | (8 | ) | | (433 | ) | | — |
|
| Change in effective U.S. state income tax rate | 15 |
| | 4 |
| | (3 | ) |
| Change in effective foreign income tax rate | (4 | ) | | 3 |
| | 3 |
|
| Total | $ | 29 |
| | $ | (742 | ) | | $ | 80 |
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in millions):
| | | | | | | | |
| | | As of December 31, | |
| | | 2015 | | | 2014 | |
Deferred tax assets: | | | | | | | | |
| | |
Trade and notes receivable, principally due to allowance for doubtful accounts | | $ | 7.3 | | | $ | 11.6 | |
Accrued employee benefits | | | 66.1 | | | | 53.1 | |
Unfavorable leases | | | 162.0 | | | | 132.5 | |
Liabilities not currently deductible for tax | | | 45.1 | | | | 52.0 | |
Tax loss and credit carryforwards | | | 287.3 | | | | 215.5 | |
Other | | | 1.2 | | | | — | |
| | | | | | | | |
Total gross deferred tax assets | | | 569.0 | | | | 464.7 | |
Valuation allowance | | | (124.6 | ) | | | (68.8 | ) |
| | | | | | | | |
Net deferred tax assets | | | 444.4 | | | | 395.9 | |
Less deferred tax liabilities: | | | | | | | | |
Property and equipment, principally due to differences in depreciation | | | 46.0 | | | | 48.4 | |
Intangible assets | | | 1,633.9 | | | | 1,800.7 | |
Leases | | | 161.2 | | | | 117.3 | |
Statutory Impairment | | | 24.3 | | | | 8.0 | |
Derivatives | | | 90.2 | | | | 28.1 | |
Outside basis difference | | | 98.9 | | | | 272.3 | |
Other | | | — | | | | 16.8 | |
| | | | | | | | |
Total gross deferred tax liabilities | | | 2,054.5 | | | | 2,291.6 | |
| | | | | | | | |
Net deferred tax liability | | $ | 1,610.1 | | | $ | 1,895.7 | |
| | | | | | | | |
|
| | | | | | | |
| | As of December 31, |
| | 2018 | | 2017 |
| Deferred tax assets: | | | |
| Accounts and notes receivable | $ | 5 |
| | $ | 5 |
|
| Accrued employee benefits | 49 |
| | 49 |
|
| Unfavorable leases | 123 |
| | 146 |
|
| Liabilities not currently deductible for tax | 176 |
| | 74 |
|
| Tax loss and credit carryforwards | 509 |
| | 550 |
|
| Derivatives | 25 |
| | 136 |
|
| Other | 8 |
| | — |
|
| Total gross deferred tax assets | 895 |
| | 960 |
|
| Valuation allowance | (325 | ) | | (282 | ) |
| Net deferred tax assets | 570 |
| | 678 |
|
| Less deferred tax liabilities: | | | |
| Property and equipment, principally due to differences in depreciation | 43 |
| | 33 |
|
| Intangible assets | 1,734 |
| | 1,791 |
|
| Leases | 105 |
| | 129 |
|
| Statutory impairment | 31 |
| | 26 |
|
| Outside basis difference | 35 |
| | 68 |
|
| Total gross deferred tax liabilities | 1,948 |
| | 2,047 |
|
| Net deferred tax liability | $ | 1,378 |
| | $ | 1,369 |
|
The valuation allowance had a net increase of
$55.8$43 million during
20152018 primarily due to
current year losses and true-up adjustmentsthe change in provisional estimates related to
prior year ordinary andthe utilization of foreign tax credits. This increase was partially offset by a release due to the utilization of capital
losses.losses that had been previously valued.
Changes in the valuation allowance are as follows (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Beginning balance | | $ | 68.8 | | | $ | 97.7 | | | $ | 93.3 | |
Additions due to Tim Hortons acquisition | | | — | | | | 19.5 | | | | — | |
Change in estimates recorded to deferred income tax expense | | | 31.8 | | | | 6.7 | | | | 22.6 | |
Expiration of foreign tax credits and capital losses | | | (3.2 | ) | | | (11.3 | ) | | | — | |
Changes from foreign currency exchange rates | | | (8.2 | ) | | | (2.1 | ) | | | 0.1 | |
True-ups from changes in ordinary and capital losses | | | 35.4 | | | | (41.7 | ) | | | — | |
Sale of foreign subsidiaries | | | — | | | | — | | | | (18.3 | ) |
| | | | | | | | | | | | |
Ending balance | | $ | 124.6 | | | $ | 68.8 | | | $ | 97.7 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 282 |
| | $ | 133 |
| | $ | 125 |
|
| Additions due to acquisition | — |
| | 9 |
| | — |
|
| Change in estimates recorded to deferred income tax expense | 43 |
| | 133 |
| | 2 |
|
| Changes from foreign currency exchange rates | — |
| | 6 |
| | (1 | ) |
| True-ups from changes in losses and credits | — |
| | 1 |
| | 7 |
|
| Ending balance | $ | 325 |
| | $ | 282 |
| | $ | 133 |
|
The gross amount and expiration dates of operating loss and tax credit
carryforwardscarry-forwards as of December 31,
20152018 are as follows (in millions):
| | | | | | |
| | | Amount | | | Expiration Date |
Canadian net operating loss carryforwards | | $ | 197.9 | | | 2024-2035 |
Canadian capital loss carryforwards | | | 278.0 | | | Indefinite |
U.S. federal net operating loss carryforwards | | | 198.4 | | | 2034 |
U.S. state net operating loss carryforwards | | | 326.9 | | | 2016-2034 |
U.S. capital loss carryforwards | | | 59.4 | | | 2018 |
U.S. foreign tax credits | | | 33.9 | | | 2020-2035 |
Other foreign net operating loss carryforwards | | | 131.8 | | | Indefinite |
Other foreign net operating loss carryforwards | | | 1.5 | | | 2016-2034 |
Other foreign capital loss carryforward | | | 34.7 | | | Indefinite |
Other | | | 3.6 | | | Indefinite |
| | | | | | |
Total | | $ | 1,266.1 | | | |
| | | | | | |
Income
|
| | | | | |
| | Amount | | Expiration Date |
| Canadian net operating loss carryforwards | $ | 735 |
| | 2036-2038 |
| Canadian capital loss carryforwards | 1,139 |
| | Indefinite |
| U.S. state net operating loss carryforwards | 595 |
| | 2019-2038 |
| U.S. foreign tax credits | 81 |
| | 2019-2028 |
| Other foreign net operating loss carryforwards | 192 |
| | Indefinite |
| Other foreign net operating loss carryforwards | 57 |
| | 2020-2037 |
| Other foreign capital loss carryforward | 30 |
| | Indefinite |
| Foreign credits | 2 |
| | 2019-2036 |
| Total | $ | 2,831 |
| | |
In prior periods, we provided deferred taxes
have not been providedon certain undistributed foreign earnings. Under our transition to a modified territorial tax system whereby all previously untaxed undistributed foreign earnings are subject to a transition tax charge at reduced rates and future repatriations of foreign earnings will generally be exempt from U.S. tax, we wrote off the existing deferred tax liability on undistributed foreign earnings and recorded the impact of the new transition tax charge on foreign earnings. We will continue to monitor available evidence and our plans for foreign earnings and expect to continue to provide any applicable deferred taxes based on the
excesstax liability or withholding taxes that would be due upon repatriation of
the amount for financial reporting over the tax basis of investment in foreign subsidiaries that areamounts not considered
indefinitelypermanently reinvested.
Determination of the amount of unrecognized deferred income tax liabilities on this temporary difference is not practical because of the complexity of the hypothetical calculation. Income taxes of approximately $98.9 million have been recognized on foreign unremitted earnings that are expected to be repatriated. We had
$238.6$441 million of unrecognized tax benefits at December 31,
2015,2018, which if recognized, would favorably affect the effective income tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Beginning balance | | $ | 41.6 | | | $ | 27.7 | | | $ | 23.3 | |
Additions on tax position related to the current year | | | 0.8 | | | | 2.7 | | | | 2.2 | |
Additions for tax positions of prior years | | | 4.3 | | | | 2.5 | | | | 2.4 | |
Additions due to acquisitions (1) | | | 202.5 | | | | 13.4 | | | | — | |
Reductions for tax positions of prior year | | | (2.8 | ) | | | (3.6 | ) | | | (0.1 | ) |
Reductions for settlement | | | (7.4 | ) | | | (0.3 | ) | | | (0.1 | ) |
Reductions due to statute expiration | | | (0.4 | ) | | | (0.8 | ) | | | — | |
| | | | | | | | | | | | |
Ending balance | | $ | 238.6 | | | $ | 41.6 | | | $ | 27.7 | |
| | | | | | | | | | | | |
(1) | Positions taken in conjunction with the Transactions. |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 461 |
| | $ | 241 |
| | $ | 239 |
|
| Additions on tax position related to the current year | 1 |
| | 186 |
| | 2 |
|
| Additions for tax positions of prior years | 18 |
| | 41 |
| | 6 |
|
| Additions for tax positions taken in conjunction with acquisition of Tim Hortons | — |
| | 2 |
| | — |
|
| Reductions for tax positions of prior year | (18 | ) | | — |
| | (1 | ) |
| Reductions for settlement | (18 | ) | | (2 | ) | | (5 | ) |
| Reductions due to statute expiration | (3 | ) | | (7 | ) | | — |
|
| Ending balance | $ | 441 |
| | $ | 461 |
| | $ | 241 |
|
During the twelve months beginning January 1,
2016,2019, it is reasonably possible we will reduce unrecognized tax benefits by approximately
$7.0$6 million, primarily as a result of the expiration of certain statutes of limitations and the resolution of audits.
We recognize interest and penalties related to unrecognized tax benefits in
Incomeincome tax expense. The total amount of accrued interest and penalties was
$16.1$51 million and
$12.8$37 million at December 31,
20152018 and
2014,2017, respectively. Potential interest and penalties associated with uncertain tax positions recognized was
$3.3$14 million during
the year ended December 31, 2015, $0.52018, $10 million during
the year ended December 31, 2014,2017 and
$0.6$11 million during
the year ended December 31, 2013.2016. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.
We file income tax returns with Canada and its provinces and territories. Generally we are subject to routine examinations by the Canada Revenue Agency (“CRA”). The CRA is conducting examinations of the
20102013 through
20132015 taxation years. Additionally, income tax returns filed with various provincial jurisdictions are generally open to examination for periods of three to five years subsequent to the filing of the respective return.
The appeals for tax years 2005 through 2009 were successfully resolved during 2015. A hearing at the federal court of appeal with respect to the tax year 2002 was heard in early 2016. We are awaiting a decision. At this time, we believe that we have complied with all applicable Canadian tax laws and that we have adequately provided for these matters.We also file income tax returns, including returns for our subsidiaries, with U.S. federal, U.S. state, and foreign jurisdictions. Generally we are subject to routine examination by taxing authorities in the U.S. jurisdictions, as well as
other foreign tax
jurisdictions, such as the United Kingdom, Germany, Spain, Switzerland and Singapore.jurisdictions. None of the foreign jurisdictions should be individually material. The examination
phase of our U.S. federal income tax returns for fiscal 2009, 2010, the period July 1, 2010 through October 18, 2010 and the period October 19, 2010 through December 31, 2010 was
completedclosed during
2015. Variousthe first half of 2018. The U.S. federal income tax
positions related to thosereturns for our U.S. companies for fiscal years
2014, 2015 and 2016 are currently under
appeals.audit by the U.S. Internal Revenue Service. We have various U.S. state and foreign income tax returns in the process of examination. From time to time, these audits result in proposed assessments where the ultimate resolution may result in owing additional taxes. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters.
Note
15. Pension and Post Retirement Medical BenefitsPension Benefits
We sponsor noncontributory defined benefit pension plans for our employees in the United States (the “U.S. Pension Plans”) and certain employees in the United Kingdom, Germany and Switzerland (the “International Pension Plans”). Effective December 31, 2005, all benefits accrued under the U.S. Pension Plans were frozen at the benefit level attained as of that date.
Postretirement Medical Benefits
Our Burger King postretirement medical plan (the “U.S. Retiree Medical Plan”) provides medical, dental and life insurance benefits to U.S. salaried retirees hired prior to June 30, 2001 and who were age 40 or older as of June 30, 2001, and their eligible dependents. The amount of retirement health care coverage an employee will receive depends upon the length of credited service. In 2011, the credited service for this plan was frozen for all participants. Beginning January 1, 2012, the annual employer-provided subsidy will be $160 (pre-age 65) and $80 (post-age 65) per year of credited service for anyone not already receiving benefits prior to this date.
Obligations and Funded Status
The following table sets forth the change in benefit obligations, fair value of plan assets and amounts recognized in the balance sheets for the U.S. Pension Plans, International Pension Plans and U.S. Retiree Medical Plan (in millions):
| | | | | | | | | | | | | | | | |
| | | U.S. Pension Plans | | | U.S. Retiree Medical Plan | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Change in benefit obligation | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | | $ | 231.7 | | | $ | 193.6 | | | $ | 9.2 | | | $ | 7.9 | |
Interest cost | | | 9.1 | | | | 9.2 | | | | 0.4 | | | | 0.4 | |
Actuarial (gains) losses | | | 0.6 | | | | 38.1 | | | | (0.6 | ) | | | 1.5 | |
Benefits paid | | | (17.0 | ) | | | (9.2 | ) | | | (0.6 | ) | | | (0.6 | ) |
| | | | | | | | | | | | | | | | |
Benefit obligation at end of year | | $ | 224.4 | | | $ | 231.7 | | | $ | 8.4 | | | $ | 9.2 | |
| | | | |
Change in plan assets | | | | | | | | | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 172.9 | | | $ | 159.6 | | | $ | — | | | $ | — | |
Actual return on plan assets | | | (8.4 | ) | | | 17.3 | | | | — | | | | — | |
Employer contributions | | | 1.1 | | | | 5.2 | | | | 0.6 | | | | 0.6 | |
Benefits paid | | | (17.0 | ) | | | (9.2 | ) | | | (0.6 | ) | | | (0.6 | ) |
| | | | | | | | | | | | | | | | |
Fair value of plan assets at end of year | | $ | 148.6 | | | $ | 172.9 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Funded status of plan | | $ | (75.8 | ) | | $ | (58.8 | ) | | $ | (8.4 | ) | | $ | (9.2 | ) |
| | | | | | | | | | | | | | | | |
Amounts recognized in the consolidated balance sheet | | | | | | | | | | | | | | | | |
Current liabilities | | $ | (0.8 | ) | | $ | (0.8 | ) | | $ | (0.7 | ) | | $ | (0.7 | ) |
Noncurrent liabilities | | | (75.0 | ) | | | (58.0 | ) | | | (7.7 | ) | | | (8.5 | ) |
| | | | | | | | | | | | | | | | |
Net pension liability, end of fiscal year | | $ | (75.8 | ) | | $ | (58.8 | ) | | $ | (8.4 | ) | | $ | (9.2 | ) |
| | | | | | | | | | | | | | | | |
Amounts recognized in accumulated other comprehensive income (AOCI) | | | | | | | | | | | | | | | | |
Prior service cost / (credit) | | $ | — | | | $ | — | | | $ | (6.5 | ) | | $ | (9.5 | ) |
Unrecognized actuarial loss (gain) | | | 42.5 | | | | 27.1 | | | | (1.0 | ) | | | (0.4 | ) |
| | | | | | | | | | | | | | | | |
Total AOCI (before tax) | | $ | 42.5 | | | $ | 27.1 | | | $ | (7.5 | ) | | $ | (9.9 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
| |
| | | International Pension Plans | |
| | | 2015 | | | 2014 | |
Benefit obligation at end of year | | $ | 34.9 | | | $ | 33.4 | |
Fair value of plan assets at end of year | | | 29.7 | | | | 30.8 | |
| | | | | | | | |
Funded status of plan | | $ | (5.2 | ) | | $ | (2.6 | ) |
| | | | | | | | |
Amounts recognized in the consolidated balance sheet | | | | | | | | |
Current assets | | $ | — | | | $ | 0.3 | |
Noncurrent assets | | | — | | | | 2.0 | |
Noncurrent liabilities | | | (5.2 | ) | | | (4.9 | ) |
| | | | | | | | |
Net pension liability, end of fiscal year | | $ | (5.2 | ) | | $ | (2.6 | ) |
| | | | | | | | |
Amounts recognized in accumulated other comprehensive income (AOCI) | | | | | | | | |
Unrecognized actuarial loss (gain) | | $ | 3.1 | | | $ | (0.3 | ) |
| | | | | | | | |
Total AOCI (before tax) | | $ | 3.1 | | | $ | (0.3 | ) |
| | | | | | | | |
Additional Year-end Information for the U.S. Pension Plans, International Pension Plans and U.S. Retiree Medical Plan with Accumulated Benefit Obligations in Excess of Plan Assets
The following sets forth the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the U.S. Pension Plans, International Pension Plans and U.S. Retiree Medical Plan (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Pension Plans | | | U.S. Retiree Medical Plan | | | International Pension Plans | |
| | | As of December 31, | | | As of December 31, | | | As of December 31, | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Projected benefit obligation | | $ | 224.4 | | | $ | 231.7 | | | $ | 8.4 | | | $ | 9.2 | | | $ | 34.9 | | | $ | 33.4 | |
Accumulated benefit obligation | | $ | 224.4 | | | $ | 231.7 | | | $ | 8.4 | | | $ | 9.2 | | | $ | 24.2 | | | $ | 24.0 | |
Fair value of plan assets | | $ | 148.6 | | | $ | 172.9 | | | $ | — | | | $ | — | | | $ | 29.7 | | | $ | 30.8 | |
Components of Net Periodic Benefit Cost
The following sets forth the net periodic benefit costs (income) for the U.S. Pension Plans and U.S. Retiree Medical Plan for the periods indicated (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Pension Plans | | | U.S. Retiree Medical Plan | |
| | | 2015 | | | 2014 | | | 2013 | | | 2015 | | | 2014 | | | 2013 | |
Interest costs on projected benefit obligations | | $ | 9.1 | | | $ | 9.2 | | | $ | 8.4 | | | $ | 0.3 | | | $ | 0.4 | | | $ | 0.3 | |
Expected return on plan assets | | | (9.1 | ) | | | (9.2 | ) | | | (8.3 | ) | | | — | | | | — | | | | — | |
Amortization of prior service costs (credit) | | | — | | | | — | | | | — | | | | (2.9 | ) | | | (2.9 | ) | | | (2.9 | ) |
Amortization of actuarial losses (gains) | | | 2.7 | | | | — | | | | 1.2 | | | | — | | | | (0.2 | ) | | | (0.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic benefit costs (income) | | $ | 2.7 | | | $ | — | | | $ | 1.3 | | | $ | (2.6 | ) | | $ | (2.7 | ) | | $ | (2.7 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
The net periodic benefit costs (income) for our International Pension Plans was not significant for any comparative period.
Other Changes in Plan Assets and Projected Benefit Obligation Recognized in Other Comprehensive Income
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Pension Plans | | | U.S. Retiree Medical Plan | |
| | | 2015 | | | 2014 | | | 2013 | | | 2015 | | | 2014 | | | 2013 | |
Unrecognized actuarial (gain) loss | | $ | 18.1 | | | $ | 30.0 | | | $ | (26.2 | ) | | $ | (0.5 | ) | | $ | 1.5 | | | $ | (0.6 | ) |
(Gain) loss recognized due to settlement | | | — | | | | — | | | | (0.3 | ) | | | — | | | | — | | | | — | |
Amortization of prior service (cost) credit | | | — | | | | — | | | | — | | | | 2.9 | | | | 2.9 | | | | 2.9 | |
Amortization of actuarial gain (loss) | | | (2.7 | ) | | | — | | | | (1.2 | ) | | | — | | | | 0.2 | | | | 0.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total recognized in OCI | | $ | 15.4 | | | $ | 30.0 | | | $ | (27.7 | ) | | $ | 2.4 | | | $ | 4.6 | | | $ | 2.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | International Pension Plans | |
| | | 2015 | | | 2014 | | | 2013 | |
Unrecognized actuarial (gain) loss | | $ | 2.6 | | | $ | 4.9 | | | $ | (4.4 | ) |
Amortization of actuarial gain (loss) | | | 0.2 | | | | 0.4 | | | | — | |
| | | | | | | | | | | | |
Total recognized in OCI | | $ | 2.8 | | | $ | 5.3 | | | $ | (4.4 | ) |
| | | | | | | | | | | | |
As of December 31, 2015, for the combined U.S. Pension Plans, U.S. Retiree Medical Plan, and International Pension Plans, we expect to amortize during 2016 from Accumulated other comprehensive income (loss) (“AOCI”) into net periodic pension cost an estimated $2.9 million of net prior service credit and $2.4 million of net actuarial loss.
Assumptions
The weighted-average assumptions used in computing the benefit obligations of the U.S. Pension Plans, International Pension Plans and U.S. Retiree Medical Plan are as follows:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
U.S. Pension Plans: | | | | | | | | | | | | |
Discount rate as of year-end | | | 4.35 | % | | | 4.03 | % | | | 4.84 | % |
| | | |
U.S. Retiree Medical Plan: | | | | | | | | | | | | |
Discount rate as of year-end | | | 4.35 | % | | | 4.03 | % | | | 4.84 | % |
| | | |
International Pension Plans: | | | | | | | | | | | | |
Discount rate as of year-end | | | 3.34 | % | | | 3.57 | % | | | 4.70 | % |
Range of compensation rate increase | | | 3.49 | % | | | 3.36 | % | | | 3.52 | % |
The discount rate used in the calculation of the benefit obligation at December 31, 2015 and December 31, 2014 for the U.S. Plans is derived from a yield curve comprised of the yields of approximately 768 and 774 market-weighted corporate bonds, respectively, rated AA on average by Moody’s, Standard & Poor’s, and Fitch, matched against the cash flows of the U.S. Plans. The discount rate used in the calculation of the benefit obligation at December 31, 2015 and December 31, 2014 for the International Pension Plans is primarily derived from the yields on Swiss government bonds with a maturity matched against the cash flows of the International Pension Plans.
The weighted-average assumptions used in computing the net periodic benefit cost of the U.S. Pension Plans, International Pension Plans and the U.S. Retiree Medical Plan are as follows:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
U.S. Pension Plans: | | | | | | | | | | | | |
Discount rate | | | 4.03 | % | | | 4.84 | % | | | 4.04 | % |
Expected long-term rate of return on plan assets | | | 5.95 | % | | | 6.20 | % | | | 6.05 | % |
| | | |
U.S. Retiree Medical Plan: | | | | | | | | | | | | |
Discount rate | | | 4.03 | % | | | 4.84 | % | | | 4.04 | % |
Expected long-term rate of return on plan assets | | | N/A | | | | N/A | | | | N/A | |
| | | |
International Pension Plans: | | | | | | | | | | | | |
Discount rate | | | 3.59 | % | | | 4.67 | % | | | 4.18 | % |
Range of compensation rate increase | | | 3.40 | % | | | 3.52 | % | | | 3.27 | % |
Expected long-term rate of return on plan assets | | | 4.50 | % | | | 4.58 | % | | | 5.64 | % |
The expected long-term rate of return on plan assets is determined by expected future returns on the asset categories in target investment allocation. These expected returns are based on historical returns for each asset’s category adjusted for an assessment of current market conditions.
The assumed healthcare cost trend rates are as follows:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Healthcare cost trend rate assumed for next year | | | 7.00 | % | | | 8.00 | % | | | 8.00 | % |
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % |
Year that the rate reaches the ultimate trend rate | | | 2020 | | | | 2020 | | | | 2020 | |
Assumed healthcare cost trend rates do not have a significant effect on the amounts reported for the postretirement healthcare plans, since a one-percentage point increase or decrease in the assumed healthcare cost trend rate would have a minimal effect on service and interest cost for the postretirement obligation.
Plan Assets
The fair value of the major categories of pension plan assets for U.S. and International Pension Plans at December 31, 2015 and December 31, 2014 is presented below (in millions):
| | | | | | | | | | | | | | | | |
| | | U.S.
Pension Plans | | | International
Pension Plan | | | U.S.
Pension Plans | | | International
Pension Plan | |
| | | As of December 31, | |
| | | 2015 | | | 2014 | |
Level 1 | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — | | | $ | — | | | $ | 3.0 | | | $ | — | |
| | | | |
Level 2 | | | | | | | | | | | | | | | | |
Cash and cash equivalents (a) | | | 2.5 | | | | 0.2 | | | | 2.8 | | | | 0.2 | |
| | | | |
Equity Securities (b): | | | | | | | | | | | | | | | | |
U.S. | | | 38.3 | | | | 5.7 | | | | 47.7 | | | | 3.0 | |
Non - U.S. | | | 32.7 | | | | 14.7 | | | | 36.3 | | | | 18.1 | |
Fixed Income (b) : | | | | | | | | | | | | | | | | |
Corporate bonds and notes | | | 51.2 | | | | — | | | | 57.1 | | | | — | |
U.S. Government treasuries | | | 19.4 | | | | — | | | | 17.0 | | | | — | |
International debt | | | 3.3 | | | | 4.3 | | | | 4.6 | | | | 4.5 | |
Mortgage-backed securities | | | 0.5 | | | | — | | | | 0.2 | | | | — | |
U.S. Government agencies | | | 2.4 | | | | — | | | | 3.4 | | | | — | |
Non- U.S. bonds | | | — | | | | 4.5 | | | | — | | | | 4.7 | |
Other (c) | | | (1.7 | ) | | | 0.3 | | | | 0.8 | | | | 0.3 | |
| | | | | | | | | | | | | | | | |
Total fair value of plan assets | | $ | 148.6 | | | $ | 29.7 | | | $ | 172.9 | | | $ | 30.8 | |
| | | | | | | | | | | | | | | | |
(a) | Short-term investments in money market funds and short term receivables for investments sold |
(b) | Securities held in common commingled trust funds |
(c) | Other securities held in common commingled trust funds including interest rate swaps and foreign currency contracts |
We categorize plan assets within a three level fair value hierarchy as described in Note 3. Pooled funds are primarily classified as Level 2 and are valued using net asset values of participation units held in common collective trusts, as reported by the managers of the trusts and as supported by the unit prices of actual purchase and sale transactions.
The investment objective for the U.S. Pension Plans and International Pension Plans is to secure the benefit obligations to participants while minimizing our costs. The goal is to optimize the long-term return on plan assets at an average level of risk. The Investment Committee developed a strategic allocation policy for the U.S. Pension Plan to reduce return seeking assets and increase fixed income assets as the plan’s funded status improves. The portfolio of equity securities, currently targeted at 50% for U.S. Pension Plan and 70% for International Pension Plan, includes primarily large-capitalization companies with a mix of small-capitalization U.S. and foreign companies well diversified by industry. The portfolio of fixed income asset allocation, currently targeted at 50% for U.S. Pension Plan and 30% for International Pension Plan, is actively managed and consists of long duration fixed income securities primarily in U.S. debt markets and non-U.S. bonds with long-term maturities that help to reduce exposure to interest variation and to better correlate asset maturities with obligations.
Estimated Future Cash Flows
Total contributions to the U.S. Pension Plans and International Pension Plans were $1.8 million for 2015, $6.1 million for 2014 and $8.2 million for 2013.
The U.S. and International Pension Plans’ and U.S. Retiree Medical Plan’s expected contributions to be paid in the next year, the projected benefit payments for each of the next five years and the total aggregate amount for the subsequent five years are as follows (in millions):
| | | | | | | | | | | | |
| | | U.S. Pension
Plans | | | International
Pension
Plans | | | U.S. Retiree
Medical Plan | |
Estimated Net Contributions During Year Ended 2016 | | $ | 4.6 | | | $ | 0.1 | | | $ | 0.7 | |
| | | |
Estimated Future Benefit Payments During Years Ended: | | | | | | | | | | | | |
2016 | | $ | 10.8 | | | $ | 0.2 | | | $ | 0.7 | |
2017 | | $ | 11.1 | | | $ | 0.2 | | | $ | 0.7 | |
2018 | | $ | 11.2 | | | $ | 0.2 | | | $ | 0.6 | |
2019 | | $ | 11.6 | | | $ | 0.2 | | | $ | 0.6 | |
2020 | | $ | 12.3 | | | $ | 0.3 | | | $ | 0.6 | |
2021 - 2025 | | $ | 68.8 | | | $ | 1.5 | | | $ | 2.7 | |
Note 16. Fair Value Measurements
Fair Value Measurements
The following table presents our assets and liabilities measured at fair value on a recurring basis and the levels of inputs used to measure fair value, which include derivatives designated as cash flow hedging instruments, derivatives designated as net investment hedges, derivatives not designated as hedging instruments, investments held in a rabbi trust which consist of money market accounts and mutual funds established to fund a portion of our current and future obligations under the Burger King Executive Retirement Plan (“ERP”), and ERP liabilities as well as their location on our condensed consolidated balance sheets as of December 31, 2015 and December 31, 2014:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements
at December 31, 2015 | | | Fair Value Measurements
at December 31, 2014 | |
| | | Balance Sheet Location | | (Level 1) | | | (Level 2) | | | Total | | | (Level 1) | | | (Level 2) | | | Total | |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives designated as cash flow hedges | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency | | Trade and notes receivable, net | | $ | — | | | $ | 6.6 | | | $ | 6.6 | | | $ | — | | | $ | 6.0 | | | $ | 6.0 | |
Derivatives designated as net investment hedges | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency | | Inventories and other current assets, net | | | — | | | | — | | | | — | | | | — | | | | 2.1 | | | | 2.1 | |
Foreign currency | | Other assets, net | | | — | | | | 830.9 | | | | 830.9 | | | | — | | | | 75.9 | | | | 75.9 | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate | | Other assets, net | | | — | | | | — | | | | — | | | | — | | | | 88.9 | | | | 88.9 | |
Other | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investments held in a rabbi trust | | Inventories and other current assets, net | | | 0.9 | | | | — | | | | 0.9 | | | | 1.1 | | | | — | | | | 1.1 | |
Investments held in a rabbi trust | | Other assets, net | | | 4.3 | | | | — | | | | 4.3 | | | | 5.2 | | | | — | | | | 5.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets at fair value | | | | $ | 5.2 | | | $ | 837.5 | | | $ | 842.7 | | | $ | 6.3 | | | $ | 172.9 | | | $ | 179.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives designated as cash flow hedges | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate | | Other liabilities, net | | $ | — | | | $ | 40.9 | | | $ | 40.9 | | | $ | — | | | $ | 25.6 | | | $ | 25.6 | |
Derivatives designated as net investment hedges | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency | | Other liabilities, net | | | — | | | | 6.3 | | | | 6.3 | | | | — | | | | — | | | | — | |
Other | | | | | | | | | | | | | | | | | | | | | | | | | | |
ERP liabilities | | Other accrued liabilities | | | — | | | | 0.9 | | | | 0.9 | | | | — | | | | 1.1 | | | | 1.1 | |
ERP liabilities | | Other liabilities, net | | | — | | | | 4.3 | | | | 4.3 | | | | — | | | | 5.2 | | | | 5.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities at fair value | | | | $ | — | | | $ | 52.4 | | | $ | 52.4 | | | $ | — | | | $ | 31.9 | | | $ | 31.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Our derivatives are valued using a discounted cash flow analysis that incorporates observable market parameters, such as interest rate yield curves and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by us or the counterparty.
Investments held in a Rabbi trust consist of money market funds and mutual funds and the fair value measurements are derived using quoted prices in active markets for the specific funds which are based on Level 1 inputs of the fair value hierarchy. The fair value measurements of the ERP liabilities are derived principally from observable market data which are based on Level 2 inputs of the fair value hierarchy.
At December 31, 2015, the fair value of our variable rate term debt and bonds was estimated at $8.7 billion, compared to a principal carrying amount of $8.6 billion. At December 31, 2014, the fair value of our variable rate term debt and bonds was estimated at $10.1 billion, compared to a principal carrying amount of $10.0 billion. Fair value of variable rate term debt and fixed rate debt was estimated using inputs based on bid and offer prices and are Level 2 inputs within the fair value hierarchy.
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to periodic impairment tests. These items primarily include long-lived assets, goodwill, the Brand and other intangible assets. Refer to Note 3 for inputs and valuation techniques used to measure fair value of these nonfinancial assets.
Note 17.12. 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. See Note 16 for fair value measurements
Interest Rate Swaps
– Outstanding as of December 31, 2015During
May 2015,2018, we entered into a series of receive-variable, pay-fixed interest rate swaps
with a notional value of $3,500 million to hedge the variability in the interest payments on
$2,500.0 milliona portion of our
2014 Termsenior secured term loan facility (the “Term Loan
FacilityFacility”) beginning
May 28, 2015,March 29, 2018 through the expiration of the final swap on
March 31, 2021. The notional value of the swaps is $2,500.0 million. There are six sequential interest rate swaps to achieve the hedged position. Each year on March 31, the existing interest rate swap is scheduled to expire and be immediately replaced with a new interest rate swap until the expiration of the final swap on March 31, 2021.February 17, 2024, resetting each March. At inception, these interest rate swaps were designated as
a cash flow
hedgehedges for hedge
accounting, and as such, the effective portion ofaccounting. The unrealized changes in market value are 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.Interest Rate Swaps – Settled Prior to December 31,
During 2015,
The following derivative instruments were settled during May 2015. During November 2014, we entered into a series of receive-variable, pay-fixed interest rate swaps with a notional value of $2,500 million to hedge the variability in the interest payments associated withon a portion of our 2014 Term Loan Facility beginning April 1, 2015, through the expirationMay 28, 2015. All of the final swap on March 31, 2021. The initial notional value of the swaps was $6,733.1 million, which initially aligned with the outstanding principal balance of the 2014 Term Loan Facility as of April 1, 2015, and was to be reduced quarterly in accordance with the principal repayments of the 2014 Term Loan Facility. There were six sequentialthese interest rate swaps to achieve the hedged position. Each yearwere settled on March 31, the existing interest rate swap was scheduled to expire and be immediately replaced with a new interest rate swap until the expiration of the arrangement on March 31, 2021.April 26, 2018 for an insignificant cash receipt. At inception, these interest rate swaps were designated as a cash flow hedgehedges for hedge accounting, and as such, the effective portion ofaccounting. The unrealized changes in market value were recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Gains and losses from hedge ineffectiveness were recognized in earnings.
During
the first quarter of 2015, we
temporarily discontinued hedge accounting on the entire balance of thesesettled certain interest rate swaps
asand recognized a
result of the $42.7 million mandatory prepayment of our 2014 Term Loan Facility as well as changes to forecasted cash flows and settled $42.7 million of these instruments equal to the amount of the mandatory prepayment of our 2014 Term Loan Facility. During this same period, of the remaining $6,690.4 million of notional outstanding, we re-designated $5,690.4 million of notional amount as a cash flow hedge for hedge accounting and $1,000.0 million of notional amount was not designated for hedge accounting and as such changes in fair value on this portion of the interest rate swaps were recognized in earnings. During April 2015, in order to offset thecash flows associated with our $1,000.0 million notional value receive-variable, pay-fixed interest rate swap that was not designated for hedge accounting, we entered into a pay-variable, receive-fixed mirror interest rate swap with a notional value of $1,000.0 million and a maturity date of March 31, 2021.
The following derivative instruments were settled during May 2015. During October 2014, we entered into a series of receive-variable, pay-fixed interest rate swaps with a combined initial notional value of $6,750.0 million that was amortized each quarter at the same rate of the 2014 Term Loan Facility. To offset the cash flows associated with these interest rate swaps, in November 2014 we entered into a series of receive-fixed, pay-variable mirror interest rate swaps with a combined initial notional value of $6,750.0 million that was amortized each quarter at the same rate of the 2014 Term Loan Facility. For all of these derivative instruments, each year on March 31, the existing interest rate swap was scheduled to expire and be immediately replaced with a new interest rate swap until the expiration of the arrangement on March 31, 2021. These interest rate swaps were not designated for hedge accounting and as such changes in fair value were recognized in earnings.
In connection with the foregoing interest rate swaps settled during May 2015, we paid $36.2 million that is reflected as a use of cash within investing activities in the consolidated statement of cash flows for 2015. The net unrealized loss remainingof $85 million in AOCI totaled $84.6 million at the date of settlement and will besettlement. This amount gets reclassified into Interest expense, net as the original hedged forecasted transaction affects earnings. The amount of pre-tax losses in AOCI as of December 31, 20152018 that we expect to be reclassified into interest expense within the next 12 months is $12.7$12 million.
Interest Rate Swaps – Settled Prior to December 31, 2014
During 2012, we entered into three forward-starting interest rate swaps with a total notional value of $2,300.0 million to hedge the variability of forecasted interest payments on our forecasted debt issuance attributable to changes in LIBOR. These swaps were settled during the fourth quarter of 2014. The forward-starting interest rate swaps fixed LIBOR on $1,000.0 million of floating-rate debt beginning 2015 and an additional $1,300.0 million of floating-rate debt starting 2016. During 2014, we discontinued hedge accounting on our forward-starting interest rate swaps as it was probable at the time that the forecasted transactions will not occur since we intended to repay our outstanding 2012 Term Loan Facility concurrently with the Transactions and did not anticipate issuing new debt in 2015 or 2016. Whenever hedge accounting is discontinued and the derivative remains outstanding, we continue to carry the derivative at its fair value on the balance sheet and recognize any subsequent changes in fair value in earnings. When it is no longer probable that a forecasted transaction will occur, we discontinue hedge accounting and recognize immediately in earnings any gains and losses, attributable to those forecasted transactions that are probable not to occur, that were recorded in AOCI related to the hedging relationship. Prior to the discontinuance of hedge accounting, we accounted for these swaps as cash flow hedges, and as such, the effective portion of unrealized changes in market value was recorded in AOCI and was to be reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Gains and losses from hedge ineffectiveness are recognized in earnings.
Cross-Currency Rate Swaps
To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we
may, from time to time, hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At December 31,
2015,2018, 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.
At December 31, 2015,
During 2017, we
had outstandingterminated and settled our previous cross-currency rate swaps
in which we pay quarterly between 4.802% and 7.002% on a tiered payment structure per annum on the Canadian dollar notional amount of C$5,641.7 million and receive quarterly between 3.948% and 6.525% on a tiered payment structure per annum on the U.S. dollar notional amount of $5,000.0 million through the maturity date of March 31, 2021. At inception, these derivative instruments were not designated for hedge accounting and, as such, changes in fair value were initially recognized in earnings. Beginning with the closing of the Transactions on December 12, 2014, we designated these cross-currency rate swaps as hedges and began accounting for these derivative instruments as net investment hedges.At December 31, 2015, we also had outstanding a cross-currency rate swap in which we pay quarterly fixed-rate interest payments on the Euro notional amount of €1,107.8 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional amount 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.
During 2015, we terminated our cross-currency rate swaps entered into prior to the Transactions with an aggregate notional value of $315.0 million.$5,000 million, between the Canadian dollar and U.S. dollar. In connection with this termination, we received $52.1$764 million which is reflected as a source of cash provided by investing activities in the consolidated statement of cash flows for 2015.flows. The net unrealized gains totaled $31.8$533 million, net of tax, as of December 31, 2015. Such amountsthe termination date and will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. Additionally during 2017, 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 wereare accounted for as net investment hedges. A total notional value of $115.0 million of theseThese swaps wereare contracts to exchange quarterly fixed-rate interest payments we make in Euroson the Canadian dollar notional amount of C$6,754 million for quarterly fixed-rate interest payments we receive on the U.S. dollar notional amount of $5,000 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 December 31, 2018, we also had outstanding cross-currency rate swaps in which we pay quarterly fixed-rate interest payments on the Euro notional amount of €1,108 million and receive quarterly fixed-rate interest payments on the U.S. dollarsdollar notional amount of $1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and had an originalare accounted for as a net investment hedge. During 2018, we extended the term of the swaps from March 31, 2021 to the maturity date of October 19, 2016. A totalFebruary 17, 2024. The extension of the term resulted in a re-designation of the hedge and the swaps continue to be accounted for as a net investment hedge. Additionally, during 2018, we entered into cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $200.0$400 million through the maturity date of February 17, 2024. At inception, these swaps were contracts to exchange quarterly floating-rate interest payments we make in Euros based on EURIBOR for quarterly floating-rate interest payments we receive in U.S. dollars based on LIBOR and had an original maturity of September 28, 2017. These cross-currency rate swaps were designated as a hedge are accounted for as a net investment hedge.
The fixed to fixed cross-currency rate swaps hedging Canadian dollar and Euro net investments utilized the forward method of effectiveness assessment prior to March 15, 2018. On March 15, 2018, we dedesignated and subsequently redesignated the outstanding fixed to fixed cross-currency rate swaps to prospectively use the spot method of hedge effectiveness assessment. We also requiredelected to amortize the exchangeExcluded Component over the life of Eurosthe derivative instrument. The amortization of the Excluded Component is recognized in Interest expense, net in the consolidated statement of operations. The change in fair value that is not related to the Excluded Component is recorded in AOCI and U.S. dollar principal payments upon maturity.will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. See Note 2,
Significant Accounting Policies - New Accounting Pronouncements, for further information on the adoption of this new guidance.
Foreign Currency Exchange Contracts
In connection with the Transactions, we were exposed to foreign currency risk as the cash consideration paid to Tim Hortons shareholders in connection with the Transactions was denominated in Canadian dollars. As such, during 2014 we entered into foreign currency forward and foreign currency option contracts to hedge our exposure to the volatility of the Canadian dollar. We had outstanding foreign currency forward contracts to effectively exchange $9,000.0 million U.S. dollars for C$9,971.8 million Canadian dollars and foreign currency option contracts to exchange $5,230.0 million U.S. dollars for C$5,635.3 million Canadian dollars that were settled during the fourth quarter of 2014. At any point in time, the aggregate notional value of these derivative instruments never exceeded $9,230.0 million U.S. dollars. The foreign currency option contracts had a total premium of $59.9 million that was paid at expiration. These derivative instruments did not qualify for hedge accounting and changes in fair values were immediately recognized in Other operating expenses (income), net in current earnings.
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 December 31,
2015,2018, 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
$170.0$124 million with maturities to
March 2017.January 2020. We have designated these instruments as cash flow hedges, and as such, the
effective portion of unrealized changes in market value
of effective hedges 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.Interest Rate Caps
During 2010, we entered into interest rate cap agreements (the “Cap Agreements”) to manage interest rate risk related to our variable rate debt. The six year Cap Agreements were a series of individual caplets that reset and settle quarterly with an original maturity of October 19, 2016, consistent with the payment dates of our LIBOR-based term debt. The Cap Agreements were designated as cash flow hedges and, to the extent they were effective in offsetting the variability of the variable rate interest payments, changes in the derivatives’ fair values were not included in earnings but were included in AOCI. At each cap maturity date, the portion of the fair value attributable to the matured cap was reclassified from AOCI into earnings as a component of Interest expense, net.
During 2014, we terminated the Cap Agreements and discontinued hedge accounting for our Cap Agreements in connection with the repayment of the 2012 Term Loans, 2010 Senior Notes and 2011 Discount Notes concurrently with the Transactions.
By entering into derivative
instrument 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 consolidated balance sheets (in millions):
| | | | | | | | | | | | |
| | | Gain (Loss) Recognized in
Other Comprehensive Income (Loss)
(effective portion) | |
| | | 2015 | | | 2014 | | | 2013 | |
Derivatives designated as cash flow hedges: | | | | | | | | | | | | |
Interest rate caps | | $ | — | | | $ | (1.9 | ) | | $ | — | |
Forward-starting interest rate swaps | | $ | (128.2 | ) | | $ | (155.5 | ) | | $ | 169.1 | |
Forward-currency contracts | | $ | 18.2 | | | $ | 1.1 | | | $ | — | |
| | | |
Derivatives designated as net investment hedges: | | | | | | | | | | | | |
Cross-currency rate swaps | | $ | 798.5 | | | $ | 66.3 | | | $ | (14.8 | ) |
| |
Classification on Condensed Consolidated Statements of Operations | | Gain (Loss) Reclassified from AOCI into
Earnings | |
| | | 2015 | | | 2014 | | | 2013 | |
Interest expense, net | | $ | (12.0 | ) | | $ | (6.6 | ) | | $ | (6.1 | ) |
Other operating expenses (income), net | | $ | (27.6 | ) | | $ | 13.4 | | | $ | — | |
Cost of sales | | $ | 12.3 | | | $ | — | | | $ | — | |
| |
| | | Gain (Loss) Recognized in
Other operating expenses (income), net | |
| | | 2015 | | | 2014 | | | 2013 | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
Interest rate caps | | $ | — | | | $ | (1.0 | ) | | $ | — | |
Interest rate swaps | | $ | (12.4 | ) | | $ | 55.4 | | | $ | — | |
Cross-currency rate swaps | | $ | 4.3 | | | $ | (358.7 | ) | | $ | (0.4 | ) |
Ineffectiveness of cash flow hedges: | | | | | | | | | | | | |
Interest rate swaps | | $ | (1.6 | ) | | $ | — | | | $ | — | |
|
| | | | | | | | | | | |
| | Gain (Loss) Recognized in
Other Comprehensive Income (Loss) |
| | 2018 | | 2017 | | 2016 |
Derivatives designated as cash flow hedges(1) | | | | | |
| Interest rate swaps | $ | (37 | ) | | $ | (6 | ) | | $ | (23 | ) |
| Forward-currency contracts | $ | 11 |
| | $ | (9 | ) | | $ | (5 | ) |
| Derivatives designated as net investment hedges | | | | | |
| Cross-currency rate swaps | $ | 383 |
| | $ | (384 | ) | | $ | (87 | ) |
| |
| (1) | We did not exclude any components from the cash flow hedge relationships presented in this table. |
|
| | | | | | | | | | | | | | |
| | | Location of Gain or (Loss) Reclassified from AOCI into Earnings | | Gain or (Loss) Reclassified from AOCI into Earnings |
| | | | | 2018 | | 2017 | | 2016 |
| Derivatives designated as cash flow hedges | | | | | | | | |
| Interest rate swaps | | Interest expense, net | | $ | (19 | ) | | $ | (31 | ) | | $ | (21 | ) |
| Forward-currency contracts | | Cost of sales | | $ | (1 | ) | | $ | (3 | ) | | $ | — |
|
| | | | | | | | | |
| | | Location of Gain or (Loss) Recognized in Earnings | | Gain or (Loss) Recognized in Earnings (Amount Excluded from Effectiveness Testing) |
| | | | | 2018 | | 2017 | | 2016 |
| Derivatives designated as net investment hedges | | | | | | | | |
| Cross-currency rate swaps | | Interest expense, net | | $ | 60 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | |
| | Fair Value as of
December 31, | | |
| | 2018 | | 2017 | | Balance Sheet Location |
| Assets: | | | | | |
| Derivatives designated as cash flow hedges | | | | | |
| Foreign currency | $ | 7 |
| | $ | 1 |
| | Prepaids and other current assets |
| Derivatives designated as net investment hedges | | | | | |
| Foreign currency | 58 |
| | — |
| | Other assets, net |
| Total assets at fair value | $ | 65 |
| | $ | 1 |
| | |
| Liabilities: | | | | | |
| Derivatives designated as cash flow hedges | | | | | |
| Interest rate | $ | 72 |
| | $ | 42 |
| | Other liabilities, net |
| Foreign currency | — |
| | 5 |
| | Other accrued liabilities |
| Derivatives designated as net investment hedges | | | | | |
| Foreign currency | 107 |
| | 456 |
| | Other liabilities, net |
| Total liabilities at fair value | $ | 179 |
| | $ | 503 |
| | |
Note
18.13. Partnership Preferred Units
In connection with the Transactions,
On December 12, 2014 we issued 68,530,939 Partnership preferred units to RBI. Under the terms of the partnership agreement, Partnership
iswas required to make distributions
to RBI on the Partnership preferred units
(all of which are owned by RBI) that correspondin amounts equal to
(i) preferred dividends declared and payable by RBI on the 68,530,939 Class A 9.0% cumulative compounding perpetual voting preferred shares
of RBI (“Preferred Shares”) soldissued by RBI
to a subsidiary of Berkshire Hathaway, Inc. Additionally,(the “Preferred Shares”) and (ii) in the event
RBI redeemed the Preferred Shares,
are redeemed for cash, Partnership is required to make a distribution on the Partnership preferred units in an amount sufficient for RBI to fund the redemption
amount.The 9.0% annual dividend on the Preferred Shares will accrue whether or not declared by RBI’s Board of Directors and will be payable, quarterly in arrears, only when declared and approved by RBI’s Board of Directors. In addition to the preferred dividends, RBI is required to pay the holderamount of the Preferred Shares an additional amount (the “make-whole dividend”) determined by a formula designed to ensure that on an after-tax basis, the net amount of the dividends received by the holder of the Preferred Shares from the original issue date is the same as it would have been if RBI were a U.S. corporation. The make-whole dividend can be paid, at RBI’s option, in cash, common shares or any combination thereof. The make-whole dividends are payable not later than 75 days after the close of each fiscal year, beginning with the fiscal year ended December 31, 2017. The right to receive the make-whole dividends will terminate if and at the time that 100% of the outstanding Preferred Shares are no longer held by the original purchaser or any of its subsidiaries.
The Preferred Shares may be redeemed at RBI’s option on and after the third anniversary of the original issue date. After the tenth anniversary of the original issue date, holders of not less than a majority of the outstanding Preferred Shares may cause RBI to redeem their Preferred Shares. In either case, the fixed redemption price is 109.9% of the Purchase Price per share (the “redemption price”) plus accrued and unpaid dividends and unpaid make-whole dividends. Holders of the Preferred Shares also hold a contingently exercisable option to cause RBI to redeem their Preferred Shares at the redemption price in the eventUpon payment of a change of control.
The distribution provisions of the Partnership preferred unitsto RBI to fund the redemption of the Preferred Shares, representthe Partnership preferred units remain outstanding, but provide no economic rights to RBI, other than a nominal dividend of $100 per year.
The distribution provisions of the partnership agreement requiring Partnership to fund RBI's redemption of the Preferred Shares were accounted for as an in substancein-substance redemption provision of the Partnership preferred units that is not solely in the control of Partnership. Consequently, Partnership has classified theunits. The Partnership preferred units were classified as temporary equity. Additionally, duringequity as a result of Partnership's lack of control over this distribution provision. In 2014, wePartnership adjusted the carrying value of the Partnership preferred units to reflect the Preferred Shares redemption price of $48.109657 per Preferred Share (the “redemption price”).
On December 12, 2017 (the “Redemption Date”), RBI redeemed all of the
RBIissued and outstanding Preferred Shares
whichfor aggregate consideration of $3,116 million (the “Redemption Consideration”), including $54 million of accrued and unpaid Preferred Share dividends up to the Redemption Date. Partnership made a distribution to RBI in an equal amount under the terms of the partnership agreement described above. Partnership accounted for $54 million of this distribution as a preferred unit distribution, with the remainder accounted for as an in-substance redemption of the Partnership preferred units. The difference between (i) the Redemption Consideration and related transaction costs, net of the $54 million preferred unit distribution and (ii) the carrying amount of the Partnership preferred units on the Redemption Date is reflected as a
$546.4$234 million
reductionincrease in
net income attributable to common
unitholders/shareholders.Note 19. Equity
For the period of January 1, 2014,unitholders and partner's capital.
During 2018, RBI made a payment, which was funded by Partnership through
December 11, 2014 (i.e., prior to the closing date of the Transactions), our common equity reflected 100% ownership by Burger King Worldwide common stockholders. In connection with the Transactions, Burger King Worldwide completed a
reorganization into Partnership and holders of 352.0 million shares of common stock of Burger King Worldwide exchanged their holdings for 265.0 million Partnership exchangeable units and 87.0 million RBI common shares. During 2014, we also issued 202.0 million Class A common units to RBI, which correspond to (i) the 87.0 million RBI common shares issued by RBI to former holders of Burger King Worldwide common stock, (ii) 106.6 million RBI common shares issued by RBI to former holders of Tim Hortons common stockdistribution, in connection with the
acquisitionsettlement of
Tim Hortons and (iii) 8.4 million RBI common shares issued by RBI tocertain provisions associated with the
holder2017 redemption of
RBIthe Preferred Shares
in connection with the exercise of a warrant. Asas a result of
the foregoing, during 2014 the carrying amountrecently proposed Treasury regulations included within Other operating expense (income), net in our consolidated statements of
Partnership’s equity was allocated between Class A common units and Partnership exchangeable units to reflect the relative ownership interests of the two classes of common equity.operations.
Note 14. Equity
Pursuant to the terms of the partnership agreement, RBI, as the holder of Class A common units, is entitled to
receive distributions from Partnership in an amount equal to the aggregate dividends payable by RBI to holders of RBI common shares, and the holders of Partnership exchangeable units are entitled to receive distributions from Partnership in an amount per unit equal to the dividend payable by RBI on each RBI common share. Additionally, if RBI proposes to redeem, repurchase or otherwise acquire any RBI common shares, the partnership agreement requires that Partnership, immediately prior to such redemption, repurchase or acquisition, make a distribution to RBI on the Class A common units in an amount sufficient for RBI to fund such redemption, repurchase or acquisition, as the case may be.
Each holder of a Partnership exchangeable unit is entitled to vote in respect of matters on which holders of RBI common shares are entitled to vote through one special voting share of RBI. Since December 12, 2015, the one year anniversary of the effective date of the Transactions, thea holder of a Partnership exchangeable unit may require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for RBI common shares at a ratio of one common share for each Partnership exchangeable unit, subject to RBI’s right as the general
partner of Partnership, in its sole discretion, to deliver a cash payment in lieu of RBI common shares. If RBI elects to make a cash payment in lieu of issuing common shares, the amount of the payment will be the weighted average trading price of the RBI common shares on the New York Stock Exchange for the 20 consecutive trading days ending on the last business day prior to the exchange date.
During
2015,2018, Partnership
receivedexchanged 10,185,333 Partnership exchangeable units, pursuant to exchange notices
representing 31,302,135 Partnership exchangeable units. Pursuant toreceived. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by repurchasing
8,150,00310,000,000 Partnership exchangeable units for approximately
$293.7$561 million in cash and exchanging
23,152,132185,333 Partnership exchangeable units for the same number of newly issued RBI common
shares,shares. During 2017, Partnership exchanged 9,286,480 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the
issuanceterms of
which was accountedthe partnership agreement, Partnership satisfied the exchange notices by repurchasing 5,000,000 Partnership exchangeable units for
as a capital contributionapproximately $330 million in cash and exchanging 4,286,480 Partnership exchangeable units for the same number of newly issued RBI common shares. During 2016, Partnership exchanged 6,744,244 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
to Partnership.common shares. The
exchangeexchanges of Partnership exchangeable units
waswere recorded as
an increaseincreases to the Class A common units balance within partner’s capital in our consolidated balance
sheetsheets in an amount equal to the market value of the newly issued RBI common shares and a reduction to the Partnership exchangeable units balance within partner’s capital of our consolidated balance
sheetsheets in an amount equal to the cash paid by Partnership and the market value of the newly issued RBI common shares. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit
is automatically deemedwas cancelled concurrently with
suchthe exchange.
Noncontrolling Interests
The noncontrolling interest recognized in connection with the Restaurant VIEs
Table of Tim Hortons was $0.7 million and $1.3 million at December 31, 2015 and 2014, respectively.We adjust the Net income (loss) in our consolidated statement of operations to exclude the noncontrolling interests’ proportionate share of results. Also, we present the proportionate share of equity attributable to the noncontrolling interests as a separate component of equity within our consolidated balance sheet.
Distributions / Dividends Declared
Distributions declared on Class A common units were $89.1 million during 2015. Distributions declared on Partnership exchangeable units were $116.6 million during 2015. Dividends paid to shareholders of Burger King Worldwide common stock were $105.6 million in 2014 and $84.3 million in 2013.
As described above, following the Transactions, the partnership agreement requires Partnership to make distributions to RBI as the holder of the Class A common units in an amount equal to the aggregate dividends payable by RBI to holders of RBI common shares. Additionally, the partnership agreement requires Partnership to make distributions to holders of Partnership exchangeable units in an amount per unit equal to the dividend payable by RBI on each RBI common share. The terms of the Preferred Shares and the 2015 Amended Credit Agreement, 2015 Senior Notes Indenture and 2014 Senior Notes Indenture and applicable Canadian law limit RBI’s ability to pay cash dividends in certain circumstances.
Annual Bonus Election
We have a bonus program under which eligible employees may elect to use a portion of their annual bonus compensation to purchase RBI common shares, and prior to the Transactions, Burger King Worldwide common stock. During 2015, RBI issued approximately 0.1 million shares of RBI common shares to participants in this program, for aggregate consideration of $6.9 million. During 2014, we issued approximately 0.1 million shares of Burger King Worldwide common stock to participants in this program, for aggregate consideration of $3.3 million. During 2013, we issued approximately 0.3 million shares of Burger King Worldwide common stock to participants in this program, for aggregate consideration of $3.5 million.
Contents
Accumulated Other Comprehensive Income (Loss)
The following table displays the change 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, 2012 | | $ | (29.2 | ) | | $ | (3.8 | ) | | $ | (77.3 | ) | | $ | (110.3 | ) |
Foreign currency translation adjustment | | | — | | | | — | | | | 50.1 | | | | 50.1 | |
Reclassification of foreign currency translation adjustment into net income | | | — | | | | — | | | | (3.0 | ) | | | (3.0 | ) |
Net change in fair value of derivatives, net of tax | | | 94.2 | | | | — | | | | — | | | | 94.2 | |
Amounts reclassified to earnings of cash flow hedges, net of tax | | | 3.8 | | | | — | | | | — | | | | 3.8 | |
Pension and post-retirement benefit plans, net of tax | | | — | | | | 20.8 | | | | — | | | | 20.8 | |
Amortization of prior service (credits) costs, net of tax | | | — | | | | (1.8 | ) | | | — | | | | (1.8 | ) |
Amortization of actuarial (gains) losses, net of tax | | | — | | | | 0.8 | | | | — | | | | 0.8 | |
| | | | | | | | | | | | | | | | |
Balances at December 31, 2013 | | $ | 68.8 | | | $ | 16.0 | | | $ | (30.2 | ) | | $ | 54.6 | |
| | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | — | | | | — | | | | (219.1 | ) | | | (219.1 | ) |
Net change in fair value of derivatives, net of tax | | | (53.3 | ) | | | — | | | | — | | | | (53.3 | ) |
Amounts reclassified to earnings of cash flow hedges, net of tax | | | (4.1 | ) | | | — | | | | — | | | | (4.1 | ) |
Pension and post-retirement benefit plans, net of tax | | | — | | | | (23.8 | ) | | | — | | | | (23.8 | ) |
Amortization of prior service (credits) costs, net of tax | | | — | | | | (1.8 | ) | | | — | | | | (1.8 | ) |
Amortization of actuarial (gains) losses, net of tax | | | — | | | | (1.0 | ) | | | — | | | | (1.0 | ) |
| | | | | | | | | | | | | | | | |
Balances at December 31, 2014 | | $ | 11.4 | | | $ | (10.6 | ) | | $ | (249.3 | ) | | $ | (248.5 | ) |
| | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | — | | | | — | | | | (1,830.8 | ) | | | (1,830.8 | ) |
Net change in fair value of derivatives, net of tax | | | 605.8 | | | | — | | | | — | | | | 605.8 | |
Amounts reclassified to earnings of cash flow hedges, net of tax | | | 19.8 | | | | — | | | | — | | | | 19.8 | |
Pension and post-retirement benefit plans, net of tax | | | — | | | | (13.8 | ) | | | — | | | | (13.8 | ) |
Amortization of prior service (credits) costs, net of tax | | | — | | | | (1.8 | ) | | | — | | | | (1.8 | ) |
Amortization of actuarial (gains) losses, net of tax | | | — | | | | 1.5 | | | | — | | | | 1.5 | |
| | | | | | | | | | | | | | | | |
Balances at December 31, 2015 | | $ | 637.0 | | | $ | (24.7 | ) | | $ | (2,080.1 | ) | | $ | (1,467.8 | ) |
| | | | | | | | | | | | | | | | |
The following table displays the reclassifications out of Accumulated other comprehensive income (loss):
| | | | | | | | | | | | | | |
| | | Affected Line Item in the | | Amounts Reclassified from AOCI | |
Details about AOCI Components | | Statements of Operations | | 2015 | | | 2014 | | | 2013 | |
Gains (losses) on cash flow hedges: | | | | | | | | | | | | | | |
Interest rate derivative contracts | | Interest expense, net | | $ | (12.0 | ) | | $ | (6.6 | ) | | $ | (6.1 | ) |
Interest rate derivative contracts | | Other operating expenses (income), net | | | (27.6 | ) | | | 13.4 | | | | — | |
Forward-currency contracts | | Cost of sales | | | 12.3 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
| | Total before tax | | | (27.3 | ) | | | 6.8 | | | | (6.1 | ) |
| | Income tax (expense) benefit | | | 7.5 | | | | (2.7 | ) | | | 2.3 | |
| | | | | | | | | | | | | | |
| | Net of tax | | $ | (19.8 | ) | | $ | 4.1 | | | $ | (3.8 | ) |
| | | | | | | | | | | | | | |
Defined benefit pension: | | | | | | | | | | | | | | |
Amortization of prior service credits(costs) | | SG&A (1) | | $ | 2.9 | | | $ | 2.9 | | | $ | 3.0 | |
Amortization of actuarial gains(losses) | | SG&A (1) | | | (2.6 | ) | | | 1.0 | | | | (1.2 | ) |
| | | | | | | | | | | | | | |
| | Total before tax | | | 0.3 | | | | 3.9 | | | | 1.8 | |
| | Income tax (expense) benefit | | | — | | | | (1.1 | ) | | | (0.8 | ) |
| | | | | | | | | | | | | | |
| | Net of tax | | $ | 0.3 | | | $ | 2.8 | | | $ | 1.0 | |
| | | | | | | | | | | | | | |
Foreign currency translation adjustment into net income: | | | | | | | | | | | | | | |
Sale of foreign entity | | Other operating expenses (income), net | | | — | | | | — | | | | (3.0 | ) |
| | | | | | | | | | | | | | |
Total reclassifications | | Net of tax | | $ | (19.5 | ) | | $ | 6.9 | | | $ | (5.8 | ) |
| | | | | | | | | | | | | | |
(1) | Refers to Selling, general and administrative expenses in the consolidated statements of operations. |
|
| | | | | | | | | | | | | | | |
| | Derivatives | | Pensions | | Foreign
Currency
Translation | | Accumulated
Other
Comprehensive
Income (Loss) |
| Balances at December 31, 2015 | $ | 637 |
| | $ | (24 | ) | | $ | (2,080 | ) | | $ | (1,467 | ) |
| Foreign currency translation adjustment | — |
| | — |
| | 223 |
| | 223 |
|
| Net change in fair value of derivatives, net of tax | (119 | ) | | — |
| | — |
| | (119 | ) |
| Amounts reclassified to earnings of cash flow hedges, net of tax | 16 |
| | — |
| | — |
| | 16 |
|
| Pension and post-retirement benefit plans, net of tax | — |
| | (8 | ) | | — |
| | (8 | ) |
| Balances at December 31, 2016 | $ | 534 |
| | $ | (32 | ) | | $ | (1,857 | ) | | $ | (1,355 | ) |
| Foreign currency translation adjustment | — |
| | — |
| | 824 |
| | 824 |
|
| Net change in fair value of derivatives, net of tax | (382 | ) | | — |
| | — |
| | (382 | ) |
| Amounts reclassified to earnings of cash flow hedges, net of tax | 25 |
| | — |
| | — |
| | 25 |
|
| Pension and post-retirement benefit plans, net of tax | — |
| | 4 |
| | — |
| | 4 |
|
| Balances at December 31, 2017 | $ | 177 |
| | $ | (28 | ) | | $ | (1,033 | ) | | $ | (884 | ) |
| Foreign currency translation adjustment | — |
| | — |
| | (831 | ) | | (831 | ) |
| Net change in fair value of derivatives, net of tax | 263 |
| | — |
| | — |
| | 263 |
|
| Amounts reclassified to earnings of cash flow hedges, net of tax | 14 |
| | — |
| | — |
| | 14 |
|
| Pension and post-retirement benefit plans, net of tax | — |
| | 1 |
| | — |
| | 1 |
|
| Balances at December 31, 2018 | $ | 454 |
| | $ | (27 | ) | | $ | (1,864 | ) | | $ | (1,437 | ) |
Note
20. Equity-based15. Share-based Compensation
Subsequent to the Transactions, equity-based
Share-based compensation expense associated with the participation of Partnership and its subsidiaries in RBI’s share-based compensation plans is recognized in Partnership’s financial statements.
On
February 2, 2011, theJanuary 30, 2015, RBI’s board of directors
approved: (i) adoption of
Burger King Worldwide Holdings, Inc. (“Worldwide”) approved and adopted the Burger King Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan (the “2011 Omnibus Plan”). The 2011 Omnibus Plan generally provided for the grant of awards to employees, directors, consultants and other persons who provide services to Worldwide and its subsidiaries.On June 20, 2012, the board of directors of Burger King Worldwide adopted the Burger King Worldwide, Inc. 2012 Omnibus Incentive Plan (the “2012 Omnibus Plan”). The 2012 Omnibus Plan generally provided for the grant of awards to employees, directors and other persons who provide services to Burger King Worldwide and its subsidiaries. All stock options and restricted stock units (RSUs) under the 2011 Omnibus Plan outstanding on June 20, 2012 were assumed by Burger King Worldwide and converted into stock options to acquire common stock and RSUs of Burger King Worldwide, and Burger King Worldwide assumed all of the obligations of Worldwide under the 2011 Omnibus Plan. The Board also froze the 2011 Omnibus Plan. Subsequently, the board of directors of Burger King Worldwide adopted the Burger King Worldwide, Inc. Amended and Restated 2012 Omnibus Incentive Plan (“Amended and Restated 2012 Omnibus Incentive Plan”) which increased the shares available for issuance. The Amended and Restated 2012 Omnibus Incentive Plan was approved by Burger King Worldwide stockholders at its annual meeting on May 15, 2013.
On December 12, 2014, the board of directors of RBI adopted the Restaurant Brands International Inc. 2014 Omnibus Incentive Plan, (the “2014 Omnibus Plan”). Thecurrently the Amended and Restated 2014 Omnibus Incentive Plan, generally provides(the “Omnibus Plan”), to provide for the grant of awards to employees, directors, consultants and other persons who provide services to RBI and its subsidiaries. The 2014 Omnibus Plansubsidiaries; (ii) assumption and amendment of various legacy plans of BK, and assumption of the obligation for all BK stock options and restricted stock units (“RSUs”) outstanding; and (iii) assumption and amendment of various legacy plans of TH, and assumption of the obligation for each vested and unvested TH stock option issued with tandem stock appreciation rights (“SARs”) that was approved bynot surrendered in connection with the shareholdersTim Hortons transaction on the same terms and conditions of RBI at RBI’s 2015 annual and special meeting held on June 17, 2015. the original awards, as adjusted. No new awards may be granted under these legacy BK plans or legacy TH plans.
RBI is currently issuing
stock awards under the
2014 Omnibus Plan and the number of shares available for issuance under such
Planplan as of December 31,
20152018 was
9,802,906.On December 12, 2014, in connection with the Transactions, RBI assumed and amended the 2011 Omnibus Plan and Amended and Restated 2012 Omnibus Plan, assumed the obligation for all Burger King Worldwide stock options and RSUs outstanding under the 2011 Omnibus Plan and Amended and Restated 2012 Omnibus Plan at December 12, 2014 and froze the Amended and Restated 2012 Omnibus Plan. Additionally, RBI assumed and amended two legacy Tim Hortons plans and assumed the obligation for each vested
and unvested Tim Hortons stock option with tandem SARs that was not surrendered in connection with the Transactions on the same terms and conditions of the original awards, adjusted by an exchange ratio of 2.41.16,945,969. The assumed Tim Hortons awards vest ratably over a three year period commencing on the grant date and no new awards under these legacy Tim Hortons plans may be granted.
The 2014 Omnibus Plan permits the grant of several types of awards with respect to RBI common shares, including stock options, restricted stock units, restricted stocktime-vested RSUs, and performance-based RSUs, which may include RBI and/or individual performance shares. based-vesting conditions. Under the terms of the Omnibus Plan, RSUs are entitled to dividend equivalents, unless otherwise noted. Dividends are not distributed unless the awards vest. Upon vesting, the amount of the dividend, which is distributed in additional RSUs, except in the case of RSUs awarded to non-management members of RBI's board of directors, is equal to the equivalent of the aggregate dividends declared on common shares during the period from the date of grant of the award compounded until the date the shares underlying the award are delivered.
Stock option awards are granted with an exercise price or market value equal to the last salesclosing price of RBI’sRBI's common shares on the trading day preceding the date of grant. RBI satisfies stock option exercises through the issuance of authorized but previously unissued common shares. New stock option grants generally cliff vest five5 years from the original grant date, provided the employee is continuously employed by RBI or one of itsour subsidiaries, and the stock options expire ten10 years following the grant date. Additionally, if we terminateRBI terminates the employment of a stock option holder without cause prior to the vesting date, or if the employee retires or becomes disabled, the employee will become vested in the number of stock options as if the stock options vested 20% on each anniversary of the grant date. If the employee dies, the employee will become vested in the number of stock options as if the stock
options vested 20% on the first anniversary of the grant date, 40% on the second anniversary of the grant date and 100% on the third anniversary of the grant date. If
an employee is terminated with cause or resigns before vesting, all stock options are forfeited. If there is an event such as a return of capital or dividend that is determined to be dilutive, the exercise price of the awards will be adjusted accordingly.
During 2015, RBI granted a total of 198,065 performance based stock options and 262,889 performance based restricted stock units (the “Performance Awards”). The Performance Awards will vest one-third each on September 30, 2017, September 30, 2018 and September 30, 2019, respectively, if the performance condition is met. The Black-Scholes option-pricing model was used to determine the fair value of performance based stock options at the date of grant. The fair value of the performance based restricted stock units is based on the last sales price of RBI common shares on the trading day preceding the date of grant. Equity-based
Share-based compensation expense
for the Performance Awards is recognized on a straight-line basis by tranche over the vesting period, once it is determined that it is probable that the performance condition will be met.Equity-based compensation expense consistedconsists of the following for the periods presented:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Stock options, stock options with tandem SARs and restricted stock units (a) | | $ | 50.8 | | | $ | 43.1 | | | $ | 14.8 | |
Accelerated vesting of Tim Hortons restricted stock units and performance stock units (b) | | | — | | | | 14.8 | | | | — | |
| | | | | | | | | | | | |
Total equity-based compensation expense (c) | | $ | 50.8 | | | $ | 57.9 | | | $ | 14.8 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Stock options, stock options with tandem SARs and RSUs (a) | $ | 48 |
| | $ | 48 |
| | $ | 35 |
|
| Accelerated vesting of Popeyes stock options (b) | — |
| | 12 |
| | — |
|
| Total share-based compensation expense (c) | $ | 48 |
| | $ | 60 |
| | $ | 35 |
|
| |
| (a) | Includes (i) $5.1$2 million, $5 million, and $9.8$1 million due to accelerated vesting of awards due to terminations in 2015 and 2014, respectively, and (ii) $9.0 million, $10.4 million and $4.0 million in 2015, 2014 and 2013, respectively, due to modification of awards.awards in 2018, 2017 and 2016, respectively. |
| |
| (b) | Represents expense attributed to the post-combination service associated with the accelerated vesting of restricted and performance stock unitsoptions in connection with the Transactions. See Note 2,The Transactions.Popeyes Acquisition. |
| |
| (c) | Generally classified as Selling,selling, general and administrative expenses in the consolidated statements of operations. |
As of December 31, 2018, total unrecognized compensation cost related to share-based compensation arrangements was $126 million and is expected to be recognized over a weighted-average period of approximately 3.3 years.
The following assumptions were used in the Black-Scholes option-pricing model to determine the fair value of stock option awards at the grant
date and, for stock options issued with tandem SARs, at each subsequent re-measurement date:
| | | | | | |
| | | 2015 | | 2014 | | 2013 |
Risk-free interest rate | | 1.17% - 2.07% | | 0.96% - 2.11% | | 1.26% |
Expected term (in years) | | 3.53 - 7.35 | | 1.00 - 6.71 | | 6.83 |
Expected volatility | | 24.0% - 25.0% | | 20.0% - 25.0% | | 30.0% |
Expected dividend yield | | 1.00% - 1.09% | | 1.00% - 1.03% | | 1.10% |
|
| | | | | |
| | 2018 | | 2017 | | 2016 |
| Risk-free interest rate | 2.13% | | 1.23% - 1.25% | | 0.85% |
| Expected term (in years) | 6.39 | | 6.74 | | 6.74 |
| Expected volatility | 25.2% | | 24.5% | | 26.6% |
| Expected dividend yield | 3.08% | | 1.37% | | 1.81% |
The risk-free interest rate was based on the U.S. Treasury or Canadian Sovereign bond yield with a remaining term equal to the expected option life assumed at the date of grant. The expected term was calculated based on the analysis of a three to five-year vesting period coupled with our expectations of exercise activity. Expected volatility was based on
the historical equity volatility of RBI and a review of the equity volatilities of publicly-traded guideline companies. The expected dividend yield is based on the annual dividend yield at the time of grant.
The following is a summary of stock option activity under
RBI’sour plans for the year ended December 31,
2015: | | | | | | | | | | | | | | | | |
| | | Total Number of
Options (in 000’s) | | | Weighted Average
Exercise Price | | | Aggregate Intrinsic
Value (1)
(in 000’s) | | | Weighted Average
Remaining
Contractual Term
(Yrs) | |
Outstanding at January 1, 2015 | | | 21,328 | | | $ | 11.42 | | | | | | | | | |
Granted | | | 5,046 | | | $ | 41.34 | | | | | | | | | |
Exercised | | | (1,703 | ) | | $ | 16.95 | | | | | | | | | |
Forfeited | | | (655 | ) | | $ | 31.75 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2015 | | | 24,016 | | | $ | 16.28 | | | $ | 521,555 | | | | 6.8 | |
| | | | | | | | | | | | | | | | |
Exercisable at December 31, 2015 | | | 8,120 | | | $ | 4.69 | | | $ | 265,297 | | | | 5.0 | |
| | | | | | | | | | | | | | | | |
Vested or expected to vest at December 31, 2015 | | | 21,765 | | | $ | 15.71 | | | $ | 484,263 | | | | 6.8 | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | Total Number of
Options
(in 000’s) | | Weighted
Average
Exercise Price | | Aggregate
Intrinsic
Value (a)
(in 000’s) | | Weighted
Average
Remaining
Contractual Term
(Years) |
| Outstanding at January 1, 2018 | 20,071 |
| | $ | 25.15 |
| | | | |
| Granted | 1,548 |
| | $ | 58.19 |
| | | | |
| Exercised | (7,268 | ) | | $ | 8.37 |
| | | | |
| Forfeited | (748 | ) | | $ | 48.26 |
| | | | |
| Outstanding at December 31, 2018 | 13,603 |
| | $ | 36.41 |
| | $ | 231,988 |
| | 6.2 |
| Exercisable at December 31, 2018 | 3,118 |
| | $ | 16.32 |
| | $ | 112,215 |
| | 3.8 |
| Vested or expected to vest at December 31, 2018 | 12,479 |
| | $ | 35.75 |
| | $ | 220,320 |
| | 6.1 |
(1) | |
| (a) | The intrinsic value represents the amount by which the fair value of RBI common shareour stock exceeds the option exercise price at December 31, 2015.2018. |
The weighted-average grant date fair value per stock option granted was
$10.12, $7.17$10.82, $12.57, and
$5.23$7.53 during
2015, 20142018, 2017 and
2013,2016, respectively. The total intrinsic value of stock options exercised was
$40.3$371 million during
2015, $4.92018, $288 million during
20142017, and
$25.3$47 million during
2013. As of December 31, 2015, total unrecognized compensation cost related to stock options outstanding was $56.5 million and is expected to be recognized over a weighted-average period of approximately 2.2 years.2016.
The
total fair value
for liability classified stock options with SARs outstanding was $5.5 million and $34.8 million at December 31, 2015 and December 31, 2014, respectively, and is classified as Other liabilities, net in the consolidated balance sheets. During 2015, RBI modified a portion of these awards to remove the SAR and such SARs were cancelled as a result. The modification to remove the SARs resulted in a change in classification of the
awards from liability to equitytime-vested RSUs and
a corresponding reclassification of $10.2 million from Other liabilities, net to common shares in the consolidated balance sheets. As such these awards will no longer be remeasured to fair value after the modification date. Cash settlements of stock options with SARs was $30.6 million in 2015. There were no cash settlements of stock options with SARs in 2014 or 2013.performance-based RSUs are measured at fair valueis based on the closing price of RBI’s common shares on the first businesstrading day preceding the date of grant. New grants generally cliff vest five years from the original grant date. RBI has awarded a limited number of performance-based RSUs that proportionally vest over a four year period. Time-vested RSUs and performance-based RSUs are expensed on a straight-line basis over the vesting period, exceptbased upon the probability that during 2014 and 2013the performance target will be met. RBI grants fully vested RSUs, with dividend equivalent rights that accrue in cash, to non-employee members of RBI’s board of directors were expensed immediately. RBI grants RSUs to non-employee members of itsRBI's board of directors in lieu of a cash retainer and committee fees. All such RSUs will settle and common shares of RBI will be issued upon termination of service by the board member.
The time-vested RSUs generally cliff vest five years from December 31st of the year preceding the grant date and performance-based RSUs generally cliff vest five years from the grant date (in each case, the “Anniversary Date”). If the employee is terminated for any reason within the first two years of the Anniversary Date, 100% of the time-vested RSUs granted will be forfeited. If RBI terminates the employment of a time-vested RSU holder without cause two years after the Anniversary Date, or if the employee retires, the employee will become vested in the number of time-vested RSUs as if the time-vested RSUs vested 20% for each year after the Anniversary Date. If the employee is terminated for any reason within the first three years of the Anniversary Date, 100% of the performance-based RSUs granted will be forfeited. If RBI terminates the employment of a performance-based RSU holder without cause between three and five years after the Anniversary Date, or if the employee retires, the employee will become vested in 50% of the performance-based RSUs on the fourth anniversary date. An alternate ratable vesting schedule applies to the extent the participant ends employment by reason of death or disability.
The following is a summary of
RSUtime-vested RSUs and performance-based RSUs activity for the year ended December 31,
2015: | | | | | | | | |
| | | Total Number of
Shares
(in 000’s) | | | Weighted Average
Grant Date Fair
Value | |
Outstanding at January 1, 2015 | | | 287 | | | $ | 18.23 | |
Granted | | | 299 | | | $ | 35.00 | |
Vested & Settled | | | — | | | | — | |
Forfeited | | | — | | | | — | |
| | | | | | | | |
Outstanding at December 31, 2015 | | | 586 | | | $ | 26.61 | |
| | | | | | | | |
The weighted average grant date fair value per RSU granted was $35.00 during 2015, $38.99 during 2014 and $22.74 during 2013. No RSUs settled during 2015 and 2014. 2018:
|
| | | | | | | | | | | | | |
| | Time-vested RSUs | | Performance-based RSUs |
| | Total Number of
Shares
(in 000’s) | | Weighted Average
Grant Date Fair
Value | | Total Number of
Shares
(in 000’s) | | Weighted Average
Grant Date Fair
Value |
| Outstanding at January 1, 2018 | 1,293 |
| | $ | 38.64 |
| | 1,590 |
| | $ | 36.31 |
|
| Granted | 329 |
| | $ | 57.68 |
| | 920 |
| | $ | 58.49 |
|
| Vested and settled | (43 | ) | | $ | 41.62 |
| | (81 | ) | | $ | 34.68 |
|
| Dividend equivalents granted | 31 |
| | $ | — |
| | 58 |
| | $ | — |
|
| Forfeited | (110 | ) | | $ | 51.05 |
| | (80 | ) | | $ | 34.65 |
|
| Outstanding at December 31, 2018 | 1,500 |
| | $ | 41.88 |
| | 2,407 |
| | $ | 45.25 |
|
The total intrinsic value, determined as of the date of vesting, of RSUs vested and converted to common shares of RBI during 2018, 2017 and 2016 was $7 million, $6 million and $3 million, respectively.
Note 16. Revenue Recognition
Revenue from Contracts with Customers
We transitioned to ASC 606 from the Previous Standards on January 1, 2018 using the modified retrospective transition method. Our Financial Statements reflect the application of ASC 606 guidance beginning in 2018, while our consolidated financial statements for prior periods were prepared under the guidance of the Previous Standards. The $250 million cumulative effect of our transition to ASC 606 is reflected as an adjustment to January 1, 2018 Partners' capital.
Our transition to ASC 606 represents a change in accounting principle. ASC 606 eliminates industry-specific guidance and provides a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of ASC 606 is that a reporting entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which settled was $0.8 million during 2013. Asthe reporting entity expects to be entitled for the exchange of those goods or services.
Contract Liabilities
Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We classify these contract liabilities as Other liabilities, net in our consolidated balance sheets. The following table reflects the change in contract liabilities by segment and on a consolidated basis between the date of adoption (January 1, 2018) and December 31, 2015, total unrecognized compensation cost related to RSUs outstanding was $8.7 million and is2018 (in millions):
|
| | | | | | | | | | | | | | | | |
| Contract Liabilities | | TH | | BK | | PLK | | Consolidated |
| Balance at January 1, 2018 | | $ | 47 |
| | $ | 402 |
| | $ | 6 |
| | $ | 455 |
|
| Revenue recognized that was included in the contract liability balance at the beginning of the year | | (6 | ) | | (43 | ) | | — |
| | (49 | ) |
| Increase, excluding amounts recognized as revenue during the period | | 24 |
| | 58 |
| | 13 |
| | 95 |
|
| Impact of foreign currency translation | | (3 | ) | | (12 | ) | | — |
| | (15 | ) |
| Balance at December 31, 2018 | | $ | 62 |
| | $ | 405 |
| | $ | 19 |
| | $ | 486 |
|
The following table illustrates estimated revenues expected to be recognized
overin the future related to performance obligations that are unsatisfied (or partially unsatisfied) by segment and on a
weighted-average periodconsolidated basis as of
approximately 2.7 years.Note 21. Sales and Cost of Sales
Sales and cost of sales consists of the followingDecember 31, 2018 (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Supply chain sales | | $ | 1,828.4 | | | $ | 79.4 | | | $ | — | |
Company restaurant sales (a) | | | 340.6 | | | | 88.0 | | | | 222.7 | |
| | | | | | | | | | | | |
Sales | | $ | 2,169.0 | | | $ | 167.4 | | | $ | 222.7 | |
| | | | | | | | | | | | |
(a) | Includes Restaurant VIEs’ sales. |
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Supply chain cost of sales | | $ | 1,525.5 | | | $ | 80.5 | | | $ | — | |
Company restaurant expenses (b) | | | 284.0 | | | | 75.9 | | | | 195.3 | |
| | | | | | | | | | | | |
Cost of sales | | $ | 1,809.5 | | | $ | 156.4 | | | $ | 195.3 | |
| | | | | | | | | | | | |
(b) | Includes Restaurant VIEs’ cost of sales. |
Note 22. Franchise and Property
|
| | | | | | | | | | | | | | | | |
| Contract liabilities expected to be recognized in | | TH | | BK | | PLK | | Consolidated |
| 2019 | | $ | 7 |
| | $ | 30 |
| | $ | 1 |
| | $ | 38 |
|
| 2020 | | 7 |
| | 29 |
| | 1 |
| | 37 |
|
| 2021 | | 7 |
| | 28 |
| | 1 |
| | 36 |
|
| 2022 | | 6 |
| | 28 |
| | 1 |
| | 35 |
|
| 2023 | | 6 |
| | 27 |
| | 1 |
| | 34 |
|
| Thereafter | | 29 |
| | 263 |
| | 14 |
| | 306 |
|
| Total | | $ | 62 |
| | $ | 405 |
| | $ | 19 |
| | $ | 486 |
|
Disaggregation of Total Revenues
Franchise and property
Total revenues consist of the following (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Franchise royalties | | $ | 936.5 | | | $ | 701.1 | | | $ | 657.0 | |
Property revenues | | | 760.2 | | | | 242.7 | | | | 213.7 | |
Franchise fees and other revenue | | | 186.5 | | | | 87.6 | | | | 52.9 | |
| | | | | | | | | | | | |
Franchise and property revenues | | $ | 1,883.2 | | | $ | 1,031.4 | | | $ | 923.6 | |
| | | | | | | | | | | | |
Refer
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Sales | $ | 2,355 |
| | $ | 2,390 |
| | $ | 2,205 |
|
| Royalties | 2,165 |
| | 1,215 |
| | 993 |
|
| Property revenues | 744 |
| | 765 |
| | 753 |
|
| Franchise fees and other revenue | 93 |
| | 206 |
| | 195 |
|
| Total revenues | $ | 5,357 |
| | $ | 4,576 |
| | $ | 4,146 |
|
Financial Statement Impact of Transition to Note 13ASC 606
As noted above, we transitioned to ASC 606 using the modified retrospective method on January 1, 2018. The cumulative effect of this transition to applicable contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to Partners’ capital as of this date. As a result of applying the modified retrospective method to transition to ASC 606, the following adjustments were made to the consolidated balance sheet as of January 1, 2018 (in millions):
|
| | | | | | | | | | | |
| | As Reported | | Total | | Adjusted |
| | December 31, 2017 | | Adjustments | | January 1, 2018 |
| ASSETS | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | $ | 1,097 |
| | $ | — |
| | $ | 1,097 |
|
| Accounts and notes receivable, net | 489 |
| | — |
| | 489 |
|
| Inventories, net | 78 |
| | — |
| | 78 |
|
| Prepaids and other current assets | 86 |
| | (23 | ) | | 63 |
|
| Total current assets | 1,750 |
| | (23 | ) | | 1,727 |
|
| Property and equipment, net | 2,133 |
| | — |
| | 2,133 |
|
| Intangible assets, net | 11,062 |
| | — |
| | 11,062 |
|
| Goodwill | 5,782 |
| | — |
| | 5,782 |
|
| Net investment in property leased to franchisees | 71 |
| | — |
| | 71 |
|
| Other assets, net | 426 |
| | 107 |
| | 533 |
|
| Total assets | $ | 21,224 |
| | $ | 84 |
| | $ | 21,308 |
|
| LIABILITIES AND EQUITY | | | | | |
| Current liabilities: | | | | | |
| Accounts and drafts payable | $ | 496 |
| | $ | — |
| | $ | 496 |
|
| Other accrued liabilities | 866 |
| | 9 |
| | 875 |
|
| Gift card liability | 215 |
| | (43 | ) | | 172 |
|
| Current portion of long term debt and capital leases | 78 |
| | — |
| | 78 |
|
| Total current liabilities | 1,655 |
| | (34 | ) | | 1,621 |
|
| Term debt, net of current portion | 11,801 |
| | — |
| | 11,801 |
|
| Capital leases, net of current portion | 244 |
| | — |
| | 244 |
|
| Other liabilities, net | 1,455 |
| | 426 |
| | 1,881 |
|
| Deferred income taxes, net | 1,508 |
| | (58 | ) | | 1,450 |
|
| Total liabilities | 16,663 |
| | 334 |
| | 16,997 |
|
| Partners' capital | | | | | |
| Class A common units | 4,168 |
| | (132 | ) | | 4,036 |
|
| Partnership exchangeable units | 1,276 |
| | (118 | ) | | 1,158 |
|
| Accumulated other comprehensive income (loss) | (884 | ) | | — |
| | (884 | ) |
| Total Partners' capital | 4,560 |
| | (250 | ) | | 4,310 |
|
| Noncontrolling interests | 1 |
| | — |
| | 1 |
|
| Total equity | 4,561 |
| | (250 | ) | | 4,311 |
|
| Total liabilities and equity | $ | 21,224 |
| | $ | 84 |
| | $ | 21,308 |
|
Franchise Fees
The cumulative adjustment for franchise fees consists of the following:
A $321 million increase in Other liabilities, net for the componentscumulative reversal and deferral of previously recognized franchise fees related to franchise agreements in effect at January 1, 2018 that were entered into subsequent to the acquisitions of BK in 2010, TH in 2014 and PLK in 2017 (net of the cumulative revenue attributable for the period through January 1, 2018), with a corresponding decrease to Partners’ capital.
A $107 million increase in Other assets, net for the previously unrecognized value of equity interests received in connection with MFDA arrangements. This increase resulted in a corresponding increase in Other liabilities, net of $105 million and an increase to Partners’ capital of $2 million for the cumulative effect of revenue attributable for the period between the inception of each such arrangement and January 1, 2018.
A $67 million decrease to Deferred income taxes, net for the tax effects of the two adjustments noted above, with a corresponding increase to Partners’ capital.
Advertising Funds
The cumulative adjustment for advertising funds reflects the recognition of cumulative advertising expenditures temporarily in excess of cumulative advertising fund contributions as of January 1, 2018, which is reflected as a $23 million decrease in Prepaids and other current assets and a $23 million decrease to Partners’ capital.
Gift Card Breakage
The adjustment for gift card breakage reflects the impact of the change to recognize gift card breakage proportionately as gift card balances are used rather than when it is deemed remote that the unused gift card balance would be redeemed, as done under the Previous Standards. The cumulative effect of applying ASC 606 accounting to gift card balances outstanding at January 1, 2018 is reflected as a $43 million decrease in Gift card liability, a $9 million increase in Other accrued liabilities, a $9 million increase in Deferred income taxes, net and a $25 million increase in January 1, 2018 Partners’ capital.
Comparison to Amounts if Previous Standards Had Been in Effect
The following tables reflect the impact of adoption of ASC 606 on our consolidated statements of operations for 2018 and cash flows from operating activities for 2018 and our consolidated balance sheet as of December 31, 2018 and the amounts as if the Previous Standards were in effect (“Amounts Under Previous Standards”) (in millions):
Consolidated Statement of Operations for 2018
|
| | | | | | | | | | | |
| | As Reported | | Total Adjustments | | Amounts Under Previous Standards |
| Revenues: | | | | | |
| Sales | $ | 2,355 |
| | $ | — |
| | $ | 2,355 |
|
| Franchise and property revenues | 3,002 |
| | (750 | ) | | 2,252 |
|
| Total revenues | 5,357 |
| | (750 | ) | | 4,607 |
|
| Operating costs and expenses: | | | | | |
| Cost of sales | 1,818 |
| | — |
| | 1,818 |
|
| Franchise and property expenses | 422 |
| | — |
| | 422 |
|
| Selling, general and administrative expenses | 1,214 |
| | (785 | ) | | 429 |
|
| (Income) loss from equity method investments | (22 | ) | | (6 | ) | | (28 | ) |
| Other operating expenses (income), net | 8 |
| | (1 | ) | | 7 |
|
| Total operating costs and expenses | 3,440 |
| | (792 | ) | | 2,648 |
|
| Income from operations | 1,917 |
| | 42 |
| | 1,959 |
|
| Interest expense, net | 535 |
| | 1 |
| | 536 |
|
| Income before income taxes | 1,382 |
| | 41 |
| | 1,423 |
|
| Income tax expense | 238 |
| | 9 |
| | 247 |
|
| Net income | 1,144 |
| | 32 |
| | 1,176 |
|
| Net income attributable to noncontrolling interests | 1 |
| | — |
| | 1 |
|
| Net income attributable to common unitholders | $ | 1,143 |
| | $ | 32 |
| | $ | 1,175 |
|
| | | | | | |
| Earnings per unit - basic and diluted: | | | | | |
| Class A common units | $ | 3.03 |
| | | | $ | 3.12 |
|
| Partnership exchangeable units | $ | 2.46 |
| | | | $ | 2.53 |
|
The following summarizes the adjustments to our condensed consolidated statement of operations for 2018 to reflect our consolidated statement of operations as if we had continued to recognize revenue under the Previous Standards:
As described above, our transition to ASC 606 resulted in the deferral of franchise fees, recognition of franchise fees in connection with MFDAs where we received an equity interest in the equity method investee, and a change in the timing of recognizing gift card breakage income. The adjustments for 2018 to reflect the recognition of this revenue as if the Previous Standards were in effect consists of a $43 million increase in Franchise and property
revenues.revenue and a $11 million increase in Income tax expense.
The adjustments to (income) loss from equity method investments for 2018 reflect the amount of losses from equity method investments we would not have recognized if the Previous Standards were in effect. There is no tax impact related to these adjustments.
As described above, under the Previous Standards our statement of operations did not reflect gross presentations of advertising fund contributions and expenses. Our transition to ASC 606 requires the presentation of advertising fund contributions and advertising fund expenses on a gross basis. The adjustments for 2018 reflect advertising fund contributions and expenses as if the Previous Standards were in effect consist of a $793 million decrease in Franchise and property revenues, a $785 million decrease in Selling, general and administrative expenses, a $1 million decrease in Other operating expenses (income), net, a $1 million increase in Interest expense, net, and a $2 million decrease in Income tax expense.
Consolidated Statement of Cash Flows for 2018
The transition to ASC 606 had no net impact on our cash provided by operating activities and no impact on our cash used for investing activities or cash used for financing activities during 2018.
|
| | | | | | | | | | | | |
| | | | | Total | | Amounts Under |
| | | As Reported | | Adjustments | | Previous Standards |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 1,144 |
| | $ | 32 |
| | $ | 1,176 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 180 |
| | — |
| | 180 |
|
| Amortization of deferred financing costs and debt issuance discount | | 29 |
| | — |
| | 29 |
|
| (Income) loss from equity method investments | | (22 | ) | | (6 | ) | | (28 | ) |
| Loss (gain) on remeasurement of foreign denominated transactions | | (33 | ) | | — |
| | (33 | ) |
| Net (gains) losses on derivatives | | (40 | ) | | — |
| | (40 | ) |
| Share-based compensation expense | | 48 |
| | — |
| | 48 |
|
| Deferred income taxes | | 29 |
| | 9 |
| | 38 |
|
| Other | | 5 |
| | — |
| | 5 |
|
| Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | | | | |
| Accounts and notes receivable | | 19 |
| | — |
| | 19 |
|
| Inventories and prepaids and other current assets | | (7 | ) | | 6 |
| | (1 | ) |
| Accounts and drafts payable | | 41 |
| | 7 |
| | 48 |
|
| Other accrued liabilities and gift card liability | | (219 | ) | | (6 | ) | | (225 | ) |
| Tenant inducements paid to franchisees | | (52 | ) | | — |
| | (52 | ) |
| Other long-term assets and liabilities | | 43 |
| | (42 | ) | | 1 |
|
| Net cash provided by operating activities | | $ | 1,165 |
| | $ | — |
| | $ | 1,165 |
|
Consolidated Balance Sheet as of December 31, 2018
|
| | | | | | | | | | | |
| | As Reported | | Total | | Amounts Under |
| | December 31, 2018 | | Adjustments | | Previous Standards |
| ASSETS | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | $ | 913 |
| | $ | — |
| | $ | 913 |
|
| Accounts and notes receivable, net | 452 |
| | — |
| | 452 |
|
| Inventories, net | 75 |
| | — |
| | 75 |
|
| Prepaids and other current assets | 60 |
| | 17 |
| | 77 |
|
| Total current assets | 1,500 |
| | 17 |
| | 1,517 |
|
| Property and equipment, net | 1,996 |
| | — |
| | 1,996 |
|
| Intangible assets, net | 10,463 |
| | — |
| | 10,463 |
|
| Goodwill | 5,486 |
| | — |
| | 5,486 |
|
| Net investment in property leased to franchisees | 54 |
| | — |
| | 54 |
|
| Other assets, net | 642 |
| | (101 | ) | | 541 |
|
| Total assets | $ | 20,141 |
| | $ | (84 | ) | | $ | 20,057 |
|
| LIABILITIES AND EQUITY | | | | | |
| Current liabilities: | | | | | |
| Accounts and drafts payable | $ | 513 |
| | $ | 7 |
| | $ | 520 |
|
| Other accrued liabilities | 637 |
| | (15 | ) | | 622 |
|
| Gift card liability | 167 |
| | 42 |
| | 209 |
|
| Current portion of long term debt and capital leases | 91 |
| | — |
| | 91 |
|
| Total current liabilities | 1,408 |
| | 34 |
| | 1,442 |
|
| Term debt, net of current portion | 11,823 |
| | — |
| | 11,823 |
|
| Capital leases, net of current portion | 226 |
| | — |
| | 226 |
|
| Other liabilities, net | 1,547 |
| | (468 | ) | | 1,079 |
|
| Deferred income taxes, net | 1,519 |
| | 67 |
| | 1,586 |
|
| Total liabilities | 16,523 |
| | (367 | ) | | 16,156 |
|
| Partners' capital | | | | | |
| Class A common units | 4,323 |
| | 155 |
| | 4,478 |
|
| Partnership exchangeable units | 730 |
| | 128 |
| | 858 |
|
| Accumulated other comprehensive income (loss) | (1,437 | ) | | — |
| | (1,437 | ) |
| Total Partners' capital | 3,616 |
| | 283 |
| | 3,899 |
|
| Noncontrolling interests | 2 |
| | — |
| | 2 |
|
| Total equity | 3,618 |
| | 283 |
| | 3,901 |
|
| Total liabilities and equity | $ | 20,141 |
| | $ | (84 | ) | | $ | 20,057 |
|
Note
23.17. Other Operating Expenses (Income), net
Other operating expenses (income), net, consist of the following (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Net losses (gains) on disposal of assets, restaurant closures and refranchisings | | $ | 22.0 | | | $ | 25.4 | | | $ | 0.7 | |
Litigation settlements and reserves, net | | | 1.3 | | | | 4.0 | | | | 7.6 | |
Net losses on derivatives | | | 37.3 | | | | 290.9 | | | | — | |
Foreign exchange net losses (gains) | | | 46.7 | | | | (3.8 | ) | | | 7.4 | |
Other, net | | | (1.8 | ) | | | 10.9 | | | | 5.6 | |
| | | | | | | | | | | | |
Other operating expenses (income), net | | $ | 105.5 | | | $ | 327.4 | | | $ | 21.3 | |
| | | | | | | | | | | | |
Closures and Dispositions
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Net losses on disposal of assets, restaurant closures and refranchisings | $ | 19 |
| | $ | 29 |
| | $ | 18 |
|
| Litigation settlements and reserves, net | 11 |
| | 2 |
| | 1 |
|
| Net losses (gains) on foreign exchange | (33 | ) | | 77 |
| | (20 | ) |
| Other, net | 11 |
| | 1 |
| | — |
|
| Other operating expenses (income), net | $ | 8 |
| | $ | 109 |
| | $ | (1 | ) |
Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and
refranchisings, and are recorded in Other operating expenses (income), net in the accompanying consolidated statements of operations.refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods.
During 2015,
Litigation settlements and reserves, net
losses (gains) on disposal of assets, restaurant closuresprimarily reflects accruals and
refranchisings consisted of net losses associatedpayments made and proceeds received in connection with
refranchisings of $2.6 million and net losses associated with asset disposals and restaurant closures of $19.4 million.During 2014, net losses (gains) on disposal of assets, restaurant closures and refranchisings consisted of net losses associated with refranchisings of $10.5 million and net losses associated with asset disposals and restaurant closures of $14.9 million.
During 2013, net losses (gains) on disposal of assets, restaurant closures and refranchisings consisted of net gains associated with refranchisings of $5.3 million, net losses from sale of subsidiaries of $1.0 million and net losses associated with asset disposals and restaurant closures of $5.0 million.
litigation matters.
Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities.
During 2015,
Other, net
losses on derivativesduring 2018 is comprised primarily
reflectsof a payment in connection with the
reclassificationsettlement of
losses on cash flow hedges from accumulated other comprehensive income (loss) to earningscertain provisions associated with the 2017 redemption of our preferred shares as a result of
de-designation and settlement of certain interest rate swaps.During 2014, we entered into foreign currency forward and foreign currency option contracts to hedge our exposure to the volatility of the Canadian dollar in connection with the cash portion of the purchase price of the Tim Hortons acquisition. We recorded a net loss on derivatives of $133.0 million related to the change in fair value on these instruments and an expense of $59.9 million related to the premium on the foreign currency option contracts. These instruments were settled in the fourth quarter of 2014. Additionally, as a result of discontinuing hedge accounting on our interest rate caps and forward-starting interest rate swaps, we recognized a loss of $34.5 million related to the change in fair value related to both instruments and a net gain of $13.4 million related to the reclassification of amounts from AOCI into earnings related to both instruments. These instruments were settled in the fourth quarter of 2014. Additionally, during the fourth quarter of 2014, we entered into a series of forward-starting interest rate swaps to hedge the variability in the interest payments associated with our 2014 Term Loan Facility and recorded a gain of $88.9 million related to the change in fair value related to these instruments. Lastly, during the fourth quarter of 2014, we entered into a series of cross-currency rate swaps to protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates and recorded a loss of $165.8 million related to the change in fair value on these instruments. See recently proposed Treasury regulations.
Note
17,Derivative Instruments for additional information about accounting for our derivative instruments.Note 24.18. Commitments and Contingencies
Guarantees
We guarantee certain lease payments
Letters of
franchisees arising from leases assigned in connection with sales of Company restaurants to franchisees, by remaining secondarily liable for base and contingent rents under the assigned leases of varying terms. The maximum contingent rent amount is not determinable as the amount is based on future revenues. In the event of default by the franchisees, we have typically retained the right to acquire possession of the related restaurants, subject to landlord consent. The potential amount of undiscounted payments we could be required to make in the event of non-payment by the franchisee arising from these assigned lease guarantees, excluding contingent rents, was $18.6 million as of December 31, 2015, expiring over an average period of four years.From time to time, we enter into agreements under which we guarantee loans made by third parties to qualified franchisees. Credit
As of December 31,
2015, there were $119.1 million of loans outstanding to Burger King franchisees that2018, we had
guaranteed under six such programs, with additional franchisee borrowing capacity of approximately $235.5 million remaining. Our maximum guarantee liability under these six programs is limited to an aggregate of $42.5 million, assuming full utilization of all borrowing capacity. We record a liability in the period the loans are funded and the maximum term of the guarantee is approximately ten years. As of December 31, 2015, the liability reflecting the fair value of these guarantee obligations was $4.4 million. In addition to these six programs, as of December 31, 2015, we also had a liability of $0.1 million, with a potential maximum guarantee exposure of $2.5 million, in connection with Tim Hortons franchisee loan guarantees. No significant payments have been made by us in connection with these guarantees through December 31, 2015.Letters of Credit
As of December 31, 2015, we had $25.8$20 million in irrevocable standby letters of credit outstanding, which were issued primarily to certain insurance carriers to guarantee payments of deductibles for various insurance programs, such as health and commercial liability insurance. Of theseThese letters of credit outstanding $3.8 million are secured by the collateral under our 2014 Revolving Credit Facility and the remainder are secured by cash collateral.Facility. As of December 31, 2015,2018, no amounts had been drawn on any of these irrevocable standby letters of credit.
Vendor Relationships
During the fiscal year ended June 30, 2000, we entered into long-term, exclusive contracts with soft drink vendors to supply Company and franchise restaurants with their products and obligating Burger King restaurants in the United States to purchase a specified number of gallons of soft drink syrup. These volume commitments are not subject to any time limit and as of December 31, 2015, we estimate it will take approximately 15 years for these purchase commitments to be completed. In the event of early termination of this arrangement, we may be required to make termination payments that could be material to our financial position, results of operations and cash flows.
Purchase Commitments
We have
separate arrangements for
information technology and telecommunication services with an aggregate contractual obligation of
$78.9$41 million over the next
fivethree years,
with nosome of which have early termination
fee.fees. We also enter into commitments to purchase advertising. As of December 31, 2015,2018, these commitments to purchase advertising totaled $224.3$380 million and run through December 2016.
2024.
Litigation
On March 1, 2013, a putative class action lawsuit was filed against BKC in the U.S. District Court of Maryland. The complaint alleges that BKC and/or its agents sent unsolicited advertisements by fax to thousands of consumers in Maryland and elsewhere in the United States to promote its home delivery program in violation of the Telephone Consumers Protection Act. The plaintiff sought monetary damages and injunctive relief. On August 19, 2014, BKC agreed to pay $8.5 million to settle the lawsuit. On December 2, 2014, the parties finalized a settlement agreement which received final court approval on April 15, 2015.
From time to time, we are involved in
other legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property.
New BK Global Headquarters
On June 19, 2017, a claim was filed in the Ontario Superior Court of Justice against The TDL Group Corp, a subsidiary of RBI, RBI, the Tim Hortons Ad Fund and certain individual defendants. 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, breach of the statutory duty of fair dealing, and breach of fiduciary duties.
On October 6, 2017, a claim was filed in the Ontario Superior Court of Justice against the same defendants as named above. The plaintiffs, two franchisees of Tim Hortons restaurants, seek to certify a class of all persons who have carried on business as a Tim Hortons franchisee at any time after March 8, 2017. The claim alleges various causes of action against the defendants in relation to the purported adverse treatment of member and potential member franchisees of the Great White North Franchisee Association. The plaintiffs seek damages for, among other things, breach of contract, breach of the statutory duty of fair dealing, and breach of the franchisees’ statutory right of association.
In November 2015, we entered into an agreementconnection with these two lawsuits, the court granted our motion to lease a buildingstrike the individuals named in Miami, Florida, to serve as our U.S. headquartersthe lawsuits, RBI and BK global restaurant support center beginning inthe Tim Hortons Ad Fund on October 22, 2018. The initial termonly defendant that remains in the lawsuits is The TDL Group Corp.
On July 24, 2018, a complaint for declaratory relief was filed against Tim Hortons USA, Inc. (“THUSA”) and Restaurant Brands International Limited Partnership in the Circuit Court of the lease is for 15 years with two 5-year renewal options.11th Judicial Circuit in Miami-Dade County, Florida by Great White North Franchisee Association - USA, Inc., on behalf of its members. The annual base rent steps up over the termcomplaint alleges certain breaches of the lease from $1.8 millionfranchise agreements between THUSA and its franchisees and the implied covenant of good faith and fair dealing, as well as violations of the U.S. franchise rules and the Florida Deceptive and Unfair Trade Practices Act.
On October 5, 2018, a class action complaint was filed against Burger King Worldwide, Inc. (“BKW”) and Burger King Corporation (“BKC”) in the
first year to $4.9 millionU.S. District Court for the Southern District of Florida by Jarvis Arrington, individually and on behalf of all others similarly situated. On October 18, 2018, a second class action complaint was filed against RBI, BKW and BKC in the
final year.Insurance Programs
We carry insurance programs to cover claims such as workers’ compensation, general liability, automotive liability, executive riskU.S. District Court for the Southern District of Florida by Monique Michel, individually and property,on behalf of all others similarly situated. On October 31, 2018, a third class action complaint was filed against BKC and are self-insuredBKW in the U.S. District Court for healthcare claimsthe Southern District
of Florida by Geneva Blanchard and Tiffany Miller, individually and on behalf of all others similarly situated. On November 2, 2018, a fourth class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for
eligible participating employees. Through the
useSouthern District of
insurance program deductibles (up to $5.0 million)Florida by Sandra Muster, individually and
self-insurance, we retain a significant portionon behalf of all others similarly situated. These complaints allege that the defendants violated Section 1 of the
expected losses under these programs.Insurance reserves have been recorded based on our estimateSherman Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Burger King franchisees are required to sign. Each plaintiff seeks injunctive relief and damages for himself or herself and other members of the anticipated ultimate costs to settle allclass.
While we believe the claims
both reported and incurred-but-not-reported (IBNR), and such reserves include judgments and independent actuarial assumptions about economic conditions, the frequency or severity of claims and claim development patterns, and claim reserve, management and settlement practices. We had $9.8 million in accrued liabilities as of December 31, 2015 and $12.8 million as of December 31, 2014 for these claims.Note 25. Variable Interest Entities
VIEs for Which We Are the Primary Beneficiary
We consolidate 141 and 270 Restaurant VIEs at December 31, 2015 and 2014, respectively, where TH is the restaurants’ primary beneficiary and Advertising VIEs. During the year ended December 31, 2015, sales and operating costs and expenses associated with Restaurant VIEs were $226.9 million and $222.8 million, respectively, prior to consolidation adjustments. During the year ended December 31, 2014, sales and operating costs and expenses associated with Restaurant VIEs were $12.6 million and $12.4 million, respectively, prior to consolidation adjustments.
The balance sheet data associated with Restaurant VIEs and Advertising VIEs presented on a gross basis, prior to consolidation adjustments, are as follows:
| | | | | | | | | | | | | | | | |
| | | As of December 31, 2015 | | | As of December 31, 2014 | |
| | | Restaurant
VIE’s | | | Advertising
VIE’s | | | Restaurant
VIE’s | | | Advertising
VIE’s | |
Cash and cash equivalents | | $ | 2.8 | | | $ | — | | | $ | 5.9 | | | $ | — | |
Inventories and other current assets, net | | | 2.5 | | | | — | | | | 5.2 | | | | — | |
Advertising fund restricted assets – current | | | — | | | | 57.5 | | | | — | | | | 53.0 | |
Property and equipment, net | | | 4.9 | | | | 37.4 | | | | 10.7 | | | | 55.7 | |
Other assets, net | | | 0.1 | | | | 0.1 | | | | 0.2 | | | | 0.4 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 10.3 | | | $ | 95.0 | | | $ | 22.0 | | | $ | 109.1 | |
| | | | | | | | | | | | | | | | |
Notes payable to Tim Hortons – current (1) | | $ | 4.6 | | | $ | 9.6 | | | $ | 9.2 | | | $ | 11.4 | |
Other accrued liabilities | | | 3.6 | | | | 0.1 | | | | 7.5 | | | | 0.2 | |
Advertising fund liabilities – current | | | — | | | | 49.1 | | | | — | | | | 45.5 | |
Notes payable to Tim Hortons – long-term (1) | | | — | | | | 30.2 | | | | 0.3 | | | | 45.5 | |
Long-term debt | | | 1.1 | | | | — | | | | — | | | | — | |
Other liabilities, net | | | 0.3 | | | | 6.0 | | | | 3.9 | | | | 6.5 | |
| | | | | | | | | | | | | | | | |
Total liabilities | | | 9.6 | | | | 95.0 | | | | 20.9 | | | | 109.1 | |
| | | | | | | | | | | | | | | | |
Equity of VIEs | | | 0.7 | | | | — | | | | 1.1 | | | | — | |
| | | | | | | | | | | | | | | | |
Total liabilities and equity | | $ | 10.3 | | | $ | 95.0 | | | $ | 22.0 | | | $ | 109.1 | |
| | | | | | | | | | | | | | | | |
(1) | Various assets and liabilities are eliminated upon the consolidation of these VIEs. |
The liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims by our creditors as they are not legally included within our general assets.
VIEs for Which We Are Not the Primary Beneficiary
We have investments in certain TH real estate ventures and certain BK master franchisees, which were determined to be VIEs of whichwithout merit, we are notunable to predict the primary beneficiary. We do not consolidateultimate outcome of these entities as control is considered to be shared by both THcases or estimate the range of possible loss, if any.
Note 19. Segment Reporting and the other joint ownersGeographical Information
As stated in the caseNote 1, Description of the TH real estate ventures, or control rests with other parties in the case of BK master franchisee VIEs.Note 26. Segment Reporting
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. We generateUnder the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. Our business generates revenue from fourthe following sources: (i) sales exclusive to Tim Hortons franchisees related to our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers; (ii) property revenues from properties we lease or sublease to franchisees; (iii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iv)(iii) sales at restaurants owned by us (“Company restaurants.Priorrestaurants”). In addition, our TH business generates revenue from sales to 2015, we had five operating segments consisting of TH and four geographical regions of BK. We completed an internal reorganization of our business following the Transactions, which resulted in two brand presidents, both of whom reportfranchisees related to our chief operating decision maker (“CODM”),supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers.
Each brand is managed by a brand president that reports directly to our Chief Executive Officer, who is our Chief Executive Officer. This reorganization changed the way our CODM manages and evaluates our business. Accordingly, during the first quarter of 2015,Operating Decision Maker. Therefore, we determined we had twohave three operating segments: (1) TH, which includes all operations of our Tim Hortons brand, and (2) BK, which includes all operations of our Burger King brand.We also determined that
brand, and (3) PLK, which includes all operations of our twoPopeyes brand. Our three operating segments represent our reportable segments. This As stated in Note 16, Revenue Recognition, we transitioned to ASC 606 on January 1, 2018 using the modified retrospective transition method. Our Financial Statements reflect the application of ASC 606 guidance beginning in 2018, while our Financial Statements for prior periods were prepared under the guidance of the Previous Standards. For comparability purposes, we have disclosed 2018 total revenues by operating segment under the Previous Standards as well as segment income with a reconciliation to net income under the Previous Standards. See Note 16, Revenue Recognition, for further details of the effects of this change had no effectin accounting principle on total revenues and net income.
PLK revenues and segment income from the acquisition date of March 27, 2017 through December 31, 2017 are included in our
previously reported consolidated
resultsstatement of operations
financial position or cash flows. In connection with this change, we have reclassified historical amounts to conform to our current segment presentation.for 2017. The following tables present revenues, by segment income,and by country, depreciation and amortization, (income) loss from equity method investments, and capital expenditures assets, and long-lived assets by segment (in millions):
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Revenues: | | | | | | | | | | | | |
TH | | $ | 2,956.9 | | | $ | 143.6 | | | $ | — | |
BK | | | 1,095.3 | | | | 1,055.2 | | | | 1,146.3 | |
| | | | | | | | | | | | |
Total revenues | | $ | 4,052.2 | | | $ | 1,198.8 | | | $ | 1,146.3 | |
| | | | | | | | | | | | |
Total revenues in
|
| | | | | | | | | | | | | | | |
| | 2018 As Reported | | 2018 Amounts Under Previous Standards | | 2017 | | 2016 |
| Revenues by operating segment: | | | | | | | |
| TH | $ | 3,292 |
| | $ | 3,077 |
| | $ | 3,155 |
| | $ | 3,001 |
|
| BK | 1,651 |
| | 1,251 |
| | 1,219 |
| | 1,145 |
|
| PLK | 414 |
| | 279 |
| | 202 |
| | — |
|
| Total | $ | 5,357 |
| | $ | 4,607 |
| | $ | 4,576 |
| | $ | 4,146 |
|
| | | | | | | | |
| Revenues by country (a): | | | | | | | |
| Canada | $ | 2,984 |
| | | | $ | 2,832 |
| | $ | 2,672 |
|
| United States | 1,785 |
| | | | 1,190 |
| | 1,004 |
|
| Other | 588 |
| | | | 554 |
| | 470 |
|
| Total | $ | 5,357 |
| | | | $ | 4,576 |
| | $ | 4,146 |
|
|
| | | | | | | | | | | | | |
| Depreciation and amortization: | | | | | | | |
| TH | $ | 108 |
| | | | $ | 110 |
| | $ | 108 |
|
| BK | 61 |
| | | | 62 |
| | 64 |
|
| PLK | 11 |
| | | | 10 |
| | — |
|
| Total | $ | 180 |
| | | | $ | 182 |
| | $ | 172 |
|
|
| | | | | | | | | | | | | |
| (Income) loss from equity method investments: | | | | | | | |
| TH | $ | (6 | ) | | | | $ | (8 | ) | | $ | (8 | ) |
| BK | (16 | ) | | | | (4 | ) | | (12 | ) |
| Total | $ | (22 | ) | | | | $ | (12 | ) | | $ | (20 | ) |
|
| | | | | | | | | | | | | |
| Capital expenditures: | | | | | | | |
| TH | $ | 59 |
| | | | $ | 13 |
| | $ | 12 |
|
| BK | 25 |
| | | | 23 |
| | 22 |
|
| PLK | 2 |
| | | | 1 |
| | — |
|
| Total | $ | 86 |
| | | | $ | 37 |
| | $ | 34 |
|
(a)Only Canada were $2,623.2 million in 2015, $152.0 million in 2014, and $60.9 million in 2013. Total revenues outside of Canada were $1,429.0 million in 2015, $1,046.8 million in 2014, and $1,085.4 million in 2013.Thethe United States represented 10% or more of our total revenues in each period presented.
Total revenuesassets by segment, and long-lived assets by segment and country are as follows (in millions):
|
| | | | | | | | | | | | | | | |
| | Assets | | Long-Lived Assets |
| | As of December 31, | | As of December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| By operating segment: | | | | | | | |
| TH | $ | 12,666 |
| | $ | 13,733 |
| | $ | 1,226 |
| | $ | 1,351 |
|
| BK | 4,514 |
| | 4,633 |
| | 729 |
| | 751 |
|
| PLK | 2,420 |
| | 2,440 |
| | 95 |
| | 102 |
|
| Unallocated | 541 |
| | 418 |
| | — |
| | — |
|
| Total | $ | 20,141 |
| | $ | 21,224 |
| | $ | 2,050 |
| | $ | 2,204 |
|
| By country: | | | | | | | |
| Canada | | | | | $ | 945 |
| | $ | 1,059 |
|
| United States | | | | | 1,098 |
| | 1,138 |
|
| Other | | | | | 7 |
| | 7 |
|
| Total | | | | | $ | 2,050 |
| | $ | 2,204 |
|
Long-lived assets include property and equipment, net, and net investment in
property leased to franchisees. Only Canada and the United States
were $982.2 million in 2015, $630.9 million in 2014,represented 10% or more of our total long-lived assets as of December 31, 2018 and
$604.4 million in 2013.December 31, 2017.
Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest
expense, net, loss on early extinguishment of debt,
taxes,income tax expense (benefit), and depreciation and amortization, adjusted to exclude the
non-cash impact of share-based compensation and non-cash incentive compensation expense
other operating expenses (income), net,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
allexpenses associated with the Popeyes Acquisition (“PLK Transaction costs”), Corporate restructuring and tax advisory fees related to the interpretation and implementation of the Tax Act, including Treasury regulations proposed in late 2018, non-operational Office centralization and relocation costs in connection with the centralization and relocation of our Canadian and U.S. restaurant support centers to new offices in Toronto, Ontario, and Miami, Florida, respectively, 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
doare not
directly reflect our core operations. Adjusted EBITDA assists management in comparing segmentrelevant to management’s assessment of operating performance
by removingor the
impactperformance of
such items, including acquisition accounting impact on cost of sales and TH transaction and restructuring costs.an acquired business. A reconciliation of segment income to net income (loss) consists of the
following: | | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Segment Income: | | | | | | | | | | | | |
TH | | $ | 906.7 | | | $ | 34.9 | | | $ | — | |
BK | | | 759.5 | | | | 726.0 | | | | 665.6 | |
| | | | | | | | | | | | |
Adjusted EBITDA | | | 1,666.2 | | | | 760.9 | | | | 665.6 | |
Share-based compensation and non-cash incentive compensation expense | | | 51.8 | | | | 37.3 | | | | 17.6 | |
Aquisition accounting impact on cost of sales | | | 0.5 | | | | 11.8 | | | | — | |
TH transaction and restructuring costs | | | 116.7 | | | | 125.0 | | | | — | |
Global portfolio realignment project costs | | | — | | | | — | | | | 26.2 | |
Impact of equity method investments (a) | | | 17.7 | | | | 9.5 | | | | 12.7 | |
Other operating expenses (income), net | | | 105.5 | | | | 327.4 | | | | 21.3 | |
| | | | | | | | | | | | |
EBITDA | | | 1,374.0 | | | | 249.9 | | | | 587.8 | |
Depreciation and amortization | | | 181.8 | | | | 68.8 | | | | 65.6 | |
| | | | | | | | | | | | |
Income from operations | | | 1,192.2 | | | | 181.1 | | | | 522.2 | |
Interest expense, net | | | 478.3 | | | | 279.7 | | | | 200.0 | |
Loss on early extinguishment of debt | | | 40.0 | | | | 155.4 | | | | — | |
Income tax expense | | | 162.2 | | | | 14.9 | | | | 88.5 | |
| | | | | | | | | | | | |
Net income (loss) | | $ | 511.7 | | | $ | (268.9 | ) | | $ | 233.7 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | 2018 As Reported | | 2018 Amounts Under Previous Standards | | 2017 | | 2016 |
| Segment income: | | | | | | | |
| TH | $ | 1,127 |
| | $ | 1,128 |
| | $ | 1,136 |
| | $ | 1,072 |
|
| BK | 928 |
| | 950 |
| | 903 |
| | 816 |
|
| PLK | 157 |
| | 169 |
| | 107 |
| | — |
|
| Adjusted EBITDA | 2,212 |
| | 2,247 |
| | 2,146 |
| | 1,888 |
|
| Share-based compensation and non-cash incentive compensation expense | 55 |
| | 55 |
| | 55 |
| | 42 |
|
| PLK Transaction costs | 10 |
| | 10 |
| | 62 |
| | — |
|
| Corporate restructuring and tax advisory fees | 25 |
| | 25 |
| | 2 |
| | — |
|
| Office centralization and relocation costs | 20 |
| | 20 |
| | — |
| | — |
|
| Integration costs | — |
| | — |
| | — |
| | 16 |
|
| Impact of equity method investments (a) | (3 | ) | | (9 | ) | | 1 |
| | (8 | ) |
| Other operating expenses (income), net | 8 |
| | 7 |
| | 109 |
| | (1 | ) |
| EBITDA | 2,097 |
| | 2,139 |
| | 1,917 |
| | 1,839 |
|
| Depreciation and amortization | 180 |
| | 180 |
| | 182 |
| | 172 |
|
| Income from operations | 1,917 |
| | 1,959 |
| | 1,735 |
| | 1,667 |
|
| Interest expense, net | 535 |
| | 536 |
| | 512 |
| | 467 |
|
| Loss on early extinguishment of debt | — |
| | — |
| | 122 |
| | — |
|
| Income tax expense (benefit) | 238 |
| | 247 |
| | (134 | ) | | 244 |
|
| Net income (loss) | $ | 1,144 |
| | $ | 1,176 |
| | $ | 1,235 |
| | $ | 956 |
|
| |
| (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. |
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Depreciation and Amortization: | | | | | | | | |
TH | | $ | 121.4 | | | $ | 4.5 | | | $ | — | |
BK | | | 60.4 | | | | 64.3 | | | | 65.6 | |
| | | | | | | | | | | | |
Total depreciation and amortization | | $ | 181.8 | | | $ | 68.8 | | | $ | 65.6 | |
| | | | | | | | | | | | |
| | | |
| | | 2015 | | | 2014 | | | 2013 | |
(Income) Loss from Equity Method Investments: | | | | | | | | |
TH | | $ | (7.9 | ) | | $ | (0.3 | ) | | $ | — | |
BK | | | 12.0 | | | | 9.8 | | | | 12.7 | |
| | | | | | | | | | | | |
Total (income) loss from equity method investments | | $ | 4.1 | | | $ | 9.5 | | | $ | 12.7 | |
| | | | | | | | | | | | |
| | | |
| | | 2015 | | | 2014 | | | 2013 | |
Capital Expenditures: | | | | | | | | |
TH | | $ | 88.1 | | | $ | 8.0 | | | $ | — | |
BK | | | 27.2 | | | | 22.9 | | | | 25.5 | |
| | | | | | | | | | | | |
Total capital expenditures | | $ | 115.3 | | | $ | 30.9 | | | $ | 25.5 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Assets | | | Long-Lived Assets | |
| | | As of December 31, | | | As of December 31, | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
TH | | $ | 12,646.8 | | | $ | 14,814.4 | | | $ | 1,407.5 | | | $ | 1,667.0 | |
BK | | | 4,693.1 | | | | 5,277.6 | | | | 860.3 | | | | 910.0 | |
Unallocated | | | 1,068.6 | | | | 1,251.0 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total | | $ | 18,408.5 | | | $ | 21,343.0 | | | $ | 2,267.8 | | | $ | 2,577.0 | |
| | | | | | | | | | | | | | | | |
Long-lived assets include Property and equipment, net, and Net investment in property leased to franchisees. Long-lived assets in Canada totaled $1,056.9 million as
Note
27.20. Quarterly Financial Data (Unaudited)
Our Financial Statements reflect the application of ASC 606 guidance beginning in 2018, while our consolidated financial statements for prior periods were prepared under the guidance of the Previous Standards. As such, 2018 results are not comparable to 2017 results.
Summarized unaudited quarterly financial data (in millions, except per share data)
: | | | | | | | | | | | | | | | | |
| | | Quarters Ended | |
| | | March 31,
2015 | | | June 30,
2015 | | | September 30,
2015 | | | December 31,
2015 | |
Revenues | | $ | 933.3 | | | $ | 1,042.1 | | | $ | 1,019.8 | | | $ | 1,057.0 | |
Income from operations | | $ | 224.1 | | | $ | 302.1 | | | $ | 344.2 | | | $ | 321.8 | |
Net income | | $ | 50.6 | | | $ | 93.7 | | | $ | 182.9 | | | $ | 184.5 | |
Earnings (loss) per unit - basic: | | | | | | | | | | | | | | | | |
Class A common units | | $ | (0.04 | ) | | $ | 0.05 | | | $ | 0.25 | | | $ | 0.25 | |
Partnership exchangeable units | | $ | (0.04 | ) | | $ | 0.05 | | | $ | 0.25 | | | $ | 0.25 | |
Earnings (loss) per unit - diluted: | | | | | | | | | | | | | | | | |
Class A common units | | $ | (0.04 | ) | | $ | 0.05 | | | $ | 0.25 | | | $ | 0.25 | |
Partnership exchangeable units | | $ | (0.04 | ) | | $ | 0.05 | | | $ | 0.25 | | | $ | 0.25 | |
| |
| | | Quarters Ended | |
| | | March 31,
2014 | | | June 30,
2014 | | | September 30,
2014 | | | December 31,
2014 | |
Revenues | | $ | 240.9 | | | $ | 261.2 | | | $ | 278.9 | | | $ | 417.8 | |
Income (loss) from operations | | $ | 131.3 | | | $ | 151.5 | | | $ | 0.9 | | | $ | (102.6 | ) |
Net income (loss) | | $ | 60.4 | | | $ | 75.1 | | | $ | (23.5 | ) | | $ | (380.9 | ) |
Earnings (loss) per unit / share - basic: | | | | | | | | | | | | | | | | |
Class A common units | | | — | | | | — | | | | — | | | $ | (1.63 | ) |
Partnership exchangeable units | | | — | | | | — | | | | — | | | $ | (1.63 | ) |
Common shares | | $ | 0.17 | | | $ | 0.21 | | | $ | (0.07 | ) | | $ | (0.52 | ) |
Earnings (loss) per unit / share - diluted: | | | | | | | | | | | | | | | | |
Class A common units | | | — | | | | — | | | | — | | | $ | (1.63 | ) |
Partnership exchangeable units | | | — | | | | — | | | | — | | | $ | (1.63 | ) |
Common shares | | $ | 0.17 | | | $ | 0.21 | | | $ | (0.07 | ) | | $ | (0.52 | ) |
was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarters Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Total revenues | $ | 1,254 |
| | $ | 1,001 |
| | $ | 1,343 |
| | $ | 1,132 |
| | $ | 1,375 |
| | $ | 1,209 |
| | $ | 1,385 |
| | $ | 1,234 |
|
| Income from operations | $ | 421 |
| | $ | 336 |
| | $ | 503 |
| | $ | 415 |
| | $ | 477 |
| | $ | 479 |
| | $ | 516 |
| | $ | 505 |
|
| Net income | $ | 279 |
| | $ | 167 |
| | $ | 314 |
| | $ | 243 |
| | $ | 250 |
| | $ | 247 |
| | $ | 301 |
| | $ | 578 |
|
| Basic and diluted earnings per unit | | | | | | | | | | | | | | | |
| Class A common units | $ | 0.73 |
| | $ | 0.25 |
| | $ | 0.83 |
| | $ | 0.44 |
| | $ | 0.66 |
| | $ | 0.45 |
| | $ | 0.81 |
| | $ | 1.96 |
|
| Partnership exchangeable units | $ | 0.60 |
| | $ | 0.21 |
| | $ | 0.67 |
| | $ | 0.38 |
| | $ | 0.53 |
| | $ | 0.39 |
| | $ | 0.65 |
| | $ | 1.64 |
|
Note
28.21. Supplemental Financial Information
On May 22, 2015, 1011778
B.CB.C. Unlimited Liability Company (the “Parent Issuer”) and New Red Finance Inc. (the “Co-Issuer” and together with the Parent Issuer, the “Issuers”) entered into
the 2015 Amended Credit Agreementan amended credit agreement that provides for obligations under the
2014 Credit Facilities. On May 22, 2015 the Issuers entered into the 2015 Senior Notes Indenture with respect to the 2015 Senior Notes. On October 8, 2014 the Issuers entered into
an indenture (the “2014the 2014 Senior Notes
Indenture”)Indenture with respect to the 2014 Senior Notes.
The
2015 Amendedagreement governing our Credit
Agreement,Facilities, the 2015 Senior Notes Indenture and the 2014 Senior Notes Indenture allow the financial reporting obligation of the Parent Issuer to be satisfied through the reporting of Partnership’s consolidated financial information, provided that the consolidated financial information of the Parent Issuer and its restricted subsidiaries is presented on a standalone basis.
The following represents the condensed consolidating financial information for the Parent Issuer and its restricted subsidiaries (“Consolidated Borrowers”) on a consolidated basis, together with eliminations, as of and for the periods indicated. The condensed consolidating financial information of Partnership is combined with the financial information of its wholly-owned subsidiaries that are also parent entities of the Parent Issuer and presented in a single column under the heading “RBILP”. The consolidating financial information may not necessarily be indicative of the financial position, results of operations or cash flows had the Issuers and Partnership operated as independent entities.
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
As of December 31, 2015 | | | | | | | | | | | | | | | | |
| | | Consolidated
Borrowers | | | RBILP | | | Eliminations | | | Consolidated | |
| ASSETS | | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 753.7 | | | $ | — | | | $ | — | | | $ | 753.7 | |
Restricted cash and cash equivalents | | | — | | | | — | | | | — | | | | — | |
Trade and notes receivable, net | | | 421.7 | | | | — | | | | — | | | | 421.7 | |
Inventories and other current assets, net | | | 132.2 | | | | — | | | | — | | | | 132.2 | |
Advertising fund restricted assets | | | 57.5 | | | | — | | | | — | | | | 57.5 | |
Deferred income taxes, net | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total current assets | | | 1,365.1 | | | | — | | | | — | | | | 1,365.1 | |
| | | | |
Property and equipment, net | | | 2,150.6 | | | | — | | | | — | | | | 2,150.6 | |
Intangible assets, net | | | 9,147.8 | | | | — | | | | — | | | | 9,147.8 | |
Goodwill | | | 4,574.4 | | | | — | | | | — | | | | 4,574.4 | |
Net investment in property leased to franchisees | | | 117.2 | | | | — | | | | — | | | | 117.2 | |
Intercompany receivable | | | — | | | | 128.3 | | | | (128.3 | ) | | | — | |
Investment in subsidiaries | | | — | | | | 6,210.1 | | | | (6,210.1 | ) | | | — | |
Other assets, net | | | 1,053.4 | | | | — | | | | — | | | | 1,053.4 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 18,408.5 | | | $ | 6,338.4 | | | $ | (6,338.4 | ) | | $ | 18,408.5 | |
| | | | | | | | | | | | | | | | |
| LIABILITIES, PARTNERSHIP PREFERRED UNITS AND EQUITY | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts and drafts payable | | $ | 361.5 | | | $ | — | | | $ | — | | | $ | 361.5 | |
Accrued advertising | | | 45.2 | | | | — | | | | — | | | | 45.2 | |
Other accrued liabilities | | | 310.0 | | | | 128.3 | | | | — | | | | 438.3 | |
Gift card liability | | | 168.5 | | | | — | | | | — | | | | 168.5 | |
Advertising fund liabilities | | | 48.4 | | | | — | | | | — | | | | 48.4 | |
Current portion of long term debt and capital leases | | | 56.1 | | | | — | | | | — | | | | 56.1 | |
| | | | | | | | | | | | | | | | |
Total current liabilities | | | 989.7 | | | | 128.3 | | | | — | | | | 1,118.0 | |
| | | | |
Term debt, net of current portion | | | 8,462.3 | | | | — | | | | — | | | | 8,462.3 | |
Capital leases, net of current portion | | | 203.4 | | | | — | | | | — | | | | 203.4 | |
Other liabilities, net | | | 795.9 | | | | — | | | | — | | | | 795.9 | |
Payables to affiliates | | | 128.3 | | | | — | | | | (128.3 | ) | | | — | |
Deferred income taxes, net | | | 1,618.8 | | | | — | | | | — | | | | 1,618.8 | |
| | | | | | | | | | | | | | | | |
Total liabilities | | | 12,198.4 | | | | 128.3 | | | | (128.3 | ) | | | 12,198.4 | |
| | | | | | | | | | | | | | | | |
Partnership preferred units | | | — | | | | 3,297.0 | | | | — | | | | 3,297.0 | |
| | | | |
Partners’ capital: | | | | | | | | | | | | | | | | |
Class A common units | | | — | | | | 2,876.7 | | | | — | | | | 2,876.7 | |
Partnerhsip exchangeable units | | | — | | | | 1,503.5 | | | | — | | | | 1,503.5 | |
Common shares | | | 7,318.1 | | | | — | | | | (7,318.1 | ) | | | — | |
Retained earnings | | | 359.1 | | | | — | | | | (359.1 | ) | | | — | |
Accumulated other comprehensive income (loss) | | | (1,467.8 | ) | | | (1,467.8 | ) | | | 1,467.8 | | | | (1,467.8 | ) |
| | | | | | | | | | | | | | | | |
Total Partners’ capital/shareholders’ equity | | | 6,209.4 | | | | 2,912.4 | | | | (6,209.4 | ) | | | 2,912.4 | |
Noncontrolling interests | | | 0.7 | | | | 0.7 | | | | (0.7 | ) | | | 0.7 | |
| | | | | | | | | | | | | | | | |
Total equity | | | 6,210.1 | | | | 2,913.1 | | | | (6,210.1 | ) | | | 2,913.1 | |
| | | | | | | | | | | | | | | | |
Total liabilities, Partnership preferred units and equity | | $ | 18,408.5 | | | $ | 6,338.4 | | | $ | (6,338.4 | ) | | $ | 18,408.5 | |
| | | | | | | | | | | | | | | | |
2018
|
| | | | | | | | | | | | | | | |
| | Consolidated
Borrowers | | RBILP | | Eliminations | | Consolidated |
| ASSETS | | | | | | | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | $ | 913 |
| | $ | — |
| | $ | — |
| | $ | 913 |
|
| Accounts and notes receivable, net | 452 |
| | — |
| | — |
| | 452 |
|
| Inventories, net | 75 |
| | — |
| | — |
| | 75 |
|
| Prepaids and other current assets | 60 |
| | — |
| | — |
| | 60 |
|
| Total current assets | 1,500 |
| | — |
| | — |
| | 1,500 |
|
| Property and equipment, net | 1,996 |
| | — |
| | — |
| | 1,996 |
|
| Intangible assets, net | 10,463 |
| | — |
| | — |
| | 10,463 |
|
| Goodwill | 5,486 |
| | — |
| | — |
| | 5,486 |
|
| Net investment in property leased to franchisees | 54 |
| | — |
| | — |
| | 54 |
|
| Intercompany receivable | — |
| | 207 |
| | (207 | ) | | — |
|
| Investment in subsidiaries | — |
| | 3,618 |
| | (3,618 | ) | | — |
|
| Other assets, net | 642 |
| | — |
| | — |
| | 642 |
|
| Total assets | $ | 20,141 |
| | $ | 3,825 |
| | $ | (3,825 | ) | | $ | 20,141 |
|
| LIABILITIES AND EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts and drafts payable | $ | 513 |
| | $ | — |
| | $ | — |
| | $ | 513 |
|
| Other accrued liabilities | 430 |
| | 207 |
| | — |
| | 637 |
|
| Gift card liability | 167 |
| | — |
| | — |
| | 167 |
|
| Current portion of long term debt and capital leases | 91 |
| | — |
| | — |
| | 91 |
|
| Total current liabilities | 1,201 |
| | 207 |
| | — |
| | 1,408 |
|
| Term debt, net of current portion | 11,823 |
| | — |
| | — |
| | 11,823 |
|
| Capital leases, net of current portion | 226 |
| | — |
| | — |
| | 226 |
|
| Other liabilities, net | 1,547 |
| | — |
| | — |
| | 1,547 |
|
| Payables to affiliates | 207 |
| | — |
| | (207 | ) | | — |
|
| Deferred income taxes, net | 1,519 |
| | — |
| | — |
| | 1,519 |
|
| Total liabilities | 16,523 |
| | 207 |
| | (207 | ) | | 16,523 |
|
| Partners’ capital: | | | | | | | |
| Class A common units | — |
| | 4,323 |
| | — |
| | 4,323 |
|
| Partnership exchangeable units | — |
| | 730 |
| | — |
| | 730 |
|
| Common shares | 3,071 |
| | — |
| | (3,071 | ) | | — |
|
| Retained earnings | 1,982 |
| | — |
| | (1,982 | ) | | — |
|
| Accumulated other comprehensive income (loss) | (1,437 | ) | | (1,437 | ) | | 1,437 |
| | (1,437 | ) |
| Total Partners’ capital/shareholders’ equity | 3,616 |
| | 3,616 |
| | (3,616 | ) | | 3,616 |
|
| Noncontrolling interests | 2 |
| | 2 |
| | (2 | ) | | 2 |
|
| Total equity | 3,618 |
| | 3,618 |
| | (3,618 | ) | | 3,618 |
|
| Total liabilities and equity | $ | 20,141 |
| | $ | 3,825 |
| | $ | (3,825 | ) | | $ | 20,141 |
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating
Statements of OperationsBalance Sheets
(In millions)
2015
| | | | | | | | | | | | | | | | |
| | | Consolidated
Borrowers | | | RBILP | | | Eliminations | | | Consolidated | |
Revenues: | | | | | | | | | | | | | | | | |
Sales | | $ | 2,169.0 | | | $ | — | | | $ | — | | | $ | 2,169.0 | |
Franchise and property revenues | | | 1,883.2 | | | | — | | | | — | | | | 1,883.2 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 4,052.2 | | | | — | | | | — | | | | 4,052.2 | |
Cost of sales | | | 1,809.5 | | | | — | | | | — | | | | 1,809.5 | |
Franchise and property expenses | | | 503.2 | | | | — | | | | — | | | | 503.2 | |
Selling, general and administrative expenses | | | 437.7 | | | | — | | | | — | | | | 437.7 | |
(Income) loss from equity method investments | | | 4.1 | | | | — | | | | — | | | | 4.1 | |
Other operating expenses (income), net | | | 105.5 | | | | — | | | | — | | | | 105.5 | |
| | | | | | | | | | | | | | | | |
Total operating costs and expenses | | | 2,860.0 | | | | — | | | | — | | | | 2,860.0 | |
| | | | | | | | | | | | | | | | |
Income from operations | | | 1,192.2 | | | | — | | | | — | | | | 1,192.2 | |
Interest expense, net | | | 478.3 | | | | — | | | | — | | | | 478.3 | |
Loss on early extinguishment of debt | | | 40.0 | | | | — | | | | — | | | | 40.0 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | 673.9 | | | | — | | | | — | | | | 673.9 | |
Income tax expense | | | 162.2 | | | | — | | | | — | | | | 162.2 | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | | 511.7 | | | | — | | | | — | | | | 511.7 | |
Equity in earnings of consolidated subsidiaries | | | — | | | | 511.7 | | | | (511.7 | ) | | | — | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | | 511.7 | | | | 511.7 | | | | (511.7 | ) | | | 511.7 | |
| | | | | | | | | | | | | | | | |
Net income (loss) attributable to noncontrolling interests | | | 3.4 | | | | 3.4 | | | | (3.4 | ) | | | 3.4 | |
Partnership preferred unit distributions | | | — | | | | 271.2 | | | | — | | | | 271.2 | |
| | | | | | | | | | | | | | | | |
Net income (loss) attributable to common unitholders / shareholders | | $ | 508.3 | | | $ | 237.1 | | | $ | (508.3 | ) | | $ | 237.1 | |
| | | | | | | | | | | | | | | | |
Total comprehensive income (loss) | | $ | (707.6 | ) | | $ | (707.6 | ) | | $ | 707.6 | | | $ | (707.6 | ) |
| | | | | | | | | | | | | | | | |
As of December 31, 2017
|
| | | | | | | | | | | | | | | |
| | Consolidated
Borrowers | | RBILP | | Eliminations | | Consolidated |
| ASSETS | | | | | | | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | $ | 1,097 |
| | $ | — |
| | $ | — |
| | $ | 1,097 |
|
| Accounts and notes receivable, net | 489 |
| | — |
| | — |
| | 489 |
|
| Inventories, net | 78 |
| | — |
| | — |
| | 78 |
|
| Prepaids and other current assets | 86 |
| | — |
| | — |
| | 86 |
|
| Total current assets | 1,750 |
| | — |
| | — |
| | 1,750 |
|
| Property and equipment, net | 2,133 |
| | — |
| | — |
| | 2,133 |
|
| Intangible assets, net | 11,062 |
| | — |
| | — |
| | 11,062 |
|
| Goodwill | 5,782 |
| | — |
| | — |
| | 5,782 |
|
| Net investment in property leased to franchisees | 71 |
| | — |
| | — |
| | 71 |
|
| Intercompany receivable | — |
| | 97 |
| | (97 | ) | | — |
|
| Investment in subsidiaries | — |
| | 4,561 |
| | (4,561 | ) | | — |
|
| Other assets, net | 426 |
| | — |
| | — |
| | 426 |
|
| Total assets | $ | 21,224 |
| | $ | 4,658 |
| | $ | (4,658 | ) | | $ | 21,224 |
|
| LIABILITIES AND EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts and drafts payable | $ | 496 |
| | $ | — |
| | $ | — |
| | $ | 496 |
|
| Other accrued liabilities | 769 |
| | 97 |
| | — |
| | 866 |
|
| Gift card liability | 215 |
| | — |
| | — |
| | 215 |
|
| Current portion of long term debt and capital leases | 78 |
| | — |
| | — |
| | 78 |
|
| Total current liabilities | 1,558 |
| | 97 |
| | — |
| | 1,655 |
|
| Term debt, net of current portion | 11,801 |
| | — |
| | — |
| | 11,801 |
|
| Capital leases, net of current portion | 244 |
| | — |
| | — |
| | 244 |
|
| Other liabilities, net | 1,455 |
| | — |
| | — |
| | 1,455 |
|
| Payables to affiliates | 97 |
| | — |
| | (97 | ) | | — |
|
| Deferred income taxes, net | 1,508 |
| | — |
| | — |
| | 1,508 |
|
| Total liabilities | 16,663 |
| | 97 |
| | (97 | ) | | 16,663 |
|
| Partners’ capital: | | | | | | | |
| Class A common units | — |
| | 4,168 |
| | — |
| | 4,168 |
|
| Partnership exchangeable units | — |
| | 1,276 |
| | — |
| | 1,276 |
|
| Common shares | 3,516 |
| | — |
| | (3,516 | ) | | — |
|
| Retained earnings | 1,928 |
| | — |
| | (1,928 | ) | | — |
|
| Accumulated other comprehensive income (loss) | (884 | ) | | (884 | ) | | 884 |
| | (884 | ) |
| Total Partners’ capital/shareholders’ equity | 4,560 |
| | 4,560 |
| | (4,560 | ) | | 4,560 |
|
| Noncontrolling interests | 1 |
| | 1 |
| | (1 | ) | | 1 |
|
| Total equity | 4,561 |
| | 4,561 |
| | (4,561 | ) | | 4,561 |
|
| Total liabilities and equity | $ | 21,224 |
| | $ | 4,658 |
| | $ | (4,658 | ) | | $ | 21,224 |
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of
Cash FlowsOperations
(In millions)
2015
| | | | | | | | | | | | | | | | |
| | | Consolidated
Borrowers | | | RBILP | | | Eliminations | | | Consolidated | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 511.7 | | | $ | 511.7 | | | $ | (511.7 | ) | | $ | 511.7 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Equity in loss (earnings) of consolidated subsidiaries | | | — | | | | (511.7 | ) | | | 511.7 | | | | — | |
Depreciation and amortization | | | 182.0 | | | | — | | | | — | | | | 182.0 | |
Loss on early extinguishment of debt | | | 40.0 | | | | — | | | | — | | | | 40.0 | |
Amortization of deferred financing costs and debt issuance discount | | | 34.9 | | | | — | | | | — | | | | 34.9 | |
(Income) loss from equity method investments | | | 4.1 | | | | — | | | | — | | | | 4.1 | |
Loss (gain) on remeasurement of foreign denominated transactions | | | 37.0 | | | | — | | | | — | | | | 37.0 | |
Amortization of defined benefit pension and postretirement items | | | (0.4 | ) | | | — | | | | — | | | | (0.4 | ) |
Net losses (gains) on derivatives | | | 53.6 | | | | — | | | | — | | | | 53.6 | |
Net losses (gains) on refranchisings and dispositions of assets | | | 5.4 | | | | — | | | | — | | | | 5.4 | |
Bad debt expense (recoveries), net | | | 4.1 | | | | — | | | | — | | | | 4.1 | |
Share-based compensation expense | | | 50.8 | | | | — | | | | — | | | | 50.8 | |
Acquisition accounting impact on cost of sales | | | 0.5 | | | | — | | | | — | | | | 0.5 | |
Deferred income taxes | | | (32.3 | ) | | | — | | | | — | | | | (32.3 | ) |
Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | | | | | | | | | | | | | | |
Restricted cash and cash equivalents | | | 79.2 | | | | — | | | | — | | | | 79.2 | |
Trade and notes receivable | | | (26.2 | ) | | | — | | | | — | | | | (26.2 | ) |
Inventories and other current assets | | | 9.2 | | | | — | | | | — | | | | 9.2 | |
Accounts and drafts payable | | | 191.2 | | | | — | | | | — | | | | 191.2 | |
Accrued advertising | | | 32.9 | | | | — | | | | — | | | | 32.9 | |
Other accrued liabilities | | | 53.2 | | | | — | | | | — | | | | 53.2 | |
Other long-term assets and liabilities | | | (30.2 | ) | | | — | | | | — | | | | (30.2 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 1,200.7 | | | | — | | | | — | | | | 1,200.7 | |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Payments for property and equipment | | | (115.3 | ) | | | — | | | | — | | | | (115.3 | ) |
Proceeds (payments) from refranchisings, disposition of assets and restaurant closures | | | 19.6 | | | | — | | | | — | | | | 19.6 | |
Net payments for acquired and disposed franchisee operations, net of cash acquired | | | — | | | | — | | | | — | | | | — | |
Net payment for purchase of Tim Hortons, net of cash acquired | | | — | | | | — | | | | — | | | | — | |
Return of investment on direct financing leases | | | 16.3 | | | | — | | | | — | | | | 16.3 | |
Settlement/sale of derivatives, net | | | 14.2 | | | | — | | | | — | | | | 14.2 | |
Other investing activities, net | | | 3.7 | | | | — | | | | — | | | | 3.7 | |
| | | | | | | | | | | | | | | | |
Net cash provided by (used for) investing activities | | | (61.5 | ) | | | — | | | | — | | | | (61.5 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Proceeds from term debt | | | — | | | | — | | | | — | | | | — | |
Proceeds from Senior Notes | | | 1,250.0 | | | | — | | | | — | | | | 1,250.0 | |
Proceeds from issuance of preferred units, net | | | — | | | | — | | | | — | | | | — | |
Repayments of term debt, Senior Notes, Discount Notes and capital leases | | | (2,627.8 | ) | | | — | | | | | | | | (2,627.8 | ) |
Payment of financing costs | | | (81.3 | ) | | | — | | | | — | | | | (81.3 | ) |
Dividends paid on Partnership units | | | — | | | | (362.4 | ) | | | — | | | | (362.4 | ) |
Repurchase of Partnership exchangeable units | | | — | | | | (293.7 | ) | | | | | | | (293.7 | ) |
Proceeds from stock option/warrant exercises | | | 3.0 | | | | — | | | | — | | | | 3.0 | |
Proceeds from issuance of shares | | | 2.1 | | | | — | | | | — | | | | 2.1 | |
Excess tax benefits from equity-based compensation | | | 0.5 | | | | — | | | | — | | | | 0.5 | |
Repurchases of common stock | | | — | | | | — | | | | — | | | | — | |
Distributions from subsidiaries | | | (656.1 | ) | | | 656.1 | | | | — | | | | — | |
Other financing activities, net | | | (5.6 | ) | | | — | | | | — | | | | (5.6 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by (used for) financing activities | | | (2,115.2 | ) | | | — | | | | — | | | | (2,115.2 | ) |
| | | | | | | | | | | | | | | | |
Effect of exchange rates on cash and cash equivalents | | | (73.5 | ) | | | — | | | | — | | | | (73.5 | ) |
Increase (decrease) in cash and cash equivalents | | | (1,049.5 | ) | | | — | | | | — | | | | (1,049.5 | ) |
Cash and cash equivalents at beginning of period | | | 1,803.2 | | | | — | | | | — | | | | 1,803.2 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 753.7 | | | $ | — | | | $ | — | | | $ | 753.7 | |
| | | | | | | | | | | | | | | | |
2018
|
| | | | | | | | | | | | | | | |
| | Consolidated
Borrowers | | RBILP | | Eliminations | | Consolidated |
| Revenues: | | | | | | | |
| Sales | $ | 2,355 |
| | $ | — |
| | $ | — |
| | $ | 2,355 |
|
| Franchise and property revenues | 3,002 |
| | — |
| | — |
| | 3,002 |
|
| Total revenues | 5,357 |
| | — |
| | — |
| | 5,357 |
|
| Operating costs and expenses: | | | | | | | |
| Cost of sales | 1,818 |
| | — |
| | — |
| | 1,818 |
|
| Franchise and property expenses | 422 |
| | — |
| | — |
| | 422 |
|
| Selling, general and administrative expenses | 1,214 |
| | — |
| | — |
| | 1,214 |
|
| (Income) loss from equity method investments | (22 | ) | | — |
| | — |
| | (22 | ) |
| Other operating expenses (income), net | 8 |
| | — |
| | — |
| | 8 |
|
| Total operating costs and expenses | 3,440 |
| | — |
| | — |
| | 3,440 |
|
| Income from operations | 1,917 |
| | — |
| | — |
| | 1,917 |
|
| Interest expense, net | 535 |
| | — |
| | — |
| | 535 |
|
| Income before income taxes | 1,382 |
| | — |
| | — |
| | 1,382 |
|
| Income tax (benefit) expense | 238 |
| | — |
| | — |
| | 238 |
|
| Net income | 1,144 |
| | — |
| | — |
| | 1,144 |
|
| Equity in earnings of consolidated subsidiaries | — |
| | 1,144 |
| | (1,144 | ) | | — |
|
| Net income (loss) | 1,144 |
| | 1,144 |
| | (1,144 | ) | | 1,144 |
|
| Net income (loss) attributable to noncontrolling interests | 1 |
| | 1 |
| | (1 | ) | | 1 |
|
| Net income (loss) attributable to common unitholders / shareholders | $ | 1,143 |
| | $ | 1,143 |
| | $ | (1,143 | ) | | $ | 1,143 |
|
| Total comprehensive income (loss) | $ | 591 |
| | $ | 591 |
| | $ | (591 | ) | | $ | 591 |
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating
Balance SheetsAsStatements of December 31, 2014
| | | | | | | | | | | | | | | | |
| | | Consolidated
Borrowers | | | RBILP | | | Eliminations | | | Consolidated | |
| ASSETS | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,803.2 | | | $ | — | | | $ | — | | | $ | 1,803.2 | |
Restricted cash and cash equivalents | | | 84.5 | | | | — | | | | — | | | | 84.5 | |
Trade and notes receivable, net | | | 441.2 | | | | — | | | | — | | | | 441.2 | |
Inventories and other current assets, net | | | 171.2 | | | | — | | | | — | | | | 171.2 | |
Advertising fund restricted assets | | | 53.0 | | | | — | | | | — | | | | 53.0 | |
Deferred income taxes, net | | | 86.6 | | | | — | | | | — | | | | 86.6 | |
| | | | | | | | | | | | | | | | |
Total current assets | | | 2,639.7 | | | | — | | | | — | | | | 2,639.7 | |
| | | | |
Property and equipment, net | | | 2,436.5 | | | | — | | | | — | | | | 2,436.5 | |
Intangible assets, net | | | 10,445.1 | | | | — | | | | — | | | | 10,445.1 | |
Goodwill | | | 5,235.7 | | | | — | | | | — | | | | 5,235.7 | |
Net investment in property leased to franchisees | | | 140.5 | | | | — | | | | — | | | | 140.5 | |
Intercompany receivable | | | — | | | | 13.8 | | | | (13.8 | ) | | | — | |
Investment in subsidiaries | | | — | | | | 7,636.8 | | | | (7,636.8 | ) | | | — | |
Other assets, net | | | 445.5 | | | | — | | | | — | | | | 445.5 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 21,343.0 | | | $ | 7,650.6 | | | $ | (7,650.6 | ) | | $ | 21,343.0 | |
| | | | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts and drafts payable | | $ | 223.0 | | | $ | — | | | $ | — | | | $ | 223.0 | |
Accrued advertising | | | 25.9 | | | | — | | | | — | | | | 25.9 | |
Other accrued liabilities | | | 321.4 | | | | 13.8 | | | | — | | | | 335.2 | |
Gift card liability | | | 187.0 | | | | — | | | | — | | | | 187.0 | |
Advertising fund liabilities | | | 45.5 | | | | — | | | | — | | | | 45.5 | |
Current portion of long term debt and capital leases | | | 1,128.8 | | | | — | | | | — | | | | 1,128.8 | |
| | | | | | | | | | | | | | | | |
Total current liabilities | | | 1,931.6 | | | | 13.8 | | | | — | | | | 1,945.4 | |
| | | | |
Term debt, net of current portion | | | 8,826.5 | | | | — | | | | — | | | | 8,826.5 | |
Capital leases, net of current portion | | | 243.7 | | | | — | | | | — | | | | 243.7 | |
Other liabilities, net | | | 707.8 | | | | — | | | | — | | | | 707.8 | |
Payables to affiliates | | | 13.8 | | | | — | | | | (13.8 | ) | | | — | |
Deferred income taxes, net | | | 1,982.8 | | | | — | | | | — | | | | 1,982.8 | |
| | | | | | | | | | | | | | | | |
Total liabilities | | | 13,706.2 | | | | 13.8 | | | | (13.8 | ) | | | 13,706.2 | |
| | | | | | | | | | | | | | | | |
Partnership preferred units | | | — | | | | 3,297.0 | | | | — | | | | 3,297.0 | |
| | | | |
Partners’ capital: | | | | | | | | | | | | | | | | |
Class A common units | | | — | | | | 1,986.1 | | | | — | | | | 1,986.1 | |
Partnerhsip exchangeable units | | | — | | | | 2,600.9 | | | | — | | | | 2,600.9 | |
Common shares | | | 8,033.2 | | | | — | | | | (8,033.2 | ) | | | — | |
Accumulated deficit | | | (149.2 | ) | | | — | | | | 149.2 | | | | — | |
Accumulated other comprehensive income (loss) | | | (248.5 | ) | | | (248.5 | ) | | | 248.5 | | | | (248.5 | ) |
| | | | | | | | | | | | | | | | |
Total Partners’ capital/shareholders’ equity | | | 7,635.5 | | | | 4,338.5 | | | | (7,635.5 | ) | | | 4,338.5 | |
Noncontrolling interests | | | 1.3 | | | | 1.3 | | | | (1.3 | ) | | | 1.3 | |
| | | | | | | | | | | | | | | | |
Total equity | | | 7,636.8 | | | | 4,339.8 | | | | (7,636.8 | ) | | | 4,339.8 | |
| | | | | | | | | | | | | | | | |
Total liabilities, Partnership preferred units and equity | | $ | 21,343.0 | | | $ | 7,650.6 | | | $ | (7,650.6 | ) | | $ | 21,343.0 | |
| | | | | | | | | | | | | | | | |
Operations
(In millions)
2017
|
| | | | | | | | | | | | | | | |
| | Consolidated
Borrowers | | RBILP | | Eliminations | | Consolidated |
| Revenues: | | | | | | | |
| Sales | $ | 2,390 |
| | $ | — |
| | $ | — |
| | $ | 2,390 |
|
| Franchise and property revenues | 2,186 |
| | — |
| | — |
| | 2,186 |
|
| Total revenues | 4,576 |
| | — |
| | — |
| | 4,576 |
|
| Operating costs and expenses: | | | | | | | |
| Cost of sales | 1,850 |
| | — |
| | — |
| | 1,850 |
|
| Franchise and property expenses | 478 |
| | — |
| | — |
| | 478 |
|
| Selling, general and administrative expenses | 416 |
| | — |
| | — |
| | 416 |
|
| (Income) loss from equity method investments | (12 | ) | | — |
| | — |
| | (12 | ) |
| Other operating expenses (income), net | 109 |
| | — |
| | — |
| | 109 |
|
| Total operating costs and expenses | 2,841 |
| | — |
| | — |
| | 2,841 |
|
| Income from operations | 1,735 |
| | — |
| | — |
| | 1,735 |
|
| Interest expense, net | 512 |
| | — |
| | — |
| | 512 |
|
| Loss on early extinguishment of debt | 122 |
| | — |
| | — |
| | 122 |
|
| Income before income taxes | 1,101 |
| | — |
| | — |
| | 1,101 |
|
| Income tax expense | (134 | ) | | — |
| | — |
| | (134 | ) |
| Net income | 1,235 |
| | — |
| | — |
| | 1,235 |
|
| Equity in earnings of consolidated subsidiaries | — |
| | 1,235 |
| | (1,235 | ) | | — |
|
| Net income (loss) | 1,235 |
| | 1,235 |
| | (1,235 | ) | | 1,235 |
|
| Net income (loss) attributable to noncontrolling interests | 2 |
| | 2 |
| | (2 | ) | | 2 |
|
| Partnership preferred unit distributions | — |
| | 256 |
| | — |
| | 256 |
|
| Gain on redemption of Partnership preferred units | — |
| | (234 | ) | | — |
| | (234 | ) |
| Net income (loss) attributable to common unitholders / shareholders | $ | 1,233 |
| | $ | 1,211 |
| | $ | (1,233 | ) | | $ | 1,211 |
|
| Total comprehensive income (loss) | $ | 1,706 |
| | $ | 1,706 |
| | $ | (1,706 | ) | | $ | 1,706 |
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
2014
| | | | | | | | | | | | | | | | |
| | | Consolidated
Borrowers | | | RBILP | | | Eliminations | | | Consolidated | |
Revenues: | | | | | | | | | | | | | | | | |
Sales | | $ | 167.4 | | | $ | — | | | $ | — | | | $ | 167.4 | |
Franchise and property revenues | | | 1,031.4 | | | | — | | | | — | | | | 1,031.4 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 1,198.8 | | | | — | | | | — | | | | 1,198.8 | |
Cost of sales | | | 156.4 | | | | — | | | | — | | | | 156.4 | |
Franchise and property expenses | | | 179.0 | | | | — | | | | — | | | | 179.0 | |
Selling, general and administrative expenses | | | 345.4 | | | | — | | | | — | | | | 345.4 | |
(Income) loss from equity method investments | | | 9.5 | | | | — | | | | — | | | | 9.5 | |
Other operating expenses (income), net | | | 327.4 | | | | — | | | | — | | | | 327.4 | |
| | | | | | | | | | | | | | | | |
Total operating costs and expenses | | | 1,017.7 | | | | — | | | | — | | | | 1,017.7 | |
| | | | | | | | | | | | | | | | |
Income from operations | | | 181.1 | | | | — | | | | — | | | | 181.1 | |
Interest expense, net | | | 279.7 | | | | — | | | | — | | | | 279.7 | |
Loss on early extinguishment of debt | | | 155.4 | | | | — | | | | — | | | | 155.4 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (254.0 | ) | | | — | | | | — | | | | (254.0 | ) |
Income tax expense | | | 14.9 | | | | — | | | | — | | | | 14.9 | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | | (268.9 | ) | | | — | | | | — | | | | (268.9 | ) |
Equity in earnings of consolidated subsidiaries | | | — | | | | (268.9 | ) | | | 268.9 | | | | — | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | | (268.9 | ) | | | (268.9 | ) | | | 268.9 | | | | (268.9 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) attributable to noncontrolling interests | | | 0.2 | | | | 0.2 | | | | (0.2 | ) | | | 0.2 | |
Partnership preferred unit distributions | | | — | | | | 13.8 | | | | — | | | | 13.8 | |
Accretion of Partnership preferred units | | | — | | | | 546.4 | | | | — | | | | 546.4 | |
| | | | | | | | | | | | | | | | |
Net income (loss) attributable to common unitholders / shareholders | | $ | (269.1 | ) | | $ | (829.3 | ) | | $ | 269.1 | | | $ | (829.3 | ) |
| | | | | | | | | | | | | | | | |
| | | | |
Total comprehensive income (loss) | | $ | (572.0 | ) | | $ | (572.0 | ) | | $ | 572.0 | | | $ | (572.0 | ) |
| | | | | | | | | | | | | | | | |
(In millions)
2016
|
| | | | | | | | | | | | | | | |
| | Consolidated
Borrowers | | RBILP | | Eliminations | | Consolidated |
| Revenues: | | | | | | | |
| Sales | $ | 2,205 |
| | $ | — |
| | $ | — |
| | $ | 2,205 |
|
| Franchise and property revenues | 1,941 |
| | — |
| | — |
| | 1,941 |
|
| Total revenues | 4,146 |
| | — |
| | — |
| | 4,146 |
|
| Operating costs and expenses: | | | | | | | |
| Cost of sales | 1,727 |
| | — |
| | — |
| | 1,727 |
|
| Franchise and property expenses | 454 |
| | — |
| | — |
| | 454 |
|
| Selling, general and administrative expenses | 319 |
| | — |
| | — |
| | 319 |
|
| (Income) loss from equity method investments | (20 | ) | | — |
| | — |
| | (20 | ) |
| Other operating expenses (income), net | (1 | ) | | — |
| | — |
| | (1 | ) |
| Total operating costs and expenses | 2,479 |
| | — |
| | — |
| | 2,479 |
|
| Income from operations | 1,667 |
| | — |
| | — |
| | 1,667 |
|
| Interest expense, net | 467 |
| | — |
| | — |
| | 467 |
|
| Income before income taxes | 1,200 |
| | — |
| | — |
| | 1,200 |
|
| Income tax expense | 244 |
| | — |
| | — |
| | 244 |
|
| Net income | 956 |
| | — |
| | — |
| | 956 |
|
| Equity in earnings of consolidated subsidiaries | — |
| | 956 |
| | (956 | ) | | — |
|
| Net income (loss) | 956 |
| | 956 |
| | (956 | ) | | 956 |
|
| Net income (loss) attributable to noncontrolling interests | 3 |
| | 3 |
| | (3 | ) | | 3 |
|
| Partnership preferred unit distributions | — |
| | 270 |
| | — |
| | 270 |
|
| Net income (loss) attributable to common unitholders / shareholders | $ | 953 |
| | $ | 683 |
| | $ | (953 | ) | | $ | 683 |
|
| Total comprehensive income (loss) | $ | 1,068 |
| | $ | 1,068 |
| | $ | (1,068 | ) | | $ | 1,068 |
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
2014
| | | | | | | | | | | | | | | | |
| | | Consolidated
Borrowers | | | RBI | | | Eliminations | | | Consolidated | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | |
Net income (loss) attributable to controlling and noncontrolling interests | | $ | (268.9 | ) | | $ | (268.9 | ) | | $ | 268.9 | | | $ | (268.9 | ) |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Equity in loss (earnings) of consolidated subsidiaries | | | — | | | | 268.9 | | | | (268.9 | ) | | | — | |
Depreciation and amortization | | | 68.8 | | | | — | | | | — | | | | 68.8 | |
Loss on early extinguishment of debt | | | 127.3 | | | | — | | | | — | | | | 127.3 | |
Amortization of deferred financing costs and debt issuance discount | | | 60.2 | | | | — | | | | — | | | | 60.2 | |
(Income) loss from equity method investments | | | 9.5 | | | | — | | | | — | | | | 9.5 | |
Loss (gain) on remeasurement of foreign denominated transactions | | | (6.2 | ) | | | — | | | | — | | | | (6.2 | ) |
Amortization of defined benefit pension and postretirement items | | | (3.9 | ) | | | — | | | | — | | | | (3.9 | ) |
Net losses (gains) on derivatives | | | 297.5 | | | | — | | | | — | | | | 297.5 | |
Net losses (gains) on refranchisings and dispositions of assets | | | 17.6 | | | | — | | | | — | | | | 17.6 | |
Bad debt expense (recoveries), net | | | 1.9 | | | | — | | | | — | | | | 1.9 | |
Share-based compensation expense | | | 43.1 | | | | — | | | | — | | | | 43.1 | |
Acquisition accounting impact on cost of sales | | | 11.8 | | | | | | | | | | | | 11.8 | |
Deferred income taxes | | | (61.9 | ) | | | — | | | | — | | | | (61.9 | ) |
Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | | | | | | | | | | | | | | |
Restricted cash and cash equivalents | | | (36.4 | ) | | | — | | | | — | | | | (36.4 | ) |
Trade and notes receivable | | | (24.5 | ) | | | — | | | | — | | | | (24.5 | ) |
Inventories and other current assets | | | (23.0 | ) | | | — | | | | — | | | | (23.0 | ) |
Accounts and drafts payable | | | (17.9 | ) | | | — | | | | — | | | | (17.9 | ) |
Accrued advertising | | | (35.9 | ) | | | — | | | | — | | | | (35.9 | ) |
Other accrued liabilities | | | 122.7 | | | | — | | | | — | | | | 122.7 | |
Other long-term assets and liabilities | | | (22.5 | ) | | | | | | | — | | | | (22.5 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 259.3 | | | | — | | | | — | | | | 259.3 | |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Payments for property and equipment | | | (30.9 | ) | | | — | | | | — | | | | (30.9 | ) |
(Payments) proceeds from refranchisings, disposition of assets and restaurant closures | | | (7.8 | ) | | | — | | | | — | | | | (7.8 | ) |
Net payments for acquired and disposed franchisee operations, net of cash acquired | | | (3.9 | ) | | | — | | | | — | | | | (3.9 | ) |
Net payment for purchase of Tim Hortons, net of cash acquired | | | (7,374.7 | ) | | | — | | | | — | | | | (7,374.7 | ) |
Return of investment on direct financing leases | | | 15.5 | | | | — | | | | — | | | | 15.5 | |
Settlement/sale of derivatives | | | (388.9 | ) | | | — | | | | — | | | | (388.9 | ) |
Other investing activities | | | (0.1 | ) | | | — | | | | — | | | | (0.1 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by (used for) investing activities | | | (7,790.8 | ) | | | — | | | | — | | | | (7,790.8 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Proceeds from term debt | | | 6,682.5 | | | | — | | | | — | | | | 6,682.5 | |
Proceeds from Senior Notes | | | 2,250.0 | | | | — | | | | — | | | | 2,250.0 | |
Proceeds from issuance of preferred units | | | — | | | | 2,998.2 | | | | — | | | | 2,998.2 | |
Repayments of term debt, Senior Notes, Discount Notes and capital leases | | | (3,102.0 | ) | | | — | | | | — | | | | (3,102.0 | ) |
Payment of financing costs | | | (158.0 | ) | | | — | | | | — | | | | (158.0 | ) |
Dividends paid on common stock | | | (105.6 | ) | | | — | | | | — | | | | (105.6 | ) |
Proceeds from stock option/warrant exercises | | | 0.5 | | | | — | | | | — | | | | 0.5 | |
Distributions from sudsidiaries | | | 2,998.2 | | | | (2,998.2 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net cash provided by (used for) financing activities | | | 8,565.6 | | | | — | | | | — | | | | 8,565.6 | |
| | | | | | | | | | | | | | | | |
Effect of exchange rates on cash and cash equivalents | | | (17.8 | ) | | | — | | | | — | | | | (17.8 | ) |
Increase (decrease) in cash and cash equivalents | | | 1,016.3 | | | | — | | | | — | | | | 1,016.3 | |
Cash and cash equivalents at beginning of period | | | 786.9 | | | | — | | | | — | | | | 786.9 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 1,803.2 | | | $ | — | | | $ | — | | | $ | 1,803.2 | |
| | | | | | | | | | | | | | | | |
(In millions)
2018
|
| | | | | | | | | | | | | | | |
| | Consolidated Borrowers | | RBILP | | Eliminations | | Consolidated |
| Cash flows from operating activities: | | | | | | | |
| Net income | $ | 1,144 |
| | $ | 1,144 |
| | $ | (1,144 | ) | | $ | 1,144 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Equity in loss (earnings) of consolidated subsidiaries | — |
| | (1,144 | ) | | 1,144 |
| | — |
|
| Depreciation and amortization | 180 |
| | — |
| | — |
| | 180 |
|
| Amortization of deferred financing costs and debt issuance discount | 29 |
| | — |
| | — |
| | 29 |
|
| (Income) loss from equity method investments | (22 | ) | | — |
| | — |
| | (22 | ) |
| Loss (gain) on remeasurement of foreign denominated transactions | (33 | ) | | — |
| | — |
| | (33 | ) |
| Net (gains) losses on derivatives | (40 | ) | | — |
| | — |
| | (40 | ) |
| Share-based compensation expense | 48 |
| | — |
| | — |
| | 48 |
|
| Deferred income taxes | 29 |
| | — |
| | — |
| | 29 |
|
| Other | 5 |
| | — |
| | — |
| | 5 |
|
| Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | | | | | |
| Accounts and notes receivable | 19 |
| | — |
| | — |
| | 19 |
|
| Inventories and prepaids and other current assets | (7 | ) | | — |
| | — |
| | (7 | ) |
| Accounts and drafts payable | 41 |
| | — |
| | — |
| | 41 |
|
| Other accrued liabilities and gift card liability | (219 | ) | | — |
| | — |
| | (219 | ) |
| Tenant inducements paid to franchisees | (52 | ) | | — |
| | — |
| | (52 | ) |
| Other long-term assets and liabilities | 43 |
| | — |
| | — |
| | 43 |
|
| Net cash provided by operating activities | 1,165 |
| | — |
| | — |
| | 1,165 |
|
| Cash flows from investing activities: | | | | | | | |
| Payments for property and equipment | (86 | ) | | — |
| | — |
| | (86 | ) |
| Proceeds from disposal of assets, restaurant closures and refranchisings | 8 |
| | — |
| | — |
| | 8 |
|
| Return of investment on direct financing leases | 16 |
| | — |
| | — |
| | 16 |
|
| Settlement/sale of derivatives, net | 17 |
| | — |
| | — |
| | 17 |
|
| Other investing activities, net | 1 |
| | — |
| | — |
| | 1 |
|
| Net cash provided by (used for) investing activities | (44 | ) | | — |
| | — |
| | (44 | ) |
| Cash flows from financing activities: | | | | | | | |
| Proceeds from issuance of long-term debt | 75 |
| | — |
| | — |
| | 75 |
|
| Repayments of long-term debt and capital leases | (74 | ) | | — |
| | — |
| | (74 | ) |
| Distributions to RBI for payments in connection with redemption of Preferred Shares | — |
| | (60 | ) | | — |
| | (60 | ) |
| Payment of financing costs | (3 | ) | | — |
| | — |
| | (3 | ) |
| Distributions paid on common, preferred and Partnership exchangeable units | — |
| | (728 | ) | | — |
| | (728 | ) |
| Repurchase of Partnership exchangeable units | — |
| | (561 | ) | | — |
| | (561 | ) |
| Capital contribution from RBI Inc. | 61 |
| | — |
| | — |
| | 61 |
|
| Distributions from subsidiaries | (1,349 | ) | | 1,349 |
| | — |
| | — |
|
| Other financing activities, net | 5 |
| | — |
| | — |
| | 5 |
|
| Net cash provided by (used for) financing activities | (1,285 | ) | | — |
| | — |
| | (1,285 | ) |
| Effect of exchange rates on cash and cash equivalents | (20 | ) | | — |
| | — |
| | (20 | ) |
| Increase (decrease) in cash and cash equivalents | (184 | ) | | — |
| | — |
| | (184 | ) |
| Cash and cash equivalents at beginning of period | 1,097 |
| | — |
| | — |
| | 1,097 |
|
| Cash and cash equivalents at end of period | $ | 913 |
| | $ | — |
| | $ | — |
| | $ | 913 |
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
(In millions)
2017
|
| | | | | | | | | | | | | | | |
| | Consolidated Borrowers | | RBILP | | Eliminations | | Consolidated |
| Cash flows from operating activities: | | | | | | | |
| Net income | $ | 1,235 |
| | $ | 1,235 |
| | $ | (1,235 | ) | | $ | 1,235 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Equity in loss (earnings) of consolidated subsidiaries | — |
| | (1,235 | ) | | 1,235 |
| | — |
|
| Depreciation and amortization | 182 |
| | — |
| | — |
| | 182 |
|
| Premiums paid and non-cash loss on early extinguishment of debt | 119 |
| | — |
| | — |
| | 119 |
|
| Amortization of deferred financing costs and debt issuance discount | 33 |
| | — |
| | — |
| | 33 |
|
| (Income) loss from equity method investments | (12 | ) | | — |
| | — |
| | (12 | ) |
| Loss (gain) on remeasurement of foreign denominated transactions | 77 |
| | — |
| | — |
| | 77 |
|
| Net losses on derivatives | 31 |
| | — |
| | — |
| | 31 |
|
| Share-based compensation expense | 48 |
| | — |
| | — |
| | 48 |
|
| Deferred income taxes | (742 | ) | | — |
| | — |
| | (742 | ) |
| Other | 18 |
| | — |
| | — |
| | 18 |
|
| Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | | | | | |
| Accounts and notes receivable | (30 | ) | | — |
| | — |
| | (30 | ) |
| Inventories and prepaids and other current assets | 19 |
| | — |
| | — |
| | 19 |
|
| Accounts and drafts payable | 14 |
| | — |
| | — |
| | 14 |
|
| Other accrued liabilities and gift card liability | 360 |
| | — |
| | — |
| | 360 |
|
| Tenant inducements paid to franchisees | (20 | ) | | — |
| | — |
| | (20 | ) |
| Other long-term assets and liabilities | 99 |
| | — |
| | — |
| | 99 |
|
| Net cash provided by operating activities | 1,431 |
| | — |
| | — |
| | 1,431 |
|
| Cash flows from investing activities: | | | | | | | |
| Payments for property and equipment | (37 | ) | | — |
| | — |
| | (37 | ) |
| Proceeds from disposal of assets, restaurant closures and refranchisings | 26 |
| | — |
| | — |
| | 26 |
|
| Net payment for purchase of Popeyes, net of cash acquired | (1,636 | ) | | — |
| | — |
| | (1,636 | ) |
| Return of investment on direct financing leases | 16 |
| | — |
| | — |
| | 16 |
|
| Settlement/sale of derivatives, net | 772 |
| | — |
| | — |
| | 772 |
|
| Other investing activities, net | 1 |
| | — |
| | — |
| | 1 |
|
| Net cash provided by (used for) investing activities | (858 | ) | | — |
| | — |
| | (858 | ) |
| Cash flows from financing activities: | | | | | | | |
| Proceeds from issuance of long-term debt | 5,850 |
| | — |
| | — |
| | 5,850 |
|
| Repayments of long-term debt and capital leases | (2,742 | ) | | — |
| | — |
| | (2,742 | ) |
| Distributions to RBI for payments in connection with redemption of Preferred Shares | — |
| | (3,006 | ) | | — |
| | (3,006 | ) |
| Payment of financing costs | (63 | ) | | — |
| | — |
| | (63 | ) |
| Distributions paid on common, preferred and Partnership exchangeable units | — |
| | (664 | ) | | — |
| | (664 | ) |
| Repurchase of Partnership exchangeable units | — |
| | (330 | ) | | — |
| | (330 | ) |
| Capital contribution from RBI Inc. | 29 |
| | — |
| | — |
| | 29 |
|
| Distributions from subsidiaries | (4,000 | ) | | 4,000 |
| | — |
| | — |
|
| Other financing activities, net | (10 | ) | | — |
| | — |
| | (10 | ) |
| Net cash provided by (used for) financing activities | (936 | ) | | — |
| | — |
| | (936 | ) |
| Effect of exchange rates on cash and cash equivalents | 24 |
| | — |
| | — |
| | 24 |
|
| Increase (decrease) in cash and cash equivalents | (339 | ) | | — |
| | — |
| | (339 | ) |
| Cash and cash equivalents at beginning of period | 1,436 |
| | — |
| | — |
| | 1,436 |
|
| Cash and cash equivalents at end of period | $ | 1,097 |
| | $ | — |
| | $ | — |
| | $ | 1,097 |
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
(In millions)
2016
|
| | | | | | | | | | | | | | | |
| | Consolidated Borrowers | | RBILP | | Eliminations | | Consolidated |
| Cash flows from operating activities: | | | | | | | |
| Net income | $ | 956 |
| | $ | 956 |
| | $ | (956 | ) | | $ | 956 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Equity in loss (earnings) of consolidated subsidiaries | — |
| | (956 | ) | | 956 |
| | — |
|
| Depreciation and amortization | 172 |
| | — |
| | — |
| | 172 |
|
| Amortization of deferred financing costs and debt issuance discount | 39 |
| | — |
| | — |
| | 39 |
|
| (Income) loss from equity method investments | (20 | ) | | — |
| | — |
| | (20 | ) |
| Loss (gain) on remeasurement of foreign denominated transactions | (20 | ) | | — |
| | — |
| | (20 | ) |
| Net losses on derivatives | 21 |
| | — |
| | — |
| | 21 |
|
| Share-based compensation expense | 35 |
| | — |
| | — |
| | 35 |
|
| Deferred income taxes | 80 |
| | — |
| | — |
| | 80 |
|
| Other | 4 |
| | — |
| | — |
| | 4 |
|
| Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | | | | | |
| Accounts and notes receivable | (16 | ) | | — |
| | — |
| | (16 | ) |
| Inventories and prepaids and other current assets | (10 | ) | | — |
| | — |
| | (10 | ) |
| Accounts and drafts payable | 16 |
| | — |
| | — |
| | 16 |
|
| Other accrued liabilities and gift card liability | (1 | ) | | — |
| | — |
| | (1 | ) |
| Tenant inducements paid to franchisees | (19 | ) | | — |
| | — |
| | (19 | ) |
| Other long-term assets and liabilities | (23 | ) | | — |
| | — |
| | (23 | ) |
| Net cash provided by operating activities | 1,214 |
| | — |
| | — |
| | 1,214 |
|
| Cash flows from investing activities: | | | | | | | |
| Payments for property and equipment | (34 | ) | | — |
| | — |
| | (34 | ) |
| Proceeds from disposal of assets, restaurant closures and refranchisings | 30 |
| | — |
| | — |
| | 30 |
|
| Return of investment on direct financing leases | 17 |
| | — |
| | — |
| | 17 |
|
| Settlement/sale of derivatives, net | 11 |
| | — |
| | — |
| | 11 |
|
| Other investing activities, net | 3 |
| | — |
| | — |
| | 3 |
|
| Net cash provided by (used for) investing activities | 27 |
| | — |
| | — |
| | 27 |
|
| Cash flows from financing activities: | | | | | | | |
| Repayments of long-term debt and capital leases | (70 | ) | | — |
| | — |
| | (70 | ) |
| Distributions paid on common, preferred and Partnership exchangeable units | — |
| | (538 | ) | | — |
| | (538 | ) |
| Capital contribution from RBI Inc. | 14 |
| | — |
| | — |
| | 14 |
|
| Excess tax benefits from share-based compensation | 8 |
| | — |
| | — |
| | 8 |
|
| Distributions from subsidiaries | (538 | ) | | 538 |
| | — |
| | — |
|
| Other financing activities, net | (5 | ) | | — |
| | — |
| | (5 | ) |
| Net cash provided by (used for) financing activities | (591 | ) | | — |
| | — |
| | (591 | ) |
| Effect of exchange rates on cash and cash equivalents | (2 | ) | | — |
| | — |
| | (2 | ) |
| Increase (decrease) in cash and cash equivalents | 648 |
| | — |
| | — |
| | 648 |
|
| Cash and cash equivalents at beginning of period | 788 |
| | — |
| | — |
| | 788 |
|
| Cash and cash equivalents at end of period | $ | 1,436 |
| | $ | — |
| | $ | — |
| | $ | 1,436 |
|
Note
29.22. Subsequent
EventDividend
Events
Dividends
On January 5, 2016,4, 2019, RBI paid a cash dividend of $0.13$0.45 per RBI common share to common shareholders of record on November 25, 2015.December 15, 2018. Partnership made a distribution to RBI as holder of Class A common units in the amount of the aggregate dividends declared and paid by RBI on RBI common shares and also made a distribution in respect of each Partnership exchangeable unit in the amount of $0.13$0.45 per exchangeable unit to holders of record on November 25, 2015. December 15, 2018.
On January
4, 2016, RBI 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 fourth calendar quarter of 2015. Partnership made a distribution to RBI as holder of the Partnership preferred units in an equal amount on the same date.On February 16, 2016,22, 2019, the RBI board of directors declared a cash dividend of $0.14$0.50 per RBI common share whichfor the first quarter of 2019. The dividend will be paid on April 4, 20163, 2019 to RBI common shareholders of record on March 3, 2016.15, 2019. Partnership will make a distribution to RBI as holder of Class A common units in the amount of the aggregate dividends declared and paid by RBI on RBI common shares. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.14$0.50 per Partnership exchangeable unit, and the record date and payment date for such distribution will be the same as the record date and payment date for the cash dividend per RBI common share set forth above. On February 15, 2016, the RBI board
*****
Item 9.Changes in and Disagreements with Accountants on April 1, 2016. The dividend on the Preferred Shares includes the amount due for the first calendar quarter of 2016. Partnership will make a distribution to RBI as holder of the Partnership preferred units in an equal amount on the same date.Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Accounting and
Financial Disclosure None.
Item 9A. | Controls and Procedures |
Item 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the participation of the management of RBI, as the general partner of Partnership, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of RBI, of the effectiveness of the design and operation of Partnership’s disclosure controls and procedures
(as defined in Rule 13a-15e under the Exchange Act) as of December 31,
2015.2018. Based on that evaluation, the CEO and CFO of RBI concluded that Partnership’s disclosure controls and procedures were effective as of such
date to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.date.
Internal Control over Financial Reporting
RBI’s management, including the CEO and CFO, confirm that there were no changes in Partnership’s internal control over financial reporting during the fourth quarter of
20152018 that have materially affected, or are reasonably likely to materially affect, Partnership’s internal control over financial reporting.
Management’s Report on Internal Control
Overover Financial Reporting
Management’s Report on Internal Control Over Financial Reporting and the report of Independent Registered Public Accounting Firm are set forth in Part II, Item 8 of this Form 10-K.
Part III
Item 10. | Directors, Executive Officers and Corporate Governance |
Item 10.Directors, Executive Officers and Corporate Governance
The information required by this Item, other than the information regarding the executive officers of RBI, as general partner of Partnership, set forth below required by Item 401 of Regulation S-K, is incorporated herein by reference from RBI’s definitive proxy statement to be filed no later than 120 days after December 31,
2015.2018. We refer to this proxy statement as the RBI Definitive Proxy Statement.
Executive Officers of the Registrant
Set forth below is certain information about RBI’s executive officers. Ages are as of
February 26, 2016. For purposes of Canadian securities laws, our chair and vice-chair are deemed to be executive officers; however, given that these individuals are not employees of RBI and do not meet the
definition of “executive officer” set out in Rule 3b-7 under the Exchange Act, they are not included below.date hereof. |
| | | | |
Name | | Age | | Position |
| Daniel S. Schwartz | | 3538 | | Executive Chairman |
| José E. Cil | | 49 | | Chief Executive Officer |
Joshua KobzaMatthew Dunnigan | | 2935 | | Chief Financial Officer |
José E. CilJoshua Kobza | | 4632 | | President, Burger KingChief Operating Officer |
Elias Diaz SeséAlexandre Macedo | | 4241 | | President, Tim Hortons |
Heitor GonçalvesAlexandre Santoro | | 5047 | | Chief Information and Performance Officer and Chief People OfficerPresident, Popeyes |
| Jacqueline Friesner | | 4346 | | Controller and Chief Accounting Officer |
| Jill Granat | | 5053 | | General Counsel and Corporate Secretary |
Daniel S. Schwartz.
José Cil. Mr. SchwartzCil was appointed Chief Executive Officer and a director of RBI on December 12, 2014. From June 2013 until December 2014, Mr. Schwartzin January 2019, and previously served as Chief Executive Officer, from April 2013 until June 2013, he served as Chief Operating Officer and from January 1, 2011 until April 2013, he served as Chief Financial Officer of Burger King Worldwide and its predecessor. Mr. Schwartz joined Burger King Worldwide in October 2010 as Executive Vice President, Deputy Chief Finance Officer and was appointed as Executive Vice President and Chief Financial Officer in December 2010, effective January 1, 2011. Since January 2008, Mr. Schwartz has been a partner with 3G Capital, where he was responsible for managing 3G Capital’s private equity business. He joined 3G Capital in January 2005 as an analyst and worked with the firm’s public and private equity investments until October 2010. From March 2003 until January 2005, Mr. Schwartz worked for Altair Capital Management, a hedge fund located in Stamford, Connecticut and served as an analyst in the mergers and acquisitions group at Credit Suisse First Boston from June 2001 to March 2003. Mr. Schwartz is a director of 3G Capital.Joshua Kobza. Mr. Kobza was appointed Chief Financial Officer of RBI on December 15, 2014. From April 11, 2013 until December 14, 2014, Mr. Kobza served as Executive Vice President and Chief Financial Officer of Burger King Worldwide. Mr. Kobza joined Burger King Worldwide in June 2012 as Director, Investor Relations, and was promoted to Senior Vice President, Global Finance in December 2012. From January 2011 until June 2012, Mr. Kobza worked at SIP Capital, a Sao Paulo based private investment firm, where he evaluated investments across a number of industries and geographies. From July 2008 until December 2010, Mr. Kobza served as an analyst in the corporate private equity area of the Blackstone Group in New York City.
José Cil. Mr. Cil was appointed President, Burger King onsince December 15, 2014. Mr. Cil served as Executive Vice President and President of Europe, the Middle East and Africa for Burger King Worldwide and its predecessor from November 2010 until December 2014. Prior to this role, Mr. Cil was Vice President and Regional General Manager for Wal-Mart Stores, Inc. in Florida from February 2010 to November 2010. From September 2008 to January 2010, Mr. Cil served as Vice President of Company Operations of Burger King Corporation and from September 2005 to September 2008, he served as Division Vice President, Mediterranean and NW Europe Divisions, EMEA of a subsidiary of Burger King Corporation.
Daniel S. Schwartz. Mr. Cil isSchwartz was appointed Executive Chairman of RBI in January 2019. Prior to that, Mr. Schwartz served as Chief Executive Officer of RBI from December 2014 to January 2019. Mr. Schwartz has also served as a director of Carrols Restaurant Group, Inc., RBI’s largest franchisee.Elias Diaz Sesé. Mr. Diaz SeséRBI since December 2014 and was appointed President, Tim Hortons on December 15, 2014.as Co-Chairman of the Board of Directors in January 2019. From January 2012 toJune 2013 until December 2014, he was the president of BK AsiaPac, Pte. Ltd. located in Singapore. From August 2011 to December 2011, he was a Senior Vice President Continental Europe for Burger King Europe GmbH located in Zug, Switzerland. Between January 2011 and August 2011, Mr. Díaz SeséSchwartz served as a Vice President Franchise and Emerging Markets for Burger King Europe GmbH. From August 2008 to December 2010,Chief Executive Officer, from April 2013 until June 2013, he served as General Manager for Burger King’s operations in Spain and Portugal.
Heitor Gonçalves. Mr. Gonçalves was appointed Chief Information and PerformanceOperating Officer and Chief People Officer
from January 2011 until April 2013, he served as Executive Vice President, Chief Information and PerformanceFinancial Officer of Burger King Worldwide and its predecessor frompredecessor. Mr. Schwartz joined Burger King Worldwide in October 2010 as Executive Vice President, Deputy Chief Finance Officer and was appointed as Executive Vice President and Chief Financial Officer in December 2010, effective January 2011. Since January 2008, Mr. Schwartz has been a partner with 3G Capital, where he was responsible for managing 3G Capital’s private equity business until October 2010. Mr. Schwartz is a director of 3G Capital.
Joshua Kobza. Mr. Kobza was appointed Chief Operating Officer of RBI in January 2019. Prior to that, Mr. Kobza served as Chief Technology Officer and Development Officer of RBI from January 2018 to January 2019, and as Chief Financial Officer of RBI from December 2014 to January 2018. From April 2013 to December 2014, Mr. Kobza served as Executive Vice President and Chief Financial Officer of Burger King Worldwide. Mr. Kobza joined Burger King Worldwide in June 2012 as Director, Investor Relations, and was promoted to Senior Vice President, Global Finance in December 2012. From January 2011 until June 2012, Mr. Kobza worked at SIP Capital, a Sao Paulo based private investment firm, where he evaluated investments across a number of industries and geographies. From July 2008 until December 2012, assuming2010, Mr. Kobza served as an analyst in the additional rolecorporate private equity area of the Blackstone Group in New York City.
Matthew Dunnigan. Mr. Dunnigan was appointed Chief PeopleFinancial Officer in January 2018. From October 2014 until January 2018, Mr. Dunnigan held the position of Treasurer, where he took on increasing responsibilities and successfully led all of RBI's capital markets activities. Before he joined RBI, Mr. Dunnigan served as Vice President of Crescent Capital Group LP, from September 2013 through October 2014, where he evaluated investments across the credit markets. Prior to that, Mr. Dunnigan spent three years as a private equity investment professional for H.I.G. Capital.
Alexandre Macedo. Mr. Macedo has served as President, Tim Hortons since December 2017. Previously, he served as President North America for Burger King from April 2013.2013 until December 2017, where he led the turnaround of the Burger King business. Mr. Macedo joined Burger King Corporation in July 2011 as SVP, Marketing, North America and later was General Manager of the U.S. franchise business. Prior to joining Burger King, Worldwide, Mr. GonçalvesMacedo was founder and partner of True Marketing, a Brazilian based marketing consulting firm form from December 2008 to June 2011. He also worked at AmBev, a Brazilian brewing company from June 2003 through March 2007, where he served as head of the Brahma Beer business unit.
Alexandre Santoro. Mr. Santoro was appointed President, Popeyes in March 2017. From April 2015 until March 2017, Mr. Santoro was responsible for Global Supply Chain, Quality Assurance and Global Operations. Mr. Santoro served in multiple strategic roles for Anheuser-Busch InBevAmerica Latina Logistica from October 2008 toApril 2002 through March 2010,2015, including global M&A director and headChief Executive Officer of Western Europe logistics. From November 2004 to September 2008, Mr. Gonçalves served as VP, Global Rewards at InBev. He served in positions of increasing responsibility at Brahma, a brewing company, and at its successor, AmBev,America Latina Logistica from September 1995 until October 2004.June 2013 through March 2015.
Jacqueline Friesner.Friesner. Ms. Friesner was appointed PrincipalController and Chief Accounting Officer and Controller of RBI onin December 15, 2014. Ms. Friesner served as Vice President, Controller and Chief Accounting Officer of Burger King Worldwide and its predecessor from March 2011 until December 2014. Prior thereto, Ms. Friesner served as Senior Director, Global Accounting and Reporting of Burger King from December 2010 until March 2011 and as Director, Global and Technical Accounting from November 2008 until December 2010. From October 2002 until December 2010, Ms. Friesner served in positions of increasing responsibility with Burger King Corporation. Before joining Burger King Corporation in October 2002, she was an audit manager at Pricewaterhouse Coopers in Miami, Florida.
Jill Granat.Granat. Ms. Granat was appointed General Counsel and Corporate Secretary onin December 15, 2014. Ms. Granat served as Senior Vice President, General Counsel and Secretary of Burger King Worldwide and its predecessor since February 2011. Prior to her appointment,this time, Ms. Granat was Vice President and Assistant General Counsel of Burger King Corporation from July 2009 until March 2011. Ms. Granat joined BKCBurger King Corporation in 1998 as a member of the legal department and served in positions of increasing responsibility with BKC and RBI.Item 11. | Executive Compensation |
Burger King Corporation.
Item 11.Executive Compensation
The information required by this item will be contained in the RBI Definitive Proxy Statement and is incorporated herein by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item, other than the information regarding our equity plans set forth below required by Item 201(d) of Regulation S-K, will be contained in the RBI Definitive Proxy Statement and is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding equity awards outstanding under RBI's compensation plans as of December 31, 2018 was as follows (amounts in thousands, except per share data):
|
| | | | | | | | | |
| | (a) | | (b) | | (c) |
| Plan Category | Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights | | Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights | | Number of
Securities
Remaining
Available for
Future Issuance
under Equity
Compensation
Plans (Excluding
Securities Reflected
in Column (a)) |
| Equity Compensation Plans Approved by Security Holders | 13,603 |
| | $ | 36.41 |
| | 16,946 |
|
| Equity Compensation Plans Not Approved by Security Holders | — |
| | — |
| | — |
|
| Total | 13,603 |
| | $ | 36.41 |
| | 16,946 |
|
Item 13.Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be contained in the RBI Definitive Proxy Statement and is incorporated herein by reference.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Item 14.Principal Accountant Fees and Services
The information required by this item will be contained in the RBI Definitive Proxy Statement and is incorporated herein by reference.
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 14. | Principal Accountant Fees and Services |
The information required by this item will be contained in the RBI Definitive Proxy Statement and is incorporated herein by reference.
Part IV
Item 15. | Exhibits and Financial Statement Schedules |
| (a)(1) | All Financial Statements |
Consolidated financial statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K.
| |
| (a)(2) | Financial Statement Schedules |
No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
The
following exhibits
listed in the accompanying index are filed as part of this report.
|
| | | | |
Number | | Description | | Incorporated by Reference
|
| | |
2.1
| | Business Combination Agreement and Plan of Merger, dated April 3, 2012, by and among Justice Holdings Limited, Justice Delaware Holdco Inc., Justice Holdco LLC and Burger King Worldwide Holdings, Inc. | | Incorporated herein by reference to Exhibit 2.1 to Burger King Holdings, Inc.’s Form 8-K filed on April 10, 2012.Reference |
| | |
2.2
| | Contingent Contribution Agreement, dated April 3, 2012, by and among Justice Holdings Limited, Justice Delaware Holdco Inc., and each of the other parties set forth on the signature pages thereto. | | Incorporated herein by reference to Exhibit 2.2 to Burger King Worldwide, Inc.’s Form S-1 (File No. 333-181261). |
| | |
| | Arrangement Agreement and Plan of Merger, dated August 26, 2014, by and among Burger King Worldwide, Inc., 1011773 B.C. Unlimited Liability Company, New Red Canada Partnership, Blue Merger Sub, Inc., 8997900 Canada Inc., and Tim Hortons Inc. | | |
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2.4
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3.1
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| | Agreement and Plan of Merger, dated as of February 21, 2017, by and among Restaurant Brands International Inc., Popeyes Louisiana Kitchen, Inc., Orange, Inc., and, solely for purposes of Section 9.03 of the Agreement and Plan of Merger, Restaurant Brands Holdings Corporation. | |
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3.2
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4.1
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4.2
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4.3(a)
| | Indenture, dated October 8, 2014, between 1011778 B.C. Unlimited Liability Company, as Issuer, New Red Finance, Inc., as Co-Issuer, the Guarantors party thereto, and Wilmington Trust, National Association, as Trustee and Collateral Agent. |
| | Incorporated herein by reference to Exhibit 4.1 to Registrant’s Form S-4 (File No. 333-198769). |
| | |
4.3(b)
| | Form of 6.00% Second Lien Senior Secured Notes due 2022 (included in Exhibit 4.3(a)). |
| | Incorporated herein by reference to Exhibit 4.1 to Registrant’s Form S-4 (File No. 333-198769). |
| | |
4.3(c)
| | First Supplemental Indenture, dated as of December 12, 2014, by and among 1011778 B.C. Unlimited Liability Company, New Red Finance, Inc., the parties that are signatories thereto as Guarantors, and Wilmington Trust National Association, as Trustee and Collateral Agent. | | Incorporated herein by reference to Exhibit 4.2 to Registrant’s Form 8-K filed on December 12, 2014. |
| | |
4.4
| | Securities Purchase Agreement, dated August 26, 2014, between 1011778 B.C. Unlimited Liability Company and Berkshire Hathaway Inc. | | Incorporated herein by reference to Exhibit 4.3 to Registrant’s Form 8-K filed on December 12, 2014. |
| | |
4.5(a)
| | Trust Indenture, dated June 1, 2010, by and between the Tim Hortons Inc. and BNY Trust Company of Canada, as trustee. | | Incorporated herein by reference to Exhibit 4.1 to the Form 8-K of Tim Hortons Inc. filed on June 1, 2010. |
| | |
4.5(b)
| | First Supplemental Trust Indenture, dated June 1, 2010, by and between the Tim Hortons Inc. and BNY Trust Company of Canada, as trustee. | | Incorporated herein by reference to Exhibit 4.2 to the Form 8-K of Tim Hortons Inc. filed on June 1, 2010. |
| | |
4.5(c)
| | First (Reopening) Supplemental Trust Indenture, dated December 1, 2010, by and between the Tim Hortons Inc. and BNY Trust Company of Canada, as trustee. | | Incorporated herein by reference to Exhibit 4.1 to the Form 8-K of Tim Hortons Inc. filed on December 1, 2010. |
| | |
4.5(d)
| | Supplement to Guarantee, dated December 1, 2010, from The TDL Group Corp. | | Incorporated herein by reference to Exhibit 4.2 to the Form 8-K of Tim Hortons Inc. filed on December 1, 2010. |
| | |
4.5(e)
| | Second Supplemental Trust Indenture, dated November 29, 2013, by and between Tim Hortons Inc. and BNY Trust Company of Canada, as trustee. | | Incorporated herein by reference to Exhibit 4.1 to the Form 8-K of Tim Hortons Inc. filed on December 5, 2013. |
| | |
4.5(f)
| | Supplement to Guarantee, dated November 29, 2013, from The TDL Group Corp. in favor of BNY Trust Company of Canada, as trustee. | | Incorporated herein by reference to Exhibit 4.2 to the Form 8-K of Tim Hortons Inc. filed on December 5, 2013. |
| | |
4.5(g)
| | Third Supplemental Trust Indenture, dated March 28, 2014, by and between Tim Hortons Inc. and BNY Trust Company of Canada, as trustee. | | Incorporated herein by reference to Exhibit 4.1 to the Form 8-K of Tim Hortons Inc. filed on March 28, 2014. |
| | |
4.5(h)
| | Supplement to Guarantee, dated March 28, 2014, from The TDL Group Corp. in favor of BNY Trust Company of Canada, as trustee. | | Incorporated herein by reference to Exhibit 4.2 to the Form 8-K of Tim Hortons Inc. filed on March 28, 2014. |
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4.5(i)
| | Fourth Supplemental Trust Indenture, dated December 12, 2014, by and between Tim Hortons Inc. and BNY Trust Company of Canada, as trustee. | | Incorporated herein by reference to Exhibit 4.5(i) to the Annual Report on Form 10-K of Restaurant Brands International Inc. filed on March 2, 2015. |
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4.5(j)
| | Deed of Guarantee dated April 16, 2015 by Restaurant Brands International Inc., as general partner of Restaurant Brands International Limited Partnership, in favor of BNY Trust Company of Canada. | | Incorporated herein by reference to Exhibit 4.5(j) to Form 10-Q of Restaurant Brands International Inc. filed on May 5, 2015. |
| | |
4.6(a)
| | Indenture, dated as of May 22, 2015, between 1011778 B.C. Unlimited Liability Company, as Issuer, New Red Finance, Inc., as Co-Issuer, the Guarantors party thereto, and Wilmington Trust, National Association, as Trustee and Collateral Agent. | | |
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4.6(b)
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4.7
| | Form of Senior Indenture | | Incorporated herein by reference to Exhibit 4.6 to the Form S-3ASR of Restaurant Brands International Inc. filed on December 3, 2015. |
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4.8
| | Form of Subordinated Indenture | | Incorporated herein by reference to Exhibit 4.7 to the Form S-3ASR of Restaurant Brands International Inc. filed on December 3, 2015. |
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4.9
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9.1
| | Indenture, dated as of May 17, 2017, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee and as collateral agent. | |
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| | Indenture, dated as of August 28, 2017, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee and as collateral agent. | |
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| | First Supplemental Indenture, dated as of October 4, 2017, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors party thereto and Wilmington Trust, National Association, as trustee and as collateral agent. | |
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10.1*
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10.2(a)*
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10.2(b)*
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10.3(a)*
| | Employment Agreement by and between Burger King Corporation and Jose Cil, dated November 2, 2010. | | Incorporated herein by reference to Exhibit 10.78 to Burger King Holdings, Inc.’s Form 10-K filed on March 14, 2012. |
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10.3(b)
| | Assignment Letter from Jose Tomas, Chief Human Resources Officer, Burger King Corporation to Jose Cil dated November 2, 2010. | | Incorporated herein by reference to Exhibit 10.79 to Burger King Holdings, Inc.’s Form 10-K filed on March 14, 2012. |
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10.4(a)*
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10.4(b)*
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10.4(c)*
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10.4(d)*
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10.4(e)*
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10.4(f)*
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10.4(g)*
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10.4(i)*
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10.4(j)*
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10.5
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| | | | Incorporated herein by reference to Exhibit 10.1 to Burger King Worldwide, Inc.’s Form 8-K filed on June 25, 2012. |
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10.6(a)*
| | Amended and Restated Option Award Agreement between Flavia Faugeres and Burger King Worldwide, Inc. under 2011 Omnibus Incentive Plan. | | Incorporated herein by reference to Exhibit 10.37 to Burger King Worldwide, Inc.’s Form 10-K filed on February 21, 2014. |
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10.6(b)*
| | Amended and Restated Option Award Agreement between Flavia Faugeres and Burger King Worldwide, Inc. under 2012 Omnibus Incentive Plan. | | Incorporated herein by reference to Exhibit 10.38 to Burger King Worldwide, Inc.’s Form 10-K filed on February 21, 2014. |
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10.7*
| | Burger King Corporation U.S. Severance Pay Plan. | | Incorporated herein by reference Exhibit 10.31 to Burger King Worldwide, Inc.’s Form 10-Q filed on October 28, 2013. |
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10.8
| | Voting Agreement, dated August 26, 2014, by and among Tim Hortons Inc. and 3G Special Situations Fund II, L.P. | | |
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10.9
| | Form8-K of Lock-Up Agreement between Tim Hortons Directors and Burger King Worldwide, Inc. filed on June 25, 2012. |
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10.10(a)
| | | | |
| | Credit Agreement, dated October 27, 2014, among 1011778 B.C. Unlimited Liability Company, as the Parent Borrower, New Red Finance, Inc., as the Subsidiary Borrower, 1013421 B.C. Unlimited Liability Company, as Holdings, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, the Lenders Party thereto, Wells Fargo Bank, National Association, as Syndication Agent, the Parties listed thereto as Co-Documentation Agents, J.P. Morgan Securities LLC, and Wells Fargo Securities LLC, as Joint Lead Arrangers, and J.P. Morgan Securities LLC, Wells Fargo Securities LLC, and Merrill Lynch, Pierce, Fenner and Smith, Incorporated, as Joint Book Runners.Runners (the “Credit Agreement”). | | |
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10.10(b)
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10.10(c)
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| | Amendment No. 1, dated May 22, 2015, to the Credit Agreement dated as of October 27, 2014, among 1011778 B.C. Unlimited Liability Company, an unlimited liability company organized under the laws of British Columbia, New Red Finance, Inc., a Delaware corporation, 1013421 B.C. Unlimited Liability Company, an unlimited liability company organized under the laws of British Columbia, the other guarantors party thereto, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and swing line lender and each L/C issuer and lender from time to time party thereto.Agreement.
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10.11(a)*
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10.11(c)*
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10.11(d)*
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10.11(e)*
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10.11(f)*
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10.12
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10.13
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10.14*
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10.15
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10.16(a)*
| | 2006 Stock Incentive Plan, as amended effective December 12, 2014. | | Incorporated herein by reference to Exhibit 99.5 to the Form S-8 filed by Restaurant Brands International Inc. (File No. 333-200997). |
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10.16(b)
| | Tim Hortons Inc. Form of Nonqualified Stock Option Award Agreement under the 2006 Stock Incentive Plan (2010 Award). | | Incorporated herein by reference to Exhibit 10(b) to the Form 10-Q of Tim Hortons Inc. filed on August 12, 2010. |
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10.16(c)*
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10.17(a)*
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10.17(b)*
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10.17(c)*
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10.17(d)*
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10.18*
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10.19*
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10.20*
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10.22*
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10.23*
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10.24*
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10.25*
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10.26*
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10.27*
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10.28*
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10.29
| | Commitment Letter, dated as of February 21, 2017, among 1011778 B.C. Unlimited Liability Company, New Red Finance, Inc., JPMorgan Chase Bank, N.A., Wells Fargo Bank, National Association and Wells Fargo Securities, LLC. | |
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10.30*
| | Award Agreement Amendment dated August 12, 2015 between Restaurant Brands International Inc. and Marc Caira. | | Incorporated herein by reference to Exhibit 10.3010.46 to the Form 10-Q of Restaurant Brands International Inc. filed on October 30, 2015.26, 2017. |
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10.31*
| | Tax Equalization Letter dated July 1, 2015 between Restaurant Brands International Inc. and Elias Diaz-Sese | | |
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10.32*
| | Form of Non-Compete, Non-Solicitation and Confidentiality Agreement | | |
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10.33*
| | Restaurant Brands International Inc. 2015 Employee Share Purchase Plan. | | |
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10.34
| | Underwriting | | |
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| | | | April 24, 2018. |
21.1
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| | | | Filed herewithherewith. |
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31.1
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| | | | Filed herewithherewith. |
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31.2
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| | | | Filed herewithherewith. |
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| | | | Filed herewithFurnished herewith. |
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32.2
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| | | | Filed herewithFurnished herewith. |
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101.INS | | XBRL Instance DocumentDocument. | | Filed herewith. |
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101.SCH | | XBRL Taxonomy Extension Schema Document. | | Filed herewith. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | Filed herewith. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | Filed herewith. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | Filed herewith. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | Filed herewith. |
* |
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| * Management contract or compensatory plan or arrangement |
Certain instruments relating to long-term borrowings, constituting less than 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis, are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The Registrant agrees to furnish copies of such instruments to the SEC upon request.
Item 16. Form 10-K Summary
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| Restaurant Brands International Limited Partnership |
| By: | | Restaurant Brands International Inc., its general partner |
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| By: | | /s/ Daniel Schwartz José E. Cil |
| Name: | | Daniel SchwartzJosé E. Cil |
| Title: | | Chief Executive Officer |
Date: February 26, 201622, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Signature | | Title | | Date |
| | |
/s/ Daniel Schwartz
Daniel Schwartz
| | |
| /s/ José E. Cil | | Chief Executive Officer and Director of Restaurant Brands International Inc. (principal executive officer) | | February 26, 201622, 2019 |
| | |
/s/ Joshua Kobza
Joshua Kobza
José E. Cil | | | |
| | |
| /s/ Matthew Dunnigan | | Chief Financial Officer of Restaurant Brands International Inc. (principal financial officer) | | February 26, 201622, 2019 |
| Matthew Dunnigan | | | |
| | |
| /s/ Jacqueline Friesner Jacqueline Friesner
| | Controller and Chief Accounting Officer of Restaurant Brands International Inc. (principal accounting officer) | | February 26, 201622, 2019 |
| Jacqueline Friesner | | | |
| | |
| /s/ Alexandre Behring Alexandre Behring
| | Executive ChairmanCo-Chairman of Restaurant Brands
International Inc. | | February 26, 201622, 2019 |
| Alexandre Behring | | | |
| | | | |
| /s/ Daniel Schwartz | | Co-Chairman of Restaurant Brands International Inc. | | February 22, 2019 |
| Daniel Schwartz | | | |
| | |
| /s/ Marc Caira Marc Caira
| | Vice Chairman of Restaurant Brands International Inc. | | February 26, 201622, 2019 |
| Marc Caira | | | |
/s/ Martin Franklin
Martin Franklin
| | |
| | Director of Restaurant Brands International Inc. | | February 26, 201622, 2019 |
| Martin Franklin | | | |
| | |
| /s/ Paul J. Fribourg Paul J. Fribourg
| | Director of Restaurant Brands International Inc. | | February 26, 201622, 2019 |
| Paul J. Fribourg | | | |
| | |
/s/ Alan ParkerAlan Parker
Neil Golden | | Director of Restaurant Brands International Inc. | | February 26, 201622, 2019 |
| Neil Golden | | | |
| | |
/s/ Carlos Alberto SicupiraCarlos Alberto Sicupira
Ali Hedayat | | Director of Restaurant Brands International Inc. | | February 26, 201622, 2019 |
| Ali Hedayat | | | |
| | |
/s/ Roberto Thompson MottaRoberto Thompson Motta
Golnar Khosrowshahi | | Director of Restaurant Brands International Inc. | | February 26, 201622, 2019 |
| Golnar Khosrowshahi | | | |
/s/ Alexandre Van Damme
Alexandre Van Damme
| | |
| | Director of Restaurant Brands International Inc. | | February 26, 201622, 2019 |
| Carlos Alberto Sicupira | | | |
| | |
/s/ Thomas MilroyThomas Milroy
Joao M. Castro-Neves | | Director of Restaurant Brands International Inc. | | February 26, 201622, 2019 |
| Joao M. Castro-Neves | | | |
| | |
/s/ John LedererJohn Lederer
Roberto Thompson Motta | | Director of Restaurant Brands International Inc. | | February 26, 2016 |
EXHIBIT INDEX
| | 22, 2019 |
Exhibit
Number
Roberto Thompson Motta | | Description
|
| |
21.1 | | List of Subsidiaries of the Registrant |
| |
31.1/s/ Alexandre Van Damme | | Certification of Chief Executive OfficerDirector of Restaurant Brands International Inc., as general partner of Restaurant Brands International Limited Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 | | Certification of Chief Financial Officer of Restaurant Brands International Inc., as general partner of Restaurant Brands International Limited Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002February 22, 2019 |
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32.1Alexandre Van Damme | | Certification of Chief Executive Officer of Restaurant Brands International Inc., as general partner of Restaurant Brands International Limited Partnership, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 | | Certification of Chief Financial Officer of Restaurant Brands International Inc., as general partner of Restaurant Brands International Limited Partnership, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.INS | | XBRL Instance Document |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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