UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 20192022
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number: 001-36787
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP
(Exact name of Registrant as Specified in Its Charter)
| Canada | 98-1206431 | ||||||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 130 King Street West, Suite 300 | M5X 1E1 | ||||||||||
| Toronto, | Ontario | ||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class | Trading Symbols | Name of each exchange on which registered | ||||||||||||
| Class B Exchangeable Limited Partnership Units | QSP | Toronto Stock Exchange | ||||||||||||
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
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 ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ��Yes ☐ No ☒
The aggregate market value of Class B exchangeable limited partnership units held by non-affiliates of the registrant on June 30, 2019,2022, computed by reference to the closing price for such units on the Toronto Stock Exchange on such date, was C$918,299,107.669,061,305.
The number of the registrant’s Class B exchangeable limited partnership units and Class A common units outstanding as of February 10, 202014, 2023 was 165,372,429142,996,640 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 20202023 Annual and SpecialGeneral Meeting of Shareholders of Restaurant Brands International Inc., which is to be filed no later than 120 days after December 31, 2019,2022, are incorporated by reference into Part III of this Form 10-K.
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP
TABLE OF CONTENTS
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Tim Hortons® and Timbits® are trademarks of Tim Hortons Canadian IP Holdings Corporation. Burger King® and BK® are trademarks of Burger King Corporation.Company LLC. Popeyes®, Popeyes Louisiana Kitchen® and Popeyes Chicken & Biscuits® are trademarks of Popeyes Louisiana Kitchen, Inc. Firehouse Subs® is a trademark of FRG, LLC. Unless the context otherwise requires, all references to “we”, “us”, “our” and “Partnership” refer to Restaurant Brands International Limited Partnership and its subsidiaries.
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Explanatory Note
We are a subsidiary of Restaurant Brands International Inc. (“RBI”) and the indirect parent of The TDL Group Corp. (“Tim Hortons”), Burger King Worldwide, Inc.Company LLC (“Burger King”) and, Popeyes Louisiana Kitchen, Inc. (“Popeyes”) and FRG, LLC (“Firehouse Subs”). RBI is our sole general partner and owns all of our outstanding Class A common units (“Class A common 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.King Worldwide, Inc. The Class B exchangeable limited partnership units of Partnership (the“Partnership(the “Partnership exchangeable units”) are deemed to be registered under Section 12(g) of the Exchange Act, and we are subject to the informational requirements of the Exchange Act and the rules and regulations promulgated thereunder. The Partnership exchangeable units trade on the Toronto Stock Exchange under the ticker symbol “QSP”. RBI’s common shares trade 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 Canadian continuous disclosure and other 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” or “C$” are to the currency of Canada unless otherwise indicated.
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Part I
Item 1. Business
Company Overview
We are a Canadian limited partnership originally formed to servethat serves as the indirect holding company for Tim Hortons, and its consolidated subsidiaries and Burger King, and its consolidated subsidiaries, and, since our acquisition of Popeyes in March 2017, Popeyes and itsFirehouse Subs and their 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 $34over $35 billion in annual system-wide sales and over 27,000approximately 30,000 restaurants in more than 100 countries and U.S. territories as of December 31, 2019.2022. Our Tim Hortons®, Burger King®, Popeyes® and PopeyesFirehouse Subs® brands have similar franchise business models with complementary daypart mixes and product platforms. Our threefour iconic brands are managed independently while benefiting from global scale and sharing of best practices. As of December 31, 2019,2022, approximately 100% of total restaurants for each of our brands was franchised.franchised and references to "our restaurants" or "system-wide restaurants" include franchised restaurants and those owned by us ("Company restaurants").
Our business generates revenuerevenues from the following sources: (i) sales, consisting primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and sales at Company restaurants; (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii)(iii) property revenues from properties we lease or sublease to franchisees; and (iii)(iv) advertising revenues and other services, consisting primarily of advertising fund contributions based on a percentage of sales at restaurants ownedreported by us (“Company 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.franchise restaurants.
Our Tim Hortons® Brand
Founded in 1964, Tim Hortons (“TH”)TH is one of the largest donut/coffee/tea restaurant chains in North America and the largest in Canada as measured by total number of restaurants. As of December 31, 2019,2022, we owned or franchised a total of 4,9325,600 TH restaurants. TH 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 Burger King® Brand
Founded in 1954, Burger King (“BK”) is the world’s second largest fast food hamburger restaurant (“FFHR”) chain as measured by total number of restaurants. As of December 31, 2019,2022, we owned or franchised a total of 18,83819,789 BK restaurants in more than 100 countries and U.S. territories.countries. 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 Popeyes® Brand
Founded in 1972, Popeyes (“PLK”) is the world’s second largest quick service chicken concept as measured by total number of restaurants. As of December 31, 2019,2022, we owned or franchised a total of 3,3164,091 PLK restaurants. PLK restaurants are quick service restaurants that distinguish themselves with a unique “Louisiana” style menu featuring fried chicken, chicken tenders, fried shrimp and other seafood, red beans and rice and other regional items.
Our Firehouse Subs® Brand
Founded in 1994, Firehouse Subs (“FHS”) is a brand built on decades of culture rooted in public service and a leading player in the QSR sandwich category in North America. As of December 31, 2022, we owned or franchised a total of 1,242 FHS restaurants. FHS restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties.
Our Business Strategy
We believe that we have created a financially strong company built upon a foundation of threefour thriving, independent brands with significant global growth potential and the opportunity to be one of the most efficient franchised QSR operators in the 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;
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•strengthening drive thru and delivery channels to provide guests convenient access to our product offerings;
•utilizing technological and digital initiatives, including loyalty programs, 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.
Operating Segments
Our business consists of threefour operating segments, which are also our reportable segments: (1) TH; (2) BK; (3) PLK; and (3) PLK.(4) FHS. Additional financial information about our reportable segments can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations” and Note 18, “Segment Reporting and Geographic Information,” to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data.”
Restaurant Development
As part of our development approach for our brands in the U.S., we have granted limited development rights in specific areas to franchisees in connection with area development agreements. We expect to enter into similar arrangements in 20202023 and beyond. In Canada, we have not granted exclusive or protected areas to BK or TH franchisees, with limited exceptions.
As part of our international growth strategy for all of our BK, TH and PLK brands, we have established master franchise and development agreements in a number of markets.markets, and we expect to enter into similar arrangements for FHS. We have also created strategic master franchise joint ventures in which we received a meaningful minority equity stake in each joint venture. We will continue to evaluate opportunities to accelerate international development of all three of our brands, including through the establishment of master franchises with exclusive development rights and joint ventures with new and existing franchisees.
Advertising and Promotions
In general, franchisees fund substantially all of the marketing programs for each of our brands by making contributions ranging from 2.0% to 5.0% of gross sales to advertising funds 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. In 2021, we spent C$80 million to support TH Canada advertising expenses and in September 2022, we announced our intention to pay $120 million of BK US advertising expenses over approximately two years.
We manage the advertising funds for each of our brands in the U.S. and Canada, as well asCanada. While we manage the advertising funds in certain otherselect markets for BK. However,BK and PLK, in manymost 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 franchisees with advertising support and guidance in order to deliver a consistent global brand message.
Product Development
New product development is a key driver of the long-term success 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. Based on guest feedback, we drive product innovation in order to satisfy the needs of our guests around the world. This strategy will continue to be a focus in 20202023 and beyond.
Operations Support
Our operations strategy is designed to deliver best-in-class restaurant operations by our franchisees and to improve friendliness, cleanliness, speed of service and overall guest satisfaction. Each of our brands has uniform operating standards and specifications relating to product quality, cleanliness and maintenance of the premises. In addition, our restaurants are required to be operated in accordance with quality assurance and health standards that each brand has established, as well as standards set by applicable governmental laws and regulations.regulations, including applicable local, provincial and state laws regarding COVID-19 and applicable health authority guidelines. Each franchisee typically participates in initial and ongoing training programs to learn all aspects of operating a restaurant in accordance with each brand’s operating standards.
Manufacturing, Supply and Distribution
In general, we approve the manufacturers of the food, packaging, equipment and other products used in restaurants for each of our brands. We have a comprehensive supplier approval process, which requires all food and packaging products to pass our quality standards and the suppliers’ 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.
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TH products are sourced from a combination of third-party suppliers and our own manufacturing facilities. To protect our proprietary blends, we operate two coffee roasting facilities in Ancaster, Ontario and Rochester, New York, where we blend allroast the majority of the coffee for our TH restaurants and where practical,blend the beans 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 syrups which are used in a number of TH products.products in North America. As of December 31, 2019,2022, we typically have only one or a few suppliers to service each category of products sold at our system restaurants.
We sell most raw materials and supplies, including coffee, sugar, paper goods and other restaurant supplies, to 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-
Our TH business has significant supply chain operations, including procurement, warehousing and distribution, to supply paper, and dry goods, frozen goods and refrigerated products 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 TH restaurants in Canada through fivenine distribution centers located in Canada. In 2018, we announced plans to build two new warehouses in Western Canada, to replace existing facilities 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.which five are company-owned. 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 BK, PLK and PLKFHS restaurants are sourced from third-party suppliers. In the U.S. and Canada, there is a purchasing cooperative for each brandof BK and PLK that negotiates the purchase terms for most equipment, food, beverages (other than branded soft drinks which we negotiate separately under long-term agreements) and other products used in BK and PLK restaurants. The purchasing agent is also authorized to purchase and manage distribution services on behalf of most of the BK and PLK restaurants in the U.S. and Canada. PLK also utilizes exclusive suppliers for certain of its proprietary products. As of December 31, 2019,2022, four distributors serviced approximately 92% of BK restaurants in the U.S. and, five distributors serviced approximately 85% of PLK restaurants in the U.S. and five distributors serviced approximately 100% of the FHS restaurants in the U.S. Additionally, some suppliers pay us rebates based on items purchased by franchisees.
In 2000, Burger King Corporation entered into long-term exclusive contracts with The Coca-Cola Company and Dr Pepper/Snapple, Inc. to supply BK restaurants with their products and which obligate restaurants in the U.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, 2019,2022, we estimate that it will take approximately 75.1 years to complete the Coca-Cola purchase commitment and approximately 108.8 years to complete the Dr Pepper/Snapple, Inc. purchase commitment. If these agreements were terminated, we would be obligated to pay an aggregate amount equal to approximately $376$268 million as of December 31, 20192022 based on an amount per gallon for each gallon of soft drink syrup remaining in the purchase commitments, interest and certain other costs. We have also entered into long-term beverage supply arrangements with certain major beverage vendors for the TH, PLK and PLKFHS brands in the U.S. and Canada.
Franchise Agreements and Other Arrangements
General. We grant franchisees the right to operate restaurants using our 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. OurIn Canada and the U.S., our TH franchise agreements grant us the right to reacquire a restaurant under certain circumstances, and our BK, PLKand PLKFHS franchise agreements generally haveprovide us 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. 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 10 years in the aggregate 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, TH 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 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.
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The typical BK and PLK franchise agreement in the U.S. and Canada has a 20-year term and contemplatesthe typical FHS agreement has a 10-year term, all of which contemplate a one-time franchise fee.fee plus an additional fee upon renewal. Subject to the incentive programs described below, most new BK franchise restaurants in the U.S. and Canada pay a royalty on gross sales of 4.5% and, most PLK restaurants in the U.S. and Canada pay a royalty on gross sales of 5.0% and most FHS restaurants in the U.S and Canada pay a royalty on gross sales of 6.0%. BK franchise agreements typically provide for a 20-year renewal term, and PLK franchise agreements typically provide for two 10-year renewal terms and FHS franchise agreements typically provide for four 5-year renewal terms. In addition, BK and PLK franchisees pay a technology fee on all digital sales through our proprietary technology and FHS franchisees pay an annual per restaurant information system fee.
In an effort to improve the image of our BK restaurants in the U.S., we offered U.S. franchisees reduced up-front franchise feesmatching funds with respect to certain restaurant upgrades and limited-termremodels. These franchisees can elect to pay an increased royalty and advertising fund rate reductionsin order to remodel restaurants to our modern image during 2017, 2018 and 2019 and wereceive a higher level of matching funds. We plan to continue to offer remodel incentives to U.S. franchisees during 2020.2023. These limited-term incentive programs are expected to negatively impact our effectivecash flow in the early years while in effect but increase the royalty rate until 2027.for a period following the remodel. However, we expect this impact to be partially mitigated as incentive programs granted in prior years will expirethat provided reductions to royalty and we will also be entering into new franchise agreements for BK restaurants in
International. Historically, we entered into franchise agreements for each BK restaurant in our international markets with up-front franchise fees and monthly royalties and advertising contributions typically of up to 5.0% of gross sales. However, asAs part of the international growth strategy for each of our brands, we have entered into master franchise agreements or development agreements that grant franchisees exclusive or non-exclusive development rights and, in some cases, allow them to sub-franchise or require them to provide support services to other franchisees in their markets. In 2019,2022, we entered into master franchise agreements for the PLK brand in Indonesia, New Zealand, Poland, the Czech Republic and Taiwan, for the BK brand in Poland, the Czech Republic and Romania, and for the TH brand in ThailandPakistan, and development agreements for the PLK brand in ChinaSingapore, Dominican Republic, Puerto Rico, Kazakhstan and Spain.Honduras. The up-front franchise fees, and royalty rate and advertising contributions paid by master franchisees or exclusive developers vary from country to country, depending on the facts and circumstances of each market. We expect to continue implementing similar arrangements for our brands in 20202023 and beyond.
Franchise Restaurant Leases. We leased or subleased 3,6463,531 properties to TH franchisees, 1,5421,364 properties to BK franchisees, and 8483 properties to PLK franchisees as of December 31, 20192022 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. In many cases, we will contribute toward the cost of remodels with the franchisees in connection with extensions of the underlying lease.
Intellectual Property
We own valuable intellectual property relating to our brands, including trademarks, service marks, patents, industrial designs, copyrights, trade secrets and other proprietary information, some of which are of material importance to our TH, BK, PLK and PLKFHS businesses. The duration of trademarks and service marks varies by country, however, trademarks and service marks generally are valid and may be renewed as long as they are in use and/or properly registered. We have established the standards and specifications for most of the goods and services used in the development, improvement and operation of our restaurants. These proprietary standards, specifications and restaurant operating procedures are our trade secrets. Additionally, we own certain patents and industrial designs of varying duration relating to equipment andand/or packaging used in BK and TH restaurants.
Information Systems and Digital Technology
Our corporate financial, human resources and similar systems are fully integrated across our brands and provide a solid foundation for our business. Our restaurant systems areWe began providing rPOS, a proprietary point-of-sale software solution, to a limited number of franchisees in BK and PLK restaurants in the U.S., Mexico and Germany, and we continue to enhance this product and work to expand its adoption. Alternatively, franchisees may utilize point of sale software provided by a set of approved third-party vendors that provide point of sale software.vendors. Depending on the region, theythese vendors may also provide labor scheduling, inventory, production management, and cash control services, and other services. We are in the process of rolling out in the US and Canadahave an architecture that enables us to build custom customer-facing applications and integrate them with our third-party providers, to support mobile ordering, web ordering, and kiosks. InAs of the future,end of 2022, we have deployed this architecture in the U.S., Canada, and several other jurisdictions, and we plan to deploy this architectureit to additional markets in the future.
We expanded our digital technologies and the use of our mobile apps continued to increase. We provide digital loyalty programs across all four brands in our home markets and offer our guests added convenience by offering third party and white label delivery at many of our home market restaurants. Further, we are modernizing the drive-thru experience with outdoor digital menu boards for TH, BK and PLK brands in their home markets. We plan to leverage our technology capabilities to continue to expand the choices for how customers order, pay and receive their food.
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Although many of our systems are provided through third parties, we have the ability to obtain transaction-level data from most of our franchised restaurants and from Company restaurants. Thisrestaurants, which allows us to assess how our new and existing products are performing around the world. Additionally, we have been investing to upgrade our supply chain systems and improve efficiency. We expect to continue to invest in technology capabilities to support and drive our business.
Competition
Each of our brands competes in the U.S., Canada and internationally with many well-established food service companies on the basis of product choice, quality, affordability, service and location. With 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, 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.stores, and (iv) new concepts, such as virtual brands and dark kitchens. Furthermore, delivery aggregators and other food delivery services provide consumers with convenient access to a broad range of competing restaurant chains and food retailers, particularly in urban areas.
Government Regulations and Affairs
General. We and our franchisees are subject to various laws and regulations including (i) licensing and regulation relating to health, food preparation, sanitation and safety standards, sustainability, and, for our distribution business, traffic and transportation regulations; (ii) information security, privacy and consumer protection laws; and (iii) other laws regulating the design, accessibility and operation of facilities, such as the Americans with Disabilities Act of 1990, the Accessibility 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 U.S., the United Kingdom and Spain. Certain 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 as well as in Ontario.
U.S. and Canada. Our restaurants 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.wages and efforts are currently underway to strengthen these laws in favor of the employee. In addition, we and our U.S. franchisees are subject to the Patient Protection and Affordable Care Act.
We are subject to federal franchising laws adopted by the U.S. Federal Trade Commission (the “FTC”) and state and 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 in nature to those affecting us and our franchisees in the U.S. and 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. 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 will have a material effect on our capital expenditures, financial condition, results of operations, or competitive position. Increased focus by U.S., Canadian and international governmental authorities on environmental matters is likely to lead to new governmental initiatives, particularly in the area of climate change. While we cannot predict the precise nature of these initiatives, we expect that they may impact our business both directly and indirectly. There is a possibility that government initiatives, or actual or perceived effect of changes in weather patterns, climate or water resources could have a direct impact on the operations of our brands in ways that we cannot predict at this time.
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Sustainability
We are committed to the simple principle of doing what’s right. Our “Restaurant Brands for Good” plan provides a framework for serving our guests the food and drinks they love while contributing to a sustainable future and having a positive social impact in the communities we serve. Our ongoing efforts will focus on three key pillars:
•Food - serving high quality and great tasting food every day;day with a focus on food safety, improving choice, nutrition, transparency, and ingredients;
•Planet - continuously reducingcontinuing to reduce our environmental footprint;footprint, with a focus on packaging and recycling, green buildings, and responsible sourcing; and
•People & Communities - supporting communities and enhancing livelihoods, with a focus on supporting communities, talent development, diversity and inclusion, ethics and human rights, and improving supplier livelihoods.
In September 2021, we announced targets to reduce greenhouse gas emissions by 50% by 2030, as approved by the Science Based Targets initiative, as well as a commitment to achieving net-zero emissions by 2050 or sooner. While most of the impact is from scope 3 emissions that are not under our direct control, reaching these targets will require us to devote resources to support changes by suppliers and franchisees.
The sustainability section of our corporate website sets forth our initiatives with respect to these pillars and will be updated periodically.periodically but is not incorporated into this Annual Report.
Seasonal Operations
Our restaurant sales are typically higher in the spring and summer months when the weather is warmer and typically lowest during the winter 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, 2019,2022, we had approximately 6,3006,400 employees, including approximately 2,100 corporate employees in our restaurant support centers regional offices,and serving our franchisees from the field, approximately 1,100 employees in our distribution centers and manufacturing facilities, field operations and approximately 3,200 employees in Company restaurants. Our franchisees are independent business owners sothat separately employ more than 500,000 team members in their restaurants.
We strive to create a workplace environment where our employees love coming to work each day; a place that is committed to inclusion, respect, accountability and doing what is right. While our board regularly receives updates from our People team, the compensation committee has oversight of our compensation program and the audit committee has been tasked with oversight of workforce management risks. Our People team is organized into four pillars that focus on attracting, retaining, developing and rewarding top talent.
The cycle starts with attracting talent from campus and professional sources, leveraging technology to identify and assess candidates who best fit our roles. As part of our hiring process, we have committed that at least half of all final-round candidates interviewing for roles with our four RBI restaurant support centers will be from groups that are notdemonstrably diverse, including gender, race and sexual orientation, based on the composition and requirements of the applicable jurisdiction. Since our commitment, we have meaningfully exceeded that target, leading to an increase in diverse hires. In 2022, RBI hired approximately 670 new corporate employees, 5,800 new restaurant employees, and 430 new distribution and manufacturing employees. Each population segment has a dedicated onboarding program designed to get employees up to speed quickly, and foster a smooth transition into the workplace.
The retention efforts focus on work environment, employee engagement and our diversity and inclusion initiatives. We regularly conduct anonymous surveys to seek feedback from our restaurant support center employees on a variety of topics, including our sustainability and diversity initiatives, flexible work policies, the support they receive from their managers, and what types of learning and development opportunities they would like to have offered. Our executive Steering Committee monitors progress across key indicators such as representation, engagement, and retention to guide strategies for promoting diversity and inclusion. To ensure that the work of the Steering Committee is fully integrated, we have dedicated team members within the people and legal teams to implement initiatives in this space. These initiatives include company-wide implicit bias training, internal events featuring eminent speakers, sponsorship and mentorship opportunities for identity-based groups. We also leverage designated subject matter experts across each of our brands to ensure accountability and consistent execution of priorities company-wide with regards to marketing, suppliers, franchisees, and community engagement.
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Developing talent includes evaluation, training, career planning and leadership development. We have a rigorous talent assessment process for restaurant support center employees built on specific competencies that we assess at both the employee and job level. This data allows us to more easily identify potential successors and illuminate potential opportunities for our employees in a more objective and unbiased way. Additionally, to help our employees and thereforefranchisee’s team members succeed in their roles, we emphasize continuous training and development opportunities. These include, but are not includedlimited to, safety and security protocols, updates on new products and service offerings and deployment of technologies. In 2022, we conducted management and leadership training, including problem solving, feedback sessions, data analysis and spot learning opportunities to address specific business needs. We also brought back our brand service days, which allow corporate employees to work in our restaurants in a structured way that enables a better link between the corporate strategies we make and the operational deployment of them at the restaurant level. We launched a formal mentoring program in 2022, connecting employees from our restaurant support centers around the world to facilitate career growth and development opportunities.
Our approach to rewarding talent is through a combination of compensation, recognition, wellness and benefits. We are committed to providing market-competitive pay and benefits, affirming our pay for performance philosophy while balancing retention risk. Restaurant support center and distribution employees are eligible for performance-based cash incentive programs. Each incentive plan reinforces and rewards individuals for achievement of specific business goals. All employees are also able to access telemedicine with no copay, as well as a 24/7 Employee Assistance Program. For corporate office and field-based employees, we offer a leading parental leave policy.
Underpinning all of these initiatives is a strong reliance on data. We leverage our people analytics team and human capital management system to assess our achievements in each of our four pillars to identify areas for improvement. A team of experienced People Business Partners work closely with their client groups to provide counsel on people issues and help roll out people initiatives directly to employees.
While much of the work mentioned above relates to our corporate workforce, we also have adopted employee count.guidelines and policies applicable to our restaurant employees and encourage our franchisees to adopt similar guidelines and policies.
Philanthropic Foundations
RBI is committed to strengthening and giving back to the communities we serve through our brand foundations and by supporting local programs and issues that are close to our guests’ hearts. To date, our philanthropic foundations include:
The Burger King Foundation: Established in 2005, the Burger King Foundation creates brighter futures by empowering individuals and feeding potential through education and emergency relief. As of December 31, 2022, the Burger King Foundation is active in 42 countries around the world. Since its inception, over 250,000 children and families have been supported through educational programs and employee emergency relief grants, with the Burger King Scholars Program awarding over $55 million in scholarship funds alone.
Tim Hortons Foundation Camps and Smile Cookie Initiative: Created in 1974, Tim Hortons Foundation Camps are helping youth aged 12-16 from disadvantaged circumstances discover the strengths within themselves. Through December 31, 2022, the Tim Hortons Foundation’s annual Camp Day has raised over C$237 million and has sent more than 300,000 youth to a multi-year camp-based program at one of seven Tims Camps in Canada and the United States. In addition, Tim Hortons’ annual Smile Cookie initiative is empowering restaurant owners to sell special Smile Cookies for a full week and donate 100% of the proceeds. Since the first-ever Smile Cookie campaign in 1996, this charitable campaign has raised more than C$92 million for local charities, hospitals, and community programs.
The Popeyes Foundation: The mission of the Popeyes Foundation is to strengthen communities with food and support in times of need. The Popeyes Foundation contributes to communities through third-party initiatives and has provided $1.7 million and over 4 million meals to children in local communities since 2018. The Foundation additionally supports the Popeyes family directly through the Popeyes Foundation Family Fund. This fund supports U.S. employees who may be victims of natural disasters or other emergency hardship situations. Since 2017 through December 31, 2022, 530 Popeyes team members have been helped through close to $500,000 in grants through the fund.
Firehouse Subs Public Safety Foundation: Firehouse Subs was founded by two brothers and former firefighters in 1994 and was built on a passion for hearty and flavorful food, heartfelt service, and public safety. In 2005, the Firehouse Subs founders established the non-profit Firehouse Subs Public Safety Foundation in the aftermath of Hurricane Katrina. Since that day through December 31, 2022, a portion of every purchase goes to the Firehouse Public Safety Foundation which has granted $73 million to provide lifesaving equipment, training, and support to first responders and public safety organizations.
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Available Information
We make available free of charge on or through the Investor Relations section of our internet website at www.rbi.com, all materials that we file electronically with the Securities and Exchange Commission (the “SEC”), including this annual reportAnnual 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 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, Nominating and Corporate Governance Committee, Conflicts Committee and Operations and StrategyConflicts Committee of the board of directors of RBI are posted in the Investor Relations section of RBI’s website at www.rbi.com.
Our principal executive offices are located at 130 King Street West, Suite 300, Toronto, Ontario M5X 1E1, Canada. Our telephone number is (905) 339-6011.
Item 1A. Risk Factors
Risks Related to Our Business Operations
We face intense competition in our markets, which could negatively impact our business.
The restaurant industry is intensely competitive and we compete with many well-established food service companies on the basis of product choice, quality, affordability, service and location. With 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, and new competitors, such as virtual brands and dark kitchens, may emerge at any time. Furthermore, delivery aggregators and food delivery services provide consumers with convenient access to a broad range of competing restaurant chains and food retailers, particularly in urbanized areas.areas, and may form a closer relationship with our customers and increase costs. Each of our brands also competes for qualified franchisees, suitable restaurant locations and management and personnel.
Our ability to compete will depend on the success of our plans to effectively respond to consumer preferences, improve existing products, to develop and roll-out new products, 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, loyalty programs, 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 implement their operational strategies more quickly or effectively than we can or benefit from changes in technologies, which could harm our competitive position. These competitive advantages may be exacerbated in a difficult economy, thereby permitting our competitors to gain market share. There canWe may be no assurance that we will be ableunable to successfully respond to changing consumer preferences, including with respect to new technologies and alternative methods of delivery. In addition, online platforms and aggregators may direct potential customers to other options based on paid placements, online reviews or other factors. 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.
We depend in large part on the value of the TH, BK, PLK and PLKFHS 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 products and our business practices.practices, including with respect to animal welfare, sustainability and other environmental or social concerns. 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. 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 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 impactand 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, inflation, and, ultimately, consumer confidence. A protracted economic slowdown, increased unemployment and underemployment of our customer base, decreased salaries and wage rates, inflation, 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 governmentalGovernmental or other responses to economic challenges willmay be unable to restore or maintain consumer confidence. As a result of
Our substantial leverageresults can be adversely affected by unforeseen events, such as adverse weather conditions, natural disasters, war or terrorist attacks, pandemics, such as the COVID-19 pandemic, or other catastrophic events.
Unforeseen events, such as adverse weather conditions, natural disasters or catastrophic events, can adversely impact restaurant sales. Natural disasters such as earthquakes, hurricanes, and obligationssevere 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, cause damage to or closure of restaurants and result in lost opportunities for our restaurants.
For example, measures implemented to reduce the spread of COVID-19 adversely affected workforces, customers, consumer sentiment, supply chains, economies and financial markets, and, along with decreased consumer spending, led to an economic downturn and increased inflation in many of our markets. As a result of COVID-19 and resulting labor challenges, we and our franchisees have experienced store closures and instances of reduced store-level operations, including reduced operating hours and dining-room closures. While markets have reopened, local conditions and new variants have and may again lead to closures or increased limitations. As a result of COVID-19, restaurant traffic and system-wide sales have been and may continue to be significantly negatively impacted.
We cannot predict the effects that actual or threatened armed conflicts such as the war in Ukraine, 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 are fixed or semi-fixed in nature, the loss of sales and increases in labor, energy and commodity costs during these periods hurt our and our franchisees’ operating margins and can result in restaurant operating losses and our loss of royalties.
Our results depend on effective marketing and advertising, successful new products launches and digital engagement.
Our revenues are heavily influenced by brand marketing and advertising and by our ability to develop and launch new and innovative products. If our marketing and advertising programs are not successful, or we fail to develop commercially successful new products, our ability to attract new guests and retain existing guests and our results of operations could be materially adversely affected. Because franchisees contribute to advertising funds based on a percentage of gross sales at their franchise restaurants, advertising fund expenditures generally are dependent upon restaurant sales volumes. If system-wide sales decline, amounts available for our marketing and advertising programs will be reduced. Also, to the extent we use value offerings in our marketing and advertising programs to drive traffic, the low price offerings may condition our guests to resist higher prices in a more favorable economic environment.
In addition, we continue to focus on transforming the restaurant experience through technology and digital engagement to improve our service model and strengthen relationships with customers, including through digital channels, loyalty initiatives, mobile ordering and payment systems and delivery initiatives. These initiatives may not have the anticipated impact on our debtfranchise sales and therefore we may not fully realize the intended benefits of these significant investments. Also, utilizing third-party delivery services may not be as profitable as sales directly to our guests and may also introduce food quality and customer satisfaction risks outside of our control.
The global scope of our business subjects us to risks and costs and may cause our profitability to decline.
Our global operations expose us to risks in managing the differing cultural, regulatory, geopolitical and economic environments in the countries where our restaurants operate. These risks, which can vary substantially by market and may increase in importance as our franchisees expand operations in international markets, are described in many of the risk factors discussed in this report 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 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 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 or anti-Canadian sentiment and social and ethnic unrest in the countries in which we operate;
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•the risks of operating in developing or emerging markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws, regulations, 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;
•the impact of labor costs on our franchisees' margins given changing labor conditions and difficulties experienced by our franchisees in staffing their international operations; and
•the effects of increases in the taxes we pay and other changes in applicable tax laws.
The conflict between Russia and Ukraine may continue to adversely impact economic conditions in Europe and elsewhere including through increased commodity, labor and energy costs that may adversely affect us and our franchisees’ restaurants.
Our operations are subject to fluctuations in foreign currency exchange and interest rates.
Because our reporting currency is U.S. dollars, the operations of TH, BK, PLK and FHS that are denominated in currencies other than the U.S. dollar are translated to U.S. dollars for our financial reporting purposes and are impacted by fluctuations in currency exchange rates and changes in currency regulations. In addition, fluctuations in interest rates may affect our business. Although we attempt to minimize these risks through geographic diversification and the utilization of derivative financial instruments, our risk management strategies may not be effective and our results of operations could be adversely affected.
Increases in food, equipment and commodity costs or shortages or interruptions in supply or delivery thereof could harm our operating results and the results of our franchisees.
The profitability of our franchisees and us depends in part on our ability to anticipate and react to changes in food, equipment 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 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, the markets for beef and chicken are subject to significant price fluctuations due to seasonal shifts, climate conditions, the cost of grain, disease, industry demand, international commodity markets, food safety concerns, product recalls, government regulation, labor availability and cost and other factors, all of which are beyond our control and, in many instances unpredictable. Such increases in commodity costs may materially and adversely affect our business and operating results.
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 or equipment caused by unanticipated demand, natural disasters or unforeseen events, such as the COVID-19 pandemic, problems in production or distribution, inclement weather, delays or restrictions on shipping and/or manufacturing, closures of supplier or distributor facilities, financial distress or insolvency of suppliers or distributors or other conditions have and in the future could adversely affect our business.
Our supply chain operations 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 TH restaurants. Risks associated with this strategy include:
•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 markets;expenditures and overhead;
•inclement weather or extreme weather events;
•shortages or interruptions in 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 (such as from cybersecurity incidents) in our or our suppliers’ manufacturing and/or warehousing plants, facilities, or equipment.
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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, interruptions in the availability and delivery of food, beverages and other supplies to our restaurants arising from shortages or greater than expected demand, may increase costs or reduce revenues. As of December 31, 2022, we have only one or a few suppliers to service each category of products sold at a competitive disadvantageour TH restaurants, and the loss of any one of these suppliers would likely adversely affect our business.
We and our franchisees may be unable to secure desirable restaurant locations to maintain and grow our restaurant portfolios.
The success of any restaurant depends in substantial part on its location. Neighborhood or economic conditions where our restaurants are located could decline in the future as compareddemographic patterns change, resulting in potentially reduced sales in those locations. Competition for restaurant locations can also be intense and there may be delays or cancellation of new site developments by developers and landlords, which may be exacerbated by factors related to certainthe 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, difficulty negotiating leases with acceptable terms, onerous land use or zoning restrictions, or challenges in securing required governmental permits, then their ability to execute their respective growth strategies may be adversely affected.
Based on their size advantage and/or their greater financial resources, some of our competitors who are not as highly leveraged;
Food safety concerns and concerns about the health risk of fast food may adversely affect 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 and other food safety issues have occurred in the food industry in the past and could occur in the future. Also, our reliance on third-party food suppliers, distributors and food delivery aggregators 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. 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 sales and profits. Such occurrence at restaurants of competitors could adversely affect sales as a result of negative publicity about the 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 costs and/or lower margins for us and our franchisees. In addition, the COVID-19 pandemic has resulted in stricter health regulations and guidelines, which have increased operating costs for our franchisees.
Some of our products 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 these compounds can lead to a variety of adverse health effects. An unfavorable report on the health effects of any compounds present in our products, or negative publicity or litigation arising from other health risks such as obesity, could significantly reduce the demand for our beverages and food products. A decrease in customer traffic as a result of these health concerns or negative publicity could materially and adversely affect our brands and our business.
If we are unable to adequately protect our intellectual property, the value of our brands and our business may be harmed.
Our brands, which represent approximately 46% of the total assets on our balance sheet as of December 31, 2022, are very important to our success and our competitive position. We rely on a combination of trademarks, copyrights, service marks, trade secrets, patents, industrial designs, and other intellectual property rights to protect our brands and the respective branded products. While we have registered certain trademarks in Canada, the U.S. 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 U.S. and other countries may not be adequate 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. In these cases, our proprietary rights could be challenged, circumvented, infringed or invalidated. 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. 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 U.S.
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Changes in regulations may adversely affect restaurant operations and our financial results.
Our 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 have enacted and may enact laws, rules or regulations that impact restaurant operations and may increase the cost of doing business. In developing markets, we face the risks associated with new and untested laws and judicial systems. If we fail to comply with existing or future laws, we may be subject to governmental fines and sanctions.
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 an 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 indebtedness on favorable terms, or at all. An inabilitybusiness and operating results. We could also face lawsuits by franchisees based upon alleged violations of these laws.
If we are unable to generate sufficient cash flow or refinanceeffectively manage the risks associated with our indebtedness on favorable termscomplex regulatory environment, it could have a material adverse effect on our business and financial condition.
We, our franchisees and activitiesour 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 and social sustainability matters, such as packaging and waste, animal health and welfare, deforestation and land use. Also, we face increased pressure to make commitments, set targets, provide expanded disclosure and establish additional goals and take actions to meet them which could expose us to market, operational and execution costs or risks. Addressing environmental and social sustainability matters requires system-wide coordination and alignment, and the standards by which these matters are measured are evolving and subject to assumptions that could change over time.
Climate change may be in our interest. In addition, our ability to comply with these covenants and restrictions may be affected by events beyond our control.
Outsourcing certain functions to third-party vendors subjects us to risks, including disruptions and increased costs.
We have outsourced certain administrative functions for our business, certain information technology support services and benefit plan administration to third-party service providers. In the future, we may be requiredoutsource other functions to repay our credit facilities, or offer to repurchaseachieve cost savings and efficiencies. If 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.
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Risks Related 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.Our Fully Franchised Business Model
Our fully franchised business model presents a number of disadvantages and risks.
Our fully franchised business model presents a number of other drawbacks, such as limited influence over franchisees, limited ability to facilitate changes in restaurant ownership, limitations on enforcement of franchise obligations due to bankruptcy or insolvency proceedings and reliance 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. On occasion we have encountered, and may in the future encounter, challenges in receiving specific financial and operational results from our franchisees in a consistent and timely manner, which can negatively impact our business and operating results.
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 or otherwise do not devote sufficient resources to develop new restaurants or reinvest in existing restaurants, our business and financial results could be adversely affected. Also, investments in restaurant remodels and upgrades by franchisees and us may not have the expected results with respect to consumer sentiment, increased traffic or return on investment.
Our franchisees are also dependent upon their ability to attract and retain qualified employees in an intensely competitive employeelabor 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 ourindependent franchisees, who are independent operators, and we have limited influence over their restaurant operations.
We generate revenues in the form of royalties, fees and other amounts from our franchisees. As a result,franchisees and our operating results are closely tied to the success of our franchisees.their success. However, our franchisees are independent operators and we cannot control many factors that impact the profitability of their restaurants. At times, we have and may in the future provide cash flow support to franchisees by extending loans, advancing cash payments and/or providing rent relief where we have property control. These actions have and may in the future adversely affect our cash flow and financial results.
If sales trends or economic conditions worsen for franchisees, their financial results may deteriorate, which could result in, among other things, restaurant closures,closures; delayed or reduced payments to us of royalties, advertising contributions, rents and, in the case of the TH brand, delayed or reduced payments for TH products and supplies,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,Also, 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.
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Labor challenges for franchisees or we may fail to develop commercially successful new products, which may lead us to fail to attract new guests and retain existing guests, which, in turn,being liable as a joint employer could materially and adversely affect our resultsbusiness.
The inability of operations. Moreover, becauseour franchisees contribute to advertising funds basedrecruit and retain qualified individuals or increased costs to do so, including due to labor market dynamics or increases in legally required wages, may delay openings of new restaurants by our franchisees and could adversely impact existing franchise restaurant operations and franchisee profitability, which could slow our growth. If employees at either franchisee or company restaurants become unionized, their or our business could be negatively affected by factors that increase cost, decrease flexibility or otherwise disrupt the business. Responses to labor organizing efforts by our franchisees or us could negatively impact brand perception and our business and financial results. In September 2022, California passed legislation establishing a council to set sector-wide standards on a percentage of gross sales at their franchise restaurants, 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 marketingwages, hours and advertising programs. Furthermore,working conditions related to the extenthealth, safety and welfare of fast food restaurant workers; although a voter referendum blocked the new law, the potential referendum challenge is set to be on the ballot in 2024. This law and other labor related laws enacted or currently proposed at the federal, state, provincial or local level could increase our and our franchisees’ labor costs and decrease profitability.
Joint employer status is a developing area of franchise and labor and employment law that could be subject to changes in legislation, administrative agency interpretation or jurisprudential developments that may increase franchisor liability in the future. In September 2022, the National Labor Relations Board proposed a new rule that would allow a party asserting a joint-employment relationship to establish joint-employer status by using evidence of indirect and reserved forms of control bearing on an employee’s essential terms and conditions of employment. If this broader standard were to be adopted, which is likely, we use value offeringscould potentially be liable for unfair labor practices and other violations by franchisees or we could be required to conduct collective bargaining negotiations regarding employees of franchisees, who are independent employers. In such event, our operating costs may increase as a result of required modifications to business practices, increased litigation, governmental investigations or proceedings, administrative enforcement actions, fines and civil liability. Employee claims that are brought against us as a result of joint employer standards and status may also, in addition to legal and financial liability, create negative publicity that could adversely affect our marketingbrands and advertising programs to drive traffic,divert financial and management resources. A significant increase in the low price offerings may condition our guests to resist higher prices in a more favorable economic environment.
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 each 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 (oror may never do so).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.
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, to accelerate international growth. 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.countries, including, in some cases, the right to sub-franchise. A joint venture partnership involves special risks, including the following: our joint venture partners may 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. While sub-franchisees are required to operate their restaurants in accordance with specified operations, safety and health standards, we are not party to the agreements with the sub-franchisees and are dependent upon our master franchisees 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 and the sub-franchisee. In addition, the termination of an arrangement with a master franchisee or a lack of expansion by certain master franchisees couldhas and may in the future 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.
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Risks Related to our Indebtedness
Our substantial leverage and obligations to service our debt could adversely affect our business.
As of December 31, 2022, we had aggregate outstanding indebtedness of $13,045 million, including senior secured term loan facilities in an aggregate principal amount of $6,440 million, senior secured first lien notes in an aggregate principal amount of $2,800 million and senior secured second lien notes in an aggregate principal amount of $3,650 million. 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 our debt service, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, acquisitions, joint ventures, product research, dividends and distributions, unit and RBI share repurchases or other corporate purposes;
•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 who 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 for variable interest rate borrowings under our credit facilities;
•the discontinuation of the London Interbank Offered Rate (“LIBOR”) after June 2023 and the replacement with an alternative reference rate may adversely impact our interest rates and our interest rate hedging strategy;
•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.
If we are unable to effectively manage our growth, it could adversely affect our business and operating results.
Our success is dependent on securing desirable restaurant locations for each of our brands, and competition for these locations may impactindebtedness limits our ability to effectively grow our restaurant portfolios.take certain actions and could delay or prevent a future change of control.
The success of any restaurant depends in substantial part on its location. There can be no assurance that the current locationsterms 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 cancellationindebtedness include a number 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,restrictive covenants that, among other things, higher than anticipated acquisition, construction and/or development costs of new restaurants, difficulty negotiating leases with acceptable terms, onerous land use or zoning restrictions, or challenges in securing required governmental permits, then theirlimit our ability to execute their respective growth strategiesincur 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; make intercompany transactions; and enter into transactions with affiliates. These limitations may hinder our ability to finance future operations and capital needs and our ability to pursue business opportunities and activities that may be adversely affected.
A breach of the applicable 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.
Following the occurrence of either an event of default or change of control, we may not have sufficient resources to repurchase, repay or redeem our obligations, as applicable, and we may not be able to obtain additional financing to satisfy these obligations on alleged adverse health impactsterms favorable to us or at all. Also, if we were unable to repay the amounts due under our secured indebtedness, the holders of consumptionsuch indebtedness could proceed against the collateral that secures such indebtedness. In the event our creditors accelerate the repayment of various food products. An unfavorable report on the health effects of caffeine or other compounds present in our products, or negative publicity or litigation arising from other health risks such as obesity, could significantly reduce the demand for our beverages and food products. A decrease in customer traffic as a result of these health concerns or negative publicity could materially and adversely affect our brandssecured indebtedness, we and our business.
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 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, 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 and/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. 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 theThe Canada Revenue Agency (the “CRA”), the U.S. Internal Revenue Service (the “IRS”) and/or foreign tax authorities willmay not 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 result in us not being 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 have a material adverse effect on our effective income tax rate, income tax provision, net income (loss) or cash flows in the period or periods for which that determination is made.
Future changes to Canadian, U.S. and non-U.S.other foreign tax laws, including future regulations and other interpretive guidance of such tax laws, could materially affect PartnershipRBI and/or RBI, including their status as foreign entities for U.S. federal income tax purposes,Partnership, and adversely affect their anticipated financial positions and results.
The 2021 Canadian Federal Budget proposed various tax law changes, including a new limitation on the deductibility of interest and similar expenses; revised draft legislation was released on November 3, 2022, deferring the proposed effective date to taxation years beginning on or after October 1, 2023. In general, the draft legislation proposes to limit the deductibility of interest and other financing-related expenses to the rules in sections 385extent that such expenses, net of interest and 7874financing-related income, exceed a fixed ratio of the Code orentity’s tax EBITDA, with a specified carry-back limit and an indefinite carry-forward limit. The proposed rules and their application are complex and could materially increase our future income taxes if enacted, adversely impacting our effective tax rate and financial results.
The Inflation Reduction Act of 2022 (“IRA”) in the U.S. contains provisions that were effective January 1, 2023, including a 15% corporate alternative minimum tax based on adjusted financial statement income. While we do not currently expect the IRA to have a material impact on our financial statements, we will continue to evaluate its effect as further guidance becomes available. In addition, the U.S. Treasury Regulations promulgated thereunder, or otherhas broad authority to issue regulations and interpretative guidance with respect to existing and new tax laws that may significantly impact how such laws are applied. A number of currently contemplated tax law changes in law,if enacted could materially adversely affect our and/or Partnership’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,cash taxes and any such changes could have prospective or retroactive application to us and/or Partnership. It is presently uncertain whether any such legislative proposals will be enacted into law and, if so, what impactfinancial results.
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December 31, 2019. We believe that2023. The OECD has issued model rules with respect to various aspects of such proposed changes and ongoing public consultation with additional guidance expected. The implementation, timing and many details regarding such potential tax law changes remain uncertain as individual countries evaluate and pursue their respective approaches to enacting the principles underlying such model rules. Such global tax developments could materially increase our brands are very important tofuture income taxes if enacted, adversely impacting our successeffective tax rate and our competitive position. We rely on a combination of trademarks, copyrights, service marks, trade secrets, patents, industrial designs, 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 applications pending registration in the 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 U.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 U.S.
The personal information that we collect may be vulnerable to breach, theft, or loss that could adversely affect our reputation, results of operations, 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 and their employees, vendors, contractors, 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. For example, in 2019,In recent years we expanded our development and management of our brands’ mobile apps, online ordering platforms, and in-restaurant kiosks.kiosks and started to provide point-of-sale software. While our deployment of such technology facilitates our primary goals of generating both incremental sales and improving operations at our franchisees’ restaurants as well as additional customer awareness and interest in our brands, such deployment also means that we are collecting and responsible forentrusted with additional personal information about our customers. In Canada, we have been the subject of government investigation and purported class action lawsuits based on the use of certain geolocation data for TH mobile app users. Negative publicity regarding these matters or future concerns could adversely affect our reputation and our brands. Some of this personal information is also held and managed by our franchisees, including master franchisees, and certain of our vendors.vendors, and in these cases the franchisee or vendor is responsible for complying with local laws (including applicable data privacy laws) and adequately securing the data. A third-party may be able to circumvent the security and business controls that we, our vendors, our franchisees, or our franchisees' vendors use to limit access and use of personal information, which could result in a breach of employee, consumer, or franchisee privacy.
A major breach, theft, or loss of the personal information regarding our employees and their families, our franchisees, vendors, or consumersdescribed above that is held by us, our vendors, our franchisees, or our franchisees' vendors could adversely affect our reputation and restaurant operations as well as result in substantial fines, penalties, indemnification claims, and potential litigation against us which could negatively impact our results of operations and financial condition. We are subject to risks related with non-compliance of privacy and data protection laws and regulations. For example, under the European Union adopted theUnion's General Data Protection Regulation (“GDPR”) that became effective in May 2018, which requires, companies tomust meet certain requirements regarding the handling of personal data. Failure to meet GDPR requirements could result indata or face penalties of up to 4% of worldwide revenue. Furthermore, the collection and safeguarding of personal information has increasingly attracted enhanced scrutiny from the general public in the United States and Canada, which has resulted in additional actual and proposed legislative and regulatory rules at both the federal, provincial and state levels (e.g., the California Consumer Privacy Rights Act of 2018)2020, Canada's Bill C-11 and Quebec’s Bill-64). These regulations as well as their interpretation and criteria for enforcement, continue to be subject to frequent change, and there may be other jurisdictions that propose or enact new or emerging data privacy requirements in the future. As a result of such 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, or misuse of personal data, even if no breach has been attempted or has occurred, canhas and in the future may lead to investigations and litigation and may 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 efforts and 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, cause reputational harm, subject us to increased operating costs and expose us to litigation.
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 or our vendors' technology systems were to fail or become subject to ransomware and we were unable to recover in a timely way, we could experience an interruption in our operations. Furthermore, if unauthorized access to or use of our or our vendors' systems were to occur, data related to our
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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 due to human error.
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 thatthose 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, 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 as 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.worldwide. To the extent that we are not able to obtain transparency into our operations from our systems and manual estimations and effectively manage the information demands associated with significant growth, it could impair the ability of our management to react quickly to changes in the business or economic environment.
Risks Related to our Partnership Exchangeable Units
3G RBH owns approximately 32%29% of the combined voting power with respect to RBI, and its interests may conflict with or differ from the interests of the other shareholders.equity holders.
3G Restaurant Brands Holdings LP (“3G RBH”) currently owns approximately 90%93% of the Partnership exchangeable units and approximately 32%29% 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 global investment firm (“3G Capital”). 3G Capital is in the business of making investments in companies and may from time to time in the future pursue opportunities, 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, asAs a result, those acquisition opportunities may not be available to us.
A unitholder’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 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. For example, RBI or Partnership, as applicable, may issue these securitiesunits, including 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 of RBI shareholders or our unitholders. Issuances of RBI common shares or Partnership exchangeable units would reduce the influence of holders of RBI common shares and Partnership exchangeable units over matters on which they are entitled to vote.
An active trading market for Partnership exchangeable units may not be sustained.sustained and they may not trade equally with RBI common shares.
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
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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.
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.
The RBI common shares for which Partnership exchangeable units may be exchanged may be subject to significant fluctuations in value for many reasons, including:
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.
The Limited 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.
General Risks
The loss of key management personnel or our inability to attract and retain new qualified personnel could hurt our business.
We are dependent on the efforts and abilities of our senior management, including the executives managing each 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. Also, integration of strategic transactions such as the acquisition of Firehouse Subs may divert management’s attention from other initiatives, and effectively executing our growth strategy.
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We have been, and in the future may be, subject to litigation that could have an adverse effect on our business.
We are regularly involved in litigation including related to disputes with franchisees, suppliers, employees, team members, and customers, as well as disputes over our advertising claims about our food and over our intellectual property. See the discussion of Legal Proceedings in Note 17, “Commitments and Contingencies,” to the Consolidated Financial Statements included in Item 8 of this Form 10-K. 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. Also, 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. 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. Should management’s evaluation of our current exposure to legal matters pending against us 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 financial condition or results of operations may be adversely affected.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters is located in Toronto, Ontario and consists of approximately 65,000 square feet which we 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, Singapore and Singapore.Jacksonville, Florida. Related to the TH business, we own five distribution centers and own two manufacturing plants throughout Canada. In addition to our corporate headquarters in Toronto, Ontario, we lease one office and one cross-docking facility in Canada and lease one manufacturing plant in the U.S. In 2018, we announced plans to build two new distribution centers in Western Canada, to replace two existing distribution centers, 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.
As of December 31, 2019,2022, our restaurant footprint was as follows:
| TH | BK | PLK | FHS | Total | |||||||||||||||||||||||||
| Franchise Restaurants | |||||||||||||||||||||||||||||
| Sites owned by us and leased to franchisees | 767 | 648 | 38 | — | 1,453 | ||||||||||||||||||||||||
| Sites leased by us and subleased to franchisees | 2,764 | 716 | 45 | — | 3,525 | ||||||||||||||||||||||||
| Sites owned/leased directly by franchisees | 2,062 | 18,375 | 3,967 | 1,203 | 25,607 | ||||||||||||||||||||||||
| Total franchise restaurant sites | 5,593 | 19,739 | 4,050 | 1,203 | 30,585 | ||||||||||||||||||||||||
| Company Restaurants | |||||||||||||||||||||||||||||
| Sites owned by us | 1 | 16 | 10 | — | 27 | ||||||||||||||||||||||||
| Sites leased by us | 6 | 34 | 31 | 39 | 110 | ||||||||||||||||||||||||
| Total company restaurant sites | 7 | 50 | 41 | 39 | 137 | ||||||||||||||||||||||||
| Total system-wide restaurant sites | 5,600 | 19,789 | 4,091 | 1,242 | 30,722 | ||||||||||||||||||||||||
| TH | BK | PLK | Total | ||||||||
Franchise Restaurants(1) | |||||||||||
| Sites owned by us and leased to franchisees | 763 | 691 | 36 | 1,490 | |||||||
| Sites leased by us and subleased to franchisees | 2,883 | 851 | 48 | 3,782 | |||||||
| Sites owned/leased directly by franchisees | 1,264 | 17,244 | 3,191 | 21,699 | |||||||
| Total franchise restaurant sites | 4,910 | 18,786 | 3,275 | 26,971 | |||||||
| Company Restaurants | |||||||||||
| Sites owned by us | 6 | 16 | 10 | 32 | |||||||
| Sites leased by us | 16 | 36 | 31 | 83 | |||||||
| Total company restaurant sites | 22 | 52 | 41 | 115 | |||||||
| Total system-wide restaurant sites | 4,932 | 18,838 | 3,316 | 27,086 | |||||||
We believe that our existing headquarters and other leased and owned facilities are adequate to meet our current requirements.
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
Not applicable.
Part II
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 the TSX under the ticker symbol “QSR”. As of February 10, 2020,14, 2023, there were 5043 holders of record of Partnership exchangeable units.
On February 10, 2020,14, 2023, we announced that the RBI board of directors had declared a cash dividend of $0.52$0.55 per RBI common share for the first quarter of 2020.2023. The dividend will be paid on April 3, 20205, 2023 to RBI common shareholders of record on March 16, 2020.22, 2023. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.52$0.55 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.
RBI is targeting a total of $2.08$2.20 in declared dividends per common share and distributions in respect of each Partnership exchangeable unit for 2020.2023.
We do not have a formal dividenddistribution policy. However, pursuant to the partnership agreement, RBI, as our general partner, must cause us to make distributions 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.
Although RBI’s board of directors declared a cash distribution on Partnership exchangeable units for each quarter of 2022 and for the first quarter of 2023, any future distributions on Partnership exchangeable units will be determined at the discretion of RBI’s board of directors and will depend upon results of operations, financial condition, contractual restrictions, including the terms of the agreements governing our debt and any future indebtedness we may incur, restrictions imposed by applicable law and other factors that RBI’s board of directors deems relevant. Although we are targeting a total of $2.20 in declared distributions per Partnership exchangeable unit for 2023, there is no assurance that we will achieve our target total distributions for 2023 and satisfy our debt service and other obligations.
Issuer Purchases of Equity Securities
We distributed to RBI $326 million and $551 million during 2022 and 2021, respectively, to repurchase RBI common shares.
During 2019,2022, we received exchange notices representing 42,016,3921,996,818 Partnership exchangeable units, including 22,623301,959 during the fourth quarter of 2019.2022. Pursuant to the terms of the partnership agreement, we satisfied the exchange notices by exchanging the Partnership exchangeable units for the same number of newly issued RBI common shares. During 2018 and 2017,2021, we received exchange notices representing 10,185,333 and 9,286,48010,119,880 Partnership exchangeable units respectively. Weand satisfied the exchange notices by exchanging the Partnership exchangeable units for the same number of newly issued RBI common shares. During 2020, we received exchange notices representing 10,393,861 Partnership exchangeable units. Pursuant to the terms of the partnership agreement, we satisfied the exchange notices by repurchasing 10,000,000 and 5,000,0006,757,692 Partnership exchangeable units for approximately $561 million and $330$380 million in cash during 2018 and 2017, respectively, and exchanging the remaining Partnership exchangeable units for the same number of newly issued RBI common shares. 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'sRBI common shares on the NYSE for the 20 consecutive trading days ending on the last business day prior to the exchange date. Upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit was automatically deemed cancelled concurrently with such exchange.
Stock Performance Graph
The following graph depicts the total return to the holders of Partnership exchangeable units from December 31, 20152017 through December 31, 2019,2022, relative to the performance of the Standard & Poor’s/TSX Composite Index and the Standard & Poor’s/TSX Capped Consumer Discretionary Index, a peer group. The graph assumes an investment of $100 in Partnership exchangeable units and each index on December 31, 20152017 and the reinvestment of distributions paid since that date. The price performance shown in the graph is not necessarily indicative of future price performance.
| 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | ||||||||||||||||||||||||||||||
| Restaurant Brands International Limited Partnership (TSX) | $ | 100 | $ | 96 | $ | 116 | $ | 112 | $ | 115 | $ | 134 | |||||||||||||||||||||||
| S&P/TSX Composite Index (C$) | $ | 100 | $ | 91 | $ | 112 | $ | 118 | $ | 148 | $ | 139 | |||||||||||||||||||||||
| S&P/TSX Capped Consumer Discretionary Index (C$) | $ | 100 | $ | 84 | $ | 97 | $ | 115 | $ | 138 | $ | 130 | |||||||||||||||||||||||
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| 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | ||||||||||||||||||
| Restaurant Brands International Limited Partnership (TSX) | $ | 100 | $ | 118 | $ | 146 | $ | 176 | $ | 163 | $ | 189 | |||||||||||
| S&P/TSX Composite Index (C$) | $ | 100 | $ | 89 | $ | 104 | $ | 111 | $ | 98 | $ | 117 | |||||||||||
| S&P/TSX Capped Consumer Discretionary Index (C$) | $ | 100 | $ | 97 | $ | 104 | $ | 126 | $ | 103 | $ | 117 | |||||||||||
Item 6. [Reserved]
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| 2019 | 2018 | 2017(a) | 2016 | 2015 | |||||||||||||||
| (In millions, except per unit data) | |||||||||||||||||||
| Statement of Operations Data: | |||||||||||||||||||
| Revenues: | |||||||||||||||||||
| Sales | $ | 2,362 | $ | 2,355 | $ | 2,390 | $ | 2,205 | $ | 2,169 | |||||||||
| Franchise and property revenues | 3,241 | 3,002 | 2,186 | 1,941 | 1,883 | ||||||||||||||
| Total revenues | 5,603 | 5,357 | 4,576 | 4,146 | 4,052 | ||||||||||||||
| Income from operations (b) | 2,007 | 1,917 | 1,735 | 1,667 | 1,192 | ||||||||||||||
| Net income (b) | 1,111 | 1,144 | 1,235 | 956 | 512 | ||||||||||||||
| Earnings per unit - Basic and Diluted: | |||||||||||||||||||
| Class A common units | $ | 3.18 | $ | 3.03 | $ | 3.10 | $ | 1.71 | $ | 0.51 | |||||||||
| Partnership exchangeable units | $ | 2.40 | $ | 2.46 | $ | 2.59 | $ | 1.48 | $ | 0.51 | |||||||||
| Distributions per unit: | |||||||||||||||||||
| Class A common units | $ | 2.70 | $ | 2.23 | $ | 0.92 | $ | 0.72 | $ | 0.44 | |||||||||
| Partnership exchangeable units | $ | 2.00 | $ | 1.80 | $ | 0.78 | $ | 0.62 | $ | 0.44 | |||||||||
| Other Financial Data: | |||||||||||||||||||
| Net cash provided by operating activities | $ | 1,476 | $ | 1,165 | $ | 1,431 | $ | 1,214 | $ | 1,207 | |||||||||
| Net cash provided by (used for) investing activities | (30 | ) | (44 | ) | (858 | ) | 27 | (62 | ) | ||||||||||
| Net cash used for financing activities | (842 | ) | (1,285 | ) | (936 | ) | (591 | ) | (2,115 | ) | |||||||||
| December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017(a) | 2016 | 2015 | |||||||||||||||
| (In millions) | |||||||||||||||||||
| Balance Sheet Data: | |||||||||||||||||||
| Cash and cash equivalents | $ | 1,533 | $ | 913 | $ | 1,097 | $ | 1,436 | $ | 788 | |||||||||
| Total assets | 22,360 | 20,141 | 21,224 | 19,125 | 18,409 | ||||||||||||||
| Total debt and finance lease obligations | 12,148 | 12,140 | 12,123 | 8,723 | 8,722 | ||||||||||||||
| Total liabilities | 18,101 | 16,523 | 16,663 | 12,339 | 12,198 | ||||||||||||||
| Partnership preferred units | — | — | — | 3,297 | 3,297 | ||||||||||||||
| Total equity | 4,259 | 3,618 | 4,561 | 3,489 | 2,913 | ||||||||||||||
| 2019 | 2018 | 2017 | |||||||||
| System-wide sales growth | |||||||||||
| Tim Hortons | (0.3 | )% | 2.4 | % | 3.0 | % | |||||
| Burger King | 9.3 | % | 8.9 | % | 10.1 | % | |||||
| Popeyes (a) | 18.5 | % | 8.9 | % | 5.1 | % | |||||
| Consolidated | 8.3 | % | 7.4 | % | 7.9 | % | |||||
| System-wide sales ($ in millions) | |||||||||||
| Tim Hortons | $ | 6,716 | $ | 6,869 | $ | 6,717 | |||||
| Burger King | $ | 22,921 | $ | 21,624 | $ | 20,075 | |||||
| Popeyes (a) | $ | 4,397 | $ | 3,732 | $ | 3,512 | |||||
| Consolidated | $ | 34,034 | $ | 32,225 | $ | 30,304 | |||||
| Comparable sales | |||||||||||
| Tim Hortons | (1.5 | )% | 0.6 | % | (0.1 | )% | |||||
| Burger King | 3.4 | % | 2.0 | % | 3.1 | % | |||||
| Popeyes (a) | 12.1 | % | 1.6 | % | (1.5 | )% | |||||
| Net restaurant growth | |||||||||||
| Tim Hortons | 1.8 | % | 2.1 | % | 2.9 | % | |||||
| Burger King | 5.9 | % | 6.1 | % | 6.5 | % | |||||
| Popeyes (b) | 6.9 | % | 7.3 | % | 6.1 | % | |||||
| Consolidated | 5.2 | % | 5.5 | % | 5.8 | % | |||||
| System Restaurant count | |||||||||||
| Tim Hortons | 4,932 | 4,846 | 4,748 | ||||||||
| Burger King | 18,838 | 17,796 | 16,767 | ||||||||
| Popeyes | 3,316 | 3,102 | 2,892 | ||||||||
| Consolidated | 27,086 | 25,744 | 24,407 | ||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of 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, 2019 (our “Annual Report”) and our audited Consolidated Financial Statements and the related notes thereto included in Part II, Item 8 “Financial Statements and Supplementary Data” of ourthis Annual Report.Report for the year ended December 31, 2022 (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 ourthis 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, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors.
Unless the context otherwise requires, all references in this section to “Partnership,” “we,” “us,” or “our” are to Restaurant Brands International Limited Partnership and its subsidiaries, collectively.
All references to “$” or “dollars” in this report are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated.
This section generally discusses 2022 and 2021 items and the year-to-year comparisons between 2022 and 2021. For discussion of our financial condition and results of operations for 2020 and the year-to-year comparisons between 2021 and 2020, refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 23, 2022.
Overview
We are a Canadian corporation originally formed on August 25, 2014 to servelimited partnership that serves as the indirect holding company for Tim Hortons, and its consolidated subsidiaries and for Burger King, Popeyes and its consolidated subsidiaries. On March 27, 2017, we acquired Popeyes Louisiana Kitchen, Inc.Firehouse Subs and itstheir consolidated subsidiaries. We are one of the world’s largest quick service restaurant (“QSR”) companies with more than $34over $35 billion in annual system-wide sales and over 27,000approximately 30,000 restaurants in more than 100 countries and U.S. territories as of December 31, 2019.2022. Our Tim Hortons®, Burger King®, Popeyes® and PopeyesFirehouse Subs® brands have similar franchise business models with complementary daypart mixes and product platforms. Our threefour iconic brands are managed independently while benefiting from global scale and sharing of best practices.
Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, Timbits®, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups, and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken, and other specialty sandwiches, french fries, soft drinks, and other affordably-priced food items. Popeyes restaurants are quick service restaurants featuring a unique “Louisiana” style menu that includes fried chicken, chicken tenders, fried shrimp, and other seafood, red beans and rice, and other regional items. Firehouse Subs restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties.
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We have threefour operating and reportable segments: (1) Tim Hortons (“TH”); (2) Burger King (“BK”); and (3) Popeyes Louisiana Kitchen (“PLK”); and (4) Firehouse Subs (“FHS”). Our business generates revenue from the following sources: (i) sales, consisting primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and sales at restaurants owned by us (“Company restaurants”); (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii)(iii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us (“Company restaurants”). In addition, our Tim Hortons business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing(iv) advertising revenues and distribution, as well as sales to retailers.
As described in Note 3, “Firehouse Acquisition,” to the accompanyingnotes to the consolidated financial statements, on March 27, 2017,December 15, 2021, we completed the acquisition of Popeyes Louisiana Kitchen, Inc.Firehouse Subs for total consideration of approximately $1,016 million (the "Popeyes Acquisition"“Firehouse Acquisition”). Our 2019 and 20182022 consolidated statementsstatement of operations includes PLKFHS revenues and segment income for a full fiscal year. Our 20172021 consolidated statementsstatement of operations includes PLKincluded FHS revenues and segment income from March 28, 2017the acquisition date of December 15, 2021 through December 26, 2021, the 2021 fiscal year end for FHS.
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 (referred to as system-wide sales) 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, BK and FHS and 17 months or longer for PLK. Additionally, if a restaurant is closed for a significant portion of a month, the restaurant is excluded from the monthly comparable sales calculation.
•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. 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 and advertising fund contributions are calculated based on a percentage of franchise sales.
•Net restaurant growth refers to the net increase in restaurant count (openings, net of permanent closures) over a trailing twelve month period, divided by the restaurant count at the beginning of the trailing twelve month period.
These metrics are important indicators of the overall direction of our business, including trends in sales and the effectiveness of each brand’s marketing, operations and growth initiatives.
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The following table presents our operating metrics for each of the periods indicated, which have been derived from our internal records. 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.
| 2022 | 2021 | 2020 | |||||||||||||||
| System-wide sales growth | |||||||||||||||||
| Tim Hortons | 13.7 | % | 12.5 | % | (17.5) | % | |||||||||||
| Burger King | 14.3 | % | 15.9 | % | (11.1) | % | |||||||||||
| Popeyes | 9.4 | % | 7.3 | % | 17.7 | % | |||||||||||
| Consolidated (a) | 13.4 | % | 13.8 | % | (8.6) | % | |||||||||||
| Firehouse Subs (b) | 4.2 | % | 25.1 | % | 1.8 | % | |||||||||||
| System-wide sales ($ in millions) | |||||||||||||||||
| Tim Hortons | $ | 7,164 | $ | 6,526 | $ | 5,488 | |||||||||||
| Burger King | $ | 25,482 | $ | 23,450 | $ | 20,038 | |||||||||||
| Popeyes | $ | 5,951 | $ | 5,519 | $ | 5,143 | |||||||||||
| Firehouse Subs | $ | 1,154 | N/A | N/A | |||||||||||||
| Consolidated (a) | $ | 39,751 | $ | 35,495 | $ | 30,669 | |||||||||||
| Firehouse Subs (b) | N/A | $ | 1,091 | $ | 872 | ||||||||||||
| Comparable sales | |||||||||||||||||
| Tim Hortons | 10.0 | % | 10.6 | % | (15.7) | % | |||||||||||
| Burger King | 9.7 | % | 9.3 | % | (7.9) | % | |||||||||||
| Popeyes | 1.4 | % | (0.4) | % | 13.8 | % | |||||||||||
| Consolidated (a) | 8.5 | % | 7.9 | % | (6.6) | % | |||||||||||
| Firehouse Subs (b) | 0.6 | % | 20.9 | % | (0.2) | % | |||||||||||
| Net restaurant growth | |||||||||||||||||
| Tim Hortons | 5.8 | % | 6.9 | % | 0.3 | % | |||||||||||
| Burger King | 2.8 | % | 3.3 | % | (1.1) | % | |||||||||||
| Popeyes | 10.4 | % | 7.4 | % | 4.1 | % | |||||||||||
| Firehouse Subs | 2.4 | % | N/A | N/A | |||||||||||||
| Consolidated (a) | 4.3 | % | 4.5 | % | (0.2) | % | |||||||||||
| Firehouse Subs (b) | N/A | 1.6 | % | 0.7 | % | ||||||||||||
| System Restaurant count | |||||||||||||||||
| Tim Hortons | 5,600 | 5,291 | 4,949 | ||||||||||||||
| Burger King | 19,789 | 19,247 | 18,625 | ||||||||||||||
| Popeyes | 4,091 | 3,705 | 3,451 | ||||||||||||||
| Firehouse Subs | 1,242 | 1,213 | — | ||||||||||||||
| Consolidated | 30,722 | 29,456 | 27,025 | ||||||||||||||
| Firehouse Subs (b) | N/A | N/A | 1,194 | ||||||||||||||
(a) Consolidated system-wide sales growth and consolidated comparable sales do not include the results of Firehouse Subs for all of the periods presented. Consolidated system-wide sales and consolidated net restaurant growth do not include the results of Firehouse Subs for 2021 and 2020.
(b) For 2022, FHS system-wide sales growth, system-wide sales, comparable sales and net restaurant growth are for the period from December 27, 2021 through December 31, 2017.2022. Firehouse Subs figures for 2021 and 2020 are shown for informational purposes only, consistent with its 2021 and 2020 fiscal calendar.
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War in Ukraine
During the first quarter of 2022, we shared a number of actions that we have taken as a result of the events related to Russia's military invasion of Ukraine. Burger King is our only brand with the Popeyes Acquisition, we incurred certain non-recurring fees and expenses (“PLK Transaction costs”) totaling $10 million during 2018 and $62 million during 2017 consisting primarily of professional fees and compensation related expenses,restaurants in Russia, all of which are classified as selling, generaloperated under a master franchise arrangement. We suspended all corporate support for the Russian market, including operations, marketing, and administrative expensessupply chain support in the consolidated statements of operations. Weaddition to refusing approvals for new investment and expansion. While for 2022 we include results from our franchised restaurants in Russia within reported key business metrics, we did not incurgenerate any PLK Transaction costs during 2019.
Below are the RBI consolidated and relocationBK segment operational highlights excluding the results from Russia for each of the periods indicated.
| Key Business Metrics (excluding Russia) | 2022 | 2021 | 2020 | ||||||||||||||
| System-wide sales growth | |||||||||||||||||
| BK | 13.5 | % | 15.1 | % | (10.9) | % | |||||||||||
| Consolidated (a) | 12.9 | % | 13.3 | % | (8.4) | % | |||||||||||
| System-wide sales (in US$ millions) | |||||||||||||||||
| BK | $ | 24,402 | $ | 22,726 | $ | 19,532 | |||||||||||
| Consolidated (a) | $ | 38,671 | $ | 34,771 | $ | 30,163 | |||||||||||
| Comparable sales | |||||||||||||||||
| BK | 9.0 | % | 8.7 | % | (7.7) | % | |||||||||||
| Consolidated (a) | 7.9 | % | 7.6 | % | (6.4) | % | |||||||||||
| Net restaurant growth | |||||||||||||||||
| BK | 2.9 | % | 3.2 | % | (1.2) | % | |||||||||||
| Consolidated (a) | 4.4 | % | 4.4 | % | (0.3) | % | |||||||||||
| Restaurant count | |||||||||||||||||
| BK | 18,969 | 18,427 | 17,860 | ||||||||||||||
| Consolidated | 29,902 | 28,636 | 26,260 | ||||||||||||||
(a)Consolidated system-wide sales growth, consolidated comparable sales, and consolidated net restaurant growth do not include the results of Firehouse Subs for all of the periods presented. Consolidated system-wide sales do not include the results of Firehouse Subs for 2021 and 2020. Consolidated restaurant count does not include the results of Firehouse Subs for 2020.
COVID-19 and Macro Economic Environment
The global crisis resulting from the spread of COVID-19 impacted our global restaurant operations during 2022, 2021 and 2020, though in 2022 the impact was more modest than in the prior years. During 2022, 2021 and 2020, substantially all restaurants remained open, some with limited operations, such as reduced, if any, dine-in capacity, and/or restrictions on hours of operation. Certain markets periodically required temporary closures while implementing government mandated lockdown orders. For example, while most regions eased restrictions, increases in cases and new variants caused certain markets, including China, to re-impose temporary restrictions as a result of government mandates in 2022.
In addition, during 2022, there were increases in commodity, labor, and energy costs during 2020.partially due to the macroeconomic impact of both COVID-19 and the war in Ukraine. Further significant increases in inflation could affect the global, Canadian and U.S. economies, resulting in foreign exchange pressures and rising interest rates which could have an adverse impact on our business and results of operations if we and our franchisees are not able to adjust prices sufficiently to offset the effect of cost increases without negatively impacting consumer demand.
Results of Operations
Tabular amounts in millions of U.S. dollars unless noted otherwise. Segment income may not calculate exactly due to rounding.
| 2022 vs. 2021 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated | 2022 | 2021 | 2020 | Variance | FX Impact (a) | Variance Excluding FX Impact | Variance | FX Impact | Variance Excluding FX Impact | ||||||||||||||||||||||||||||||||||||||||||||
| Favorable / (Unfavorable) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales | $ | 2,819 | $ | 2,378 | $ | 2,013 | $ | 441 | $ | (79) | $ | 520 | $ | 365 | $ | 108 | $ | 257 | |||||||||||||||||||||||||||||||||||
| Franchise and property revenues | 2,661 | 2,443 | 2,121 | 218 | (84) | 302 | 322 | 55 | 267 | ||||||||||||||||||||||||||||||||||||||||||||
| Advertising revenues and other services | 1,025 | 918 | 834 | 107 | (11) | 118 | 84 | 13 | 71 | ||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | 6,505 | 5,739 | 4,968 | 766 | (174) | 940 | 771 | 176 | 595 | ||||||||||||||||||||||||||||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | 2,312 | 1,890 | 1,610 | (422) | 62 | (484) | (280) | (86) | (194) | ||||||||||||||||||||||||||||||||||||||||||||
| Franchise and property expenses | 518 | 489 | 515 | (29) | 12 | (41) | 26 | (22) | 48 | ||||||||||||||||||||||||||||||||||||||||||||
| Advertising expenses and other services | 1,077 | 986 | 870 | (91) | 13 | (104) | (116) | (14) | (102) | ||||||||||||||||||||||||||||||||||||||||||||
| General and administrative expenses | 631 | 484 | 407 | (147) | 10 | (157) | (77) | (9) | (68) | ||||||||||||||||||||||||||||||||||||||||||||
| (Income) loss from equity method investments | 44 | 4 | 39 | (40) | (1) | (39) | 35 | — | 35 | ||||||||||||||||||||||||||||||||||||||||||||
| Other operating expenses (income), net | 25 | 7 | 105 | (18) | (9) | (9) | 98 | 1 | 97 | ||||||||||||||||||||||||||||||||||||||||||||
| Total operating costs and expenses | 4,607 | 3,860 | 3,546 | (747) | 87 | (834) | (314) | (130) | (184) | ||||||||||||||||||||||||||||||||||||||||||||
| Income from operations | 1,898 | 1,879 | 1,422 | 19 | (87) | 106 | 457 | 46 | 411 | ||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | 533 | 505 | 508 | (28) | 1 | (29) | 3 | (1) | 4 | ||||||||||||||||||||||||||||||||||||||||||||
| Loss on early extinguishment of debt | — | 11 | 98 | 11 | — | 11 | 87 | — | 87 | ||||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | 1,365 | 1,363 | 816 | 2 | (86) | 88 | 547 | 45 | 502 | ||||||||||||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | (117) | 110 | 66 | 227 | 4 | 223 | (44) | 1 | (45) | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 1,482 | $ | 1,253 | $ | 750 | $ | 229 | $ | (82) | $ | 311 | $ | 503 | $ | 46 | $ | 457 | |||||||||||||||||||||||||||||||||||
| 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||||||||||||||||||||
| Consolidated | 2019 | 2018 | 2017 | Variance | FX Impact (a) | Variance Excluding FX Impact | Variance | FX Impact | Variance Excluding FX Impact | ||||||||||||||||||||||||||
| Favorable / (Unfavorable) | |||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Sales | $ | 2,362 | $ | 2,355 | $ | 2,390 | $ | 7 | $ | (44 | ) | $ | 51 | $ | (35 | ) | $ | 1 | $ | (36 | ) | ||||||||||||||
| Franchise and property revenues | 3,241 | 3,002 | 2,186 | 239 | (52 | ) | 291 | 816 | (10 | ) | 826 | ||||||||||||||||||||||||
| Total revenues | 5,603 | 5,357 | 4,576 | 246 | (96 | ) | 342 | 781 | (9 | ) | 790 | ||||||||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||||||||||||||
| Cost of sales | 1,813 | 1,818 | 1,850 | 5 | 34 | (29 | ) | 32 | — | 32 | |||||||||||||||||||||||||
| Franchise and property expenses | 540 | 422 | 478 | (118 | ) | 7 | (125 | ) | 56 | — | 56 | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 1,264 | 1,214 | 416 | (50 | ) | 10 | (60 | ) | (798 | ) | — | (798 | ) | ||||||||||||||||||||||
| (Income) loss from equity method investments | (11 | ) | (22 | ) | (12 | ) | (11 | ) | (3 | ) | (8 | ) | 10 | — | 10 | ||||||||||||||||||||
| Other operating expenses (income), net | (10 | ) | 8 | 109 | 18 | (3 | ) | 21 | 101 | (5 | ) | 106 | |||||||||||||||||||||||
| Total operating costs and expenses | 3,596 | 3,440 | 2,841 | (156 | ) | 45 | (201 | ) | (599 | ) | (5 | ) | (594 | ) | |||||||||||||||||||||
| Income from operations | 2,007 | 1,917 | 1,735 | 90 | (51 | ) | 141 | 182 | (14 | ) | 196 | ||||||||||||||||||||||||
| Interest expense, net | 532 | 535 | 512 | 3 | — | 3 | (23 | ) | — | (23 | ) | ||||||||||||||||||||||||
| Loss on early extinguishment of debt | 23 | — | 122 | (23 | ) | — | (23 | ) | 122 | — | 122 | ||||||||||||||||||||||||
| Income before income taxes | 1,452 | 1,382 | 1,101 | 70 | (51 | ) | 121 | 281 | (14 | ) | 295 | ||||||||||||||||||||||||
| Income tax (benefit) expense | 341 | 238 | (134 | ) | (103 | ) | 12 | (115 | ) | (372 | ) | (12 | ) | (360 | ) | ||||||||||||||||||||
| Net income | $ | 1,111 | $ | 1,144 | $ | 1,235 | $ | (33 | ) | $ | (39 | ) | $ | 6 | $ | (91 | ) | $ | (26 | ) | $ | (65 | ) | ||||||||||||
(a)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.
| 2019 vs. 2018 | 2018 vs. 2017 | 2022 vs. 2021 | 2021 vs. 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TH Segment | 2019 | 2018 | 2017 | Variance | FX Impact (a) | Variance Excluding FX Impact | Variance | FX Impact | Variance Excluding FX Impact | TH Segment | 2022 | 2021 | 2020 | Variance | FX Impact (a) | Variance Excluding FX Impact | Variance | FX Impact | Variance Excluding FX Impact | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Favorable / (Unfavorable) | Favorable / (Unfavorable) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales | $ | 2,204 | $ | 2,201 | $ | 2,229 | $ | 3 | $ | (44 | ) | $ | 47 | $ | (28 | ) | $ | 1 | $ | (29 | ) | Sales | $ | 2,631 | $ | 2,249 | $ | 1,876 | $ | 382 | $ | (79) | $ | 461 | $ | 373 | $ | 108 | $ | 265 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Franchise and property revenues | 1,140 | 1,091 | 926 | 49 | (22 | ) | 71 | 165 | (2 | ) | 167 | Franchise and property revenues | 925 | 864 | 745 | 61 | (30) | 91 | 119 | 44 | 75 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Advertising revenues and other services | Advertising revenues and other services | 267 | 229 | 189 | 38 | (8) | 46 | 40 | 11 | 29 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | 3,344 | 3,292 | 3,155 | 52 | (66 | ) | 118 | 137 | (1 | ) | 138 | Total revenues | 3,823 | 3,342 | 2,810 | 481 | (117) | 598 | 532 | 163 | 369 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | 1,677 | 1,688 | 1,707 | 11 | 34 | (23 | ) | 19 | — | 19 | Cost of sales | 2,131 | 1,765 | 1,484 | (366) | 62 | (428) | (281) | (86) | (195) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Franchise and property expenses | 358 | 279 | 336 | (79 | ) | 6 | (85 | ) | 57 | 1 | 56 | Franchise and property expenses | 333 | 337 | 328 | 4 | 11 | (7) | (9) | (20) | 11 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment SG&A | 309 | 314 | 91 | 5 | 6 | (1 | ) | (223 | ) | — | (223 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Advertising expenses and other services | Advertising expenses and other services | 280 | 278 | 204 | (2) | 10 | (12) | (74) | (12) | (62) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment G&A | Segment G&A | 127 | 109 | 93 | (18) | 3 | (21) | (16) | (4) | (12) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment depreciation and amortization (b) | 106 | 102 | 103 | (4 | ) | 2 | (6 | ) | 1 | 1 | — | Segment depreciation and amortization (b) | 109 | 126 | 113 | 17 | 4 | 13 | (13) | (6) | (7) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment income (c) | 1,122 | 1,127 | 1,136 | (5 | ) | (22 | ) | 17 | (9 | ) | (1 | ) | (8 | ) | Segment income (c) | 1,073 | 997 | 823 | 76 | (35) | 111 | 174 | 47 | 127 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(b)Segment depreciation and amortization consists of depreciation and amortization included in cost of sales and franchise and property expenses. |
| 2022 vs. 2021 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| BK Segment | 2022 | 2021 | 2020 | Variance | FX Impact (a) | Variance Excluding FX Impact | Variance | FX Impact | Variance Excluding FX Impact | ||||||||||||||||||||||||||||||||||||||||||||
| Favorable / (Unfavorable) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales | $ | 70 | $ | 64 | $ | 64 | $ | 6 | $ | — | $ | 6 | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||
| Franchise and property revenues | 1,342 | 1,292 | 1,113 | 50 | (52) | 102 | 179 | 11 | 168 | ||||||||||||||||||||||||||||||||||||||||||||
| Advertising revenues and other services | 485 | 457 | 425 | 28 | (3) | 31 | 32 | 2 | 30 | ||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | 1,897 | 1,813 | 1,602 | 84 | (55) | 139 | 211 | 13 | 198 | ||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | 74 | 66 | 65 | (8) | — | (8) | (1) | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||
| Franchise and property expenses | 167 | 142 | 176 | (25) | 1 | (26) | 34 | (2) | 36 | ||||||||||||||||||||||||||||||||||||||||||||
| Advertising expenses and other services | 522 | 473 | 442 | (49) | 3 | (52) | (31) | (2) | (29) | ||||||||||||||||||||||||||||||||||||||||||||
| Segment G&A | 177 | 162 | 146 | (15) | 4 | (19) | (16) | (1) | (15) | ||||||||||||||||||||||||||||||||||||||||||||
| Segment depreciation and amortization (b) | 47 | 48 | 49 | 1 | 1 | — | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||
| Segment income (d) | 1,007 | 1,021 | 823 | (14) | (48) | 34 | 198 | 8 | 190 | ||||||||||||||||||||||||||||||||||||||||||||
(d)BK segment income includes $1 million and $4 million of cash distributions received from equity method investments for 2022 and 2021, respectively. No significant cash distributions were received from equity method investments in 2020.
| 2022 vs. 2021 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| PLK Segment | 2022 | 2021 | 2020 | Variance | FX Impact (a) | Variance Excluding FX Impact | Variance | FX Impact | Variance Excluding FX Impact | ||||||||||||||||||||||||||||||||||||||||||||
| Favorable / (Unfavorable) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales | $ | 78 | $ | 64 | $ | 73 | $ | 14 | $ | — | $ | 14 | $ | (9) | $ | — | $ | (9) | |||||||||||||||||||||||||||||||||||
| Franchise and property revenues | 309 | 283 | 263 | 26 | (2) | 28 | 20 | — | 20 | ||||||||||||||||||||||||||||||||||||||||||||
| Advertising revenues and other services | 260 | 232 | 220 | 28 | — | 28 | 12 | — | 12 | ||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | 647 | 579 | 556 | 68 | (2) | 70 | 23 | — | 23 | ||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | 72 | 58 | 61 | (14) | — | (14) | 3 | — | 3 | ||||||||||||||||||||||||||||||||||||||||||||
| Franchise and property expenses | 11 | 9 | 11 | (2) | — | (2) | 2 | — | 2 | ||||||||||||||||||||||||||||||||||||||||||||
| Advertising expenses and other services | 263 | 235 | 224 | (28) | — | (28) | (11) | — | (11) | ||||||||||||||||||||||||||||||||||||||||||||
| Segment G&A | 65 | 56 | 49 | (9) | — | (9) | (7) | — | (7) | ||||||||||||||||||||||||||||||||||||||||||||
| Segment depreciation and amortization (b) | 7 | 7 | 8 | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||
| Segment income | 242 | 228 | 218 | 14 | (2) | 16 | 10 | — | 10 | ||||||||||||||||||||||||||||||||||||||||||||
| FHS Segment | 2022 | 2021 | Variance | ||||||||||||||
| Revenues: | |||||||||||||||||
| Sales | $ | 40 | $ | 1 | $ | 39 | |||||||||||
| Franchise and property revenues | 85 | 4 | 81 | ||||||||||||||
| Advertising revenues and other services | 13 | — | 13 | ||||||||||||||
| Total revenues | 138 | 5 | 133 | ||||||||||||||
| Cost of sales | 35 | 1 | (34) | ||||||||||||||
| Franchise and property expenses | 7 | 1 | (6) | ||||||||||||||
| Advertising expenses and other services | 12 | — | (12) | ||||||||||||||
| Segment G&A | 31 | 1 | (30) | ||||||||||||||
| Segment depreciation and amortization (b) | 2 | — | (2) | ||||||||||||||
| Segment income | 56 | 2 | 54 | ||||||||||||||
33
| 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||||||||||||||||||||
| BK Segment | 2019 | 2018 | 2017 | Variance | FX Impact (a) | Variance Excluding FX Impact | Variance | FX Impact | Variance Excluding FX Impact | ||||||||||||||||||||||||||
| Favorable / (Unfavorable) | |||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Sales | $ | 76 | $ | 75 | $ | 94 | $ | 1 | $ | — | $ | 1 | $ | (19 | ) | $ | — | $ | (19 | ) | |||||||||||||||
| Franchise and property revenues | 1,701 | 1,576 | 1,125 | 125 | (30 | ) | 155 | 451 | (7 | ) | 458 | ||||||||||||||||||||||||
| Total revenues | 1,777 | 1,651 | 1,219 | 126 | (30 | ) | 156 | 432 | (7 | ) | 439 | ||||||||||||||||||||||||
| Cost of sales | 71 | 67 | 86 | (4 | ) | — | (4 | ) | 19 | — | 19 | ||||||||||||||||||||||||
| Franchise and property expenses | 168 | 131 | 135 | (37 | ) | 1 | (38 | ) | 4 | (1 | ) | 5 | |||||||||||||||||||||||
| Segment SG&A | 600 | 577 | 143 | (23 | ) | 3 | (26 | ) | (434 | ) | (2 | ) | (432 | ) | |||||||||||||||||||||
| Segment depreciation and amortization (b) | 49 | 48 | 47 | (1 | ) | — | (1 | ) | (1 | ) | (1 | ) | — | ||||||||||||||||||||||
| Segment income (d) | 994 | 928 | 903 | 66 | (26 | ) | 92 | 25 | (9 | ) | 34 | ||||||||||||||||||||||||
| 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||||||||||||||||||||
| PLK Segment | 2019 | 2018 | 2017 (e) | Variance | FX Impact (a) | Variance Excluding FX Impact | Variance | FX Impact | Variance Excluding FX Impact | ||||||||||||||||||||||||||
| Favorable / (Unfavorable) | |||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Sales | $ | 82 | $ | 79 | $ | 67 | $ | 3 | $ | — | $ | 3 | $ | 12 | $ | — | $ | 12 | |||||||||||||||||
| Franchise and property revenues | 400 | 335 | 135 | 65 | (1 | ) | 66 | 200 | (1 | ) | 201 | ||||||||||||||||||||||||
| Total revenues | 482 | 414 | 202 | 68 | (1 | ) | 69 | 212 | (1 | ) | 213 | ||||||||||||||||||||||||
| Cost of sales | 65 | 63 | 57 | (2 | ) | — | (2 | ) | (6 | ) | — | (6 | ) | ||||||||||||||||||||||
| Franchise and property expenses | 14 | 12 | 7 | (2 | ) | — | (2 | ) | (5 | ) | — | (5 | ) | ||||||||||||||||||||||
| Segment SG&A | 225 | 193 | 40 | (32 | ) | — | (32 | ) | (153 | ) | — | (153 | ) | ||||||||||||||||||||||
| Segment depreciation and amortization (b) | 11 | 10 | 9 | (1 | ) | — | (1 | ) | (1 | ) | — | (1 | ) | ||||||||||||||||||||||
| Segment income | 188 | 157 | 107 | 31 | (1 | ) | 32 | 50 | (1 | ) | 51 | ||||||||||||||||||||||||
Comparable Sales
TH comparable sales were (1.5)%10.0% during 2019,2022, including Canada comparable sales of (1.4)%11.6%.
BK comparable sales were 3.4%9.7% during 2019,2022, including rest of the world comparable sales of 15.9% and U.S. comparable sales of 2.2%.
PLK comparable sales were 1.4% during 2022, including U.S. comparable sales of 1.7%(0.5)%.
Sales and Cost of Sales
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. In periods prior to January 1, 2018, we classified revenues derived from sales of equipment packages at the establishment of a restaurant and in connection with renewal or renovation as franchise and property revenues. Sales from Company restaurants including sales by our consolidated TH 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 products sold to retailers. Cost of sales also includes food, paper and labor costs of Company restaurants. In periods prior to January 1, 2018, we classified costs 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 2019,2022, the increase in sales was driven by an increase of $47$461 million in our TH segment, primarily as a result of an increase in supply chain sales, an increase of $3$39 million from our FHS segment reflecting a full year, an increase of $14 million in our PLK segment and an increase of $1$6 million in our BK segment, partially offset by an unfavorable FX Impact of $44$79 million. The increase in our TH segment was primarily driven by an increase in supply chain sales due to an increase in system-wide sales as well as increases in commodity prices passed on to franchisees and an increase in sales to retailers.
During 2018,2022, the decreaseincrease in cost of sales was primarily driven by a decreasean increase of $29$428 million in our TH segment, an increase of $34 million from our FHS segment reflecting a full year, an increase of $14 million in our PLK segment and a decreasean increase of $19$8 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$62 million. The decrease in our TH segment was driven by a $48 million decrease in our 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 reclassification of revenue from the sales of equipment packages from franchise and property revenues to sales beginning January 1, 2018, partially offset by the 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.
Franchise and Property
Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or subleased to franchisees, franchise fees, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization 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 2019,2022, the increase in franchise and property revenues was driven by an increase of $155$102 million in our BK segment, an increase of $71$91 million in our TH segment, an increase of $81 million from our FHS segment reflecting a full year, and an increase of $66$28 million in our PLK segment, partially offset by a $52 millionan unfavorable FX Impact.Impact of $84 million. The increases in our BK and PLK segments were primarily driven by increases in royalties as a result of system-wide sales growth. Additionally, the increase in franchise and property revenues in all of our segments during 2019 reflected the gross recognition of property income from lessee reimbursements of costs such as property taxes and maintenance when we are the lessor in the lease as a result of the application of ASC 842 beginning January 1, 2019.
During 2019,2022, the increase in franchise and property expenses was driven by an increase of $85$26 million in our BK segment, an increase of $7 million in our TH segment, an increase of $38$6 million infrom our BKFHS segment reflecting a full year, and an increase of $2 million in our PLK segment, partially offset by a $7 million favorable FX Impact.Impact of $12 million. The increase in allour BK segment was primarily related to bad debt expenses in the current year, inclusive of Russia, compared to bad debt recoveries in the prior year.
Advertising and Other Services
Advertising revenues and other services consist primarily of advertising contributions earned on franchise sales and are based on a percentage of sales reported by franchise restaurants and intended to fund advertising expenses. This line item also includes other services which consist primarily of fees from digital sales that partially offset expenses related to technology initiatives. Advertising expenses and other services consist primarily of expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives, depreciation and amortization and other related support functions for the respective brands. We generally manage advertising expenses to equal advertising revenues in the long term, however in some periods there may be a mismatch in the timing of revenues and expense or higher expenses due to our segments during 2019support initiatives behind the marketing programs.
34
During 2022, the increase in advertising revenues and other services was driven by the gross recognitionan increase of property expenses for costs such as property taxes$46 million in our TH segment, an increase of $31 million in our BK segment, an increase of $28 million in our PLK segment, and maintenance paidan increase of $13 million from our FHS segment reflecting a full year, partially offset by usan unfavorable FX Impact of $11 million. The increases in our TH, BK and reimbursedPLK segments were primarily driven by lessees when we are the lessorincreases in the lease as a result of the application of ASC 842 beginning January 1, 2019.system-wide sales.
During 2018,2022, the decreaseincrease in franchiseadvertising expenses and property expensesother services was driven by a decreasean increase of $56$52 million in our BK segment, an increase of $28 million in our PLK segment, an increase of $12 million in our TH segment, and a decreasean increase of $5$12 million in our BKFHS segment reflecting a full year, partially offset by an increasea favorable FX Impact of $5 million$13 million. The increases in our BK, PLK and TH segments were driven primarily by increases in advertising revenues and other services. Additionally, our BK segment primarily as a result of including PLK for a full yearreflects increases in 2018 comparedexpenses related to nine months in 2017. The decrease intechnology initiatives and our TH segment was primarily due toreflects the reclassificationnon-recurrence of expenses from sales of equipment packages from franchise and property expenses to cost of sales beginning January 1, 2018.our support behind the prior year marketing program in Canada.
Our selling, general and administrative expenses were comprised of the following:
| 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | $ | % | $ | % | |||||||||||||||||||
| Favorable / (Unfavorable) | |||||||||||||||||||||||||
| TH Segment SG&A | $ | 309 | $ | 314 | $ | 91 | $ | 5 | 1.6 | % | $ | (223 | ) | NM | |||||||||||
| BK Segment SG&A | 600 | 577 | 143 | (23 | ) | (4.0 | )% | (434 | ) | NM | |||||||||||||||
| PLK Segment SG&A | 225 | 193 | 40 | (32 | ) | (16.6 | )% | (153 | ) | NM | |||||||||||||||
| Share-based compensation and non-cash incentive compensation expense | 74 | 55 | 55 | (19 | ) | (34.5 | )% | — | — | % | |||||||||||||||
| Depreciation and amortization | 19 | 20 | 23 | 1 | 5.0 | % | 3 | 13.0 | % | ||||||||||||||||
| PLK Transaction costs | — | 10 | 62 | 10 | 100.0 | % | 52 | 83.9 | % | ||||||||||||||||
| Corporate restructuring and tax advisory fees | 31 | 25 | 2 | (6 | ) | NM | (23 | ) | NM | ||||||||||||||||
| Office centralization and relocation costs | 6 | 20 | — | 14 | NM | (20 | ) | NM | |||||||||||||||||
| Selling, general and administrative expenses | $ | 1,264 | $ | 1,214 | $ | 416 | $ | (50 | ) | (4.1 | )% | $ | (798 | ) | NM | ||||||||||
| 2022 vs. 2021 | 2021 vs. 2020 | ||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | $ | % | $ | % | |||||||||||||||||||||||||||||||||||
| Favorable / (Unfavorable) | |||||||||||||||||||||||||||||||||||||||||
| TH Segment G&A | $ | 127 | $ | 109 | $ | 93 | $ | (18) | (17) | % | $ | (16) | (17) | % | |||||||||||||||||||||||||||
| BK Segment G&A | 177 | 162 | 146 | (15) | (9) | % | (16) | (11) | % | ||||||||||||||||||||||||||||||||
| PLK Segment G&A | 65 | 56 | 49 | (9) | (16) | % | (7) | (14) | % | ||||||||||||||||||||||||||||||||
| FHS Segment G&A | 31 | 1 | — | (30) | NM | (1) | NM | ||||||||||||||||||||||||||||||||||
| Share-based compensation and non-cash incentive compensation expense | 136 | 102 | 84 | (34) | (33) | % | (18) | (21) | % | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | 25 | 20 | 19 | (5) | (25) | % | (1) | (5) | % | ||||||||||||||||||||||||||||||||
| FHS Transaction costs | 24 | 18 | — | (6) | (33) | % | (18) | NM | |||||||||||||||||||||||||||||||||
| Corporate restructuring and tax advisory fees | 46 | 16 | 16 | (30) | (188) | % | — | — | % | ||||||||||||||||||||||||||||||||
| General and administrative expenses | $ | 631 | $ | 484 | $ | 407 | $ | (147) | (30) | % | $ | (77) | (19) | % | |||||||||||||||||||||||||||
NM –- Not Meaningfulmeaningful
During 2019,2022, the increases in Segment G&A for our TH, BK and PLK segments were primarily driven by higher salary and employee-related costs for non-restaurant employees, largely a result of hiring across a number of key areas including operations and franchising, and the increase in Segment SGG&A for our FHS segment is driven by a full year of results in our BK and PLK segments is primarily due to an increase in advertising fund expenses.2022.
During 2018, TH, BK and PLK Segment SG&A increased primarily due to the inclusion of advertising fund expenses from the application of ASC 606 beginning January 1, 2018.
(Income) Loss from Equity Method Investments
(Income) loss from equity method investments reflects our share of investee net income or loss, non-cash dilution gains or losses from changes in our ownership interests in equity method investees and basis difference amortization.impairment charges.
The change in (income) loss from equity method investments during 20192022 was primarily driven by the recognition of a $20 million non-cash dilution gain during 2018 on the initial public offering by one of our equity method investees, partially offset by an $11 million non-cash dilution gain during 2019 from the issuance of additional shares in connection with a merger by one of our equity method investees.
Other Operating Expenses (Income), net
Our other operating expenses (income), net were comprised of the following:
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| Net losses (gains) on disposal of assets, restaurant closures and refranchisings | $ | 7 | $ | 19 | $ | 29 | Net losses (gains) on disposal of assets, restaurant closures and refranchisings | $ | 4 | $ | 2 | $ | 6 | |||||||||||||||
| Litigation settlements and reserves, net | 2 | 11 | 2 | Litigation settlements and reserves, net | 11 | 81 | 7 | |||||||||||||||||||||
| Net losses (gains) on foreign exchange | (15 | ) | (33 | ) | 77 | Net losses (gains) on foreign exchange | (4) | (76) | 100 | |||||||||||||||||||
| Other, net | (4 | ) | 11 | 1 | Other, net | 14 | — | (8) | ||||||||||||||||||||
| Other operating expenses (income), net | $ | (10 | ) | $ | 8 | $ | 109 | Other operating expenses (income), net | $ | 25 | $ | 7 | $ | 105 | ||||||||||||||
Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods.
Litigation settlements and reserves, net primarily reflects accruals and payments made and proceeds received in connection with litigation matters.and arbitration matters and other business disputes.
In early 2022, we entered into negotiations to resolve business disputes that arose during 2021 with counterparties to the master franchise agreements for Burger King and Popeyes in China. Based on these discussions, we paid approximately $100 million in 2022, $5 million and $72 million of which was recorded as Litigation settlements and reserves, net in 2022 and 2021, respectively. The majority of this amount related to Popeyes, resolved our disputes, and allowed us to move forward in the market with a new master franchisee. Additionally, pursuant to this agreement we and our partners have made equity contributions to the Burger King business in China.
Net losses (gains) on foreign exchange isare primarily related to revaluation of foreign denominated assets and liabilities.
Interest Expense, net
| 2019 | 2018 | 2017 | |||||||||
| Interest expense, net | $ | 532 | $ | 535 | $ | 512 | |||||
| Weighted average interest rate on long-term debt | 5.0 | % | 5.0 | % | 4.8 | % | |||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Interest expense, net | $ | 533 | $ | 505 | $ | 508 | |||||||||||
| Weighted average interest rate on long-term debt | 4.4 | % | 4.2 | % | 4.4 | % | |||||||||||
During 2018,2022, interest expense, net increased primarily due to higher outstandingan increase in long-term debt fromand an increase in the incurrence of incremental term loans and the issuance of senior notes during 2017 and a decreaseweighted average interest rate driven by increases in interest income, partially offset byrates. There is a $60 million benefit during 2018 relatedmarket expectation that U.S. benchmark rates will continue to the amortization of amounts other than currency movements ofincrease in 2023, which would impact our net investment hedges, which is excluded from the accounting hedge.
Income Tax Expense
Our effective tax rate was 23.5%(8.6)% in 20192022 and 17.2%8.1% in 2018.2021. The effective tax rate was reduced by 2.2% and 5.0% for 2019 and 2018, respectively, as2022 includes a resultnet decrease in tax reserves of benefits from stock option exercises. The comparison between 2019 and 2018 was also unfavorably impacted by 2018 reserve releases and settlements,$364 million related primarily to expiring statutes of limitations for certain prior tax years which reduceddecreased the 2018 effective tax rate by 26.7%. The effective tax rate for 2021 includes a net 2.8%. Additionally,decrease in tax reserves of $101 million related primarily to expiring statutes of limitations for certain prior tax years which decreased the effective tax rate by 7.4%. The effective tax rates for 2019 increased by 1.1% due to2022 and 2021 also reflect the impactmix of an increase in ourincome from multiple tax provision related to revaluing our Swiss net deferred tax liability due to Swiss tax reform. In 2019,jurisdictions, and the beneficial impact of internal financing arrangements in various jurisdictions was offset by an increase in the provision for unrecognized tax benefits related to a financing arrangement that is not applicable to ongoing operations.and structural changes.
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Net Income
We reported net income of $1,111$1,482 million for 20192022 compared to net income of $1,144$1,253 million for 2018.2021. The decreaseincrease in net income is primarily due to an income tax benefit of $117 million in the current year compared to an income tax expense of $110 million in the prior year, a $103$76 million increase in TH segment income, tax expense, a $23$54 million increase in FHS segment income reflecting a full year, a $14 million increase in PLK segment income, the non-recurrence of $11 million of loss on early extinguishment of debt, and an $11 million decrease in the current year,depreciation and amortization. These factors were partially offset by a $19$34 million increase in share-based compensation and non-cash incentive compensation expense, a $14$34 million unfavorable change from the impact of equity method investments, a $6$30 million increase in Corporate restructuring and tax advisory fees, and a $5 million decrease in TH segment income. These factors were partially offset by a $66$28 million increase in BK segment income, a $31interest expense, net, an $18 million increase in PLK segment income, an $18 million favorable change in the results from other operating expenses (income), net, a $14 million decrease in Office centralizationBK segment income, and relocation costs and the non-recurrencean increase of $10$6 million of PLKFHS Transaction costs incurred in the prior period.costs. Amounts above include a total unfavorable FX Impact to net income of $39 million.
Non-GAAP Reconciliations
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 providesthey provide them with the same tools that management uses to evaluate our performance and isare 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, income tax (benefit) expense, and depreciation and amortization and is used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA excluding (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, and(ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, as well as(iii) other operating expenses (income), net. Other specifically identifiednet and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the Firehouse Acquisition consisting of professional fees, compensation related expenses and integration costs; and (ii) non-operating costs from professional advisory and consulting services associated with non-recurringcertain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives. Management believes that these types of expenses are either not related to our underlying profitability drivers or not likely to re-occur in the foreseeable future and the varied timing, size and nature of these projects are also excluded from Adjusted EBITDA, including PLK Transaction costs, Corporate restructuring and tax advisory fees, and Office centralization and relocation costs. may cause volatility in our results unrelated to the performance of our core business that does not reflect trends of our core operations.
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Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance or the performance of an acquired business.performance. Adjusted EBITDA, as defined above, also represents our measure of segment income for each of our threefour operating segments.
| 2022 | 2021 | 2020 | 2022 vs. 2021 | 2021 vs. 2020 | |||||||||||||||||||||||||
| Favorable / (Unfavorable) | |||||||||||||||||||||||||||||
| Net income | $ | 1,482 | $ | 1,253 | $ | 750 | $ | 229 | $ | 503 | |||||||||||||||||||
| Income tax (benefit) expense | (117) | 110 | 66 | 227 | (44) | ||||||||||||||||||||||||
| Loss on early extinguishment of debt | — | 11 | 98 | 11 | 87 | ||||||||||||||||||||||||
| Interest expense, net | 533 | 505 | 508 | (28) | 3 | ||||||||||||||||||||||||
| Income from operations | 1,898 | 1,879 | 1,422 | 19 | 457 | ||||||||||||||||||||||||
| Depreciation and amortization | 190 | 201 | 189 | 11 | (12) | ||||||||||||||||||||||||
| EBITDA | 2,088 | 2,080 | 1,611 | 8 | 469 | ||||||||||||||||||||||||
| Share-based compensation and non-cash incentive compensation expense | 136 | 102 | 84 | (34) | (18) | ||||||||||||||||||||||||
| FHS Transaction costs | 24 | 18 | — | (6) | (18) | ||||||||||||||||||||||||
| Corporate restructuring and tax advisory fees | 46 | 16 | 16 | (30) | — | ||||||||||||||||||||||||
| Impact of equity method investments (a) | 59 | 25 | 48 | (34) | 23 | ||||||||||||||||||||||||
| Other operating expenses (income), net | 25 | 7 | 105 | (18) | 98 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 2,378 | $ | 2,248 | $ | 1,864 | $ | 130 | $ | 384 | |||||||||||||||||||
| Segment income: | |||||||||||||||||||||||||||||
| TH | $ | 1,073 | $ | 997 | $ | 823 | $ | 76 | $ | 174 | |||||||||||||||||||
| BK | 1,007 | 1,021 | 823 | (14) | 198 | ||||||||||||||||||||||||
| PLK | 242 | 228 | 218 | 14 | 10 | ||||||||||||||||||||||||
| FHS | 56 | 2 | — | 54 | 2 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 2,378 | $ | 2,248 | $ | 1,864 | $ | 130 | $ | 384 | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||||||
| Favorable / (Unfavorable) | |||||||||||||||||||
| Segment income: | |||||||||||||||||||
| TH | $ | 1,122 | $ | 1,127 | $ | 1,136 | $ | (5 | ) | $ | (9 | ) | |||||||
| BK | 994 | 928 | 903 | 66 | 25 | ||||||||||||||
| PLK | 188 | 157 | 107 | 31 | 50 | ||||||||||||||
| Adjusted EBITDA | 2,304 | 2,212 | 2,146 | 92 | 66 | ||||||||||||||
| Share-based compensation and non-cash incentive compensation expense | 74 | 55 | 55 | (19 | ) | — | |||||||||||||
| PLK Transaction costs | — | 10 | 62 | 10 | 52 | ||||||||||||||
| Corporate restructuring and tax advisory fees | 31 | 25 | 2 | (6 | ) | (23 | ) | ||||||||||||
| Office centralization and relocation costs | 6 | 20 | — | 14 | (20 | ) | |||||||||||||
| Impact of equity method investments (a) | 11 | (3 | ) | 1 | (14 | ) | 4 | ||||||||||||
| Other operating expenses (income), net | (10 | ) | 8 | 109 | 18 | 101 | |||||||||||||
| EBITDA | 2,192 | 2,097 | 1,917 | 95 | 180 | ||||||||||||||
| Depreciation and amortization | 185 | 180 | 182 | (5 | ) | 2 | |||||||||||||
| Income from operations | 2,007 | 1,917 | 1,735 | 90 | 182 | ||||||||||||||
| Interest expense, net | 532 | 535 | 512 | 3 | (23 | ) | |||||||||||||
| Loss on early extinguishment of debt | 23 | — | 122 | (23 | ) | 122 | |||||||||||||
| Income tax (benefit) expense | 341 | 238 | (134 | ) | (103 | ) | (372 | ) | |||||||||||
| Net income | $ | 1,111 | $ | 1,144 | $ | 1,235 | $ | (33 | ) | $ | (91 | ) | |||||||
the prior year. The increase in EBITDA for 2019 is primarily due to an increase in segment income for our TH segment was driven by the increase in our BKsystem-wide sales and PLK segments, favorable results from other operatingby advertising expenses (income), netexceeding advertising revenues in the current period,year to a decreaselesser extent than in office centralization and relocation costs, and the non-recurrence of PLK Transaction costs,prior year driven by our support behind the marketing program in Canada in the prior year, partially offset by an increase in share-based compensationTH Segment G&A and non-cash incentive compensation expense, unfavorable resultslower cash distributions received from the impact of equity method investments, an increase in Corporate restructuring and tax advisory fees, and a decrease in segment income in our TH segment.
investments. The increase in Adjusted EBITDA for 2018 is primarily due to a decrease in other operating expenses (income), net,includes an increase in segment income in our BK and PLK segments, primarily as a resultunfavorable FX Impact 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.$85 million.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash generated by operations and borrowings available under our 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 to RBI for RBI to repurchase its common shares, to repurchase Class B exchangeable limited partnership units (“Partnership exchangeable units”), to voluntarily prepay and repurchase our or one of our affiliate’s outstanding debt, to fund ouracquisitions such as the Firehouse Acquisition and other investing activities, such as capital expenditures and joint ventures, and to make distributions on Class A common units and 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 requirements.
At December 31, 2019,2022, we had cash and cash equivalents of $1,533$1,178 million and working capital of $493 million. In addition, at December 31, 2019, we had borrowing availability of $998 million under our Revolvingsenior secured revolving credit facility (the “Revolving Credit Facility (defined below)Facility”). During 2019, we issued $750 million of 3.875% first lien senior notes and the net proceeds, as well as proceeds received from the Term Loan A (defined below), were used to redeem the entire outstanding principal balance of $1,250 million of our 2015 4.625% Senior Notes (defined below) and prepay $235 million of the Term Loan B (defined below) outstanding aggregate principal balance. Also, in connection with these transactions, the aggregate principal amount of the commitments under our Revolving Credit Facility (defined below) were increased to $1,000 million. Additionally, during 2019, we issued $750 million of 4.375% second lien senior notes and the net proceeds were used to repay $720 million of the Term Loan B outstanding aggregate principal balance. Based on our current level of operations and available cash, we believe our cash flow from operations, combined with our availability under our Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, debt service requirements and capital spending over the next twelve months.
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In September 2022, Burger King shared the fourth quarterdetails of 2019. Pursuantits “Reclaim the Flame” plan to the termsaccelerate sales growth and drive franchisee profitability. As part of the partnership agreement,plan, we satisfiedwill enhance ongoing franchisee investments by investing $400 million over the exchange notices by exchangingnext two years, comprising $150 million in advertising and digital investments (“Fuel the Partnership exchangeable units forFlame”) and $250 million in high-quality remodels and relocations, restaurant technology, kitchen equipment, and building enhancements (“Royal Reset”). As of December 31, 2022, we have funded a total of $13 million toward the same number of newly issued RBI common shares.Fuel the Flame investment and $17 million toward our Royal Reset investment.
On August 2, 2016,July 28, 2021, the RBI board of directors approved a share repurchase authorization that allowswherein RBI tomay purchase up to $300$1,000 million of RBI common shares through July 2021.until August 10, 2023. Repurchases under thisRBI's authorization will be made in the open market or through privately negotiated transactions. On August 2, 2019, 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 24,853,565 RBI common shares for the one-year period commencing on August 8, 2019 and ending on August 7, 2020, or earlier if RBI completes the repurchases prior to such date. Share repurchases under the normal 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 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. During 2022, RBI repurchased and cancelled 6,101,364 RBI common shares on the open market for $326 million and during 2021 RBI repurchased and cancelled 9,247,648 RBI common shares on the open market for $551 million. Partnership made a distribution to RBI in an amount sufficient for RBI to fund these repurchases. As of the date of this report, there have been noDecember 31, 2022, RBI commonhad $123 million remaining under its share repurchases under the normal course issuer bid.repurchase authorization.
Debt Instruments and Debt Service Requirements
As of December 31, 2019,2022, our long-term debt consists primarily of borrowings under our Credit Facilities (as defined below), amounts outstanding under our 2017 4.25%3.875% First Lien Senior Notes 2019 3.875%due 2028, 5.75% First Lien Senior Notes 2017 5.00%due 2025, 3.50% First Lien Senior Notes 2019due 2029, 4.375% Second Lien Senior Notes anddue 2028, 4.00% Second Lien Senior Notes due 2030 (together, the “Senior Notes”), TH Facility, RE Facility (each as defined below), and obligations under finance leases. Two of our subsidiaries (the “Borrowers”) have issued the Credit Facilities and Senior Notes. For further information about our long-term debt, see Note 9, “Long Term Debt,” of the notes to the accompanying consolidated financial statements included in Part II, Item 8 "Financial Statements and Supplementary Data"Data” of our Annual Report.
Credit Facilities
As of December 31, 2019,2022, we had no amounts outstanding under theour Revolving Credit Facility (including revolving loans, swingline loans and letters of credit), had $2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability was $998 million. Funds available under the Revolving Credit Facility 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 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. 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. Under the Fourth Incremental Amendment, theThe interest rate applicable to amounts drawn under each letter of credit decreasedranges from a range of 1.25% to 2.00% to a range of 0.75% to 1.50%, depending on our net first lien leverage ratio.
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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, Inc.,Company LLC, Popeyes Louisiana Kitchen, Inc., FRG, LLC 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.
Senior Notes
| Amount (in millions) | Interest Rate | Lien Priority | Due Date | ||||||||
| $1,550 | 3.875% | First lien | January 15, 2028 | ||||||||
| $500 | 5.75% | First lien | April 15, 2025 | ||||||||
| $750 | 3.50% | First lien | February 15, 2029 | ||||||||
| $750 | 4.375% | Second lien | January 15, 2028 | ||||||||
| $2,900 | 4.00% | Second lien | October 15, 2030 | ||||||||
No principal payments are due until maturity and interest is paid semi-annually.
The Borrowers may redeem a series of Senior Notes,senior notes, in whole or in part, at any time at the redemption prices set forth in the applicable Senior Notes Indenture; provided that if the redemption is prior to MayFebruary 15, 20202024 for the 2017 4.25% Senior Notes, September 15, 2022 for the 2019 3.875% Senior Notes, October 15, 2020 for the 2017 5.00%3.50% First Lien Senior Notes, and NovemberOctober 15, 20222025 for the 2019 4.375%4.00% Second Lien Senior Notes, it will instead be at a price equal to 100% of the principal amount redeemed plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, the Borrowers may redeem, in whole or in part, the 2017 4.25% Senior Notes, 2019 3.875% Senior Notes, 2017 5.00% Senior Notes, and 2019 4.375% 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 redemption provisions related to tender offers, change of control and equity offerings, among others.
Based on the amounts outstanding at December 31, 2019,2022, required debt service for the next twelve months on all of the Senior Notessenior notes outstanding is approximately $266$264 million in interest payments.
TH Facility and RE Facility
One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$225 million (increased from C$100 million during 2019) 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 threefour of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of December 31, 2019,2022, we had approximately C$203 million outstanding C$100 million under the TH Facility with a weighted average interest rate of 3.45%6.07%.
One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of $50 million with a maturity date of October 12, 2028 (the “RE Facility”). The interest rate applicable to the RE Facility is, at our option, either (i) a base rate, subject to a floor of0.50%, plus an applicable margin of 0.50% or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a margin based on duration), subject to a floor of 0.00%, plus an applicable margin of 1.50%. Obligations under the RE Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the RE Facility are secured by certain parcels of real estate. As of December 31, 2022, we are permitted to draw downhad approximately $2 million outstanding under the RE Facility with a weighted average interest rate of 5.97%.
Based on the amounts outstanding under the TH Facility until May 23, 2020.as of December 31, 2022, required debt service for the next twelve months is estimated to be approximately $9 million in interest payments and $10 million in principal payments. Based on the amounts outstanding under the RE Facility as of December 31, 2022, required debt service for the next twelve months is not material.
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Restrictions and Covenants
Our Credit Facilities and the Senior Notes Indentures contain a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability and the ability of certain of our 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; and engage in certain transactions with affiliates. In addition, underUnder the Credit Facilities, the Borrowers are not permitted to exceed a net first lien senior secured leverage ratio of 6.50 to 1.00 when, as of the end of any fiscal quarter beginning with the first quarter of 2020, any amounts are outstanding under the Term Loan A and/or outstanding revolving loans, swingline loans and certain letters of credit exceed 30.0% of the commitments under the Revolving Credit Facility.
The restrictions under the Credit Facilities and the Senior Notes Indentures have resulted in substantially all of our consolidated assets being restricted.
As of December 31, 2019,2022, we were in compliance with all applicable financial debt covenants under the Credit Facilities, the TH Facility, RE Facility and the Senior Notes Indentures, and there were no limitations on our ability to draw on the remaining availability under our Revolving Credit Facility and TH Facility.
Cash Distributions
On January 3, 2020,4, 2023, RBI paid a dividend of $0.50$0.54 per RBI common share and Partnership made a distribution on the same day to RBI as holder of Class A common units in the amount of the aggregate dividends paid by RBI on RBI common shares. On January 3, 2020,4, 2022, Partnership also made a distribution in respect of each Partnership exchangeable unit in the amount of $0.50$0.54 per Partnership exchangeable unit.
On February 10, 2020,14, 2023, we announced that the RBI board of directors had declared a quarterly cash dividend of $0.52$0.55 per common share for the first quarter of 2020,2023, payable on April 3, 20205, 2023 to RBI shareholders of record on March 16, 2020.22, 2023. 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 $0.52$0.55 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.
RBI and Partnership are targeting a total of $2.08$2.20 in declared dividends per common share and distributions in respect of each Partnership exchangeable unit for 2020.2023.
Because we are a holding 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 10, 2020,14, 2023, we had outstanding 202,006,067 Class A common units issued to RBI and 165,372,429142,996,640 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 special voting share except as otherwise provided by law. For information on our share-based compensation and RBI’s outstanding equity awards, see Note 1514 to the accompanying consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report.
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Comparative Cash Flows
Operating Activities
Cash provided by operating activities was $1,476$1,490 million in 2019,2022, compared to $1,165$1,726 million in 2018.2021. The increasedecrease in cash provided by operating activities was driven by a decrease in income tax payments, primarily due to the 2018 payment of accrued income taxes related to the December 2017 redemption of RBI preferred shares, an increase in BK and PLK segment income and a decrease in cash used forprovided by working capital. These factors were partially offset bycapital, an increase in interest payments, and a decrease in TH segment income.
Investing Activities
Cash used for investing activities was $30$64 million in 2019,2022, compared to $44$1,103 million in 2018.2021. The change in investing activities was driven primarily by a decrease in capital expenditures.
Financing Activities
Cash used for financing activities was $842$1,307 million in 2019,2022, compared to $1,285$1,093 million in 2018.2021. The change in cash used for financing activities was driven primarily by proceeds from the Term Loan A and the issuances of the 2019 3.875% Senior Notes and the 2019 4.375% Senior Notes during 2019, an increase in capital contributions from RBI, proceeds from derivatives and the non-recurrence of the 2018 distributions to RBI to fund payments related to the December 2017 redemption of the RBI preferred shares. These factors
Contractual Obligations and Commitments
Our significant contractual obligations and commitments as of December 31, 2019 are shown2022 include:
Debt Obligations and Interest Payments — Refer to Note 9, “Long-Term Debt,” of the notes to the consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for further information on our obligations and 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 (a) | $ | 7,474 | $ | 289 | $ | 575 | $ | 1,422 | $ | 5,188 | |||||||||
| Senior Notes, including interest | 7,387 | 266 | 531 | 4,964 | 1,626 | ||||||||||||||
| Other long-term debt | 91 | 4 | 12 | 75 | — | ||||||||||||||
| Operating lease obligations (b) | 1,760 | 204 | 371 | 313 | 872 | ||||||||||||||
| Purchase commitments (c) | 659 | 612 | 43 | 4 | — | ||||||||||||||
| Finance lease obligations | 462 | 46 | 88 | 79 | 249 | ||||||||||||||
| Total | $ | 17,833 | $ | 1,421 | $ | 1,620 | $ | 6,857 | $ | 7,935 | |||||||||
timing of expected payments. Future interest payments on our outstanding debt as of December 31, 2022 total $3,138 million, with $669 million due within the next twelve months. We have notestimated our interest payments through the maturity of our Credit Facilities based on LIBOR and SOFR as of December 31, 2022.
Operating and Finance Leases — Refer to Note 10, “Leases,” of the notes to the consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for further information on our obligations and the timing of expected payments.
Purchase Commitments — Purchase obligations include commitments to purchase green coffee, certain food ingredients, advertising expenditures, and obligations related to information technology and service agreements. We have purchase obligations of approximately $567 million at December 31, 2022, with approximately $536 million due within the next 12 months.
Unrecognized Tax Benefit — Our contractual obligations tableand commitments include approximately $598$166 million of gross liabilities for unrecognized tax benefits and accrued interest and penalties 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, “Income Taxes”, of the notes 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
From time to time, we enter into agreements under which we guarantee loans made by third parties to qualified franchisees. As of December 31, 2019,2022, no material amounts are outstanding under these guarantees.
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 U.S. 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. As
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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 Firehouse Acquisition was accounted for using the acquisition method of accounting, or acquisition accounting, in accordance with ASC Topic 805, Business Combinations. The acquisition method of accounting involves the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. This allocation process involves the use of estimates and assumptions made in connection with estimating the fair value of assets acquired and liabilities assumed including cash flows expected to be derived from the use of the asset, the timing of such cash flows, the remaining useful life of assets and applicable discount rates. Acquisition accounting allows for up to one year to obtain the information necessary to finalize the fair value of all assets acquired and liabilities assumed at December 15, 2021. As of December 31, 2022, we have recorded the final allocation of consideration to net tangible and intangible assets acquired.
In the event that actual results vary from the estimates or assumptions used in the valuation or allocation process, we may be required to record an impairment charge or an increase in depreciation or amortization in future periods, or both.
See Note 3, “Firehouse Acquisition,” of the notes to the consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for additional information about accounting for the Firehouse 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 acquisitions. Our indefinite-lived intangible assets consist of the Tim Hortons brand, the Burger King brand, the Popeyes brand and the PopeyesFirehouse Subs 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. We may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test, for any reporting unit or 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 quantitative goodwill impairment test that 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, we will measure any goodwill impairment loss as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. We use an income approach and a market approach, when available, to estimate a reporting unit’s fair value, which discounts the reporting unit’s projected cash flows using a discount rate we determine from a market participant's perspective under the income approach or utilizing similar publicly traded companies as guidelines for determining fair value under the market approach. 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 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 from a market participant's perspective. 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 reviews for goodwill and the Brands as of October 1, 2019, 20182022, 2021 and 20172020 and no impairment resulted. The estimates and assumptions we use to estimate fair values when performing quantitative assessments are highly subjective judgments based on our experience and knowledge of our operations. Significant changes in the assumptions used in our analysis
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could result in an impairment charge related to goodwill or the Brands. Circumstances that could result in changes to future estimates and assumptions include, but are not limited to, expectations 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.
Long-lived Assets
Long-lived assets (including intangible assets subject to amortization)amortization and lease right-of-use assets) 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.
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.
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-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.
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-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
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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.
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 11, “Income Taxes,” of the notes 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.
New Accounting Pronouncements
See Note 2, “Significant Accounting Policies – New Accounting Pronouncements,” of 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 ofadditional information about new accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About 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.
Currency Exchange Risk
We report our results in U.S. dollars, which is our reporting currency. The operations of each of TH, BK, PLK and PLKFHS 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, PLK's and PLK'sFHS'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 million between Canadian dollar and U.S. dollar and cross-currency rate swaps with a notional value of $2,100$2,250 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 AOCIaccumulated 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 was a liabilityan asset of $144$44 million as of December 31, 2019.2022. The net unrealized losses,gains, net of tax, related to these derivative instruments included in AOCI totaled $122$50 million as of December 31, 2019.2022. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations.
We 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. 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
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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.
During 2019,2022, income from operations would have decreased or increased approximately $119$190 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.
Interest Rate Risk
We are exposed to changes in interest rates related to our Term Loan Facilities and Revolving Credit Facility, which bear interest at LIBOR and SOFR plus a spread, subject to a LIBOR and SOFR 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 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 unrealized changes in market value are recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. At December 31, 2019,2022, we had a series of receive-variable, pay-fixed interest rate swaps to hedge the variability in the interest payments on $4,000 million of our Term Loan Facilities. The total notional value of these interest rate swaps is $4,000 million, of which $3,500 million expire on November 19, 2026October 31, 2028 and $500 million expire on September 30, 2026.
Based on the portion of our variable rate debt balance in excess of the notional amount of the interest rate swaps and LIBOR and SOFR as of December 31, 2019,2022, a hypothetical 1.00% increase in LIBOR and SOFR would increase our annual interest expense by approximately $21$24 million.
Commodity Price Risk
We purchase certain products, 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.
We occasionally take forward pricing positions through our suppliers to manage commodity prices. As a result, we purchase commodities and other products 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 franchisee owners, resulting in higher or lower revenues and higher or lower costs of sales from our business. These changes may impact percentage 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.
Impact of Inflation
Disclosures Regarding Partnership Pursuant to Canadian Exemptive 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 an 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 partnership agreement) that would affect the economic rights of a Partnership exchangeable unit relative to a common 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, affiliates or persons acting jointly or in concert with the offeror) 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. 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.
Mandatory Exchange
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
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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 Partnership 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; (iii) the domestic and international growth opportunities for the Tim Hortons, Burger King, Popeyes and PopeyesFirehouse Subs brands, both in existing and new markets; (iv) our ability to accelerate international development through joint venture structures and master franchise and development 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;expansion and potential deployment of similar arrangements for Firehouse Subs in the future; (vi) the impact of our strategies on the growth of our Tim Hortons, Burger King, Popeyes and PopeyesFirehouse Subs brands and our profitability; (vii) our commitment to technology and innovation, our continued investment in our technology capabilities and our plans and strategies with respect to digital sales, our information systems and technology offerings and investments; (viii) the correlation between our sales, guest traffic and profitability to consumer discretionary spending and the factors that influence spending; (ix) our ability to drive traffic, expand our customer base and allow restaurants to expand into new dayparts through new product innovation; (x) the benefits accrued from sharing and leveraging best practices among our Tim Hortons, Burger King, Popeyes and PopeyesFirehouse Subs brands; (xi) the drivers of the long-term success for and competitive position of each of our brands as well as increased sales and profitability of our franchisees; (xii) the impact of our cost management initiatives at each of our brands; (xiii) the continued use of certain franchise incentives, and their impact on our financial results;results and our ability to mitigate such impact; (xiv) the impact of our modern image remodel initiative;initiative and our ability to mitigate the negative impact of such initiative on royalty rates through entry into new BK franchise agreements; (xv) the effects and continued impact of the COVID-19 pandemic on our results of operations, business, liquidity, prospects and restaurant operations and those of our franchisees, including local conditions and government-imposed limitations and restrictions; (xvi) our digital and marketing initiatives, including the success of our “Reclaim the Flame” initiative on sales growth and franchisee profitability; (xvii) our future financial obligations, including annual debt service requirements, and capital expenditures the source of liquidity needed to satisfy such obligations, and dividend payments, our ability to meet such obligations and the source of funds used to satisfy such obligations; (xvi)(xviii) our future uses of liquidity, including distribution payments and RBI share repurchases or partnership exchangeable unit repurchases; (xix) any future cash flow support to franchisees and the impact of Partnership exchange units; (xvii)such support on our future cash flow and financial results; (xx) the amount and timing of future FHS Transaction costs and Corporate restructuring and tax advisory fees; (xviii) our plans to build new warehouses and renovate existing warehouses and the anticipated timing for completion; (xix)(xxi) 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; (xx)(xxii) the amount of net cash settlements we expect to pay on our derivative instruments; (xxiii) our tax positions and their compliance with applicable tax laws; (xxi)(xxiv) certain accounting matters, including the impact of changes in accounting standards; (xxii)(xxv) certain tax matters, such asincluding our estimates with respect to tax matters as a result of the Tax Act, including our effectiveand their impact on future periods, and any costs associated with contesting tax rate for 2020 and the impacts of the Tax Act; (xxiii)liabilities; (xxvi) the impact of inflation on our results of operations; (xxiv)(xxvii) our goals with respect to reduction in greenhouse gas emissions; (xxviii) the impact of governmental regulation, both domestically and internationally, on our business and financial and operational results; (xxv)(xxix) the adequacy of our facilities to meet our current requirements; (xxvi)(xxx) our future financial and operational results; (xxvii)(xxxi) certain litigation matters; (xxviii)(xxxii) our target total distributionsdistribution for 2020; and (xxix)2023; (xxxiii) our sustainability initiatives and the impact of government sustainability regulation and initiatives.initiatives; and (xxxiv) the impact of the conflict between Russia and Ukraine.
Our forward-looking statements, included in this Annual Report and elsewhere, represent management’s expectations as of the date hereof. Thesethat they are made. Our forward-looking statements are based on certain assumptions and analyses that we made by Partnership in light of ourits experience and ourits perception of historical trends, current conditions and expected future developments, as well as other factors we believeit believes 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 the effects of the COVID-19 pandemic, 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 fully franchised business model; (4) our franchisees' financial stability and their ability to access and maintain the liquidity necessary to operate their businesses; (5) our supply chain operations; (6) our ownership and leasing of real estate; (7) the effectiveness of our marketing, advertising and advertisingdigital programs and franchisee support of these programs; (5)(8) significant and rapid fluctuations in interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (6)(9) our ability to successfully implement our domestic and international growth strategy for each of our brands and risks related to our international
50
operations; (7)(10) our reliance on master franchisees, andincluding subfranchisees to accelerate restaurant growth; (8)(11) the ability of the counterparties to our credit facilities’ and derivatives’ to fulfill their commitments and/or obligations; (9)and (12) changes in applicable tax laws or interpretations thereof; and (10) risks related to the complexity of the Tax Actthereof, and our ability to accurately interpret and predict itsthe impact of such changes or interpretations on our financial condition and results.results; (13) evolving legislation and regulations in the area of franchise and labor and employment law; and (14) our ability to address environmental and social sustainability issues.
We operate in a very competitive and rapidly changing environment and our inability to successfully manage any of the above risks may permit our competitors to increase their market share and may decrease our profitability. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. 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 ourthis 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.authorities. 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.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
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |||||
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, 2019.2022. 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, 20192022 based on criteria established in Internal 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, 2019.2022.
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, 20192022 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
To the Partners, Restaurant Brands International Limited Partnership, and Board of Directors,
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, 20192022 and 2018,2021, 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, 2019,2022, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019,2022, 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”)(PCAOB), the Partnership’s internal control over financial reporting as of December 31, 2019,2022, 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 21, 202022, 2023 expressed an unqualified opinion on the effectiveness of the Partnership’s internal control over financial reporting.
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 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, 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 regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
As discussed in Notes 2 and 11 to the consolidated financial statements, the Partnership records a liability for unrecognized tax benefits associated with uncertain tax positions. The Partnership recognizes tax benefits from uncertain tax positions only if there is more than a 50% likelihood that the tax positions will be sustained upon examination by the taxing authorities, based on the technical merits of the positions. As of December 31, 2019,2022, the Partnership has recorded gross unrecognized tax benefits, excluding associated interest and penalties, of $506$139 million.
We identified the assessment of gross unrecognized tax benefits resulting from certain tax planning strategies implemented during the year as a critical audit matter. The assessment of identifyingIdentifying and determining certain uncertain tax positions arising from implementing tax planning strategies involved a number of uncertaintiesjudgments and assumptions, which included complex considerations of tax law. As a result, subjective and complex auditor judgment, including the involvement of tax professionals with specialized skills and knowledge, was required to evaluate the Partnership’s interpretation of tax law and its determination of which tax positions have more than a 50% likelihood of being sustained upon examination.
54
The following are the primary procedures we performed to address this critical audit matter includedmatter. We evaluated the following. Wedesign and tested the operating effectiveness of certain internal controls overrelated to the Partnership’s gross unrecognized tax benefitbenefits process, including controls related to 1) interpretinterpreting tax law, 2) identifyidentifying significant uncertain tax positions arising from tax planning strategies that were implemented during the year, 3) evaluateevaluating the tax consequences of the related strategies, and 4) evaluateevaluating which of the Partnership’s tax positions may not be sustained upon examination. In addition, we involved tax professionals with specialized skills and knowledge, who assisted in:
•obtaining an understanding of the Partnership’s tax planning strategies
•evaluating the Partnership’s interpretation of the relevant tax laws by developing an independent assessment
•evaluating the Partnership’s identification of uncertain tax positions taken by the Partnership to assess the tax consequences of these related tax positions and
•performing an independent assessment of the Partnership’s tax positions and comparing our assessment to the Partnership’s assessment.
(signed) KPMG LLP
We have served as the Partnership's auditor since 1989.
Miami, Florida
February 21, 202022, 2023
Report of Independent Registered Public Accounting Firm
To the Partners, Restaurant Brands International Limited Partnership, and Board of Directors,
Restaurant Brands International Inc., the sole general partner of Restaurant Brands International Limited Partnership:
Opinion on Internal Control overOver Financial Reporting
We have audited Restaurant Brands International Limited Partnership and subsidiaries’ (the “Partnership”)Partnership) internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on criteria established in 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”)(PCAOB), the consolidated balance sheets of the Partnership as of December 31, 20192022 and 2018,2021, 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, 2019,2022, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements), and our report dated February 21, 202022, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
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 Management’s Report on Internal Control overOver 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 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 overOver 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.
(signed) KPMG LLP
Miami, Florida
February 21, 202022, 2023
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions of U.S. dollars, except unit data)
| As of December 31, | As of December 31, | |||||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||||
| ASSETS | ASSETS | |||||||||||||||||
| Current assets: | Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 1,533 | $ | 913 | Cash and cash equivalents | $ | 1,178 | $ | 1,087 | |||||||||
| Accounts and notes receivable, net of allowance of $13 and $14, respectively | 527 | 452 | ||||||||||||||||
| Accounts and notes receivable, net of allowance of $36 and $18, respectively | Accounts and notes receivable, net of allowance of $36 and $18, respectively | 614 | 547 | |||||||||||||||
| Inventories, net | 84 | 75 | Inventories, net | 133 | 96 | |||||||||||||
| Prepaids and other current assets | 52 | 60 | Prepaids and other current assets | 123 | 86 | |||||||||||||
| Total current assets | 2,196 | 1,500 | Total current assets | 2,048 | 1,816 | |||||||||||||
| Property and equipment, net of accumulated depreciation and amortization of $746 and $704, respectively | 2,007 | 1,996 | ||||||||||||||||
| Property and equipment, net of accumulated depreciation and amortization of $1,061 and $979, respectively | Property and equipment, net of accumulated depreciation and amortization of $1,061 and $979, respectively | 1,950 | 2,035 | |||||||||||||||
| Operating lease assets, net | 1,176 | — | Operating lease assets, net | 1,082 | 1,130 | |||||||||||||
| Intangible assets, net | 10,563 | 10,463 | Intangible assets, net | 10,991 | 11,417 | |||||||||||||
| Goodwill | 5,651 | 5,486 | Goodwill | 5,688 | 6,006 | |||||||||||||
| Net investment in property leased to franchisees | 48 | 54 | Net investment in property leased to franchisees | 82 | 80 | |||||||||||||
| Other assets, net | 719 | 642 | Other assets, net | 905 | 762 | |||||||||||||
| Total assets | $ | 22,360 | $ | 20,141 | Total assets | $ | 22,746 | $ | 23,246 | |||||||||
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | |||||||||||||||||
| Current liabilities: | Current liabilities: | |||||||||||||||||
| Accounts and drafts payable | $ | 644 | $ | 513 | Accounts and drafts payable | $ | 758 | $ | 614 | |||||||||
| Other accrued liabilities | 790 | 637 | Other accrued liabilities | 1,001 | 947 | |||||||||||||
| Gift card liability | 168 | 167 | Gift card liability | 230 | 221 | |||||||||||||
| Current portion of long term debt and finance leases | 101 | 91 | ||||||||||||||||
| Current portion of long-term debt and finance leases | Current portion of long-term debt and finance leases | 127 | 96 | |||||||||||||||
| Total current liabilities | 1,703 | 1,408 | Total current liabilities | 2,116 | 1,878 | |||||||||||||
| Term debt, net of current portion | 11,759 | 11,823 | ||||||||||||||||
| Long-term debt, net of current portion | Long-term debt, net of current portion | 12,839 | 12,916 | |||||||||||||||
| Finance leases, net of current portion | 288 | 226 | Finance leases, net of current portion | 311 | 333 | |||||||||||||
| Operating lease liabilities, net of current portion | 1,089 | — | Operating lease liabilities, net of current portion | 1,027 | 1,070 | |||||||||||||
| Other liabilities, net | 1,698 | 1,547 | Other liabilities, net | 872 | 1,822 | |||||||||||||
| Deferred income taxes, net | 1,564 | 1,519 | Deferred income taxes, net | 1,313 | 1,374 | |||||||||||||
| Total liabilities | 18,101 | 16,523 | Total liabilities | 18,478 | 19,393 | |||||||||||||
| Commitments and contingencies (Note 18) | ||||||||||||||||||
| Commitments and contingencies (Note 17) | Commitments and contingencies (Note 17) | |||||||||||||||||
| Partners’ capital: | Partners’ capital: | |||||||||||||||||
| Class A common units - 202,006,067 units issued and outstanding at December 31, 2019 and December 31, 2018 | 7,786 | 4,323 | ||||||||||||||||
| Partnership exchangeable units - 165,507,199 units issued and outstanding at December 31, 2019; 207,523,591 units issued and outstanding at December 31, 2018 | (2,353 | ) | 730 | |||||||||||||||
| Class A common units - 202,006,067 units issued and outstanding at December 31, 2022 and December 31, 2021 | Class A common units - 202,006,067 units issued and outstanding at December 31, 2022 and December 31, 2021 | 8,735 | 8,421 | |||||||||||||||
| Partnership exchangeable units - 142,996,640 units issued and outstanding at December 31, 2022; 144,993,458 units issued and outstanding at December 31, 2021 | Partnership exchangeable units - 142,996,640 units issued and outstanding at December 31, 2022; 144,993,458 units issued and outstanding at December 31, 2021 | (3,496) | (3,547) | |||||||||||||||
| Accumulated other comprehensive income (loss) | (1,178 | ) | (1,437 | ) | Accumulated other comprehensive income (loss) | (973) | (1,024) | |||||||||||
| Total Partners’ capital | 4,255 | 3,616 | Total Partners’ capital | 4,266 | 3,850 | |||||||||||||
| Noncontrolling interests | 4 | 2 | Noncontrolling interests | 2 | 3 | |||||||||||||
| Total equity | 4,259 | 3,618 | Total equity | 4,268 | 3,853 | |||||||||||||
| Total liabilities and equity | $ | 22,360 | $ | 20,141 | Total liabilities and equity | $ | 22,746 | $ | 23,246 | |||||||||
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/ | By: | /s/ Ali Hedayat | |||||||||||||||||
| Ali Hedayat, Director of Restaurant Brands International Inc. | ||||||||||||||||||||
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Consolidated Statements of Operations
(In millions of U.S. dollars, except per unit data)
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| Revenues: | Revenues: | |||||||||||||||||||||||||||
| Sales | $ | 2,362 | $ | 2,355 | $ | 2,390 | Sales | $ | 2,819 | $ | 2,378 | $ | 2,013 | |||||||||||||||
| Franchise and property revenues | 3,241 | 3,002 | 2,186 | Franchise and property revenues | 2,661 | 2,443 | 2,121 | |||||||||||||||||||||
| Advertising revenues and other services | Advertising revenues and other services | 1,025 | 918 | 834 | ||||||||||||||||||||||||
| Total revenues | 5,603 | 5,357 | 4,576 | Total revenues | 6,505 | 5,739 | 4,968 | |||||||||||||||||||||
| Operating costs and expenses: | Operating costs and expenses: | |||||||||||||||||||||||||||
| Cost of sales | 1,813 | 1,818 | 1,850 | Cost of sales | 2,312 | 1,890 | 1,610 | |||||||||||||||||||||
| Franchise and property expenses | 540 | 422 | 478 | Franchise and property expenses | 518 | 489 | 515 | |||||||||||||||||||||
| Selling, general and administrative expenses | 1,264 | 1,214 | 416 | |||||||||||||||||||||||||
| Advertising expenses and other services | Advertising expenses and other services | 1,077 | 986 | 870 | ||||||||||||||||||||||||
| General and administrative expenses | General and administrative expenses | 631 | 484 | 407 | ||||||||||||||||||||||||
| (Income) loss from equity method investments | (11 | ) | (22 | ) | (12 | ) | (Income) loss from equity method investments | 44 | 4 | 39 | ||||||||||||||||||
| Other operating expenses (income), net | (10 | ) | 8 | 109 | Other operating expenses (income), net | 25 | 7 | 105 | ||||||||||||||||||||
| Total operating costs and expenses | 3,596 | 3,440 | 2,841 | Total operating costs and expenses | 4,607 | 3,860 | 3,546 | |||||||||||||||||||||
| Income from operations | 2,007 | 1,917 | 1,735 | Income from operations | 1,898 | 1,879 | 1,422 | |||||||||||||||||||||
| Interest expense, net | 532 | 535 | 512 | Interest expense, net | 533 | 505 | 508 | |||||||||||||||||||||
| Loss on early extinguishment of debt | 23 | — | 122 | Loss on early extinguishment of debt | — | 11 | 98 | |||||||||||||||||||||
| Income before income taxes | 1,452 | 1,382 | 1,101 | Income before income taxes | 1,365 | 1,363 | 816 | |||||||||||||||||||||
| Income tax expense (benefit) | 341 | 238 | (134 | ) | ||||||||||||||||||||||||
| Income tax (benefit) expense | Income tax (benefit) expense | (117) | 110 | 66 | ||||||||||||||||||||||||
| Net income | 1,111 | 1,144 | 1,235 | Net income | 1,482 | 1,253 | 750 | |||||||||||||||||||||
| Net income attributable to noncontrolling interests | 2 | 1 | 2 | Net income attributable to noncontrolling interests | 3 | 4 | 2 | |||||||||||||||||||||
| Partnership preferred unit distributions | — | — | 256 | |||||||||||||||||||||||||
| Gain on redemption of Partnership preferred units (Note 13) | — | — | (234 | ) | ||||||||||||||||||||||||
| Net income attributable to common unitholders | $ | 1,109 | $ | 1,143 | $ | 1,211 | Net income attributable to common unitholders | $ | 1,479 | $ | 1,249 | $ | 748 | |||||||||||||||
| Earnings per unit - basic and diluted (Note 4): | Earnings per unit - basic and diluted (Note 4): | |||||||||||||||||||||||||||
| Class A common units | $ | 3.18 | $ | 3.03 | $ | 3.10 | Class A common units | $ | 4.99 | $ | 4.15 | $ | 2.41 | |||||||||||||||
| Partnership exchangeable units | $ | 2.40 | $ | 2.46 | $ | 2.59 | Partnership exchangeable units | $ | 3.28 | $ | 2.72 | $ | 1.62 | |||||||||||||||
| Weighted average units outstanding - basic and diluted (Note 4): | ||||||||||||||||||||||||||||
| Weighted average units outstanding - basic and diluted (in millions) (Note 4): | Weighted average units outstanding - basic and diluted (in millions) (Note 4): | |||||||||||||||||||||||||||
| Class A common units | 202 | 202 | 202 | Class A common units | 202 | 202 | 202 | |||||||||||||||||||||
| Partnership exchangeable units | 194 | 216 | 226 | Partnership exchangeable units | 144 | 151 | 162 | |||||||||||||||||||||
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)
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| Net income | $ | 1,111 | $ | 1,144 | $ | 1,235 | Net income | $ | 1,482 | $ | 1,253 | $ | 750 | |||||||||||||||
| Foreign currency translation adjustment | 409 | (831 | ) | 824 | Foreign currency translation adjustment | (703) | (67) | 332 | ||||||||||||||||||||
| Net change in fair value of net investment hedges, net of tax of $32, $(101), and $13 | (86 | ) | 282 | (371 | ) | |||||||||||||||||||||||
| Net change in fair value of cash flow hedges, net of tax of $29, $7, and $4 | (77 | ) | (19 | ) | (11 | ) | ||||||||||||||||||||||
| Amounts reclassified to earnings of cash flow hedges, net of tax of $(6), $(5), and $(9) | 15 | 14 | 25 | |||||||||||||||||||||||||
| Gain (loss) recognized on defined benefit pension plans, net of tax of $1, $0, and $2 | (2 | ) | 1 | 4 | ||||||||||||||||||||||||
| Net change in fair value of net investment hedges, net of tax of $(77), $15, and $60 | Net change in fair value of net investment hedges, net of tax of $(77), $15, and $60 | 332 | 111 | (242) | ||||||||||||||||||||||||
| Net change in fair value of cash flow hedges, net of tax of $(141), $(36), and $91 | Net change in fair value of cash flow hedges, net of tax of $(141), $(36), and $91 | 382 | 96 | (244) | ||||||||||||||||||||||||
| Amounts reclassified to earnings of cash flow hedges, net of tax of $(12), $(36), and $(27) | Amounts reclassified to earnings of cash flow hedges, net of tax of $(12), $(36), and $(27) | 34 | 96 | 73 | ||||||||||||||||||||||||
| Gain (loss) recognized on defined benefit pension plans and other items, net of tax of $(2), $(3), and $3 | Gain (loss) recognized on defined benefit pension plans and other items, net of tax of $(2), $(3), and $3 | 6 | 15 | (16) | ||||||||||||||||||||||||
| Other comprehensive income (loss) | 259 | (553 | ) | 471 | Other comprehensive income (loss) | 51 | 251 | (97) | ||||||||||||||||||||
| Comprehensive income (loss) | 1,370 | 591 | 1,706 | Comprehensive income (loss) | 1,533 | 1,504 | 653 | |||||||||||||||||||||
| Comprehensive income (loss) attributable to noncontrolling interests | 2 | 1 | 2 | Comprehensive income (loss) attributable to noncontrolling interests | 3 | 4 | 2 | |||||||||||||||||||||
| Comprehensive income (loss) attributable to preferred unitholders | — | — | 22 | |||||||||||||||||||||||||
| Comprehensive income (loss) attributable to common unitholders | $ | 1,368 | $ | 590 | $ | 1,682 | Comprehensive income (loss) attributable to common unitholders | $ | 1,530 | $ | 1,500 | $ | 651 | |||||||||||||||
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 unit data)
| Class A Common Units | Partnership Exchangeable units | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A Common Units | Partnership Exchangeable units | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total | Units | Amount | Units | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2019 | Balances at December 31, 2019 | 202,006,067 | $ | 7,786 | 165,507,199 | $ | (2,353) | $ | (1,178) | $ | 4 | $ | 4,259 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Units | Amount | Units | Amount | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at Balances at December 31, 2016 | 202,006,067 | $ | 3,364 | 226,995,404 | $ | 1,477 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions declared on Class A common units ($3.12 per unit) | Distributions declared on Class A common units ($3.12 per unit) | — | (631) | — | — | — | — | (631) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions declared on partnership exchangeable units ($2.08 per unit) | Distributions declared on partnership exchangeable units ($2.08 per unit) | — | — | — | (336) | — | — | (336) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Partnership exchangeable units for RBI common shares | — | 11 | (185,333 | ) | (11 | ) | — | — | — | Exchange of Partnership exchangeable units for RBI common shares | — | 195 | (3,636,169) | (195) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of Partnership exchangeable units | — | — | (10,000,000 | ) | (561 | ) | — | — | (561 | ) | Repurchase of Partnership exchangeable units | — | — | (6,757,692) | (380) | — | — | (380) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Capital contribution from RBI Inc. | — | 116 | — | — | — | — | 116 | Capital contribution from RBI Inc. | — | 158 | — | — | — | — | 158 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Restaurant VIE distributions | — | — | — | — | — | — | — | Restaurant VIE distributions | — | — | — | — | — | (2) | (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | 612 | — | 531 | — | 1 | 1,144 | Net income | — | 486 | — | 262 | — | 2 | 750 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (553 | ) | — | (553 | ) | Other comprehensive income (loss) | — | — | — | — | (97) | — | (97) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at Balances at December 31, 2018 | 202,006,067 | $ | 4,323 | 207,523,591 | $ | 730 | $ | (1,437 | ) | $ | 2 | $ | 3,618 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative effect adjustment (Note 16) | — | 12 | — | 9 | — | — | 21 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions declared on Class A common units ($2.70 per unit) | — | (545 | ) | — | — | — | — | (545 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions declared on partnership exchangeable units ($2.00 per unit) | — | — | — | (382 | ) | — | — | (382 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2020 | Balances at December 31, 2020 | 202,006,067 | $ | 7,994 | 155,113,338 | $ | (3,002) | $ | (1,275) | $ | 4 | $ | 3,721 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions declared on Class A common units ($3.26 per unit) | Distributions declared on Class A common units ($3.26 per unit) | — | (658) | — | — | — | — | (658) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions declared on partnership exchangeable units ($2.12 per unit) | Distributions declared on partnership exchangeable units ($2.12 per unit) | — | — | — | (318) | — | — | (318) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Partnership exchangeable units for RBI common shares | — | 3,176 | (42,016,392 | ) | (3,176 | ) | — | — | — | Exchange of Partnership exchangeable units for RBI common shares | — | 638 | (10,119,880) | (638) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to RBI for repurchase of RBI common shares | Distributions to RBI for repurchase of RBI common shares | — | (551) | — | — | — | — | (551) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Capital contribution from RBI Inc. | — | 177 | — | — | — | — | 177 | Capital contribution from RBI Inc. | — | 160 | — | — | — | — | 160 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Restaurant VIE distributions | Restaurant VIE distributions | — | — | — | — | — | (5) | (5) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | 643 | — | 466 | — | 2 | 1,111 | Net income | — | 838 | — | 411 | — | 4 | 1,253 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | 259 | — | 259 | Other comprehensive income (loss) | — | — | — | — | 251 | — | 251 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2019 | 202,006,067 | $ | 7,786 | 165,507,199 | $ | (2,353 | ) | $ | (1,178 | ) | $ | 4 | $ | 4,259 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | Balances at December 31, 2021 | 202,006,067 | $ | 8,421 | 144,993,458 | $ | (3,547) | $ | (1,024) | $ | 3 | $ | 3,853 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions declared on Class A common units ($3.28 per unit) | Distributions declared on Class A common units ($3.28 per unit) | — | (664) | — | — | — | — | (664) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions declared on partnership exchangeable units ($2.16 per unit) | Distributions declared on partnership exchangeable units ($2.16 per unit) | — | — | — | (309) | — | — | (309) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Partnership exchangeable units for RBI common shares | Exchange of Partnership exchangeable units for RBI common shares | — | 111 | (1,996,818) | (111) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to RBI for repurchase of RBI common shares | Distribution to RBI for repurchase of RBI common shares | — | (326) | — | — | — | — | (326) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Capital contribution from RBI Inc. | Capital contribution from RBI Inc. | — | 185 | — | — | — | — | 185 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restaurant VIE distributions | Restaurant VIE distributions | — | — | — | — | — | (4) | (4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | Net income | — | 1,008 | — | 471 | — | 3 | 1,482 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | Other comprehensive income (loss) | — | — | — | — | 51 | — | 51 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2022 | Balances at December 31, 2022 | 202,006,067 | $ | 8,735 | 142,996,640 | $ | (3,496) | $ | (973) | $ | 2 | $ | 4,268 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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)
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| Cash flows from operating activities: | Cash flows from operating activities: | |||||||||||||||||||||||||||
| Net income | $ | 1,111 | $ | 1,144 | $ | 1,235 | Net income | $ | 1,482 | $ | 1,253 | $ | 750 | |||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||||||
| Depreciation and amortization | 185 | 180 | 182 | Depreciation and amortization | 190 | 201 | 189 | |||||||||||||||||||||
| Premiums paid and non-cash loss on early extinguishment of debt | 16 | — | 119 | Premiums paid and non-cash loss on early extinguishment of debt | — | 11 | 97 | |||||||||||||||||||||
| Amortization of deferred financing costs and debt issuance discount | 29 | 29 | 33 | Amortization of deferred financing costs and debt issuance discount | 28 | 27 | 26 | |||||||||||||||||||||
| (Income) loss from equity method investments | (11 | ) | (22 | ) | (12 | ) | (Income) loss from equity method investments | 44 | 4 | 39 | ||||||||||||||||||
| Loss (gain) on remeasurement of foreign denominated transactions | (14 | ) | (33 | ) | 77 | Loss (gain) on remeasurement of foreign denominated transactions | (4) | (76) | 100 | |||||||||||||||||||
| Net (gains) losses on derivatives | (49 | ) | (40 | ) | 31 | Net (gains) losses on derivatives | (9) | 87 | 32 | |||||||||||||||||||
| Share-based compensation expense | 68 | 48 | 48 | |||||||||||||||||||||||||
| Share-based compensation and non-cash incentive compensation expense | Share-based compensation and non-cash incentive compensation expense | 136 | 102 | 84 | ||||||||||||||||||||||||
| Deferred income taxes | 58 | 29 | (742 | ) | Deferred income taxes | (60) | (5) | (208) | ||||||||||||||||||||
| Other | 6 | 5 | 18 | Other | 19 | (16) | 28 | |||||||||||||||||||||
| Changes in current assets and liabilities, excluding acquisitions and dispositions: | Changes in current assets and liabilities, excluding acquisitions and dispositions: | |||||||||||||||||||||||||||
| Accounts and notes receivable | (53 | ) | 19 | (30 | ) | Accounts and notes receivable | (110) | 8 | (30) | |||||||||||||||||||
| Inventories and prepaids and other current assets | (15 | ) | (7 | ) | 19 | Inventories and prepaids and other current assets | (61) | 12 | (10) | |||||||||||||||||||
| Accounts and drafts payable | 112 | 41 | 14 | Accounts and drafts payable | 169 | 149 | (183) | |||||||||||||||||||||
| Other accrued liabilities and gift card liability | (51 | ) | (219 | ) | 360 | Other accrued liabilities and gift card liability | 37 | 67 | 6 | |||||||||||||||||||
| Tenant inducements paid to franchisees | (54 | ) | (52 | ) | (20 | ) | Tenant inducements paid to franchisees | (26) | (20) | (22) | ||||||||||||||||||
| Other long-term assets and liabilities | 138 | 43 | 99 | Other long-term assets and liabilities | (345) | (78) | 23 | |||||||||||||||||||||
| Net cash provided by operating activities | 1,476 | 1,165 | 1,431 | Net cash provided by operating activities | 1,490 | 1,726 | 921 | |||||||||||||||||||||
| Cash flows from investing activities: | Cash flows from investing activities: | |||||||||||||||||||||||||||
| Payments for property and equipment | (62 | ) | (86 | ) | (37 | ) | Payments for property and equipment | (100) | (106) | (117) | ||||||||||||||||||
| Net proceeds from disposal of assets, restaurant closures and refranchisings | 8 | 8 | 26 | Net proceeds from disposal of assets, restaurant closures and refranchisings | 12 | 16 | 12 | |||||||||||||||||||||
| Net payment for purchase of Popeyes, net of cash acquired | — | — | (1,636 | ) | ||||||||||||||||||||||||
| Net payment for purchase of Firehouse Subs, net of cash acquired | Net payment for purchase of Firehouse Subs, net of cash acquired | (12) | (1,004) | — | ||||||||||||||||||||||||
| Settlement/sale of derivatives, net | 24 | 17 | 772 | Settlement/sale of derivatives, net | 71 | 5 | 33 | |||||||||||||||||||||
| Other investing activities, net | — | 17 | 17 | Other investing activities, net | (35) | (14) | (7) | |||||||||||||||||||||
| Net cash used for investing activities | (30 | ) | (44 | ) | (858 | ) | Net cash used for investing activities | (64) | (1,103) | (79) | ||||||||||||||||||
| Cash flows from financing activities: | Cash flows from financing activities: | |||||||||||||||||||||||||||
| Proceeds from issuance of long-term debt | 2,250 | 75 | 5,850 | |||||||||||||||||||||||||
| Repayments of long-term debt and finance leases | (2,266 | ) | (74 | ) | (2,742 | ) | ||||||||||||||||||||||
| Distributions to RBI for payments in connection with redemption of preferred shares | — | (60 | ) | (3,006 | ) | |||||||||||||||||||||||
| Proceeds from revolving line of credit and long-term debt | Proceeds from revolving line of credit and long-term debt | 2 | 1,335 | 5,235 | ||||||||||||||||||||||||
| Repayments of revolving line of credit, long-term debt and finance leases | Repayments of revolving line of credit, long-term debt and finance leases | (94) | (889) | (4,708) | ||||||||||||||||||||||||
| Payment of financing costs | (50 | ) | (3 | ) | (63 | ) | Payment of financing costs | — | (19) | (43) | ||||||||||||||||||
| Distributions paid on Class A, preferred and Partnership exchangeable units | (901 | ) | (728 | ) | (664 | ) | ||||||||||||||||||||||
| Distributions on Class A common and Partnership exchangeable units | Distributions on Class A common and Partnership exchangeable units | (971) | (974) | (959) | ||||||||||||||||||||||||
| Repurchase of Partnership exchangeable units | — | (561 | ) | (330 | ) | Repurchase of Partnership exchangeable units | — | — | (380) | |||||||||||||||||||
| Capital contribution from RBI Inc. | 102 | 61 | 29 | |||||||||||||||||||||||||
| Proceeds from derivatives | 23 | — | — | |||||||||||||||||||||||||
| Distributions to RBI for repurchase of RBI common shares | Distributions to RBI for repurchase of RBI common shares | (326) | (551) | — | ||||||||||||||||||||||||
| Capital contribution from RBI | Capital contribution from RBI | 51 | 60 | 82 | ||||||||||||||||||||||||
| (Payments) proceeds from derivatives | (Payments) proceeds from derivatives | 34 | (51) | (46) | ||||||||||||||||||||||||
| Other financing activities, net | — | 5 | (10 | ) | Other financing activities, net | (3) | (4) | (2) | ||||||||||||||||||||
| Net cash used for financing activities | (842 | ) | (1,285 | ) | (936 | ) | Net cash used for financing activities | (1,307) | (1,093) | (821) | ||||||||||||||||||
| Effect of exchange rates on cash and cash equivalents | 16 | (20 | ) | 24 | Effect of exchange rates on cash and cash equivalents | (28) | (3) | 6 | ||||||||||||||||||||
| Increase (decrease) in cash and cash equivalents | 620 | (184 | ) | (339 | ) | Increase (decrease) in cash and cash equivalents | 91 | (473) | 27 | |||||||||||||||||||
| Cash and cash equivalents at beginning of period | 913 | 1,097 | 1,436 | Cash and cash equivalents at beginning of period | 1,087 | 1,560 | 1,533 | |||||||||||||||||||||
| Cash and cash equivalents at end of period | $ | 1,533 | $ | 913 | $ | 1,097 | Cash and cash equivalents at end of period | $ | 1,178 | $ | 1,087 | $ | 1,560 | |||||||||||||||
| Supplemental cash flow disclosures: | Supplemental cash flow disclosures: | |||||||||||||||||||||||||||
| Interest paid | $ | 584 | $ | 561 | $ | 447 | Interest paid | $ | 487 | $ | 404 | $ | 463 | |||||||||||||||
| Income taxes paid | $ | 248 | $ | 433 | $ | 200 | ||||||||||||||||||||||
| Income taxes paid, net | Income taxes paid, net | $ | 275 | $ | 256 | $ | 267 | |||||||||||||||||||||
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
Description of Business
Restaurant Brands International Limited Partnership (“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.Canadian limited partnership. On December 15, 2021 we acquired FRG, LLC (“Firehouse Subs”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King® brand (“Burger King” or “BK”), and chicken under the Popeyes® brand (“Popeyes” or “PLK”) and sandwiches under the Firehouse Subs® brand (“Firehouse” or “FHS”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of December 31, 2019,2022, we franchised or owned 4,9325,600 Tim Hortons restaurants, 18,83819,789 Burger King restaurants, 4,091 Popeyes restaurants, and 3,316 Popeyes1,242 Firehouse restaurants, for a total of 27,08630,722 restaurants, and operate in more than 100 countries and U.S. territories.countries. Approximately 100% of current system-wide restaurants are franchised.
We are a subsidiary of Restaurant Brands International Inc. (“RBI”). RBI is our sole 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.
All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated.
Note 2. Significant Accounting Policies
Fiscal Year
We operate on a monthly calendar, with a fiscal year that ends on December 31.
Basis of Presentation
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements (the "Financial Statements") include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. We also consolidate marketing funds we control. 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 maximum exposure to loss resulting from involvement with VIEs is attributable to accounts and notes receivable balances, investment balances, outstanding loan guarantees and future lease payments, where applicable.
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 consider ourselves the primary beneficiary of any such entity that 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. We perform an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of December 31, 20192022 and 2018,2021, we determined that we are the primary beneficiary of 3541 and 1746 Restaurant VIEs,
62
respectively, and accordingly, have consolidated the results of operations, assets and liabilities, and cash flows of these Restaurant VIEs in our Financial Statements.
Assets and liabilities related to consolidated VIEs are not significant to our total consolidated assets and liabilities. 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.
Reclassifications
Certain prior year amounts in the accompanying consolidated financial statements and notes to the consolidated financial statements have been reclassified in order to be comparable with the current year classifications. These consist of the 2021 reclassification of $9 million of technology fee revenues from Franchise and property revenues to Advertising revenues and other services and $24 million of technology expenses from General and administrative expenses to Advertising expenses and other services. These reclassifications did not arise as a result of any changes to accounting policies and relate entirely to presentation with no effect on previously reported net income.
Foreign Currency Translation and Transaction Gains and Losses
Our functional currency is the U.S. dollar, since our term loans and senior secured notes are denominated in U.S. dollars. The functional currency of each of our operating subsidiaries is generally the currency of 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. Income, expenses and 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 are reported as a component of accumulated other comprehensive income (loss) (“AOCI”) in the consolidated statements of equity.
For any transaction that is denominated in a currency different from the entity’s functional currency, we record a gain or loss based on the difference between the foreign exchange rate at the transaction date and the foreign exchange rate at the transaction settlement date (or rate at period end, if unsettled) which is included within other operating expenses (income), net in the consolidated statements of operations.
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less and credit card receivables are considered cash equivalents.
Accounts and Notes Receivable, net
Our credit loss exposure is mainly concentrated in our accounts and notes receivable portfolio, which consists primarily of amounts due from franchisees, including royalties, rents, franchise fees, contributions due to advertising funds we manage and, in the case of our TH segment, amounts due for supply chain sales. Accounts and notes receivable are reported net of an allowance for expected credit losses over the estimated life of the receivable. Credit losses are estimated based on aging, historical collection experience, financial position of the franchisee and other factors, including those related to current economic conditions and reasonable and supportable forecasts of future conditions.
Bad debt expense recognized for expected credit losses is classified in our consolidated statement of operations as Cost of sales, Franchise and property expenses or Advertising expenses and other services, based on the nature of the underlying receivable. Net bad debt expense (recoveries) totaled $19 million in 2022, $(9) million in 2021 and $33 million in 2020.
Inventories
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 materialmaterials 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, which is recognized using the straight-line method over the following estimated useful 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; and (iv) manufacturing equipment – up to 25 years. 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.
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Major improvements are capitalized, while maintenance and repairs are expensed when incurred.
We transitioned to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), from ASC Topic 840, Leases (the “Previous Standard”)record capitalized software at historical cost less accumulated amortization, which is recognized using the straight-line method. Amortization expense is based on January 1, 2019. Our Financial Statements reflect the application of ASC 842 guidance beginning in 2019, while our Financial Statements for prior periods were prepared under the guidanceestimated useful life of the Previous Standard. See Note 10, Leases,software, which is primarily up to five years, once the asset is available for further information about our transitionits intended use.
Implementation costs incurred in connection with Cloud Computing Arrangements (“CCA”) are capitalized consistently with costs capitalized for internal-use software. Capitalized CCA implementation costs are included in “Other assets” in the consolidated balance sheets and are amortized over the term of the related hosting agreement, including renewal periods that are reasonably certain to this new lease guidance on a modified retrospective basis usingbe exercised. Amortization expense of CCA implementation costs is classified as “General and administrative expenses” in the effective date transition method.consolidated statements of operations.
Leases
In all leases, whether we are the lessor or lessee, we define lease term as the noncancellable term of the lease plus any renewals covered by renewal options that are reasonably certain of exercise based on our assessment of the economic factors relevant to the lessee. The noncancellable term of the lease commences on the date the lessor makes the underlying property in the lease available to the lessee, irrespective of when lease payments begin under the contract.
Lessor Accounting
We recognize lease payments for operating leases as property revenue on a straight-line basis over the lease term, and property revenue is presented net of any related sales tax. Lease incentive payments we make to lessees are amortized as a reduction in property
revenue over the lease term. In accordance with ASC 842, weWe account for reimbursements of maintenance and property tax costs paid to us by lessees as property revenue. These expenses and reimbursements were presented on a net basis under the Previous Standard.
We also have net investments in properties leased to franchisees, which meet the criteria of sales-type leases or met the criteria of direct financing leases under the Previous Standard.previous accounting guidance. Investments in sales-type leases and direct financing leases are recorded on a net basis, consisting of the gross investmentbasis. Profit on sales-type leases is recognized at lease commencement and estimated residual valuerecorded in the lease, less unearned income.other operating expenses (income), net. Unearned income on direct financing leases is deferred, included in the net investment in the lease, and recognized over the lease term yielding a constant periodic rate of return on the net investment in the lease. We do not remeasure the net investment in a direct financing lease unless the lease is modified and that modification is not accounted for as a separate contract.
We recognize variable lease payment income for operating and direct financing leases in the period when changes in facts and circumstances on which the variable lease payments are based occur.
Lessee Accounting
In accordance with ASC 842, in leases where we are the lessee, we recognize a right-of-use ("ROU"(“ROU”) asset and lease liability at lease commencement, which are measured by discounting lease payments using our incremental borrowing rate as the discount rate. We determine the incremental borrowing rate applicable to each lease by reference to our outstanding secured borrowings and implied spreads over the risk-free discount rates that correspond to the term of each lease, as adjusted for the currency of the lease. Subsequent amortization of the ROU asset and accretion of the lease liability for an operating lease is recognized as a single lease cost, on a straight-line basis, over the lease term. Reductions of the ROU asset and the change in the lease liability are included in changes in Other long-term assets and liabilities in the Consolidated Statement of Cash Flows.
A finance lease ROU asset is depreciated on a straight-line basis over the lesser of the useful life of the leased asset or lease term. Interest on each finance lease liability is determined as the amount that results in a constant periodic discount rate on the remaining balance of the liability. Operating lease and finance lease ROU assets are assessed for impairment in accordance with our long-lived asset impairment policy.
We reassess lease classification and remeasure ROU assets and lease liabilities when a lease is modified and that modification is not accounted for as a separate contract or upon certain other events that require reassessment in accordance with ASC 842.reassessment. Maintenance and property tax expenses are accounted for on an accrual basis as variable lease cost.
We recognize variable lease cost for operating and finance leases in the period when changes in facts and circumstances on which the variable lease payments are based occur.
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 acquisition of Firehouse Subs in 2021, the acquisition of Popeyes in 2017, the acquisition of Tim Hortons in 2014 and the acquisition of Burger King Holdings, Inc. by 3G Capital Partners Ltd. in 2010. Our indefinite-lived intangible assets consist of the Tim
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Hortons brand, the Burger King brand, the Popeyes brand and the PopeyesFirehouse Subs 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. We may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test for any reporting unit or 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 quantitative goodwill impairment test that 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, we will measure any goodwill impairment loss as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
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 a 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, 2019, 20182022, 2021 and 20172020 and 0no impairment resulted.
Long-Lived Assets
Long-lived assets, such as property and equipment, and intangible assets subject to amortization and lease right-of-use assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the 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 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 record an impairment charge equal to the excess, if any, of the net carrying value over fair value.
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.
Derivative Financial Instruments
We recognize and measure all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. Derivative instruments accounted for as net investments hedges are classified as long term assets and liabilities 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.
When applying hedge accounting, we designate at a derivative’s inception, the specific assets, liabilities or future commitments being hedged, and 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 about Fair Value
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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.
The carrying amounts for cash and cash 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 at fair value and value them using various pricing models or discounted cash flow analysis that incorporate observable market parameters, such as interest rate yield curves and currency rates, which are Level 2 inputs. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or us. For disclosures about the fair value measurements of our derivative instruments, see Note 12, Derivative Instruments.
The following table presents the fair value of our variable rate term debt and senior notes, estimated using inputs based on bid and offer prices that are Level 2 inputs, and principal carrying amount (in millions):
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| Fair value of our variable term debt and senior notes | $ | 12,075 | $ | 11,237 | |||
| Principal carrying amount of our variable term debt and senior notes | 11,900 | 11,888 | |||||
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Fair value of our variable term debt and senior notes | $ | 11,885 | $ | 12,851 | |||||||
| Principal carrying amount of our variable term debt and senior notes | 12,890 | 12,943 | |||||||||
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 PopeyesFirehouse Subs were based uponon Level 3 inputs. The determination of fair values of our reporting units and the determination of the fair value of the Brands for impairment testing using a quantitative approach during 20192022 and 20182020 were based upon Level 3 inputs.
Revenue Recognition
Sales
Sales consist primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and are presented net of any related sales tax. Orders placed by customers specify the goods to be delivered and transaction prices for supply chain sales. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to the 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 accounted for as fulfillment costs and classified as cost of sales.
To a much lesser extent, sales also include Company restaurant sales (including Restaurant VIEs), which consist of sales to restaurant guests. Revenue from Company restaurant sales is recognized at the point of sale. Taxes assessed by a governmental authority that we collect are excluded from revenue.
Franchise and property 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 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. TheThese services we provide under franchise agreements are highly interrelated and dependent upon the franchise license and we concluded thethese services do not represent individually distinct performance obligations. Consequently, we bundle the franchise license performance obligation and promises to provide these services into a single performance obligation under ASC 606,(the “Franchise PO”), 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 calculated as a percentage of franchise restaurant sales over the term of the franchise agreement. 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
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franchise agreement royalties inclusive of advertising fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreementFranchise PO and are recognized as franchise sales occur. Additionally, under ASC 606, initialInitial and renewal franchise fees 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 commenced operations and our completion of all material services and conditions. Renewal franchise fees were recognized as revenue upon execution of a new franchise agreement. Our 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 for exclusive development rights are deferred and apportioned to each franchise restaurant opened by the franchisee. The 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 accountedWe account for noncash consideration as a nonmonetary exchange and did not record revenue or a basis in the equity 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 investee and recognize revenue in an amount equal to the fair value of the equity interest received. In accordance with ASC 606, upfrontUpfront fees from master franchisees, including the fair value of noncash consideration, are deferred and amortized over the MFDA term on a straight-line basis. 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, weWe 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 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 are excluded from the scope of ASC 606.revenue recognition guidance.
In certain instances, we provide incentives to franchisees in connection with restaurant renovations or other initiatives. These incentives may consist of cash consideration or non-cash consideration such as restaurant equipment. In general, these incentives are designed to support system-wide sales growth to increase our future revenues. The costs of these incentives are capitalized and amortized as a reduction in franchise and property revenue over the term of the contract to which the incentive relates.
Advertising revenues and Promotional Costsother services
Advertising revenues consist primarily of franchisee contributions to advertising funds in those markets where our subsidiaries manage an advertising fund and are calculated as a percentage of franchise restaurant sales over the term of the franchise agreement. Under our franchise agreements, advertising contributions received from franchisees must be spent on advertising, product development, marketing, and related activities. We determined our advertising and promotion management services do not represent individually distinct performance obligations and are included in the Franchise PO.
Other services revenues consist primarily of fees from digital sales that partially offset expenses related to technology initiatives. These services are distinct from the Franchise PO because they are not dependent upon the franchise license or highly interrelated with the franchise license.
Cost of Sales
Cost of sales consists primarily of costs associated with the management of our TH supply chain, including cost of goods, direct labor, depreciation and bad debt expense (recoveries) from supply chain sales. Cost of sales also includes food, paper and labor costs of Company restaurants.
Franchise and Property Expenses
Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization of franchise agreements, and bad debt expense (recoveries) from franchise and property revenues.
Advertising Expenses and Other Services
Advertising expenses and other services consist primarily of expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives, bad debt expense (recoveries) from franchisee contributions to advertising funds we manage, depreciation and amortization and other related support functions for the respective brands. Additionally, we may incur discretionary expenses to fund advertising programs in connection with periodic initiatives.
Company restaurants and franchise restaurants contribute to advertising funds that our subsidiaries manage in the United States and Canada and certain other international markets. 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
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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 expenses included in selling, general and administrative expenses totaled $858 million for 2019 and $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.
Deferred Financing Costs
Deferred financing costs are amortized over the term of the related debt agreement into interest expense using the effective interest method.
Income Taxes
Amounts in the Financial Statements related to income taxes are calculated using the principles of ASC Topic 740, Income 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 carry-forwards and loss 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 realized.
We recognize positions taken or expected to be taken in a tax return in the financial statementsFinancial 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.
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.
Share-based Compensation
Compensation expense related to the issuance of share-based awards to our employees is measured at fair value on the grant date. We use the Black-Scholes option pricing model to value stock options. The fair value of restricted stock units (“RSUs”) is generally based on the closing price of RBI's common shares on the trading day preceding the date of grant. Our total shareholder return and if applicable our total shareholder return relative to our peer group is incorporated into the underlying assumptions using a Monte Carlo simulation valuation model to calculate grant date fair value for performance based awards with a market condition. 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 to vest. We use historical data to estimate forfeitures for share-based awards. The compensation expense for awards that do not require future service is recognized immediately. Upon the end of the service period, compensation expense is adjusted to account for the actual forfeiture rate. Cash settled share-based awards are classified as liabilities and are re-measured at the end of each reporting period. The compensation expense for awards that contain performance conditions is recognized when it is probable that the performance conditions will be achieved.
New Accounting Pronouncements
Accounting Relief for the Transition Away from LIBOR and Certain other Reference Rates – In March 2020 and as clarified in January 2021 and December 2022, the Financial Accounting Standards Board (“FASB”) issued guidance which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This amendment is effective as of March 12, 2020 through December 31, 2024. The expedients and exceptions provided by this new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2024, except for hedging relationships existing as of December 31, 2024, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationships. During the third quarter of 2021, we adopted certain of the expedients as it relates to hedge accounting as certain of our debt agreements and hedging relationships bear interest at variable rates, primarily U.S. dollar LIBOR. The adoption of and future elections under this new guidance did not and are not expected to have a material impact on our Financial Statements. We will continue to monitor the discontinuance of LIBOR on our debt agreements and hedging relationships.
Lessors—Certain Leases with Variable Lease AccountingPayments – In February 2016, the FASB issued new guidance on leases. We adopted this new guidance on January 1, 2019. See Note 10, Leases, for further information about our transition to this new lease accounting standard.
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Liabilities—Supplier Finance Programs – In February 2018, the FASB issued guidance which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for the tax effects of certain items within accumulated other comprehensive income (loss). The amendment was effective commencing in 2019 with early adoption permitted. The adoption of this new guidance did not have a material impact on our Financial Statements.
Note 3. PopeyesFirehouse Acquisition
Total consideration in connection with the PopeyesFirehouse Acquisition was $1,655 million, which includes $33 million for the settlement of equity awards.$1,016 million. The consideration was funded through (1) cash on hand of approximately $355and $533 million and (2) $1,300 million fromof incremental borrowings under our Term Loan Facility.Facility - See Note 9, Long-Term Debt.
Fees and expenses related to the PopeyesFirehouse Acquisition and related financings totaled $34$1 million during 2022 and $18 million during 2021, consisting primarily of professional fees and compensation related expenses all of which are classified as selling, general and administrative expenses in the accompanying consolidated statements of operations. These fees and expenses were funded through cash on hand.
During 2022, we adjusted our preliminary estimate of the fair value of net assets acquired. The final allocation of consideration to the net tangible and intangible assets acquired is presented in the table below (in millions):
| December 15, 2021 | |||||
| Total current assets | $ | 21 | |||
| Property and equipment | 4 | ||||
Firehouse Subs brand | 816 | ||||
| Franchise agreements | 19 | ||||
| Operating lease assets | 9 | ||||
| Total liabilities | (48) | ||||
| Total identifiable net assets | 821 | ||||
| Goodwill | 195 | ||||
| Total consideration | $ | 1,016 | |||
| 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 | |
| Increase (Decrease) in Goodwill | |||||
| Change in: | |||||
| Operating lease assets | $ | (9) | |||
Firehouse Subs brand | (48) | ||||
| Franchise agreements | (19) | ||||
| Total liabilities | 35 | ||||
| Total consideration | (17) | ||||
| Total decrease in goodwill | $ | (58) | |||
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The brand, $41 million related to franchise agreements and $9 million related to favorable leases. The PopeyesFirehouse Subs 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 1718 years. Favorable leases have a weighted average amortization period of 14 years.
Goodwill attributable to the PopeyesFirehouse Acquisition will not be amortizable or deductible and amortized for tax purposes. Goodwill is considered to represent the value associated with the workforce and synergies anticipated to be realized as a combined company. We have allocated goodwill related to the Firehouse Acquisition to our FHS operating segment and to one reporting unit for goodwill impairment testing purposes. In the event that actual results vary from the estimates or assumptions used in the valuation or allocation process, we may be required to record an impairment charge or an increase in depreciation or amortization in future periods, or both. We completed our impairment reviews for goodwill and the Firehouse Subs brand as of October 1, 2022 and no impairment resulted.
The Popeyesresults of operations of Firehouse Subs have been included in our consolidated financial statements from the acquisition date of December 15, 2021. The Firehouse Acquisition is not material to our Financial Statements,consolidated financial statements, and therefore, supplemental pro forma financial information related to the acquisition is not included herein.
Note 4. Earnings Per 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 Class 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 is allocated between 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 gain on redemption of Partnership preferred units.interests. Basic and diluted earnings per Class A common unit is determined by dividing net income allocated to Class A common unitholders 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.
There are no dilutive securities for Partnership as the exercise of stock options and vesting of RSUs will not affect the numbersnumber of Class A common units or Partnership exchangeable units outstanding. However, the issuance of RBI 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 calculations (in millions, except per unit amounts):
| 2022 | 2021 | 2020 | |||||||||||||||
| Allocation of net income among partner interests: | |||||||||||||||||
| Net income allocated to Class A common unitholders | $ | 1,008 | $ | 838 | $ | 486 | |||||||||||
| Net income allocated to Partnership exchangeable unitholders | 471 | 411 | 262 | ||||||||||||||
| Net income attributable to common unitholders | $ | 1,479 | $ | 1,249 | $ | 748 | |||||||||||
| Denominator - basic and diluted partnership units: | |||||||||||||||||
| Weighted average Class A common units | 202 | 202 | 202 | ||||||||||||||
| Weighted average Partnership exchangeable units | 144 | 151 | 162 | ||||||||||||||
| Earnings per unit - basic and diluted: | |||||||||||||||||
| Class A common units (a) | $ | 4.99 | $ | 4.15 | $ | 2.41 | |||||||||||
| Partnership exchangeable units (a) | $ | 3.28 | $ | 2.72 | $ | 1.62 | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Allocation of net income among partner interests: | |||||||||||
| Net income allocated to Class A common unitholders | $ | 643 | $ | 612 | $ | 626 | |||||
| Net income allocated to Partnership exchangeable unitholders | 466 | 531 | 585 | ||||||||
| Net income attributable to common unitholders | $ | 1,109 | $ | 1,143 | $ | 1,211 | |||||
| Denominator - basic and diluted partnership units: | |||||||||||
| Weighted average Class A common units | 202 | 202 | 202 | ||||||||
| Weighted average Partnership exchangeable units | 194 | 216 | 226 | ||||||||
| Earnings per unit - basic and diluted: | |||||||||||
| Class A common units (a) | $ | 3.18 | $ | 3.03 | $ | 3.10 | |||||
| Partnership exchangeable units (a) | $ | 2.40 | $ | 2.46 | $ | 2.59 | |||||
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Note 5. Property and Equipment, net
Property and equipment, net, consist of the following (in millions):
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| Land | $ | 1,006 | $ | 998 | |||
| Buildings and improvements | 1,148 | 1,145 | |||||
| Restaurant equipment | 109 | 99 | |||||
| Furniture, fixtures, and other | 210 | 182 | |||||
| Finance leases | 245 | 257 | |||||
| Construction in progress | 35 | 19 | |||||
| 2,753 | 2,700 | ||||||
| Accumulated depreciation and amortization | (746 | ) | (704 | ) | |||
| Property and equipment, net | $ | 2,007 | $ | 1,996 | |||
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Land | $ | 985 | $ | 1,011 | |||||||
| Buildings and improvements | 1,165 | 1,200 | |||||||||
| Restaurant equipment | 192 | 193 | |||||||||
| Furniture, fixtures, and other | 300 | 257 | |||||||||
| Finance leases | 317 | 323 | |||||||||
| Construction in progress | 52 | 30 | |||||||||
| 3,011 | 3,014 | ||||||||||
| Accumulated depreciation and amortization | (1,061) | (979) | |||||||||
| Property and equipment, net | $ | 1,950 | $ | 2,035 | |||||||
Depreciation and amortization expense on property and equipment totaled $136$135 million for 2019,2022, $148 million for 20182021 and $150$140 million for 2017.2020.
Included in our property and equipment, net at December 31, 20192022 and 20182021 are $222$227 million and $180$246 million, respectively, of assets leased under finance leases (mostly buildings and improvements), net of accumulated depreciation and amortization of $23$90 million and $77 million, respectively.
Note 6. Intangible Assets, net and Goodwill
Intangible assets, net and goodwill consist of the following (in millions):
| As of December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||
| Identifiable assets subject to amortization: | |||||||||||||||||||||||||||||||||||
| Franchise agreements | $ | 720 | $ | (313) | $ | 407 | $ | 722 | $ | (290) | $ | 432 | |||||||||||||||||||||||
| Favorable leases | 90 | (57) | 33 | 104 | (63) | 41 | |||||||||||||||||||||||||||||
| Subtotal | 810 | (370) | 440 | 826 | (353) | 473 | |||||||||||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
Tim Hortons brand | $ | 6,293 | $ | — | $ | 6,293 | $ | 6,695 | $ | — | $ | 6,695 | |||||||||||||||||||||||
Burger King brand | 2,088 | — | 2,088 | 2,126 | — | 2,126 | |||||||||||||||||||||||||||||
Popeyes brand | 1,355 | — | 1,355 | 1,355 | — | 1,355 | |||||||||||||||||||||||||||||
Firehouse Subs brand | 815 | — | 815 | 768 | — | 768 | |||||||||||||||||||||||||||||
| Subtotal | 10,551 | — | 10,551 | 10,944 | — | 10,944 | |||||||||||||||||||||||||||||
| Intangible assets, net | $ | 10,991 | $ | 11,417 | |||||||||||||||||||||||||||||||
| Goodwill | |||||||||||||||||||||||||||||||||||
| Tim Hortons segment | $ | 4,059 | $ | 4,306 | |||||||||||||||||||||||||||||||
| Burger King segment | 590 | 601 | |||||||||||||||||||||||||||||||||
| Popeyes segment | 846 | 846 | |||||||||||||||||||||||||||||||||
| Firehouse segment | 193 | 253 | |||||||||||||||||||||||||||||||||
| Total | $ | 5,688 | $ | 6,006 | |||||||||||||||||||||||||||||||
| As of December 31, | |||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||
| Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||
| Identifiable assets subject to amortization: | |||||||||||||||||||||||
| Franchise agreements | $ | 720 | $ | (225 | ) | $ | 495 | $ | 705 | $ | (194 | ) | $ | 511 | |||||||||
| Favorable leases (a) | 127 | (65 | ) | 62 | 407 | (200 | ) | 207 | |||||||||||||||
| Subtotal | 847 | (290 | ) | 557 | 1,112 | (394 | ) | 718 | |||||||||||||||
| Indefinite lived intangible assets: | |||||||||||||||||||||||
| Tim Hortons brand | $ | 6,534 | $ | — | $ | 6,534 | $ | 6,259 | $ | — | $ | 6,259 | |||||||||||
| Burger King brand | 2,117 | — | 2,117 | 2,131 | — | 2,131 | |||||||||||||||||
| Popeyes brand | 1,355 | — | 1,355 | 1,355 | — | 1,355 | |||||||||||||||||
| Subtotal | 10,006 | — | 10,006 | 9,745 | — | 9,745 | |||||||||||||||||
| Intangible assets, net | $ | 10,563 | $ | 10,463 | |||||||||||||||||||
| Goodwill | |||||||||||||||||||||||
| Tim Hortons segment | $ | 4,207 | $ | 4,038 | |||||||||||||||||||
| Burger King segment | 598 | 602 | |||||||||||||||||||||
| Popeyes segment | 846 | 846 | |||||||||||||||||||||
| Total | $ | 5,651 | $ | 5,486 | |||||||||||||||||||
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Amortization expense on intangible assets totaled $44$39 million for 2019, $702022, $41 million for 2018,2021, and $72$43 million for 2017.2020. The change in the franchise agreements, brands and goodwill balances during 20192022 was due principally to the impact of foreign currency translation.translation and the impact of final adjustments to the preliminary allocation of consideration to the net tangible and intangible assets acquired in the Firehouse Acquisition.
As of December 31, 2019,2022, the estimated future amortization expense on identifiable assets subject to amortization is as follows (in millions):
| Twelve-months ended December 31, | Amount | ||||
| 2023 | $ | 37 | |||
| 2024 | 36 | ||||
| 2025 | 34 | ||||
| 2026 | 34 | ||||
| 2027 | 34 | ||||
| Thereafter | 265 | ||||
| Total | $ | 440 | |||
| Twelve-months ended December 31, | Amount | ||
| 2020 | $ | 44 | |
| 2021 | 41 | ||
| 2022 | 40 | ||
| 2023 | 38 | ||
| 2024 | 36 | ||
| Thereafter | 358 | ||
| Total | $ | 557 | |
Note 7. Equity Method Investments
The aggregate carrying amount of our equity method investments was $266$167 million and $259$194 million as of December 31, 20192022 and 2018,2021, respectively, and is included as a component of Other assets, net in our consolidated balance sheets. TH and BK both have
Except for the following equity method investments, no quoted market prices are available for our other equity method investments. PLK does notThe aggregate market value of our 15.2% equity interest in Carrols Restaurant Group, Inc. (“Carrols”) based on the quoted market price on December 31, 2022 is approximately $13 million. The aggregate market value of our 9.4% equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on December 31, 2022 is approximately $27 million. The aggregate market value of our 3.8% equity interest in TH International Limited based on the quoted market price on December 31, 2022 was approximately $16 million. We have anyevaluated recent declines in the market value of these equity method investments.investments and recognized an impairment of $15 million as a result of a sustained decline in Carrols' share price and market capitalization during 2022.
We have equity interests in entities that own or franchise Tim Hortons, Burger King and Popeyes restaurants. Franchise and property revenue recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions):
| 2022 | 2021 | 2020 | |||||||||||||||
| Revenues from affiliates: | |||||||||||||||||
| Royalties | $ | 353 | $ | 350 | $ | 239 | |||||||||||
| Advertising revenues | 71 | 67 | 50 | ||||||||||||||
| Property revenues | 31 | 32 | 32 | ||||||||||||||
| Franchise fees and other revenue | 18 | 21 | 14 | ||||||||||||||
| Sales | 18 | 10 | 3 | ||||||||||||||
| Total | $ | 491 | $ | 480 | $ | 338 | |||||||||||
At December 31, 2022 and 2021, we had $42 million and $48 million, respectively, of accounts receivable, net from our equity method investments which were recorded in accounts and notes receivable, net in our consolidated balance sheets.
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, $13$16 million and $12$8 million during 2019, 20182022, 2021 and 2017,2020, respectively.
| 2019 | 2018 | 2017 | |||||||||
| Revenues from affiliates: | |||||||||||
| Royalties | $ | 345 | $ | 310 | $ | 175 | |||||
| Property revenues | 33 | 36 | 27 | ||||||||
| Franchise fees and other revenue | 10 | 11 | 26 | ||||||||
| Total | $ | 388 | $ | 357 | $ | 228 | |||||
We recognized rent expense associated with the TIMWEN Partnership of $19 million, $20$18 million, and $20$15 million during 2019, 20182022, 2021 and 2017,2020, respectively.
(Income) loss from equity method investments reflects our share of investee net income or loss, non-cash dilution gains or losses from changes in our ownership interests in equity method investees and basis difference amortization. We recorded increases to the carrying value of our equity method investment balances and non-cash dilution gains in the amounts of $11 million and $20 million during 2019 and 2018, respectively. NaN non-cash dilution gains were recorded during 2017. The dilution gains resulted from the issuance of capital stock by our equity method investees, which reduced our ownership interests in these equity method investments. The dilution gains we recorded in connection with the issuance of capital stock reflect adjustments to the differences between the amount of underlying equity in the net assets of equity method investees before and after their issuance of capital stock.
Note 8. Other Accrued Liabilities and Other Liabilities
Other accrued liabilities (current) and other liabilities, net (non-current) consist of the following (in millions):
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| Current: | |||||||
| Dividend payable | $ | 232 | $ | 207 | |||
| Interest payable | 71 | 87 | |||||
| Accrued compensation and benefits | 57 | 69 | |||||
| Taxes payable | 126 | 113 | |||||
| Deferred income | 35 | 27 | |||||
| Accrued advertising expenses | 40 | 30 | |||||
| Restructuring and other provisions | 8 | 11 | |||||
| Current portion of operating lease liabilities (a) | 126 | — | |||||
| Other | 95 | 93 | |||||
| Other accrued liabilities | $ | 790 | $ | 637 | |||
| Non-current: | |||||||
| Taxes payable | $ | 579 | $ | 493 | |||
| Contract liabilities (see Note 16) | 541 | 486 | |||||
| Derivatives liabilities | 341 | 179 | |||||
| Unfavorable leases (b) | 103 | 192 | |||||
| Accrued pension | 65 | 64 | |||||
| Accrued lease straight-lining liability (b) | — | 69 | |||||
| Deferred income | 25 | 22 | |||||
| Other | 44 | 42 | |||||
| Other liabilities, net | $ | 1,698 | $ | 1,547 | |||
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Current: | |||||||||||
| Distributions payable | $ | 243 | $ | 241 | |||||||
| Interest payable | 89 | 63 | |||||||||
| Accrued compensation and benefits | 124 | 99 | |||||||||
| Taxes payable | 190 | 106 | |||||||||
| Deferred income | 43 | 48 | |||||||||
| Accrued advertising expenses | 37 | 43 | |||||||||
| Restructuring and other provisions | 29 | 90 | |||||||||
| Current portion of operating lease liabilities | 137 | 140 | |||||||||
| Other | 109 | 117 | |||||||||
| Other accrued liabilities | $ | 1,001 | $ | 947 | |||||||
| Non-current: | |||||||||||
| Taxes payable | $ | 139 | $ | 533 | |||||||
| Contract liabilities (see Note 15) | 540 | 531 | |||||||||
| Derivatives liabilities | 34 | 575 | |||||||||
| Unfavorable leases | 50 | 65 | |||||||||
| Accrued pension | 40 | 47 | |||||||||
| Deferred income | 44 | 37 | |||||||||
| Other | 25 | 34 | |||||||||
| Other liabilities, net | $ | 872 | $ | 1,822 | |||||||
Note 9. Long-Term Debt
Long-term debt consistconsists of the following (in millions):
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Term Loan B | $ | 5,190 | $ | 5,243 | |||||||
| Term Loan A | 1,250 | 1,250 | |||||||||
| 3.875% First Lien Senior Notes due 2028 | 1,550 | 1,550 | |||||||||
| 3.50% First Lien Senior Notes due 2029 | 750 | 750 | |||||||||
| 5.75% First Lien Senior Notes due 2025 | 500 | 500 | |||||||||
| 4.375% Second Lien Senior Notes due 2028 | 750 | 750 | |||||||||
| 4.00% Second Lien Senior Notes due 2030 | 2,900 | 2,900 | |||||||||
| TH Facility and other | 155 | 173 | |||||||||
| Less: unamortized deferred financing costs and deferred issuance discount | (111) | (138) | |||||||||
| Total debt, net | 12,934 | 12,978 | |||||||||
| Less: current maturities of debt | (95) | (62) | |||||||||
| Total long-term debt | $ | 12,839 | $ | 12,916 | |||||||
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| Term Loan B (due November 19, 2026) | $ | 5,350 | $ | 6,338 | |||
| Term Loan A (due October 7, 2024) | 750 | — | |||||
| 2015 4.625% Senior Notes (due January 15, 2022) | — | 1,250 | |||||
| 2017 4.25% Senior Notes (due May 15, 2024) | 1,500 | 1,500 | |||||
| 2019 3.875% Senior Notes (due January 15, 2028) | 750 | — | |||||
| 2017 5.00% Senior Notes (due October 15, 2025) | 2,800 | 2,800 | |||||
| 2019 4.375% Senior Notes (due January 15, 2028) | 750 | — | |||||
| Other (a) | 81 | 150 | |||||
| Less: unamortized deferred financing costs and deferred issuance discount | (148 | ) | (145 | ) | |||
| Total debt, net | 11,833 | 11,893 | |||||
| Less: current maturities of debt | (74 | ) | (70 | ) | |||
| Total long-term debt | $ | 11,759 | $ | 11,823 | |||
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Credit Facilities
On September 6, 2019,December 13, 2021, two of our subsidiaries (the "Borrowers"“Borrowers”) entered into a fourthfifth incremental facility amendment and a sixth amendment (the "Fourth Incremental Amendment"“2021 Amendment”) to the credit agreement governing our senior secured term loan facilitiesA facility (the "Term“Term Loan Facilities"A”), our senior secured term loan B facility (the “Term Loan B” and together with the Term Loan A the “Term Loan Facilities”) and our $1,000 million senior secured revolving credit facility (including revolving loans, swingline loans and letters of credit) (the "Revolving“Revolving Credit Facility"Facility” and together with the Term Loan Facilities, the "Credit Facilities"“Credit Facilities”). UnderThe 2021 Amendment increased the Fourth Incremental Amendment, (i) we obtained a new term loan inexisting Term Loan A to $1,250 million and extended the aggregate principal amount of $750 million (the "Term Loan A") with a maturity date of October 7, 2024the Term Loan A and Revolving Credit Facility to December 13, 2026 (subject to earlier maturity in specified circumstances), (ii). The security and guarantees under the Revolving Credit Facility and Term Loan A are the same as those under the existing facilities. The proceeds from the increase in the Term Loan A were used with cash on hand to complete the Firehouse Acquisition. In connection with the 2021 Amendment, we capitalized approximately $12 million in debt issuance costs.
The 2021 Amendment also amended the interest rate applicable to the Revolving Credit Facility and the Term Loan A to incorporate SOFR. The interest rate applicable to the Term Loan A and Revolving Credit Facility is, at our option, either (a) a base rate, subject to a floor of 1.00%, plus an applicable margin varying from 0.00% to 0.50%, or (b) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a Eurocurrency rate,0.10% adjustment), subject to a floor of 0.00%, plus an applicable margin varying between 0.75% and 1.50%, in each case, determined by reference to a net first lien leverage basedleverage-based pricing grid, (iii) the aggregate principal amount of the commitments under our Revolving Credit Facility was increased to $1,000 million, (iv) the maturity date of the Revolving Credit Facility was extended from October 13, 2022 to October 7, 2024 (subject to earlier maturity in specified circumstances), and (v) thegrid. The commitment fee on the unused portion of the Revolving Credit Facility was decreased from 0.25% tois 0.15%. At December 31, 2019,2022, the weighted average interest rate on the Term Loan A was 3.05%5.44%. The principal amount of the Term Loan A amortizes in quarterly installments equal to $5$8 million beginning March 31, 2023 until October 7, 2022September 30, 2024 and thereafter in quarterly installments equal to $9$16 million until maturity, with the balance payable at maturity. The Term Loan A will require compliance with a net first lien leverage ratio (described below). Except as described herein, the Fourth Incremental2021 Amendment did not materially changeincludes amendments to certain negative covenants to provide increased flexibility. The 2021 Amendment made no other material changes to the terms of the Credit Facilities. In connection with the Fourth Incremental Amendment, we capitalized approximately $7 million in debt issuance costs.Agreement.
Revolving Credit Facility
As of December 31, 2019,2022, we had 0no amounts outstanding under our Revolving Credit Facility. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt, RBI share repurchases or to make distributions to RBI for RBI to repurchase its common shares, to repurchase Class Bpartnership exchangeable limited partnership units,unit 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. Under the Fourth Incremental Amendment, theThe interest rate applicable to amounts drawn under each letter of credit decreased from a range of 1.25% to 2.00% to a range ofis 0.75% to 1.50%, depending on our net first lien leverage ratio. As of December 31, 2019,2022, we had $2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability was $998 million.
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, Inc.,Company LLC, Popeyes Louisiana Kitchen, Inc., FRG, LLC 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.
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Obligations under the 3.875% First Lien Senior Notes due May2028 are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of the Borrower's Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Company LLC, Popeyes Louisiana Kitchen, Inc., FRG, LLC and substantially all of their respective Canadian and U.S. subsidiaries (the “Note Guarantors”). The 3.875% First Lien Senior Notes due 2028 are first lien senior secured obligations and rank equal in right of payment with all of the existing and future first lien senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees under our Credit Facilities.
The 3.875% First Lien Senior Notes due 2028 may be redeemed in whole or in part at any time at the redemption prices set forth in the 3.875% First Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 3.875% First Lien Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others.
5.75% First Lien Senior Notes due 2025
On April 7, 2020, the Borrowers entered into an indenture (the “5.75% First Lien Senior Notes Indenture”) in connection with the issuance of $500 million of 5.75% first lien notes due April 15, 20242025 (the “2017 4.25%“5.75% First Lien Senior Notes”Notes due 2025”). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 2017 4.25%5.75% First Lien Senior Notes together with other sources of liquidity,due 2025 were used to redeem all of the outstanding RBI 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%5.75% First Lien Senior Notes due 2025, we capitalized approximately $13$10 million in debt issuance costs.
Obligations under the 2017 4.25%5.75% First Lien Senior Notes due 2025 are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of the Borrowers' Canadian and U.S. subsidiaries, includingNote Guarantors. The TDL Group Corp., Burger King Worldwide, Inc., Popeyes Louisiana Kitchen, Inc. and substantially all of their respective Canadian and U.S. subsidiaries (the “Note Guarantors”). The 2017 4.25%5.75% First Lien Senior Notes are first lien senior secured obligations and rank equal in right of payment with all of the existing and future senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities.
Our 2019 3.875%5.75% First Lien Senior Notes due 2025 may be redeemed in whole or in part on or after September 15, 2022at any time at the redemption prices set forth in the 2019 3.875%5.75% First Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 2019 3.875%5.75% First Lien Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others.
Obligations under the 2017 5.00%3.50% First Lien Senior Notes due 2029 are guaranteed on a senior secured basis, jointly and severally, by the Note Guarantors. The 3.50% First Lien Senior Notes due 2029 are first lien senior secured obligations and rank equal in right of payment with all of the existing and future first lien senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities.
Our 3.50% First Lien Senior Notes due 2029 may be redeemed in whole or in part, on or after February 15, 2024 at the redemption prices set forth in the 3.50% First Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 3.50% First Lien Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others.
4.375% Second Lien Senior Notes due 2028
On November 19, 2019, the Borrowers entered into an indenture (the “4.375% Second Lien Senior Notes Indenture”) in connection with the issuance of $750 million of 4.375% second lien senior notes due January 15, 2028 (the “4.375% Second Lien Senior Notes due 2028”). No principal payments are due until maturity and interest is paid semi-annually.
Obligations under the 4.375% Second Lien Senior Notes due 2028 are guaranteed on a second priority senior secured basis, jointly and severally, by the Note Guarantors. The 2017 5.00%4.375% Second Lien Senior Notes due 2028 are second lien senior secured obligations and rank equal in right of payment with all of the existing and future senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities.Facilities, and effectively subordinated to all of the existing and future first lien senior debt of the Borrowers and Note Guarantors.
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Our 2017 5.00%4.375% Second Lien Senior Notes due 2028 may be redeemed in whole or in part on or after October 15, 2020at any time at the redemption prices set forth in the 2017 5.00%4.375% Second Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 2017 5.00%4.375% Second Lien Senior Notes Indenture also contains redemption provisions related to tender offers, change of control and equity offerings, among others.
Obligations under the 2019 4.375%4.00% Second Lien Senior Notes due 2030 are guaranteed on a second priority senior secured basis, jointly and severally, by the Note Guarantors. The 2019 4.375%4.00% Second Lien Senior Notes due 2030 are second lien senior secured obligations and rank equal in right of payment withwill all of the existing and future senior debt of the Borrowers and Note Guarantors including borrowings and guaranteeseffectively subordinated to all of the Credit Facilities.existing and future first lien senior debt of the Borrowers and Note Guarantors.
Our 2019 4.375%4.00% Second Lien Senior Notes due 2030 may be redeemed in whole or in part, on or after NovemberOctober 15, 20222025 at the redemption prices set forth in the 2019 4.375%4.00% Second Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 2019 4.375%4.00% Second Lien Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others.
Restrictions and Covenants
Our Credit Facilities, 2017 4.25%as well as the 3.875% First Lien Senior Notes Indenture, 2019 3.875%5.75% First Lien Senior Notes Indenture, 2017 5.00%3.50% First Lien Senior Notes Indenture, 4.375% Second Lien Senior Notes Indenture and 2019 4.375%4.00% Second Lien Senior Notes Indenture (all together the “Senior Notes Indentures”) contain a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability and the ability of certain of our 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; and engage in certain transactions with affiliates. In addition, under the Credit Facilities, the Borrowers are not permitted to exceed a first lien senior secured leverage ratio of 6.50 to 1.00 when, as of the end of any fiscal quarter beginning with the first fiscal quarter of 2020, (1) any amounts are outstanding under the Term Loan A and/or (2) 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 30.0% of the commitments under the Revolving Credit Facility.
The restrictions under the Credit Facilities and the 2017 4.25% Senior Notes Indenture, the 2019 3.875% Senior Notes Indenture, the 2017 5.00% Senior Notes Indenture, and the 2019 4.375% Senior Notes IndentureIndentures have resulted in substantially all of our consolidated assets being restricted.
As of December 31, 2019,2022, we were in compliance with applicable financial debt covenants under the Credit Facilities 2017 4.25%and the Senior Notes Indenture, 2019 3.875% Senior Notes Indenture, 2017 5.00% Senior Notes Indenture and 2019 4.375% Senior Notes IndentureIndentures and there were no limitations on our ability to draw on the remaining availability under our Revolving Credit Facility.
TH Facility
One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$225 million (increased from C$100 million during 2019) 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 threefour of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of December 31, 2019,2022, we had approximately C$203 million outstanding C$100 million under the TH Facility with a weighted average interest rate of 3.45%6.07%.
RE Facility
One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of $50 million with a maturity date of October 12, 2028 (the “RE Facility”). The interest rate applicable to the RE Facility is, at our option, either (i) a base rate, subject to a floor of0.50%, plus an applicable margin of 0.50% or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a margin based on duration), subject to a floor of 0.00%, plus an applicable margin of
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1.50%. Obligations under the RE Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the RE Facility are secured by certain parcels of real estate. As of December 31, 2022, we are permitted to draw down onhad approximately $2 million outstanding under the THRE Facility until May 23, 2020.
Debt Issuance Costs
During 20192021 and 2017,2020, we incurred aggregate deferred financing costs of $50$19 million and $63$43 million, respectively. NaNWe did not incur any significant deferred financing costs were incurred in 2018.during 2022.
Loss on Early Extinguishment of Debt
During 2019,2021, we recorded a $23an $11 million loss on early extinguishment of debt which primarily reflects the write-off of unamortized debt issuance costs and discounts in connection with the prepayment and refinancing of the Term Loan B and the redemption of our 2015 4.625% Senior Notes. During 2017, we recorded a $122 million loss on early extinguishment of debt, whichthat primarily reflects the payment of redemption premiums to redeem our 2014 6.00% Senior Notes and the write-off of unamortized debt issuance costs and discounts in connection with the refinancingredemption of our Term Loan Facilitythe remaining $775 million principal amount outstanding of the 4.25% first lien senior notes. During 2020, we recorded a $98 million loss on early extinguishment of debt that primarily reflects the payment of premiums and the write-off of unamortized debt issuance costs in connection with the full redemption of our 2014 6.00%the 5.00% Second Lien Senior Notes.Notes due 2025 and the partial redemption of the 4.25% first lien senior notes.
Maturities
The aggregate maturities of our long-term debt as of December 31, 20192022 are as follows (in millions):
| Year Ended December 31, | Principal Amount | ||
| 2020 | $ | 74 | |
| 2021 | 75 | ||
| 2022 | 81 | ||
| 2023 | 98 | ||
| 2024 | 2,212 | ||
| Thereafter | 9,441 | ||
| Total | $ | 11,981 | |
| Year Ended December 31, | Principal Amount | ||||
| 2023 | $ | 97 | |||
| 2024 | 107 | ||||
| 2025 | 741 | ||||
| 2026 | 6,148 | ||||
| 2027 | — | ||||
| Thereafter | 5,952 | ||||
| Total | $ | 13,045 | |||
Interest Expense, net
Interest expense, net consists of the following (in millions):
| 2022 | 2021 | 2020 | |||||||||||||||
| Debt (a) | $ | 493 | $ | 461 | $ | 471 | |||||||||||
| Finance lease obligations | 19 | 20 | 20 | ||||||||||||||
| Amortization of deferred financing costs and debt issuance discount | 28 | 27 | 26 | ||||||||||||||
| Interest income | (7) | (3) | (9) | ||||||||||||||
| Interest expense, net | $ | 533 | $ | 505 | $ | 508 | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Debt (a) | $ | 503 | $ | 498 | $ | 484 | |||||
| Finance lease obligations | 20 | 23 | 21 | ||||||||
| Amortization of deferred financing costs and debt issuance discount | 29 | 29 | 33 | ||||||||
| Interest income | (20 | ) | (15 | ) | (26 | ) | |||||
| Interest expense, net | $ | 532 | $ | 535 | $ | 512 | |||||
Note 10. Leases
As of December 31, 2019,2022, we leased or subleased 5,2724,978 restaurant properties to franchisees and 182147 non-restaurant properties to third parties under operating leases, and direct financing leases and sales-type 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 provide for future rent escalations and renewal options. Certain leases also include provisions for variable rent, determined as a percentage of sales, generally when annual sales exceed specific levels. Lessees typically bear the cost of maintenance, insurance and property taxes.
We lease land, buildings, equipment, office space and warehouse space from third parties. Land and building leases generally have an initial term of 10 to 20 years, while land-only leases generally have an initial term of 20 years,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. Certain leases also include provisions for
77
variable rent payments, determined as a percentage of sales, generally when annual sales exceed specified levels. Most leases also obligate us to pay, as lessee, variable lease cost related to maintenance, insurance and property taxes.
| As Reported | Total | Adjusted | |||||||||
| December 31, 2018 | Adjustments | January 1, 2019 | |||||||||
| 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 | 26 | (a) | 2,022 | |||||||
| Operating lease assets, net | — | 1,143 | (b) | 1,143 | |||||||
| Intangible assets, net | 10,463 | (133 | ) | (c) | 10,330 | ||||||
| Goodwill | 5,486 | — | 5,486 | ||||||||
| Net investment in property leased to franchisees | 54 | — | 54 | ||||||||
| Other assets, net | 642 | — | 642 | ||||||||
| Total assets | $ | 20,141 | $ | 1,036 | $ | 21,177 | |||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts and drafts payable | $ | 513 | $ | — | $ | 513 | |||||
| Other accrued liabilities | 637 | 114 | (d) | 751 | |||||||
| Gift card liability | 167 | — | 167 | ||||||||
| Current portion of long term debt and finance leases | 91 | — | 91 | ||||||||
| Total current liabilities | 1,408 | 114 | 1,522 | ||||||||
| Term debt, net of current portion | 11,823 | (65 | ) | (e) | 11,758 | ||||||
| Finance leases, net of current portion | 226 | 62 | (e) | 288 | |||||||
| Operating lease liabilities, net of current portion | — | 1,028 | (f) | 1,028 | |||||||
| Other liabilities, net | 1,547 | (132 | ) | (g) | 1,415 | ||||||
| Deferred income taxes, net | 1,519 | 8 | (h) | 1,527 | |||||||
| Total liabilities | 16,523 | 1,015 | 17,538 | ||||||||
| Partners' capital: | |||||||||||
| Class A common units | 4,323 | 12 | (i) | 4,335 | |||||||
| Partnership exchangeable units | 730 | 9 | (i) | 739 | |||||||
| Accumulated other comprehensive income (loss) | (1,437 | ) | — | (1,437 | ) | ||||||
| Total Partners' capital | 3,616 | 21 | 3,637 | ||||||||
| Noncontrolling interests | 2 | — | 2 | ||||||||
| Total equity | 3,618 | 21 | 3,639 | ||||||||
| Total liabilities and equity | $ | 20,141 | $ | 1,036 | $ | 21,177 | |||||
Partnership as Lessor
Assets leased to franchisees and others under operating leases where we are the lessor and which are included within our property and equipment, net are as follows (in millions):
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| Land | $ | 905 | $ | 906 | |||
| Buildings and improvements | 1,142 | 1,175 | |||||
| Restaurant equipment | 18 | 17 | |||||
| 2,065 | 2,098 | ||||||
| Accumulated depreciation and amortization | (472 | ) | (475 | ) | |||
| Property and equipment leased, net | $ | 1,593 | $ | 1,623 | |||
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Land | $ | 880 | $ | 899 | |||||||
| Buildings and improvements | 1,129 | 1,180 | |||||||||
| Restaurant equipment | 16 | 18 | |||||||||
| 2,025 | 2,097 | ||||||||||
| Accumulated depreciation and amortization | (625) | (587) | |||||||||
| Property and equipment leased, net | $ | 1,400 | $ | 1,510 | |||||||
Our net investment in direct financing and sales-type leases is as follows (in millions):
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Future rents to be received: | |||||||||||
| Future minimum lease receipts | $ | 112 | $ | 113 | |||||||
| Contingent rents (a) | 5 | 7 | |||||||||
| Estimated unguaranteed residual value | 6 | 5 | |||||||||
| Unearned income | (36) | (40) | |||||||||
| 87 | 85 | ||||||||||
| Current portion included within accounts receivable | (5) | (5) | |||||||||
| Net investment in property leased to franchisees | $ | 82 | $ | 80 | |||||||
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| ASC 842 | Previous Standard | ||||||
| Future rents to be received: | |||||||
| Future minimum lease receipts | $ | 49 | $ | 60 | |||
| Contingent rents (a) | 19 | 29 | |||||
| Estimated unguaranteed residual value | 15 | 16 | |||||
| Unearned income | (26 | ) | (35 | ) | |||
| 57 | 70 | ||||||
| Current portion included within accounts receivables | (9 | ) | (16 | ) | |||
| Net investment in property leased to franchisees | $ | 48 | $ | 54 | |||
(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):
| 2022 | 2021 | 2020 | |||||||||||||||
| Rental income: | |||||||||||||||||
| Minimum lease payments | $ | 410 | $ | 455 | $ | 445 | |||||||||||
| Variable lease payments | 395 | 329 | 262 | ||||||||||||||
| Amortization of favorable and unfavorable income lease contracts, net | 1 | 3 | 6 | ||||||||||||||
| Subtotal - lease income from operating leases | 806 | 787 | 713 | ||||||||||||||
| Earned income on direct financing and sales-type leases | 7 | 6 | 5 | ||||||||||||||
| Total property revenues | $ | 813 | $ | 793 | $ | 718 | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| ASC 842 | Previous Standard | ||||||||||
| Rental income: | |||||||||||
| Minimum lease payments | $ | 448 | $ | 454 | $ | 464 | |||||
| Variable lease payments | 370 | 273 | 284 | ||||||||
| Amortization of favorable and unfavorable income lease contracts, net | 7 | 8 | 8 | ||||||||
| Subtotal - lease income from operating leases | 825 | 735 | 756 | ||||||||
| Earned income on direct financing leases | 8 | 9 | 9 | ||||||||
| Total property revenues | $ | 833 | $ | 744 | $ | 765 | |||||
Partnership as Lessee
Lease cost rent expense and other information associated with these lease commitments is as follows (in millions):
Lease Cost (Income)
| 2019 | ||||||||||||||||||||
| ASC 842 | 2022 | 2021 | 2020 | |||||||||||||||||
| Operating lease cost | $ | 210 | Operating lease cost | $ | 202 | $ | 202 | $ | 199 | |||||||||||
| Operating lease variable lease cost | 198 | Operating lease variable lease cost | 196 | 193 | 177 | |||||||||||||||
| Finance lease cost: | Finance lease cost: | |||||||||||||||||||
| Amortization of right-of-use assets | 27 | Amortization of right-of-use assets | 27 | 31 | 29 | |||||||||||||||
| Interest on lease liabilities | 20 | Interest on lease liabilities | 19 | 20 | 20 | |||||||||||||||
| Sublease income | (631 | ) | Sublease income | (603) | (587) | (534) | ||||||||||||||
| Total lease cost (income) | $ | (176 | ) | Total lease cost (income) | $ | (159) | $ | (141) | $ | (109) | ||||||||||
| 2018 | 2017 | ||||||
| Previous Standard | |||||||
| Rental expense: | |||||||
| Minimum | $ | 201 | $ | 198 | |||
| Contingent | 71 | 71 | |||||
| Amortization of favorable and unfavorable payable lease contracts, net | 9 | 10 | |||||
| Total rental expense (a) | $ | 281 | $ | 279 | |||
Lease Term and Discount Rate as of December 31, 20192022 and 2021
| As of December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Weighted-average remaining lease term (in years): | ||||||||||||||
| Operating leases | 9.8 years | 10.1 years | ||||||||||||
| Finance leases | 11.5 years | 11.4 years | ||||||||||||
| Weighted-average discount rate: | ||||||||||||||
| Operating leases | 5.5 | % | 5.5 | % | ||||||||||
| Finance leases | 5.8 | % | 6.0 | % | ||||||||||
Other Information for 20192022, 2021 and 2020
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||
| Operating cash flows from operating leases | $ | 198 | $ | 200 | $ | 200 | ||||||||||||||
| Operating cash flows from finance leases | $ | 19 | $ | 20 | $ | 20 | ||||||||||||||
| Financing cash flows from finance leases | $ | 31 | $ | 31 | $ | 29 | ||||||||||||||
| Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets: | ||||||||||||||||||||
| Right-of-use assets obtained in exchange for new finance lease obligations | $ | 22 | $ | 52 | $ | 59 | ||||||||||||||
| Right-of-use assets obtained in exchange for new operating lease obligations | $ | 133 | $ | 133 | $ | 118 | ||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | 194 | ||
| Operating cash flows from finance leases | $ | 20 | ||
| Financing cash flows from finance leases | $ | 26 | ||
| Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets: | ||||
| Right-of-use assets obtained in exchange for new finance lease obligations | $ | 18 | ||
| Right-of-use assets obtained in exchange for new operating lease obligations | $ | 163 | ||
As of December 31, 2019,2022, future minimum lease receipts and commitments are as follows (in millions):
| Lease Receipts | Lease Commitments (a) | ||||||||||||||||||||||
| Direct Financing and Sales-Type Leases | Operating Leases | Finance Leases | Operating Leases | ||||||||||||||||||||
| 2023 | $ | 8 | $ | 355 | $ | 49 | $ | 195 | |||||||||||||||
| 2024 | 8 | 332 | 48 | 184 | |||||||||||||||||||
| 2025 | 8 | 306 | 44 | 170 | |||||||||||||||||||
| 2026 | 7 | 276 | 41 | 153 | |||||||||||||||||||
| 2027 | 7 | 246 | 38 | 139 | |||||||||||||||||||
| Thereafter | 74 | 1,217 | 244 | 697 | |||||||||||||||||||
| Total minimum receipts / payments | $ | 112 | $ | 2,732 | 464 | 1,538 | |||||||||||||||||
| Less amount representing interest | (121) | (374) | |||||||||||||||||||||
| Present value of minimum lease payments | 343 | 1,164 | |||||||||||||||||||||
| Current portion of lease obligations | (32) | (137) | |||||||||||||||||||||
| Long-term portion of lease obligations | $ | 311 | $ | 1,027 | |||||||||||||||||||
(a)Minimum lease payments have not been reduced by minimum sublease rentals of $1,663 million due in the future under non-cancelable subleases
| Lease Receipts | Lease Commitments (a) | ||||||||||||||
| Direct Financing Leases | Operating Leases | Finance Leases | Operating Leases | ||||||||||||
| 2020 | $ | 9 | $ | 429 | $ | 46 | $ | 204 | |||||||
| 2021 | 7 | 406 | 45 | 192 | |||||||||||
| 2022 | 5 | 383 | 43 | 179 | |||||||||||
| 2023 | 5 | 359 | 40 | 164 | |||||||||||
| 2024 | 4 | 327 | 39 | 149 | |||||||||||
| Thereafter | 19 | 1,672 | 249 | 872 | |||||||||||
| Total minimum receipts / payments | $ | 49 | $ | 3,576 | 462 | 1,760 | |||||||||
| Less amount representing interest | (147 | ) | (545 | ) | |||||||||||
| Present value of minimum lease payments | 315 | 1,215 | |||||||||||||
| Current portion of lease obligations | (27 | ) | (126 | ) | |||||||||||
| Long-term portion of lease obligations | $ | 288 | $ | 1,089 | |||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Canadian | $ | 444 | $ | 457 | $ | 200 | |||||||||||
| Foreign | 921 | 906 | 616 | ||||||||||||||
| Income before income taxes | $ | 1,365 | $ | 1,363 | $ | 816 | |||||||||||
| Lease Receipts | Lease Commitments (a) | ||||||||||||||
| Direct Financing Leases | Operating Leases | Finance 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 finance lease payments | 247 | ||||||||||||||
| Current portion of finance lease obligation | (21 | ) | |||||||||||||
| Long-term portion of finance lease obligation | $ | 226 | |||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Current: | |||||||||||||||||
| Canadian | $ | (284) | $ | 16 | $ | 45 | |||||||||||
| U.S. Federal | 105 | (10) | 125 | ||||||||||||||
| U.S. state, net of federal income tax benefit | 26 | 25 | 26 | ||||||||||||||
| Other Foreign | 96 | 84 | 78 | ||||||||||||||
| $ | (57) | $ | 115 | $ | 274 | ||||||||||||
| Deferred: | |||||||||||||||||
| Canadian | $ | 20 | $ | 32 | $ | (67) | |||||||||||
| U.S. Federal | (79) | (37) | (82) | ||||||||||||||
| U.S. state, net of federal income tax benefit | (9) | (7) | (27) | ||||||||||||||
| Other Foreign | 8 | 7 | (32) | ||||||||||||||
| $ | (60) | $ | (5) | $ | (208) | ||||||||||||
| Income tax expense (benefit) | $ | (117) | $ | 110 | $ | 66 | |||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Statutory rate | 26.5 | % | 26.5 | % | 26.5 | % | |||||||||||
| Costs and taxes related to foreign operations | 3.8 | 3.5 | 9.6 | ||||||||||||||
| Foreign exchange gain (loss) | — | — | 0.5 | ||||||||||||||
| Foreign tax rate differential | (13.7) | (13.9) | (15.6) | ||||||||||||||
| Change in valuation allowance | (0.7) | 1.1 | 1.2 | ||||||||||||||
| Change in accrual for tax uncertainties | (26.7) | (7.4) | 3.9 | ||||||||||||||
| Intercompany financing | 1.2 | (3.5) | (6.1) | ||||||||||||||
| Impact of Tax Act | — | — | (7.8) | ||||||||||||||
| Swiss Tax Reform | — | — | (5.1) | ||||||||||||||
| Benefit from stock option exercises | (0.1) | (0.8) | (0.3) | ||||||||||||||
| Litigation settlements and reserves | — | 1.4 | — | ||||||||||||||
| Other | 1.1 | 1.2 | 1.2 | ||||||||||||||
| Effective income tax rate | (8.6) | % | 8.1 | % | 8.0 | % | |||||||||||
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 revisesrevised the U.S. tax code generallycode. During 2020, various guidance was issued by the U.S. tax authorities relating to the Tax Act and, after review of such guidance, we recorded a favorable adjustment to our deferred tax assets of $64 million related to a tax attribute carryforward, which decreased our 2020 effective tax rate by 7.8%.
In a referendum held on May 19, 2019, Swiss voters adopted the Federal Act on Tax Reform and AVS Financing (“TRAF”), under which certain long-standing preferential cantonal tax regimes were abolished effective January 1, 2018 by, among other changes, lowering2020, which the corporate income tax rate from 35%canton of Zug formally adopted in November 2019. Company subsidiaries in the canton of Zug were subjected 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 taxationTRAF and therefore the Tax ActTRAF impacted our consolidated results of operations beginning 2017 and is expectedduring 2020. In 2020, a deferred tax asset was recorded due to continue to impactan election made under TRAF by one of our consolidated results of operations in future periods.
Swiss subsidiaries. The impacts to our consolidated statement of operations consistamounts impacting income tax expense for the effects of the following (the “Tax Act Impact”):
Companies subject to the Global Intangible Low-Taxed Income provision (GILTI) have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for outside basis temporary differences expected to reverse as GILTI. The Company hasWe have elected to account for GILTI as a period cost.
| 2019 | 2018 | 2017 | |||||||||
| Canadian | $ | 685 | $ | 1,111 | $ | 1,223 | |||||
| Foreign | 767 | 271 | (122 | ) | |||||||
| Income before income taxes | $ | 1,452 | $ | 1,382 | $ | 1,101 | |||||
| 2019 | 2018 | 2017 | |||||||||
| Current: | |||||||||||
| Canadian | $ | 47 | $ | 25 | $ | 438 | |||||
| U.S. Federal | 122 | 95 | 113 | ||||||||
| U.S. state, net of federal income tax benefit | 20 | 17 | 3 | ||||||||
| Other Foreign | 94 | 72 | 54 | ||||||||
| $ | 283 | $ | 209 | $ | 608 | ||||||
| Deferred: | |||||||||||
| Canadian | $ | 43 | $ | 78 | $ | (302 | ) | ||||
| U.S. Federal | 8 | (65 | ) | (473 | ) | ||||||
| U.S. state, net of federal income tax benefit | — | 13 | 34 | ||||||||
| Other Foreign | 7 | 3 | (1 | ) | |||||||
| $ | 58 | $ | 29 | $ | (742 | ) | |||||
| Income tax expense (benefit) | $ | 341 | $ | 238 | $ | (134 | ) | ||||
| 2019 | 2018 | 2017 | ||||||
| Statutory rate | 26.5 | % | 26.5 | % | 26.5 | % | ||
| Costs and taxes related to foreign operations | 5.8 | 4.2 | 8.9 | |||||
| Foreign exchange gain (loss) | 0.1 | (0.1 | ) | (7.7 | ) | |||
| Foreign tax rate differential | (10.8 | ) | (6.1 | ) | (1.9 | ) | ||
| Change in valuation allowance | 0.5 | 3.2 | 12.0 | |||||
| Change in accrual for tax uncertainties | 5.0 | 0.1 | (0.4 | ) | ||||
| Intercompany financing | (2.4 | ) | (4.4 | ) | (19.5 | ) | ||
| Impact of Tax Act | (0.1 | ) | (1.9 | ) | (27.4 | ) | ||
| Benefit from stock option exercises | (2.2 | ) | (5.0 | ) | (4.9 | ) | ||
| Other | 1.1 | 0.7 | 2.3 | |||||
| Effective income tax rate | 23.5 | % | 17.2 | % | (12.1 | )% | ||
Income tax (benefit) expense allocated to continuing operations and amounts separately allocated to other items was (in millions):
| 2019 | 2018 | 2017 | |||||||||
| Income tax (benefit) expense from continuing operations | $ | 341 | $ | 238 | $ | (134 | ) | ||||
| Cash flow hedge in accumulated other comprehensive income (loss) | (23 | ) | (2 | ) | 5 | ||||||
| Net investment hedge in accumulated other comprehensive income (loss) | (32 | ) | 101 | (13 | ) | ||||||
| Pension liability in accumulated other comprehensive income (loss) | (1 | ) | — | (2 | ) | ||||||
| Total | $ | 285 | $ | 337 | $ | (144 | ) | ||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Income tax (benefit) expense from continuing operations | $ | (117) | $ | 110 | $ | 66 | |||||||||||
| Cash flow hedge in accumulated other comprehensive income (loss) | 153 | 72 | (64) | ||||||||||||||
| Net investment hedge in accumulated other comprehensive income (loss) | 77 | (15) | (60) | ||||||||||||||
| Foreign Currency Translation in accumulated other comprehensive income (loss) | — | (4) | 12 | ||||||||||||||
| Pension liability in accumulated other comprehensive income (loss) | 2 | 3 | (3) | ||||||||||||||
| Total | $ | 115 | $ | 166 | $ | (49) | |||||||||||
The significant components of deferred income tax (benefit) expense attributable to income from continuing operations are as follows (in millions):
| 2019 | 2018 | 2017 | |||||||||
| Deferred income tax (benefit) expense | $ | 30 | $ | (14 | ) | $ | (449 | ) | |||
| Change in valuation allowance | 7 | 43 | 133 | ||||||||
| Change in effective Canadian income tax rate | (1 | ) | (3 | ) | — | ||||||
| Change in effective U.S. federal income tax rate | — | (8 | ) | (433 | ) | ||||||
| Change in effective U.S. state income tax rate | 6 | 15 | 4 | ||||||||
| Change in effective foreign income tax rate | 16 | (4 | ) | 3 | |||||||
| Total | $ | 58 | $ | 29 | $ | (742 | ) | ||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Deferred income tax expense (benefit) | $ | 79 | $ | (22) | $ | (230) | |||||||||||
| Change in valuation allowance | (143) | 14 | 22 | ||||||||||||||
| Change in effective U.S. state income tax rate | 3 | 3 | 1 | ||||||||||||||
| Change in effective foreign income tax rate | 1 | — | (1) | ||||||||||||||
| Total | $ | (60) | $ | (5) | $ | (208) | |||||||||||
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, | |||||||
| 2019 | 2018 | ||||||
| Deferred tax assets: | |||||||
| Accounts and notes receivable | $ | 4 | $ | 5 | |||
| Accrued employee benefits | 48 | 49 | |||||
| Unfavorable leases | 99 | 123 | |||||
| Operating lease liabilities | 332 | — | |||||
| Liabilities not currently deductible for tax | 198 | 176 | |||||
| Tax loss and credit carryforwards | 493 | 509 | |||||
| Derivatives | 83 | 25 | |||||
| Other | 3 | 8 | |||||
| Total gross deferred tax assets | 1,260 | 895 | |||||
| Valuation allowance | (329 | ) | (325 | ) | |||
| Net deferred tax assets | 931 | 570 | |||||
| Less deferred tax liabilities: | |||||||
| Property and equipment, principally due to differences in depreciation | 40 | 43 | |||||
| Intangible assets | 1,792 | 1,734 | |||||
| Leases | 88 | 105 | |||||
| Operating lease assets | 325 | — | |||||
| Statutory impairment | 28 | 31 | |||||
| Outside basis difference | 42 | 35 | |||||
| Total gross deferred tax liabilities | 2,315 | 1,948 | |||||
| Net deferred tax liability | $ | 1,384 | $ | 1,378 | |||
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Deferred tax assets: | |||||||||||
| Accounts and notes receivable | $ | 8 | $ | 4 | |||||||
| Accrued employee benefits | 56 | 48 | |||||||||
| Leases | 105 | 115 | |||||||||
| Operating lease liabilities | 304 | 317 | |||||||||
| Liabilities not currently deductible for tax | 403 | 346 | |||||||||
| Tax loss and credit carryforwards | 316 | 517 | |||||||||
| Derivatives | — | 164 | |||||||||
| Other | 9 | (1) | |||||||||
| Total gross deferred tax assets | 1,201 | 1,510 | |||||||||
| Valuation allowance | (194) | (356) | |||||||||
| Net deferred tax assets | 1,007 | 1,154 | |||||||||
| Less deferred tax liabilities: | |||||||||||
| Property and equipment, principally due to differences in depreciation | 15 | 15 | |||||||||
| Intangible assets | 1,707 | 1,751 | |||||||||
| Leases | 125 | 129 | |||||||||
| Operating lease assets | 281 | 295 | |||||||||
| Statutory impairment | 27 | 29 | |||||||||
| Derivatives | 65 | — | |||||||||
| Outside basis difference | 13 | 38 | |||||||||
| Total gross deferred tax liabilities | 2,233 | 2,257 | |||||||||
| Net deferred tax liability | $ | 1,226 | $ | 1,103 | |||||||
The valuation allowance had a net increasedecrease of $4$162 million during 20192022 primarily due to the change in provisional estimates related to derivatives and the utilization of foreign tax credits. This increase was partially offset by the utilization ofcredits and capital losses that had been previously valued.
Changes in the valuation allowance are as follows (in millions):
| 2019 | 2018 | 2017 | |||||||||
| Beginning balance | $ | 325 | $ | 282 | $ | 133 | |||||
| Additions due to acquisition | — | — | 9 | ||||||||
| Change in estimates recorded to deferred income tax expense | 8 | 43 | 133 | ||||||||
| Changes from foreign currency exchange rates | — | — | 6 | ||||||||
| Changes in losses and credits | (2 | ) | — | 1 | |||||||
| Additions related to other comprehensive income | (2 | ) | — | — | |||||||
| Ending balance | $ | 329 | $ | 325 | $ | 282 | |||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Beginning balance | $ | 356 | $ | 364 | $ | 329 | |||||||||||
| Change in estimates recorded to deferred income tax expense | (9) | 14 | 19 | ||||||||||||||
| Changes in losses and credits | (134) | — | 3 | ||||||||||||||
| (Reductions) additions related to other comprehensive income | (19) | (22) | 13 | ||||||||||||||
| Ending balance | $ | 194 | $ | 356 | $ | 364 | |||||||||||
The gross amount and expiration dates of operating loss and tax credit carry-forwards as of December 31, 20192022 are as follows (in millions):
| Amount | Expiration Date | ||||
| Canadian net operating loss carryforwards | $ | 697 | 2036-2039 | ||
| Canadian capital loss carryforwards | 975 | Indefinite | |||
| U.S. state net operating loss carryforwards | 562 | 2020-2036 | |||
| U.S. foreign tax credits | 97 | 2020-2029 | |||
| Other foreign net operating loss carryforwards | 185 | Indefinite | |||
| Other foreign net operating loss carryforwards | 80 | 2020-2039 | |||
| Other foreign capital loss carryforward | 31 | Indefinite | |||
| Foreign credits | 1 | 2020-2036 | |||
| Total | $ | 2,628 | |||
| Amount | Expiration Date | ||||||||||
| Canadian net operating loss carryforwards | $ | 521 | 2036-2042 | ||||||||
| Canadian capital loss carryforwards | 153 | Indefinite | |||||||||
| Canadian tax credits | 4 | 2023-2041 | |||||||||
| U.S. state net operating loss carryforwards | 546 | 2023-2042 | |||||||||
| U.S. federal net operating loss carryforwards | 19 | Indefinite | |||||||||
| U.S. capital loss carryforwards | 16 | 2040 | |||||||||
| U.S. foreign tax credits | 69 | 2023-2031 | |||||||||
| Other foreign net operating loss carryforwards | 249 | Indefinite | |||||||||
| Other foreign net operating loss carryforwards | 41 | 2023-2038 | |||||||||
| Other foreign capital loss carryforward | 27 | Indefinite | |||||||||
| Total | $ | 1,645 | |||||||||
We are generally permanently reinvested (buton any potential outside basis differences except for unremitted earnings and profits) in any other potentialprofits and thus do not record a deferred tax liability for such outside basis differences. A determinationTo the extent of theunremitted earning and profits, we generally review various factors including, but not limited to, forecasts and budgets of financial needs of cash for working capital, liquidity and expected cash requirements to fund our various obligations and record deferred tax liability on this amount is not practicable duetaxes to the complexities, variables and assumptions inherent in the hypothetical calculations. Thusextent we have not provided taxes, including U.S. federal and state income, foreign income, or foreign withholding taxes, for any outside basis differences that we believe are permanently invested.expect to distribute.
We had $506$139 million and $437 million of unrecognized tax benefits at December 31, 2019,2022 and December 31, 2021, respectively, 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):
| 2019 | 2018 | 2017 | |||||||||
| Beginning balance | $ | 441 | $ | 461 | $ | 241 | |||||
| Additions for tax positions related to the current year | 9 | 1 | 186 | ||||||||
| Additions for tax positions of prior years | 56 | 18 | 41 | ||||||||
| Additions for tax positions taken in conjunction with acquisition of Tim Hortons | — | — | 2 | ||||||||
| Reductions for tax positions of prior year | — | (18 | ) | — | |||||||
| Reductions for settlement | — | (18 | ) | (2 | ) | ||||||
| Reductions due to statute expiration | — | (3 | ) | (7 | ) | ||||||
| Ending balance | $ | 506 | $ | 441 | $ | 461 | |||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Beginning balance | $ | 437 | $ | 497 | $ | 506 | |||||||||||
| Additions for tax positions related to the current year | (5) | 9 | 9 | ||||||||||||||
| Additions for tax positions of prior years | 3 | 23 | 7 | ||||||||||||||
| Reductions for tax positions of prior years | (15) | (5) | (25) | ||||||||||||||
| Additions for settlement | — | 7 | — | ||||||||||||||
| Reductions due to statute expiration | (281) | (94) | — | ||||||||||||||
| Ending balance | $ | 139 | $ | 437 | $ | 497 | |||||||||||
the resolution, settlement, and closure of any audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. During the twelve months beginning January 1, 2020,2023, it is reasonably possible we will reduce unrecognized tax benefits by up to approximately $6$48 million primarily as a result ofdue to the expiration of certain statutes of limitations, anticipated closure of various tax matters currently under examination, and the resolutionsettlements with tax authorities all being possibly impacted in multiple jurisdictions.
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We recognize interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of accrued interest and penalties was $92$27 million and $51$121 million at December 31, 20192022 and 2018,2021, respectively. Potential interest and penalties associated with uncertain tax positions in various jurisdictions recognized was $41$3 million during 2019, $142022, $2 million during 20182021 and $10$31 million during 2017.2020. 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 20132016 through 20152018 taxation years. Additionally, income tax returns filed with various provincial jurisdictions are generally open to examination for periods up to six years subsequent to the filing and assessment of the respective return.
We also file income tax returns, including returns for our subsidiaries, with U.S. federal, U.S. state, and other foreign jurisdictions. Generally weWe are subject to routine examination by taxing authorities in the U.S. jurisdictions, as well as other foreign tax jurisdictions. NoneTaxable years of the foreign jurisdictions should be individually material. The examination of oursuch U.S. companies are closed through 2018 for 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 closed during the first half of 2018. The U.S. federal income tax returns for our U.S. companies for fiscal years 2014, 2015 and 2016 are currently under audit by the U.S. Internal Revenue Service.purposes. We have various U.S. state and other 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 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 and derivatives designated as net investment hedges and those utilized as economic hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates.
Interest Rate Swaps
At December 31, 2019,2022, we had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $3,500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities, including any subsequent refinancing or replacement of the Term Loan Facilities, beginning OctoberAugust 31, 20192021 through the termination date of November 19, 2026.October 31, 2028. Additionally, at December 31, 2019,2022, we also had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities effective September 30, 2019 through the termination date of September 30, 2026. At inception, all of these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value are recorded in AOCI, net of tax, and reclassified into earningsinterest expense during the period in which the hedged forecasted transaction affects 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 hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At December 31, 2019,2022, 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 partly 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.
84
During 2022, we de-designated existing cross-currency rate swap hedges between the Canadian dollar and U.S. dollar with a total notional amount of $5,000 million for hedge accounting. As a result of these de-designations, changes in fair value of these un-designated hedges were recognized in earnings. Concurrently with these de-designations and to offset the changes in fair value recognized in earnings, we entered into off-setting cross-currency rate swaps, with a total notional amount of $5,000 million, that were not designated as a hedge for hedge accounting and as such changes we effectively realignedin fair value were recognized in earnings. The balances in AOCI associated with the de-designated cross-currency rate swaps will remain in AOCI and will only be reclassified into earnings if and when the net investment in our Canadian dollar hedges to reflect our currentsubsidiaries is sold or substantially sold. The entire notional amount of the de-designated cross-currency rate swaps and the off-setting cross-currency rate swaps were cash flow mixsettled during 2022 for approximately $35 million in net proceeds and capital structure maturity profile.included within operating activities in the consolidated statements of cash flows.
At December 31, 2019,2022, we 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. dollar notional amount of $1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and are 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 February 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, at December 31, 2019,2022, we also had outstanding cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $400 million, entered during 2018, and $500 million, entered during 2019, through the maturity date of February 17, 2024.2024 and $150 million, entered during 2021, through the maturity date of October 31, 2028. At inception, these cross-currency rate swaps were designated as a hedge and 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 de-designated and subsequently re-designated the outstanding fixed to fixed cross-currency rate swaps to prospectively use the spot method of hedge effectiveness assessment. Additionally, as a result of adopting new hedge accounting guidance during 2018, we elected to exclude the interest component (the "Excluded Component") from the accounting hedge without affecting net investment hedge accounting and elected to amortize the Excluded Component over the life of the 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 will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated.
Foreign Currency Exchange Contracts
We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At December 31, 2019,2022, 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 $112$197 million with maturities to December 2020.February 2024. We have designated these instruments as cash flow hedges, and as such, the 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.
Credit Risk
By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty.
Credit-Risk Related Contingent Features
Our derivative instruments do not contain any credit-risk related contingent features.
85
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 or (Loss) Recognized in Other Comprehensive Income (Loss) | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
Derivatives designated as cash flow hedges(1) | |||||||||||||||||
| Interest rate swaps | $ | 509 | $ | 132 | $ | (333) | |||||||||||
| Forward-currency contracts | $ | 14 | $ | — | $ | (2) | |||||||||||
| Derivatives designated as net investment hedges | |||||||||||||||||
| Cross-currency rate swaps | $ | 409 | $ | 96 | $ | (302) | |||||||||||
| Gain or (Loss) Recognized in Other Comprehensive Income (Loss) | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
Derivatives designated as cash flow hedges(1) | |||||||||||
| Interest rate swaps | $ | (102 | ) | $ | (37 | ) | $ | (6 | ) | ||
| Forward-currency contracts | $ | (4 | ) | $ | 11 | $ | (9 | ) | |||
| Derivatives designated as net investment hedges | |||||||||||
| Cross-currency rate swaps | $ | (118 | ) | $ | 383 | $ | (384 | ) | |||
| Location of Gain or (Loss) Reclassified from AOCI into Earnings | Gain or (Loss) Reclassified from AOCI into Earnings | |||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||
| Derivatives designated as cash flow hedges | ||||||||||||||||||||||||||
| Interest rate swaps | Interest expense, net | $ | (54) | $ | (125) | $ | (102) | |||||||||||||||||||
| Forward-currency contracts | Cost of sales | $ | 8 | $ | (7) | $ | 2 | |||||||||||||||||||
| Location of Gain or (Loss) Recognized in Earnings | Gain or (Loss) Recognized in Earnings (Amount Excluded from Effectiveness Testing) | |||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||
| Derivatives designated as net investment hedges | ||||||||||||||||||||||||||
| Cross-currency rate swaps | Interest expense, net | $ | 56 | $ | 45 | $ | 69 | |||||||||||||||||||
| Location of Gain or (Loss) Reclassified from AOCI into Earnings | Gain or (Loss) Reclassified from AOCI into Earnings | |||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||
| Derivatives designated as cash flow hedges | ||||||||||||||
| Interest rate swaps | Interest expense, net | $ | (26 | ) | $ | (19 | ) | $ | (31 | ) | ||||
| Forward-currency contracts | Cost of sales | $ | 5 | $ | (1 | ) | $ | (3 | ) | |||||
| Location of Gain or (Loss) Recognized in Earnings | Gain or (Loss) Recognized in Earnings (Amount Excluded from Effectiveness Testing) | |||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||
| Derivatives designated as net investment hedges | ||||||||||||||
| Cross-currency rate swaps | Interest expense, net | $ | 70 | $ | 60 | $ | — | |||||||
| Fair Value as of December 31, | |||||||||||||||||
| 2022 | 2021 | Balance Sheet Location | |||||||||||||||
| Assets: | |||||||||||||||||
| Derivatives designated as cash flow hedges | |||||||||||||||||
| Interest rate | $ | 280 | $ | — | Other assets, net | ||||||||||||
| Foreign currency | 7 | 2 | Prepaids and other current assets | ||||||||||||||
| Derivatives designated as net investment hedges | |||||||||||||||||
| Foreign currency | 78 | 23 | Other assets, net | ||||||||||||||
| Total assets at fair value | $ | 365 | $ | 25 | |||||||||||||
| Liabilities: | |||||||||||||||||
| Derivatives designated as cash flow hedges | |||||||||||||||||
| Interest rate | $ | — | $ | 220 | Other liabilities, net | ||||||||||||
| Derivatives designated as net investment hedges | |||||||||||||||||
| Foreign currency | 34 | 355 | Other liabilities, net | ||||||||||||||
| Total liabilities at fair value | $ | 34 | $ | 575 | |||||||||||||
| Fair Value as of December 31, | |||||||||
| 2019 | 2018 | Balance Sheet Location | |||||||
| Assets: | |||||||||
| Derivatives designated as cash flow hedges | |||||||||
| Interest rate | $ | 7 | $ | — | Other assets, net | ||||
| Foreign currency | — | 7 | Prepaids and other current assets | ||||||
| Derivatives designated as net investment hedges | |||||||||
| Foreign currency | 22 | 58 | Other assets, net | ||||||
| Total assets at fair value | $ | 29 | $ | 65 | |||||
| Liabilities: | |||||||||
| Derivatives designated as cash flow hedges | |||||||||
| Interest rate | $ | 175 | $ | 72 | Other liabilities, net | ||||
| Foreign currency | 2 | — | Other accrued liabilities | ||||||
| Derivatives designated as net investment hedges | |||||||||
| Foreign currency | 166 | 107 | Other liabilities, net | ||||||
| Total liabilities at fair value | $ | 343 | $ | 179 | |||||
Note 13. Partnership Preferred Units
Pursuant to the terms of the partnership agreement, RBI, as the holder of Class A common units, is entitled to 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, aA 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 2019,2022, Partnership exchanged 42,016,3921,996,818 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging 42,016,3921,996,818 Partnership exchangeable units for the same number of newly issued RBI common shares. During 2018,2021, Partnership exchanged 10,185,33310,119,880 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging 10,119,880 Partnership exchangeable units for the same number of newly issued RBI common shares. During 2020, Partnership exchanged 10,393,861 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by repurchasing 10,000,0006,757,692 Partnership exchangeable units for approximately $561$380 million in cash and exchanging 185,333 Partnership exchangeable units for the same number of newly issued RBI common shares. During 2017, Partnership exchanged 9,286,480 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by repurchasing 5,000,000 Partnership exchangeable units for approximately $330 million in cash and exchanging 4,286,4803,636,169 Partnership exchangeable units for the same number of newly issued RBI common shares. The exchanges of Partnership exchangeable units were recorded as increases to the Class A common units balance within partner’s capital in our consolidated balance sheets 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 sheets 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 was cancelled concurrently with the exchange.
RBI Share Repurchase
On July 28, 2021, the RBI Board of Directors approved a share repurchase program that allows RBI to purchase up to $1,000 million of RBI common shares until August 10, 2023. During 2022, RBI repurchased and cancelled 6,101,364 common shares for $326 million. During 2021, RBI repurchased and cancelled 9,247,648 common shares for $551 million. Pursuant to the terms of the partnership agreement, Partnership made a distribution to RBI on the Class A common units in an amount sufficient for RBI to fund such share repurchases.
Accumulated Other Comprehensive Income (Loss)
The following table displays the change in the components of AOCI (in millions):
| Derivatives | Pensions | Foreign Currency Translation | Accumulated Other Comprehensive Income (Loss) | ||||||||||||
| 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 | ) | ||||
| Foreign currency translation adjustment | — | — | 409 | 409 | |||||||||||
| Net change in fair value of derivatives, net of tax | (163 | ) | — | — | (163 | ) | |||||||||
| Amounts reclassified to earnings of cash flow hedges, net of tax | 15 | — | — | 15 | |||||||||||
| Pension and post-retirement benefit plans, net of tax | — | (2 | ) | — | (2 | ) | |||||||||
| Balances at December 31, 2019 | $ | 306 | $ | (29 | ) | $ | (1,455 | ) | $ | (1,178 | ) | ||||
| Derivatives | Pensions | Foreign Currency Translation | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||
| Balances at December 31, 2019 | $ | 306 | $ | (29) | $ | (1,455) | $ | (1,178) | |||||||||||||||
| Foreign currency translation adjustment | — | — | 332 | 332 | |||||||||||||||||||
| Net change in fair value of derivatives, net of tax | (486) | — | — | (486) | |||||||||||||||||||
| Amounts reclassified to earnings of cash flow hedges, net of tax | 73 | — | — | 73 | |||||||||||||||||||
| Pension and post-retirement benefit plans, net of tax | — | (16) | — | (16) | |||||||||||||||||||
| Balances at December 31, 2020 | $ | (107) | $ | (45) | $ | (1,123) | $ | (1,275) | |||||||||||||||
| Foreign currency translation adjustment | — | — | (67) | (67) | |||||||||||||||||||
| Net change in fair value of derivatives, net of tax | 207 | — | — | 207 | |||||||||||||||||||
| Amounts reclassified to earnings of cash flow hedges, net of tax | 96 | — | — | 96 | |||||||||||||||||||
| Pension and post-retirement benefit plans, net of tax | — | 15 | — | 15 | |||||||||||||||||||
| Balances at December 31, 2021 | $ | 196 | $ | (30) | $ | (1,190) | $ | (1,024) | |||||||||||||||
| Foreign currency translation adjustment | — | — | (703) | (703) | |||||||||||||||||||
| Net change in fair value of derivatives, net of tax | 714 | — | — | 714 | |||||||||||||||||||
| Amounts reclassified to earnings of cash flow hedges, net of tax | 34 | — | — | 34 | |||||||||||||||||||
| Pension and post-retirement benefit plans, net of tax | — | 6 | — | 6 | |||||||||||||||||||
| Balances at December 31, 2022 | $ | 944 | $ | (24) | $ | (1,893) | $ | (973) | |||||||||||||||
Note 15.14. Share-based Compensation
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.
RBI is currently issuing awards under the Omnibus Plan and the number of shares available for issuance under such plan as of December 31, 20192022 was 14,148,316.3,714,406. The Omnibus Plan permits the grant of several types of awards with respect to RBI common shares, including stock options, time-vested RSUs, and performance-based RSUs, which may include RBI and/or individual performance based-vesting conditions. Under the terms of the Omnibus Plan, RSUs are generally entitled to dividend equivalents, unless otherwise noted. Dividendswhich are not distributed unless the related awards vest. Upon vesting, the amount of the dividend equivalent, 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.
Share-based compensation expense is generally classified as general and administrative expenses in the consolidated statements of operations and consists of the following for the periods presented (in millions):
| 2022 | 2021 | 2020 | |||||||||||||||
| Total share-based compensation expense - RSUs and Stock options | $ | 121 | $ | 88 | $ | 74 | |||||||||||
As of December 31, 2022, total unrecognized compensation cost related to share-based compensation arrangements was $312 million and is expected to be recognized over a weighted-average period of approximately 3.1 years.
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Restricted Stock Units
The fair value of the time-vested RSUs and performance-based RSUs is based on the closing price of RBI’s common shares on the trading day preceding the date of grant. Time-vested RSUs are expensed over the vesting period. Performance-based RSUs are expensed over the vesting period, based upon the probability that the performance target will be met. RBI grants fully vested RSUs, with dividend equivalent rights that accrue in cash, to non-employee members of our 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.
Starting in 2021, grants of time-vested RSUs generally vest 25% per year on December 31st over four years from the grant date and performance-based RSUs generally cliff vest three years from the grant date (the starting date for the applicable vesting period is referred to as the “Anniversary Date”). Time-vested RSUs and performance-based RSUs awarded prior to 2021 generally cliff vest five years from the original grant date.
During 2022, RBI granted performance-based RSUs that cliff vest three years from the original grant date based on achievement of performance metrics with a multiplier that can increase or decrease the amount vested based on the achievement of contractually defined relative total shareholder return targets with respect to the S&P 500 Index. Performance-based RSUs granted in 2021 cliff vest three years from the original grant date based solely on defined relative total shareholder return targets with respect to the S&P 500 Index. The respective fair value of these performance-based RSU awards was based on a Monte Carlo Simulation valuation model and these market condition awards are expensed over the vesting period regardless of the value that the award recipients ultimately receive.
For grants of time-vested RSUs beginning in 2021, if the employee is terminated for any reason prior to any vesting date, the employee will forfeit all of the RSUs that are unvested at the time of termination. For grants of performance-based RSUs beginning in 2021, if the employee is terminated within the first two years of the Anniversary Date, 100% of the performance-based RSUs will be forfeited. If we terminate the employment of a performance-based RSU holder without cause at least two years after the grant date, or if the employee retires, the employee will become vested in 67% of the performance-based RSUs that are earned based on the performance criteria.
For grants prior to 2021, 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 we terminate 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 anniversary after the grant date. Also, for grants prior to 2021, 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 we terminate 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.
An alternate ratable vesting schedule applies to the extent the participant ends employment by reason of death or disability.
Chairman Awards
In connection with the appointment of the RBI Executive Chairman in November 2022, RBI made one-time grants of options, RSUs and performance-based RSUs with specific terms and conditions. RBI granted 2,000,000 options with an exercise price equal to the closing price of RBI common shares on the trading day preceding the date of grant that cliff vest five years from the date of grant and expire after ten years. RBI granted 500,000 RSUs that vest ratably over five years on the anniversary of the grant date. Lastly, RBI granted 750,000 performance-based RSUs that cliff vest five and a half years from the date of grant and may be earned from 50% for threshold performance to 200% for maximum performance, based on meeting performance targets tied to the appreciation of the price of RBI common shares, with none of the award being earned if the threshold is not met. The respective fair value of these performance-based RSU awards was based on a Monte Carlo Simulation valuation model and these market condition awards are expensed over the vesting period regardless of the value that the award recipient ultimately receives.
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Restricted Stock Units Activity
The following is a summary of time-vested RSUs and performance-based RSUs activity for the year ended December 31, 2022:
| 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, 2022 | 2,764 | $ | 57.47 | 3,895 | $ | 62.09 | |||||||||||||||||
| Granted | 1,722 | $ | 57.24 | 2,693 | $ | 51.31 | |||||||||||||||||
| Vested and settled | (852) | $ | 56.00 | (153) | $ | 58.31 | |||||||||||||||||
| Dividend equivalents granted | 103 | $ | — | 160 | $ | — | |||||||||||||||||
| Forfeited | (184) | $ | 58.66 | (158) | $ | 64.78 | |||||||||||||||||
| Outstanding at December 31, 2022 | 3,553 | $ | 57.31 | 6,437 | $ | 57.43 | |||||||||||||||||
The weighted-average grant date fair value of time-vested RSUs granted was $60.97 and $65.20 during 2021 and 2020, respectively. The weighted-average grant date fair value of performance-based RSUs granted was $57.60 and $62.69 during 2021 and 2020, respectively. The total fair value, determined as of the date of vesting, of RSUs vested and converted to common shares of RBI during 2022, 2021 and 2020 was $58 million, $99 million and $21 million, respectively.
Stock Options
Stock option awards are granted with an exercise price or market value equal to the closing price of RBI'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 stockStock option grants generally cliff vest 5 years from the original grant date, provided the employee is continuously employed by RBI or one of our affiliates, and the stock options expire 10 years following the grant date. Additionally, if RBI 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.
| 2019 | 2018 | 2017 | |||||||||
| Stock options, stock options with tandem SARs and RSUs (a) | $ | 68 | $ | 48 | $ | 48 | |||||
| Accelerated vesting of Popeyes stock options (b) | — | — | 12 | ||||||||
| Total share-based compensation expense (c) | $ | 68 | $ | 48 | $ | 60 | |||||
The following assumptions were used in the Black-Scholes option-pricing model to determine the fair value of stock option awards granted in 2022 and 2020 at the grant date:date. There were no significant stock option awards granted in 2021.
| 2019 | 2018 | 2017 | |||
| Risk-free interest rate | 1.82% | 2.13% | 1.23% - 1.25% | ||
| Expected term (in years) | 6.19 | 6.39 | 6.74 | ||
| Expected volatility | 25.5% | 25.2% | 24.5% | ||
| Expected dividend yield | 3.09% | 3.08% | 1.37% | ||
| 2022 | 2020 | ||||||||||
| Risk-free interest rate | 3.92% | 1.29% | |||||||||
| Expected term (in years) | 7.50 | 5.88 | |||||||||
| Expected volatility | 30.0% | 23.9% | |||||||||
| Expected dividend yield | 3.24% | 3.14% | |||||||||
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 RBI's expectations of exercise activity. Expected volatility was based on the historical and implied equity volatility of RBI and a review of the equity volatilities of publicly-traded guideline companies.RBI. The expected dividend yield is based on the annual dividend yield at the time of grant.
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Stock Options Activity
The following is a summary of stock option activity under our plans for the year ended December 31, 2019:2022:
| 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, 2022 | 6,207 | $ | 54.80 | ||||||||||||||||||||
| Granted | 2,018 | $ | 66.62 | ||||||||||||||||||||
| Exercised | (484) | $ | 43.42 | ||||||||||||||||||||
| Forfeited | (247) | $ | 64.83 | ||||||||||||||||||||
| Outstanding at December 31, 2022 | 7,494 | $ | 58.00 | $ | 55,682 | 6.1 | |||||||||||||||||
| Exercisable at December 31, 2022 | 2,724 | $ | 46.72 | $ | 48,953 | 3.0 | |||||||||||||||||
| Vested or expected to vest at December 31, 2022 | 7,125 | $ | 57.75 | $ | 54,835 | 6.0 | |||||||||||||||||
| 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, 2019 | 13,603 | $ | 36.41 | |||||||||
| Granted | 1,160 | $ | 64.86 | |||||||||
| Exercised | (4,496 | ) | $ | 22.62 | ||||||||
| Forfeited | (509 | ) | $ | 55.18 | ||||||||
| Outstanding at December 31, 2019 | 9,758 | $ | 45.29 | $ | 181,478 | 6.0 | ||||||
| Exercisable at December 31, 2019 | 1,754 | $ | 26.43 | $ | 65,486 | 2.6 | ||||||
| Vested or expected to vest at December 31, 2019 | 8,976 | $ | 44.70 | $ | 172,145 | 5.9 | ||||||
The weighted-average grant date fair value per stock option granted was $11.83, $10.82,$17.52, $10.15, and $12.57$10.38 during 2019, 20182022, 2021 and 2017,2020, respectively. The total intrinsic value of stock options exercised was $200$10 million during 2019, $3712022, $46 million during 2018,2021, and $288$55 million during 2017.2020.
| 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, 2019 | 1,500 | $ | 41.88 | 2,407 | $ | 45.25 | |||||||
| Granted | 405 | $ | 64.82 | 1,884 | $ | 65.54 | |||||||
| Vested and settled | (96 | ) | $ | 42.34 | (25 | ) | $ | 33.77 | |||||
| Dividend equivalents granted | 38 | $ | — | 104 | $ | — | |||||||
| Forfeited | (95 | ) | $ | 56.82 | (304 | ) | $ | 54.10 | |||||
| Outstanding at December 31, 2019 | 1,752 | $ | 46.50 | 4,066 | $ | 53.78 | |||||||
Note 16.15. Revenue Recognition
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 may recognize unamortized franchise fees and upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract. 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 December 31, 20182021 and December 31, 20192022 (in millions):
| Contract Liabilities | ||||||||
| Balance at December 31, 2021 | $ | 531 | ||||||
| Effect of business combination | 8 | |||||||
| Recognized during period and included in the contract liability balance at the beginning of the year | (57) | |||||||
| Increase, excluding amounts recognized as revenue during the period | 71 | |||||||
| Impact of foreign currency translation | (13) | |||||||
| Balance at December 31, 2022 | $ | 540 | ||||||
| Contract Liabilities | TH | BK | PLK | Consolidated | ||||||||||||
| Balance at December 31, 2018 | $ | 62 | $ | 405 | $ | 19 | $ | 486 | ||||||||
| Revenue recognized that was included in the contract liability balance at the beginning of the year | (9 | ) | (38 | ) | (2 | ) | (49 | ) | ||||||||
| Increase, excluding amounts recognized as revenue during the period | 9 | 86 | 11 | 106 | ||||||||||||
| Impact of foreign currency translation | 2 | (4 | ) | — | (2 | ) | ||||||||||
| Balance at December 31, 2019 | $ | 64 | $ | 449 | $ | 28 | $ | 541 | ||||||||
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The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) by segment and on a consolidated basis as of December 31, 20192022 (in millions):
| Contract liabilities expected to be recognized in | TH | BK | PLK | Consolidated | ||||||||||||
| 2020 | $ | 8 | $ | 34 | $ | 2 | $ | 44 | ||||||||
| 2021 | 8 | 33 | 2 | 43 | ||||||||||||
| 2022 | 7 | 33 | 2 | 42 | ||||||||||||
| 2023 | 7 | 32 | 2 | 41 | ||||||||||||
| 2024 | 7 | 31 | 2 | 40 | ||||||||||||
| Thereafter | 27 | 286 | 18 | 331 | ||||||||||||
| Total | $ | 64 | $ | 449 | $ | 28 | $ | 541 | ||||||||
| Contract liabilities expected to be recognized in | ||||||||
| 2023 | $ | 52 | ||||||
| 2024 | 50 | |||||||
| 2025 | 47 | |||||||
| 2026 | 44 | |||||||
| 2027 | 42 | |||||||
| Thereafter | 305 | |||||||
| Total | $ | 540 | ||||||
Disaggregation of Total Revenues
| 2022 | |||||||||||||||||||||||||||||
| TH | BK | PLK | FHS | Total | |||||||||||||||||||||||||
| Sales | $ | 2,631 | $ | 70 | $ | 78 | $ | 40 | $ | 2,819 | |||||||||||||||||||
| Royalties | 320 | 1,064 | 287 | 66 | 1,737 | ||||||||||||||||||||||||
| Property revenues | 577 | 224 | 12 | — | 813 | ||||||||||||||||||||||||
| Franchise fees and other revenue | 28 | 54 | 10 | 19 | 111 | ||||||||||||||||||||||||
| Advertising revenues and other services | 267 | 485 | 260 | 13 | 1,025 | ||||||||||||||||||||||||
| Total revenues | $ | 3,823 | $ | 1,897 | $ | 647 | $ | 138 | $ | 6,505 | |||||||||||||||||||
| 2021 | ||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | TH | BK | PLK | FHS | Total | |||||||||||||||||||||||||||||||||
| Sales | $ | 2,362 | $ | 2,355 | $ | 2,390 | Sales | $ | 2,249 | $ | 64 | $ | 64 | $ | 1 | $ | 2,378 | |||||||||||||||||||||||
| Royalties | 2,319 | 2,165 | 1,215 | Royalties | 287 | 1,008 | 264 | 2 | 1,561 | |||||||||||||||||||||||||||||||
| Property revenues | 833 | 744 | 765 | Property revenues | 556 | 224 | 13 | — | 793 | |||||||||||||||||||||||||||||||
| Franchise fees and other revenue | 89 | 93 | 206 | Franchise fees and other revenue | 21 | 60 | 6 | 2 | 89 | |||||||||||||||||||||||||||||||
| Advertising revenues and other services | Advertising revenues and other services | 229 | 457 | 232 | — | 918 | ||||||||||||||||||||||||||||||||||
| Total revenues | $ | 5,603 | $ | 5,357 | $ | 4,576 | Total revenues | $ | 3,342 | $ | 1,813 | $ | 579 | $ | 5 | $ | 5,739 | |||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||||||||
| TH | BK | PLK | FHS | Total | |||||||||||||||||||||||||
| Sales | $ | 1,876 | $ | 64 | $ | 73 | $ | — | $ | 2,013 | |||||||||||||||||||
| Royalties | 240 | 842 | 245 | — | 1,327 | ||||||||||||||||||||||||
| Property revenues | 486 | 219 | 13 | — | 718 | ||||||||||||||||||||||||
| Franchise fees and other revenue | 19 | 52 | 5 | — | 76 | ||||||||||||||||||||||||
| Advertising revenues and other services | 189 | 425 | 220 | — | 834 | ||||||||||||||||||||||||
| Total revenues | $ | 2,810 | $ | 1,602 | $ | 556 | $ | — | $ | 4,968 | |||||||||||||||||||
| 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 | |||||
| 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 | |||||||
| As Reported | Total Adjustments | Amounts Under 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 | ||||||
| As Reported December 31, 2018 | Total Adjustments | Amounts Under 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 17.16. Other Operating Expenses (Income), net
Other operating expenses (income), net, consist of the following (in millions):
| 2019 | 2018 | 2017 | |||||||||
| Net losses (gains) on disposal of assets, restaurant closures and refranchisings | $ | 7 | $ | 19 | $ | 29 | |||||
| Litigation settlements and reserves, net | 2 | 11 | 2 | ||||||||
| Net losses (gains) on foreign exchange | (15 | ) | (33 | ) | 77 | ||||||
| Other, net | (4 | ) | 11 | 1 | |||||||
| Other operating expenses (income), net | $ | (10 | ) | $ | 8 | $ | 109 | ||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net losses (gains) on disposal of assets, restaurant closures and refranchisings | $ | 4 | $ | 2 | $ | 6 | |||||||||||
| Litigation settlements and reserves, net | 11 | 81 | 7 | ||||||||||||||
| Net losses (gains) on foreign exchange | (4) | (76) | 100 | ||||||||||||||
| Other, net | 14 | — | (8) | ||||||||||||||
| Other operating expenses (income), net | $ | 25 | $ | 7 | $ | 105 | |||||||||||
Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods.
Litigation settlements and reserves, net primarily reflects accruals and payments made and proceeds received in connection with litigation matters.and arbitration matters and other business disputes.
In early 2022, we entered into negotiations to resolve business disputes that arose during 2021 with counterparties to the master franchise agreements for Burger King and Popeyes in China. Based on these discussions, we paid approximately $100 million in 2022, of which $5 million and $72 million was recorded as Litigation settlements and reserves, net in 2022 and 2021, respectively. The majority of this amount related to Popeyes, resolved our disputes, and allowed us to move forward in the market with a new master franchisee. Additionally, pursuant to this agreement we and our partners have made equity contributions to the Burger King business in China.
Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities.liabilities, primarily those denominated in Euros and Canadian dollars.
Note 18.17. Commitments and Contingencies
Letters of Credit
As of December 31, 2019,2022, we had $15$11 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 these letters of credit outstanding, $2 million are secured by the collateral under our Revolving Credit Facility and the remainder are secured by cash collateral. As of December 31, 2019,2022, no amounts had been drawn on any of these irrevocable standby letters of credit.
Purchase Commitments
We have arrangements for information technology and telecommunication services with an aggregate contractual obligation of $18$23 million over the next two years, some of which have early termination fees. We also enter into commitments to purchase advertising. As of December 31, 2019,2022, these commitments totaled $359$212 million and run through 2024.2025.
Litigation
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.
On October 5, 2018, a class action complaint was filed against Burger King Worldwide, Inc. (“BKW”) and Burger King CorporationCompany, successor in interest, (“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 the Company,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 the Company,RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Sandra Muster,Munster, individually and on behalf of all others similarly situated. These complaints have been consolidated and 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
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injunctive relief and damages for himself or herself and other members of the class. These actions have been consolidated.
lower court for further proceedings. While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of these casesthis case or estimate the range of possible loss, if any.
On June 19, 2017,30, 2020, a class action complaint was filed against RBI, Partnership and The TDL Group Corp. in the Quebec Superior Court by Steve Holcman, individually and on behalf of all Quebec residents who downloaded the Tim Hortons mobile application. On July 2, 2020, a Notice of Action related to a second class action complaint was filed against RBI, in the Ontario Superior Court by Ashley Sitko and Ashley Cadeau, individually and on behalf of all Canadian residents who downloaded the Tim Hortons mobile application. On August 31, 2020, a notice of claim was filed against RBI in the Supreme Court of British Columbia by Wai Lam Jacky Law on behalf of all persons in Canada who downloaded the Tim Hortons mobile application or the Burger King mobile application. On September 30, 2020, a notice of action was filed against RBI, Partnership, The TDL Group Corp., BKW and Popeyes Louisiana Kitchen, Inc. in the Ontario Superior Court of Justice against TDL,by William Jung on behalf of a to be determined class. All of the Company,complaints alleged that the defendants violated the plaintiff’s privacy rights, the Personal Information Protection and Electronic Documents Act, consumer protection and competition laws or app-based undertakings to users, in each case in connection with the collection of geolocation data through the Tim Hortons Ad Fundmobile application, and in certain individual defendants. Thecases, the Burger King and Popeyes mobile applications. Each plaintiff a franchisee of 2 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 bysought injunctive relief and monetary damages for himself or herself and other members of the proposed classclass. The parties have reached a national settlement of all cases, which has been approved by the applicable courts, pursuant to the Tim Hortons Canada advertising fund (the “Ad Fund”).which The plaintiff seeks to have the Ad Fund franchisee contributions held in trust for the benefit of membersTDL Group Corp. is providing each member of the proposed class a voucher for one hot beverage and one baked good and will pay plaintiffs legal fees, in 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.amount which we believe is immaterial.
On October 26, 2020, City of Warwick Municipal Employees Pension Fund, a purported stockholder of RBI, individually and putatively on behalf of all other stockholders similarly situated, filed a lawsuit in the Supreme Court of the State of New York County of New York naming RBI and certain of our officers, directors and shareholders as defendants alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, in connection with certain offerings of securities by an affiliate in August and September 2019. The complaint alleges that the shelf registration statement used in connection with such offering contained certain false and/or misleading statements or omissions. The complaint seeks, among other relief, class certification of the lawsuit, unspecified compensatory damages, rescission, pre-judgement and post-judgement interest, costs and expenses. On December 18, 2020 the plaintiffs filed an amended complaint and on February 16, 2021 RBI filed a motion to dismiss the complaint. The plaintiffs filed a brief in opposition to the motion on April 19, 2021 and RBI filed a reply in May 2021. The motion to dismiss was heard in April 2022 and the motion to dismiss was denied in May 2022. On June 6, 2017,2022, we filed an answer to the complaint and on July 8, 2022, we filed an appeal of the denial of the motion to dismiss. On November 10, 2022, the appellate division reversed the trial court and ordered that the complaint be dismissed. Plaintiffs have moved for leave to appeal to the Court of Appeals of the State of New York and we filed an opposition to their motion. The parties are awaiting a claimdecision as to whether the Court of Appeals will accept the appeal. We intend to vigorously defend. While we believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any.
In April 2022, BKC was served with two separate purported class action complaints relating to per- and polyfluoroalkyl (“PFAS”) in packaging. Hussain vs. BKC was filed on April 13, 2022 in the Ontario SuperiorU.S. District Court for the Northern District of Justice againstCalifornia, and Cooper v. BKC was filed on April 14, 2022 in the same defendants as named above. The plaintiffs, 2 franchiseesU.S. District Court for the Southern District 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 relationFlorida. Both complaints alleged that certain food products sold by BKC are not safe for human consumption due to the purported adverse treatment of memberpackaging containing allegedly unsafe PFAS and potential member franchiseesthat consumers were misled by the labelling, marketing and packaging claims asserted by BKC regarding the safety and sustainability of the Great White North Franchisee Association. The plaintiffs seekpackaging and sought compensatory, statutory and punitive damages, for, among other things, breachinjunctive relief, corrective action, and attorneys’ fees. Hussain voluntarily dismissed the case on August 22, 2022. In June 2022, Cooper voluntarily dismissed the case and then refiled their complaint in state court only on behalf of contract, breach of the statutory duty of fair dealing, and breach of the franchisees’ statutory right of association.
Note 19.18. Segment Reporting and Geographical Information
As stated in Note 1, Description of Business and Organization, we manage 3four brands. Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Under the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. Under the Firehouse Subs brand, we operate in the specialty subs category of the quick service segment of the restaurant industry. Our business generates revenue from the following sources: (i) sales, consisting primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and sales at restaurants owned by us (“Company restaurants”); (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by
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franchisees; (ii)(iii) property revenues from properties we lease or sublease to franchisees; and (iii)(iv) advertising revenues and other services, consisting primarily of advertising fund contributions based on a percentage of sales at restaurants ownedreported by us (“Company restaurants”). In addition,franchise restaurants. We manage each of our TH business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousingbrands as an operating segment and distribution, as well as sales to retailers.each operating segment represents a reportable segment.
Our management structure and financial reporting is organized around our 3four brands, including the information regularly reviewed by our Chief Executive Officer, who is our Chief Operating Decision Maker. Therefore, we have 3four operating segments: (1) TH, which includes all operations of our Tim Hortons brand, (2) BK, which includes all operations of our Burger King brand, and (3) PLK, which includes all operations of our Popeyes brand, and (4) FHS, which includes all operations of our Firehouse Subsbrand. Our 3four operating segments represent our reportable segments.
The following tables present revenues, by segment and by country, depreciation and amortization, (income) loss from equity method investments, and capital expenditures by segment (in millions):
| 2019 | 2018 | 2017 | |||||||||
| Revenues by operating segment: | |||||||||||
| TH | $ | 3,344 | $ | 3,292 | $ | 3,155 | |||||
| BK | 1,777 | 1,651 | 1,219 | ||||||||
| PLK | 482 | 414 | 202 | ||||||||
| Total | $ | 5,603 | $ | 5,357 | $ | 4,576 | |||||
| Revenues by country (a): | |||||||||||
| Canada | $ | 3,037 | $ | 2,984 | $ | 2,832 | |||||
| United States | 1,930 | 1,785 | 1,190 | ||||||||
| Other | 636 | 588 | 554 | ||||||||
| Total | $ | 5,603 | $ | 5,357 | $ | 4,576 | |||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Revenues by operating segment: | |||||||||||||||||
| TH | $ | 3,823 | $ | 3,342 | $ | 2,810 | |||||||||||
| BK | 1,897 | 1,813 | 1,602 | ||||||||||||||
| PLK | 647 | 579 | 556 | ||||||||||||||
| FHS | 138 | 5 | — | ||||||||||||||
| Total | $ | 6,505 | $ | 5,739 | $ | 4,968 | |||||||||||
| Revenues by country (a): | |||||||||||||||||
| Canada | $ | 3,458 | $ | 3,035 | $ | 2,546 | |||||||||||
| United States | 2,273 | 2,005 | 1,889 | ||||||||||||||
| Other | 774 | 699 | 533 | ||||||||||||||
| Total | $ | 6,505 | $ | 5,739 | $ | 4,968 | |||||||||||
| Depreciation and amortization: | |||||||||||
| TH | $ | 112 | $ | 108 | $ | 110 | |||||
| BK | 62 | 61 | 62 | ||||||||
| PLK | 11 | 11 | 10 | ||||||||
| Total | $ | 185 | $ | 180 | $ | 182 | |||||
| Depreciation and amortization: | |||||||||||||||||
| TH | $ | 114 | $ | 132 | $ | 119 | |||||||||||
| BK | 66 | 62 | 62 | ||||||||||||||
| PLK | 8 | 7 | 8 | ||||||||||||||
| FHS | 2 | — | — | ||||||||||||||
| Total | $ | 190 | $ | 201 | $ | 189 | |||||||||||
| (Income) loss from equity method investments: | |||||||||||
| TH | $ | (7 | ) | $ | (6 | ) | $ | (8 | ) | ||
| BK | (4 | ) | (16 | ) | (4 | ) | |||||
| Total | $ | (11 | ) | $ | (22 | ) | $ | (12 | ) | ||
| (Income) loss from equity method investments: | |||||||||||||||||
| TH | $ | (8) | $ | (13) | $ | (4) | |||||||||||
| BK | 51 | 17 | 43 | ||||||||||||||
| PLK | 1 | — | — | ||||||||||||||
| Total | $ | 44 | $ | 4 | $ | 39 | |||||||||||
| Capital expenditures: | |||||||||||
| TH | $ | 37 | $ | 59 | $ | 13 | |||||
| BK | 20 | 25 | 23 | ||||||||
| PLK | 5 | 2 | 1 | ||||||||
| Total | $ | 62 | $ | 86 | $ | 37 | |||||
| Capital expenditures: | |||||||||||||||||
| TH | $ | 30 | $ | 61 | $ | 92 | |||||||||||
| BK | 63 | 34 | 18 | ||||||||||||||
| PLK | 6 | 11 | 7 | ||||||||||||||
| FHS | 1 | — | — | ||||||||||||||
| Total | $ | 100 | $ | 106 | $ | 117 | |||||||||||
(a)Only Canada and the United States represented 10% or more of our total revenues in each period presented.
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Total assets 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, | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
| By operating segment: | |||||||||||||||
| TH | $ | 13,894 | $ | 12,666 | $ | 1,972 | $ | 1,226 | |||||||
| BK | 5,149 | 4,514 | 1,130 | 729 | |||||||||||
| PLK | 2,490 | 2,420 | 129 | 95 | |||||||||||
| Unallocated | 827 | 541 | — | — | |||||||||||
| Total | $ | 22,360 | $ | 20,141 | $ | 3,231 | $ | 2,050 | |||||||
| By country: | |||||||||||||||
| Canada | $ | 1,665 | $ | 945 | |||||||||||
| United States | 1,542 | 1,098 | |||||||||||||
| Other | 24 | 7 | |||||||||||||
| Total | $ | 3,231 | $ | 2,050 | |||||||||||
| Assets | Long-Lived Assets | ||||||||||||||||||||||
| As of December 31, | As of December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| By operating segment: | |||||||||||||||||||||||
| TH | $ | 13,279 | $ | 13,995 | $ | 1,819 | $ | 1,963 | |||||||||||||||
| BK | 5,007 | 4,946 | 1,140 | 1,137 | |||||||||||||||||||
| PLK | 2,572 | 2,563 | 143 | 141 | |||||||||||||||||||
| FHS | 1,098 | 1,103 | 12 | 4 | |||||||||||||||||||
| Unallocated | 790 | 639 | — | — | |||||||||||||||||||
| Total | $ | 22,746 | $ | 23,246 | $ | 3,114 | $ | 3,245 | |||||||||||||||
| By country: | |||||||||||||||||||||||
| Canada | $ | 1,531 | $ | 1,670 | |||||||||||||||||||
| United States | 1,558 | 1,556 | |||||||||||||||||||||
| Other | 25 | 19 | |||||||||||||||||||||
| Total | $ | 3,114 | $ | 3,245 | |||||||||||||||||||
Long-lived assets include property and equipment, net, finance and operating lease right of use assets, net and net investment in property leased to franchisees. Only Canada and the United States represented 10% or more of our total long-lived assets as of December 31, 20192022 and December 31, 2018.2021.
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, income tax (benefit) expense, (benefit), and depreciation and amortization, adjusted to exclude (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, and(ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, as well as(iii) other operating expenses (income), net. Other specifically identifiednet and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the Firehouse Acquisition consisting of professional fees, compensation-related expenses and integration costs (“FHS Transaction costs”); and (ii) non-operating costs from professional advisory and consulting services associated with non-recurring projects are also excluded from Adjusted EBITDA,certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including feesservices related to significant tax reform legislation, regulations and expenses associated with the Popeyes Acquisitionrelated restructuring initiatives (“PLK Transaction costs”), Corporate restructuring and tax advisory fees related to the interpretation and implementationfees”).
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Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance or the performance of an acquired business.performance. A reconciliation of segment income to net income (loss) consists of the following (in millions):
| 2022 | 2021 | 2020 | |||||||||||||||
| Segment income: | |||||||||||||||||
| TH | $ | 1,073 | $ | 997 | $ | 823 | |||||||||||
| BK | 1,007 | 1,021 | 823 | ||||||||||||||
| PLK | 242 | 228 | 218 | ||||||||||||||
| FHS | 56 | 2 | — | ||||||||||||||
| Adjusted EBITDA | 2,378 | 2,248 | 1,864 | ||||||||||||||
| Share-based compensation and non-cash incentive compensation expense | 136 | 102 | 84 | ||||||||||||||
| FHS Transaction costs | 24 | 18 | — | ||||||||||||||
| Corporate restructuring and tax advisory fees | 46 | 16 | 16 | ||||||||||||||
| Impact of equity method investments (a) | 59 | 25 | 48 | ||||||||||||||
| Other operating expenses (income), net | 25 | 7 | 105 | ||||||||||||||
| EBITDA | 2,088 | 2,080 | 1,611 | ||||||||||||||
| Depreciation and amortization | 190 | 201 | 189 | ||||||||||||||
| Income from operations | 1,898 | 1,879 | 1,422 | ||||||||||||||
| Interest expense, net | 533 | 505 | 508 | ||||||||||||||
| Loss on early extinguishment of debt | — | 11 | 98 | ||||||||||||||
| Income tax (benefit) expense | (117) | 110 | 66 | ||||||||||||||
| Net income | $ | 1,482 | $ | 1,253 | $ | 750 | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Segment income: | |||||||||||
| TH | $ | 1,122 | $ | 1,127 | $ | 1,136 | |||||
| BK | 994 | 928 | 903 | ||||||||
| PLK | 188 | 157 | 107 | ||||||||
| Adjusted EBITDA | 2,304 | 2,212 | 2,146 | ||||||||
| Share-based compensation and non-cash incentive compensation expense | 74 | 55 | 55 | ||||||||
| PLK Transaction costs | — | 10 | 62 | ||||||||
| Corporate restructuring and tax advisory fees | 31 | 25 | 2 | ||||||||
| Office centralization and relocation costs | 6 | 20 | — | ||||||||
| Impact of equity method investments (a) | 11 | (3 | ) | 1 | |||||||
| Other operating expenses (income), net | (10 | ) | 8 | 109 | |||||||
| EBITDA | 2,192 | 2,097 | 1,917 | ||||||||
| Depreciation and amortization | 185 | 180 | 182 | ||||||||
| Income from operations | 2,007 | 1,917 | 1,735 | ||||||||
| Interest expense, net | 532 | 535 | 512 | ||||||||
| Loss on early extinguishment of debt | 23 | — | 122 | ||||||||
| Income tax expense (benefit) | 341 | 238 | (134 | ) | |||||||
| Net income | $ | 1,111 | $ | 1,144 | $ | 1,235 | |||||
| (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. |
| Quarters Ended | |||||||||||||||||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | ||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
| Total revenues | $ | 1,266 | $ | 1,254 | $ | 1,400 | $ | 1,343 | $ | 1,458 | $ | 1,375 | $ | 1,479 | $ | 1,385 | |||||||||||||||
| Income from operations | $ | 434 | $ | 421 | $ | 491 | $ | 502 | $ | 571 | $ | 478 | $ | 511 | $ | 516 | |||||||||||||||
| Net income | $ | 246 | $ | 279 | $ | 257 | $ | 314 | $ | 351 | $ | 250 | $ | 257 | $ | 301 | |||||||||||||||
| Basic and diluted earnings per unit | |||||||||||||||||||||||||||||||
| Class A common units | $ | 0.67 | $ | 0.73 | $ | 0.70 | $ | 0.83 | $ | 1.00 | $ | 0.66 | $ | 0.81 | $ | 0.81 | |||||||||||||||
| Partnership exchangeable units | $ | 0.53 | $ | 0.60 | $ | 0.55 | $ | 0.67 | $ | 0.76 | $ | 0.53 | $ | 0.55 | $ | 0.65 | |||||||||||||||
Note 21.19. Supplemental Financial Information
The agreement governing our Credit Facilities, the 2019 4.375%3.875% First Lien Senior Notes Indenture, the 2019 3.875%5.75% First Lien Senior Notes Indenture, the 2017 5.00%3.50% First Lien Senior Notes Indenture, the 4.375% Second Lien Senior Notes Indenture and the 2017 4.25%4.00% Second Lien 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.
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RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
(In millions of U.S. dollars)
As of December 31, 20192022
| Consolidated Borrowers | RBILP | Eliminations | Consolidated | ||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||
| Current assets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,178 | $ | — | $ | — | $ | 1,178 | |||||||||||||||
| Accounts and notes receivable, net | 614 | — | — | 614 | |||||||||||||||||||
| Inventories, net | 133 | — | — | 133 | |||||||||||||||||||
| Prepaids and other current assets | 123 | — | — | 123 | |||||||||||||||||||
| Total current assets | 2,048 | — | — | 2,048 | |||||||||||||||||||
| Property and equipment, net | 1,950 | — | — | 1,950 | |||||||||||||||||||
| Operating lease assets, net | 1,082 | — | — | 1,082 | |||||||||||||||||||
| Intangible assets, net | 10,991 | — | — | 10,991 | |||||||||||||||||||
| Goodwill | 5,688 | — | — | 5,688 | |||||||||||||||||||
| Net investment in property leased to franchisees | 82 | — | — | 82 | |||||||||||||||||||
| Intercompany receivable | — | 243 | (243) | — | |||||||||||||||||||
| Investment in subsidiaries | — | 4,268 | (4,268) | — | |||||||||||||||||||
| Other assets, net | 905 | — | — | 905 | |||||||||||||||||||
| Total assets | $ | 22,746 | $ | 4,511 | $ | (4,511) | $ | 22,746 | |||||||||||||||
| LIABILITIES AND EQUITY | |||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||
| Accounts and drafts payable | $ | 758 | $ | — | $ | — | $ | 758 | |||||||||||||||
| Other accrued liabilities | 758 | 243 | — | 1,001 | |||||||||||||||||||
| Gift card liability | 230 | — | — | 230 | |||||||||||||||||||
| Current portion of long term debt and finance leases | 127 | — | — | 127 | |||||||||||||||||||
| Total current liabilities | 1,873 | 243 | — | 2,116 | |||||||||||||||||||
| Term debt, net of current portion | 12,839 | — | — | 12,839 | |||||||||||||||||||
| Finance leases, net of current portion | 311 | — | — | 311 | |||||||||||||||||||
| Operating lease liabilities, net of current portion | 1,027 | — | — | 1,027 | |||||||||||||||||||
| Other liabilities, net | 872 | — | — | 872 | |||||||||||||||||||
| Payables to affiliates | 243 | — | (243) | — | |||||||||||||||||||
| Deferred income taxes, net | 1,313 | — | — | 1,313 | |||||||||||||||||||
| Total liabilities | 18,478 | 243 | (243) | 18,478 | |||||||||||||||||||
| Partners’ capital: | |||||||||||||||||||||||
| Class A common units | — | 8,735 | — | 8,735 | |||||||||||||||||||
| Partnership exchangeable units | — | (3,496) | — | (3,496) | |||||||||||||||||||
| Common shares | 2,494 | — | (2,494) | — | |||||||||||||||||||
| Retained earnings | 2,745 | — | (2,745) | — | |||||||||||||||||||
| Accumulated other comprehensive income (loss) | (973) | (973) | 973 | (973) | |||||||||||||||||||
| Total Partners’ capital/shareholders’ equity | 4,266 | 4,266 | (4,266) | 4,266 | |||||||||||||||||||
| Noncontrolling interests | 2 | 2 | (2) | 2 | |||||||||||||||||||
| Total equity | 4,268 | 4,268 | (4,268) | 4,268 | |||||||||||||||||||
| Total liabilities and equity | $ | 22,746 | $ | 4,511 | $ | (4,511) | $ | 22,746 | |||||||||||||||
| Consolidated Borrowers | RBILP | Eliminations | Consolidated | ||||||||||||
| ASSETS | |||||||||||||||
| Current assets: | |||||||||||||||
| Cash and cash equivalents | $ | 1,533 | $ | — | $ | — | $ | 1,533 | |||||||
| Accounts and notes receivable, net | 527 | — | — | 527 | |||||||||||
| Inventories, net | 84 | — | — | 84 | |||||||||||
| Prepaids and other current assets | 52 | — | — | 52 | |||||||||||
| Total current assets | 2,196 | — | — | 2,196 | |||||||||||
| Property and equipment, net | 2,007 | — | — | 2,007 | |||||||||||
| Operating lease assets, net | 1,176 | — | — | 1,176 | |||||||||||
| Intangible assets, net | 10,563 | — | — | 10,563 | |||||||||||
| Goodwill | 5,651 | — | — | 5,651 | |||||||||||
| Net investment in property leased to franchisees | 48 | — | — | 48 | |||||||||||
| Intercompany receivable | — | 232 | (232 | ) | — | ||||||||||
| Investment in subsidiaries | — | 4,259 | (4,259 | ) | — | ||||||||||
| Other assets, net | 719 | — | — | 719 | |||||||||||
| Total assets | $ | 22,360 | $ | 4,491 | $ | (4,491 | ) | $ | 22,360 | ||||||
| LIABILITIES AND EQUITY | |||||||||||||||
| Current liabilities: | |||||||||||||||
| Accounts and drafts payable | $ | 644 | $ | — | $ | — | $ | 644 | |||||||
| Other accrued liabilities | 558 | 232 | — | 790 | |||||||||||
| Gift card liability | 168 | — | — | 168 | |||||||||||
| Current portion of long term debt and finance leases | 101 | — | — | 101 | |||||||||||
| Total current liabilities | 1,471 | 232 | — | 1,703 | |||||||||||
| Term debt, net of current portion | 11,759 | — | — | 11,759 | |||||||||||
| Finance leases, net of current portion | 288 | — | — | 288 | |||||||||||
| Operating lease liabilities, net of current portion | 1,089 | — | — | 1,089 | |||||||||||
| Other liabilities, net | 1,698 | — | — | 1,698 | |||||||||||
| Payables to affiliates | 232 | — | (232 | ) | — | ||||||||||
| Deferred income taxes, net | 1,564 | — | — | 1,564 | |||||||||||
| Total liabilities | 18,101 | 232 | (232 | ) | 18,101 | ||||||||||
| Partners’ capital: | |||||||||||||||
| Class A common units | — | 7,786 | — | 7,786 | |||||||||||
| Partnership exchangeable units | — | (2,353 | ) | — | (2,353 | ) | |||||||||
| Common shares | 3,248 | — | (3,248 | ) | — | ||||||||||
| Retained earnings | 2,185 | — | (2,185 | ) | — | ||||||||||
| Accumulated other comprehensive income (loss) | (1,178 | ) | (1,178 | ) | 1,178 | (1,178 | ) | ||||||||
| Total Partners’ capital/shareholders’ equity | 4,255 | 4,255 | (4,255 | ) | 4,255 | ||||||||||
| Noncontrolling interests | 4 | 4 | (4 | ) | 4 | ||||||||||
| Total equity | 4,259 | 4,259 | (4,259 | ) | 4,259 | ||||||||||
| Total liabilities and equity | $ | 22,360 | $ | 4,491 | $ | (4,491 | ) | $ | 22,360 | ||||||
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
(In millions of U.S. dollars)
As of December 31, 20182021
| Consolidated Borrowers | RBILP | Eliminations | Consolidated | ||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||
| Current assets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,087 | $ | — | $ | — | $ | 1,087 | |||||||||||||||
| Accounts and notes receivable, net | 547 | — | — | 547 | |||||||||||||||||||
| Inventories, net | 96 | — | — | 96 | |||||||||||||||||||
| Prepaids and other current assets | 86 | — | — | 86 | |||||||||||||||||||
| Total current assets | 1,816 | — | — | 1,816 | |||||||||||||||||||
| Property and equipment, net | 2,035 | — | — | 2,035 | |||||||||||||||||||
| Operating lease assets, net | 1,130 | — | — | 1,130 | |||||||||||||||||||
| Intangible assets, net | 11,417 | — | — | 11,417 | |||||||||||||||||||
| Goodwill | 6,006 | — | — | 6,006 | |||||||||||||||||||
| Net investment in property leased to franchisees | 80 | — | — | 80 | |||||||||||||||||||
| Intercompany receivable | — | 241 | (241) | — | |||||||||||||||||||
| Investment in subsidiaries | — | 3,853 | (3,853) | — | |||||||||||||||||||
| Other assets, net | 762 | — | — | 762 | |||||||||||||||||||
| Total assets | $ | 23,246 | $ | 4,094 | $ | (4,094) | $ | 23,246 | |||||||||||||||
| LIABILITIES AND EQUITY | |||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||
| Accounts and drafts payable | $ | 614 | $ | — | $ | — | $ | 614 | |||||||||||||||
| Other accrued liabilities | 706 | 241 | — | 947 | |||||||||||||||||||
| Gift card liability | 221 | — | — | 221 | |||||||||||||||||||
| Current portion of long term debt and finance leases | 96 | — | — | 96 | |||||||||||||||||||
| Total current liabilities | 1,637 | 241 | — | 1,878 | |||||||||||||||||||
| Term debt, net of current portion | 12,916 | — | — | 12,916 | |||||||||||||||||||
| Finance leases, net of current portion | 333 | — | — | 333 | |||||||||||||||||||
| Operating lease liabilities, net of current portion | 1,070 | — | — | 1,070 | |||||||||||||||||||
| Other liabilities, net | 1,822 | — | — | 1,822 | |||||||||||||||||||
| Payables to affiliates | 241 | — | (241) | — | |||||||||||||||||||
| Deferred income taxes, net | 1,374 | — | — | 1,374 | |||||||||||||||||||
| Total liabilities | 19,393 | 241 | (241) | 19,393 | |||||||||||||||||||
| Partners’ capital: | |||||||||||||||||||||||
| Class A common units | — | 8,421 | — | 8,421 | |||||||||||||||||||
| Partnership exchangeable units | — | (3,547) | — | (3,547) | |||||||||||||||||||
| Common shares | 2,635 | — | (2,635) | — | |||||||||||||||||||
| Retained earnings | 2,239 | — | (2,239) | — | |||||||||||||||||||
| Accumulated other comprehensive income (loss) | (1,024) | (1,024) | 1,024 | (1,024) | |||||||||||||||||||
| Total Partners’ capital/shareholders’ equity | 3,850 | 3,850 | (3,850) | 3,850 | |||||||||||||||||||
| Noncontrolling interests | 3 | 3 | (3) | 3 | |||||||||||||||||||
| Total equity | 3,853 | 3,853 | (3,853) | 3,853 | |||||||||||||||||||
| Total liabilities and equity | $ | 23,246 | $ | 4,094 | $ | (4,094) | $ | 23,246 | |||||||||||||||
| 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 finance leases | 91 | — | — | 91 | |||||||||||
| Total current liabilities | 1,201 | 207 | — | 1,408 | |||||||||||
| Term debt, net of current portion | 11,823 | — | — | 11,823 | |||||||||||
| Finance 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 Operations
(In millions of U.S. dollars)
| Consolidated Borrowers | RBILP | Eliminations | Consolidated | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Sales | $ | 2,819 | $ | — | $ | — | $ | 2,819 | |||||||||||||||
| Franchise and property revenues | 2,661 | — | — | 2,661 | |||||||||||||||||||
| Advertising revenues and other services | 1,025 | — | — | 1,025 | |||||||||||||||||||
| Total revenues | 6,505 | — | — | 6,505 | |||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Cost of sales | 2,312 | — | — | 2,312 | |||||||||||||||||||
| Franchise and property expenses | 518 | — | — | 518 | |||||||||||||||||||
| Advertising expenses and other services | 1,077 | — | — | 1,077 | |||||||||||||||||||
| General and administrative expenses | 631 | — | — | 631 | |||||||||||||||||||
| (Income) loss from equity method investments | 44 | — | — | 44 | |||||||||||||||||||
| Other operating expenses (income), net | 25 | — | — | 25 | |||||||||||||||||||
| Total operating costs and expenses | 4,607 | — | — | 4,607 | |||||||||||||||||||
| Income from operations | 1,898 | — | — | 1,898 | |||||||||||||||||||
| Interest expense, net | 533 | — | — | 533 | |||||||||||||||||||
| Income before income taxes | 1,365 | — | — | 1,365 | |||||||||||||||||||
| Income tax (benefit) expense | (117) | — | — | (117) | |||||||||||||||||||
| Net income | 1,482 | — | — | 1,482 | |||||||||||||||||||
| Equity in earnings of consolidated subsidiaries | — | 1,482 | (1,482) | — | |||||||||||||||||||
| Net income (loss) | 1,482 | 1,482 | (1,482) | 1,482 | |||||||||||||||||||
| Net income (loss) attributable to noncontrolling interests | 3 | 3 | (3) | 3 | |||||||||||||||||||
| Net income (loss) attributable to common unitholders | $ | 1,479 | $ | 1,479 | $ | (1,479) | $ | 1,479 | |||||||||||||||
| Total comprehensive income (loss) | $ | 1,533 | $ | 1,533 | $ | (1,533) | $ | 1,533 | |||||||||||||||
| Consolidated Borrowers | RBILP | Eliminations | Consolidated | ||||||||||||
| Revenues: | |||||||||||||||
| Sales | $ | 2,362 | $ | — | $ | — | $ | 2,362 | |||||||
| Franchise and property revenues | 3,241 | — | — | 3,241 | |||||||||||
| Total revenues | 5,603 | — | — | 5,603 | |||||||||||
| Operating costs and expenses: | |||||||||||||||
| Cost of sales | 1,813 | — | — | 1,813 | |||||||||||
| Franchise and property expenses | 540 | — | — | 540 | |||||||||||
| Selling, general and administrative expenses | 1,264 | — | — | 1,264 | |||||||||||
| (Income) loss from equity method investments | (11 | ) | — | — | (11 | ) | |||||||||
| Other operating expenses (income), net | (10 | ) | — | — | (10 | ) | |||||||||
| Total operating costs and expenses | 3,596 | — | — | 3,596 | |||||||||||
| Income from operations | 2,007 | — | — | 2,007 | |||||||||||
| Interest expense, net | 532 | — | — | 532 | |||||||||||
| Loss on early extinguishment of debt | 23 | — | — | 23 | |||||||||||
| Income before income taxes | 1,452 | — | — | 1,452 | |||||||||||
| Income tax expense (benefit) | 341 | — | — | 341 | |||||||||||
| Net income | 1,111 | — | — | 1,111 | |||||||||||
| Equity in earnings of consolidated subsidiaries | — | 1,111 | (1,111 | ) | — | ||||||||||
| Net income (loss) | 1,111 | 1,111 | (1,111 | ) | 1,111 | ||||||||||
| Net income (loss) attributable to noncontrolling interests | 2 | 2 | (2 | ) | 2 | ||||||||||
| Net income (loss) attributable to common unitholders | $ | 1,109 | $ | 1,109 | $ | (1,109 | ) | $ | 1,109 | ||||||
| Total comprehensive income (loss) | $ | 1,370 | $ | 1,370 | $ | (1,370 | ) | $ | 1,370 | ||||||
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
(In millions of U.S. dollars)
| Consolidated Borrowers | RBILP | Eliminations | Consolidated | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Sales | $ | 2,378 | $ | — | $ | — | $ | 2,378 | |||||||||||||||
| Franchise and property revenues | 2,443 | — | — | 2,443 | |||||||||||||||||||
| Advertising revenues and other services | 918 | — | — | 918 | |||||||||||||||||||
| Total revenues | 5,739 | — | — | 5,739 | |||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Cost of sales | 1,890 | — | — | 1,890 | |||||||||||||||||||
| Franchise and property expenses | 489 | — | — | 489 | |||||||||||||||||||
| Advertising expenses and other services | 986 | — | — | 986 | |||||||||||||||||||
| General and administrative expenses | 484 | — | — | 484 | |||||||||||||||||||
| (Income) loss from equity method investments | 4 | — | — | 4 | |||||||||||||||||||
| Other operating expenses (income), net | 7 | — | — | 7 | |||||||||||||||||||
| Total operating costs and expenses | 3,860 | — | — | 3,860 | |||||||||||||||||||
| Income from operations | 1,879 | — | — | 1,879 | |||||||||||||||||||
| Interest expense, net | 505 | — | — | 505 | |||||||||||||||||||
| Loss on early extinguishment of debt | 11 | — | — | 11 | |||||||||||||||||||
| Income before income taxes | 1,363 | — | — | 1,363 | |||||||||||||||||||
| Income tax expense | 110 | — | — | 110 | |||||||||||||||||||
| Net income | 1,253 | — | — | 1,253 | |||||||||||||||||||
| Equity in earnings of consolidated subsidiaries | — | 1,253 | (1,253) | — | |||||||||||||||||||
| Net income (loss) | 1,253 | 1,253 | (1,253) | 1,253 | |||||||||||||||||||
| Net income (loss) attributable to noncontrolling interests | 4 | 4 | (4) | 4 | |||||||||||||||||||
| Net income (loss) attributable to common unitholders | $ | 1,249 | $ | 1,249 | $ | (1,249) | $ | 1,249 | |||||||||||||||
| Total comprehensive income (loss) | $ | 1,504 | $ | 1,504 | $ | (1,504) | $ | 1,504 | |||||||||||||||
| 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 expense (benefit) | 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 | $ | 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 Statements of Operations
(In millions of U.S. dollars)
| Consolidated Borrowers | RBILP | Eliminations | Consolidated | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Sales | $ | 2,013 | $ | — | $ | — | $ | 2,013 | |||||||||||||||
| Franchise and property revenues | 2,121 | — | — | 2,121 | |||||||||||||||||||
| Advertising revenues and other services | 834 | — | — | 834 | |||||||||||||||||||
| Total revenues | 4,968 | — | — | 4,968 | |||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Cost of sales | 1,610 | — | — | 1,610 | |||||||||||||||||||
| Franchise and property expenses | 515 | — | — | 515 | |||||||||||||||||||
| Advertising expenses and other services | 870 | — | — | 870 | |||||||||||||||||||
| General and administrative expenses | 407 | — | — | 407 | |||||||||||||||||||
| (Income) loss from equity method investments | 39 | — | — | 39 | |||||||||||||||||||
| Other operating expenses (income), net | 105 | — | — | 105 | |||||||||||||||||||
| Total operating costs and expenses | 3,546 | — | — | 3,546 | |||||||||||||||||||
| Income from operations | 1,422 | — | — | 1,422 | |||||||||||||||||||
| Interest expense, net | 508 | — | — | 508 | |||||||||||||||||||
| Loss on early extinguishment of debt | 98 | — | — | 98 | |||||||||||||||||||
| Income before income taxes | 816 | — | — | 816 | |||||||||||||||||||
| Income tax expense | 66 | — | — | 66 | |||||||||||||||||||
| Net income | 750 | — | — | 750 | |||||||||||||||||||
| Equity in earnings of consolidated subsidiaries | — | 750 | (750) | — | |||||||||||||||||||
| Net income (loss) | 750 | 750 | (750) | 750 | |||||||||||||||||||
| Net income (loss) attributable to noncontrolling interests | 2 | 2 | (2) | 2 | |||||||||||||||||||
| Net income (loss) attributable to common unitholders | $ | 748 | $ | 748 | $ | (748) | $ | 748 | |||||||||||||||
| Total comprehensive income (loss) | $ | 653 | $ | 653 | $ | (653) | $ | 653 | |||||||||||||||
| 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 (benefit) | (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 | $ | 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 Cash Flows
(In millions of U.S. dollars)
| Consolidated Borrowers | RBILP | Eliminations | Consolidated | ||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||
| Net income | $ | 1,482 | $ | 1,482 | $ | (1,482) | $ | 1,482 | |||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||
| Equity in loss (earnings) of consolidated subsidiaries | — | (1,482) | 1,482 | — | |||||||||||||||||||
| Depreciation and amortization | 190 | — | — | 190 | |||||||||||||||||||
| Amortization of deferred financing costs and debt issuance discount | 28 | — | — | 28 | |||||||||||||||||||
| (Income) loss from equity method investments | 44 | — | — | 44 | |||||||||||||||||||
| Loss (gain) on remeasurement of foreign denominated transactions | (4) | — | — | (4) | |||||||||||||||||||
| Net (gains) losses on derivatives | (9) | — | — | (9) | |||||||||||||||||||
| Share-based compensation and non-cash incentive compensation expense | 136 | — | — | 136 | |||||||||||||||||||
| Deferred income taxes | (60) | — | — | (60) | |||||||||||||||||||
| Other | 19 | — | — | 19 | |||||||||||||||||||
| Changes in current assets and liabilities, excluding acquisitions and dispositions: | |||||||||||||||||||||||
| Accounts and notes receivable | (110) | — | — | (110) | |||||||||||||||||||
| Inventories and prepaids and other current assets | (61) | — | — | (61) | |||||||||||||||||||
| Accounts and drafts payable | 169 | — | — | 169 | |||||||||||||||||||
| Other accrued liabilities and gift card liability | 37 | — | — | 37 | |||||||||||||||||||
| Tenant inducements paid to franchisees | (26) | — | — | (26) | |||||||||||||||||||
| Other long-term assets and liabilities | (345) | — | — | (345) | |||||||||||||||||||
| Net cash provided by operating activities | 1,490 | — | — | 1,490 | |||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||
| Payments for property and equipment | (100) | — | — | (100) | |||||||||||||||||||
| Net proceeds from disposal of assets, restaurant closures and refranchisings | 12 | — | — | 12 | |||||||||||||||||||
| Net payments in connection with purchase of Firehouse Subs | (12) | — | — | (12) | |||||||||||||||||||
| Settlement/sale of derivatives, net | 71 | — | — | 71 | |||||||||||||||||||
| Other investing activities, net | (35) | — | — | (35) | |||||||||||||||||||
| Net cash used for investing activities | (64) | — | — | (64) | |||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||
| Proceeds from long-term debt | 2 | — | — | 2 | |||||||||||||||||||
| Repayments of long-term debt and finance leases | (94) | — | — | (94) | |||||||||||||||||||
| Distributions on Class A and Partnership exchangeable units | — | (971) | — | (971) | |||||||||||||||||||
| Distributions to RBI for repurchase of RBI common shares | — | (326) | — | (326) | |||||||||||||||||||
| Capital contribution from RBI | 51 | — | — | 51 | |||||||||||||||||||
| Distributions from subsidiaries | (1,297) | 1,297 | — | — | |||||||||||||||||||
| (Payments) proceeds from derivatives | 34 | — | — | 34 | |||||||||||||||||||
| Other financing activities, net | (3) | — | — | (3) | |||||||||||||||||||
| Net cash used for financing activities | (1,307) | — | — | (1,307) | |||||||||||||||||||
| Effect of exchange rates on cash and cash equivalents | (28) | — | — | (28) | |||||||||||||||||||
| Increase (decrease) in cash and cash equivalents | 91 | — | — | 91 | |||||||||||||||||||
| Cash and cash equivalents at beginning of period | 1,087 | — | — | 1,087 | |||||||||||||||||||
| Cash and cash equivalents at end of period | $ | 1,178 | $ | — | $ | — | $ | 1,178 | |||||||||||||||
Consolidated Borrowers | RBILP | Eliminations | Consolidated | ||||||||||||
| Cash flows from operating activities: | |||||||||||||||
| Net income | $ | 1,111 | $ | 1,111 | $ | (1,111 | ) | $ | 1,111 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
| Equity in loss (earnings) of consolidated subsidiaries | — | (1,111 | ) | 1,111 | — | ||||||||||
| Depreciation and amortization | 185 | — | — | 185 | |||||||||||
| Premiums paid and non-cash loss on early extinguishment of debt | 16 | — | — | 16 | |||||||||||
| Amortization of deferred financing costs and debt issuance discount | 29 | — | — | 29 | |||||||||||
| (Income) loss from equity method investments | (11 | ) | — | — | (11 | ) | |||||||||
| Loss (gain) on remeasurement of foreign denominated transactions | (14 | ) | — | — | (14 | ) | |||||||||
| Net (gains) losses on derivatives | (49 | ) | — | — | (49 | ) | |||||||||
| Share-based compensation expense | 68 | — | — | 68 | |||||||||||
| Deferred income taxes | 58 | — | — | 58 | |||||||||||
| Other | 6 | — | — | 6 | |||||||||||
| Changes in current assets and liabilities, excluding acquisitions and dispositions: | |||||||||||||||
| Accounts and notes receivable | (53 | ) | — | — | (53 | ) | |||||||||
| Inventories and prepaids and other current assets | (15 | ) | — | — | (15 | ) | |||||||||
| Accounts and drafts payable | 112 | — | — | 112 | |||||||||||
| Other accrued liabilities and gift card liability | (51 | ) | — | — | (51 | ) | |||||||||
| Tenant inducements paid to franchisees | (54 | ) | — | — | (54 | ) | |||||||||
| Other long-term assets and liabilities | 138 | — | — | 138 | |||||||||||
| Net cash provided by operating activities | 1,476 | — | — | 1,476 | |||||||||||
| Cash flows from investing activities: | |||||||||||||||
| Payments for property and equipment | (62 | ) | — | — | (62 | ) | |||||||||
| Net proceeds from disposal of assets, restaurant closures and refranchisings | 8 | — | — | 8 | |||||||||||
| Settlement/sale of derivatives, net | 24 | — | — | 24 | |||||||||||
| Net cash used for investing activities | (30 | ) | — | — | (30 | ) | |||||||||
| Cash flows from financing activities: | |||||||||||||||
| Proceeds from issuance of long-term debt | 2,250 | — | — | 2,250 | |||||||||||
| Repayments of long-term debt and finance leases | (2,266 | ) | — | — | (2,266 | ) | |||||||||
| Payment of financing costs | (50 | ) | — | — | (50 | ) | |||||||||
| Distributions paid on Class A and Partnership exchangeable units | — | (901 | ) | — | (901 | ) | |||||||||
| Capital contribution from RBI Inc. | 102 | — | — | 102 | |||||||||||
| Distributions from subsidiaries | (901 | ) | 901 | — | — | ||||||||||
| Proceeds from derivatives | 23 | — | — | 23 | |||||||||||
| Net cash used for financing activities | (842 | ) | — | — | (842 | ) | |||||||||
| Effect of exchange rates on cash and cash equivalents | 16 | — | — | 16 | |||||||||||
| Increase (decrease) in cash and cash equivalents | 620 | — | — | 620 | |||||||||||
| Cash and cash equivalents at beginning of period | 913 | — | — | 913 | |||||||||||
| Cash and cash equivalents at end of period | $ | 1,533 | $ | — | $ | — | $ | 1,533 | |||||||
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
(In millions of U.S. dollars)
| Consolidated Borrowers | RBILP | Eliminations | Consolidated | ||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||
| Net income | $ | 1,253 | $ | 1,253 | $ | (1,253) | $ | 1,253 | |||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||
| Equity in loss (earnings) of consolidated subsidiaries | — | (1,253) | 1,253 | — | |||||||||||||||||||
| Depreciation and amortization | 201 | — | — | 201 | |||||||||||||||||||
| Premiums paid and non-cash loss on early extinguishment of debt | 11 | — | — | 11 | |||||||||||||||||||
| Amortization of deferred financing costs and debt issuance discount | 27 | — | — | 27 | |||||||||||||||||||
| (Income) loss from equity method investments | 4 | — | — | 4 | |||||||||||||||||||
| Loss (gain) on remeasurement of foreign denominated transactions | (76) | — | — | (76) | |||||||||||||||||||
| Net (gains) losses on derivatives | 87 | — | — | 87 | |||||||||||||||||||
| Share-based compensation and non-cash incentive compensation expense | 102 | — | — | 102 | |||||||||||||||||||
| Deferred income taxes | (5) | — | — | (5) | |||||||||||||||||||
| Other | (16) | — | — | (16) | |||||||||||||||||||
| Changes in current assets and liabilities, excluding acquisitions and dispositions: | |||||||||||||||||||||||
| Accounts and notes receivable | 8 | — | — | 8 | |||||||||||||||||||
| Inventories and prepaids and other current assets | 12 | — | — | 12 | |||||||||||||||||||
| Accounts and drafts payable | 149 | — | — | 149 | |||||||||||||||||||
| Other accrued liabilities and gift card liability | 67 | — | — | 67 | |||||||||||||||||||
| Tenant inducements paid to franchisees | (20) | — | — | (20) | |||||||||||||||||||
| Other long-term assets and liabilities | (78) | — | — | (78) | |||||||||||||||||||
| Net cash provided by operating activities | 1,726 | — | — | 1,726 | |||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||
| Payments for property and equipment | (106) | — | — | (106) | |||||||||||||||||||
| Net proceeds from disposal of assets, restaurant closures and refranchisings | 16 | — | — | 16 | |||||||||||||||||||
| Net payment for purchase of Firehouse Subs, net of cash acquired | (1,004) | — | — | (1,004) | |||||||||||||||||||
| Settlement/sale of derivatives, net | 5 | — | — | 5 | |||||||||||||||||||
| Other investing activities, net | (14) | — | — | (14) | |||||||||||||||||||
| Net cash used for investing activities | (1,103) | — | — | (1,103) | |||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||
| Proceeds from long-term debt | 1,335 | — | — | 1,335 | |||||||||||||||||||
| Repayments of long-term debt and finance leases | (889) | — | — | (889) | |||||||||||||||||||
| Payment of financing costs | (19) | — | — | (19) | |||||||||||||||||||
| Distributions on Class A and Partnership exchangeable units | — | (974) | — | (974) | |||||||||||||||||||
| Repurchase of Partnership exchangeable units | — | — | — | — | |||||||||||||||||||
| Distributions to RBI for repurchase of RBI common shares | — | (551) | — | (551) | |||||||||||||||||||
| Capital contribution from RBI | 60 | — | — | 60 | |||||||||||||||||||
| Distributions from subsidiaries | (1,525) | 1,525 | — | — | |||||||||||||||||||
| (Payments) proceeds from derivatives | (51) | — | — | (51) | |||||||||||||||||||
| Other financing activities, net | (4) | — | — | (4) | |||||||||||||||||||
| Net cash used for financing activities | (1,093) | — | — | (1,093) | |||||||||||||||||||
| Effect of exchange rates on cash and cash equivalents | (3) | — | — | (3) | |||||||||||||||||||
| Increase (decrease) in cash and cash equivalents | (473) | — | — | (473) | |||||||||||||||||||
| Cash and cash equivalents at beginning of period | 1,560 | — | — | 1,560 | |||||||||||||||||||
| Cash and cash equivalents at end of period | $ | 1,087 | $ | — | $ | — | $ | 1,087 | |||||||||||||||
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 | ) | |||||||||
| Net proceeds from disposal of assets, restaurant closures and refranchisings | 8 | — | — | 8 | |||||||||||
| Settlement/sale of derivatives, net | 17 | — | — | 17 | |||||||||||
| Other investing activities, net | 17 | — | — | 17 | |||||||||||
| Net cash 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 finance leases | (74 | ) | — | — | (74 | ) | |||||||||
| Distributions to RBI for payments in connection with redemption of RBI preferred shares | — | (60 | ) | — | (60 | ) | |||||||||
| Payment of financing costs | (3 | ) | — | — | (3 | ) | |||||||||
| Distributions paid on Class A 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 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 of U.S. dollars)
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 (gains) 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 | ) | |||||||||
| Net 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 | ) | |||||||||
| Settlement/sale of derivatives, net | 772 | — | — | 772 | |||||||||||
| Other investing activities, net | 17 | — | — | 17 | |||||||||||
| Net cash 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 finance 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 Class A, 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 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 | |||||||
| Consolidated Borrowers | RBILP | Eliminations | Consolidated | ||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||
| Net income | $ | 750 | $ | 750 | $ | (750) | $ | 750 | |||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||
| Equity in loss (earnings) of consolidated subsidiaries | — | (750) | 750 | — | |||||||||||||||||||
| Depreciation and amortization | 189 | — | — | 189 | |||||||||||||||||||
| Premiums paid and non-cash loss on early extinguishment of debt | 97 | — | — | 97 | |||||||||||||||||||
| Amortization of deferred financing costs and debt issuance discount | 26 | — | — | 26 | |||||||||||||||||||
| (Income) loss from equity method investments | 39 | — | — | 39 | |||||||||||||||||||
| Loss (gain) on remeasurement of foreign denominated transactions | 100 | — | — | 100 | |||||||||||||||||||
| Net (gains) losses on derivatives | 32 | — | — | 32 | |||||||||||||||||||
| Share-based compensation and non-cash incentive compensation expense | 84 | — | — | 84 | |||||||||||||||||||
| Deferred income taxes | (208) | — | — | (208) | |||||||||||||||||||
| Other | 28 | — | — | 28 | |||||||||||||||||||
| Changes in current assets and liabilities, excluding acquisitions and dispositions: | |||||||||||||||||||||||
| Accounts and notes receivable | (30) | — | — | (30) | |||||||||||||||||||
| Inventories and prepaids and other current assets | (10) | — | — | (10) | |||||||||||||||||||
| Accounts and drafts payable | (183) | — | — | (183) | |||||||||||||||||||
| Other accrued liabilities and gift card liability | 6 | — | — | 6 | |||||||||||||||||||
| Tenant inducements paid to franchisees | (22) | — | — | (22) | |||||||||||||||||||
| Other long-term assets and liabilities | 23 | — | — | 23 | |||||||||||||||||||
| Net cash provided by operating activities | 921 | — | — | 921 | |||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||
| Payments for property and equipment | (117) | — | — | (117) | |||||||||||||||||||
| Net proceeds from disposal of assets, restaurant closures and refranchisings | 12 | — | — | 12 | |||||||||||||||||||
| Settlement/sale of derivatives, net | 33 | — | — | 33 | |||||||||||||||||||
| Other investing activities, net | (7) | — | — | (7) | |||||||||||||||||||
| Net cash used for investing activities | (79) | — | — | (79) | |||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||
| Proceeds from revolving line of credit and long-term debt | 5,235 | — | — | 5,235 | |||||||||||||||||||
| Repayments of revolving line of credit, long-term debt and finance leases | (4,708) | — | — | (4,708) | |||||||||||||||||||
| Payment of financing costs | (43) | — | — | (43) | |||||||||||||||||||
| Distributions on Class A and Partnership exchangeable units | — | (959) | — | (959) | |||||||||||||||||||
| Repurchase of Partnership exchangeable units | — | (380) | — | (380) | |||||||||||||||||||
| Capital contribution from RBI | 82 | — | — | 82 | |||||||||||||||||||
| Distributions from subsidiaries | (1,339) | 1,339 | — | — | |||||||||||||||||||
| (Payments) proceeds from derivatives | (46) | — | — | (46) | |||||||||||||||||||
| Other financing activities, net | (2) | — | — | (2) | |||||||||||||||||||
| Net cash used for financing activities | (821) | — | — | (821) | |||||||||||||||||||
| Effect of exchange rates on cash and cash equivalents | 6 | — | — | 6 | |||||||||||||||||||
| Increase (decrease) in cash and cash equivalents | 27 | — | — | 27 | |||||||||||||||||||
| Cash and cash equivalents at beginning of period | 1,533 | — | — | 1,533 | |||||||||||||||||||
| Cash and cash equivalents at end of period | $ | 1,560 | $ | — | $ | — | $ | 1,560 | |||||||||||||||
Note 22.20. Subsequent Events
Distributions/Dividends
On January 3, 2020,4, 2023, RBI paid a cash dividend of $0.50$0.54 per RBI common share to common shareholders of record on December 17, 2019.21, 2022. 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 $0.50$0.54 per exchangeable unit to holders of record on December 17, 2019.21, 2022.
On February 10, 2020,14, 2023, we announced that the RBI board of directors had declared a cash dividend of $0.52$0.55 per RBI common share for the first quarter of 2020.2023. The dividend will be paid on April 3, 20205, 2023 to RBI common shareholders of record on March 16, 2020.22, 2023. 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 $0.52$0.55 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.
*****
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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, 2019.2022. Based on that evaluation, the CEO and CFO of RBI concluded that Partnership’s disclosure controls and procedures were effective as of such date.
Changes in Internal Controls
We have integrated Firehouse Subs into our overall internal control over financial reporting processes.
Internal Control over Financial Reporting
Management’s Report on Internal Control over 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.
Item 9B.Other Information
Item 5.02 Departure of Directors or Certain Officers; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers
(e)
Pursuant to RBI’s Bonus Swap Program, RBI provides eligible employees, including its named executive officers, or NEOs, the ability to invest 25% or 50% of their net cash bonus into RBI common shares (“Investment Shares”) and leverage the investment through the issuance of matching restricted share units (“RSUs”). The matching RSUs vest ratably over four years on December 31 of each year, beginning the year of grant. All of the unvested matching RSUs will be forfeited if an NEO’s service (including service on the Board of Directors of RBI) is terminated for any reason (other than death or disability) prior to the date of vesting. If an NEO transfers any Investment Shares before the vesting date, he or she will forfeit 100% of the unvested matching RSUs. All of RBI’s eligible NEOs elected to participate in the 2022 Bonus Swap Program at the 50% level. On January 27, 2023, the Compensation Committee of the Board of Directors (the “Compensation Committee”) approved the 2023 bonus swap program on substantially the same terms as the 2022 bonus swap program, except the matching RSUs will vest on December 15 of each year, beginning the year of grant.
On January 27, 2023, the Compensation Committee approved the 2023 Annual Bonus Program. For 2023 annual incentive, each of the NEOs will have 25% of the target based on achievement of individual metrics which may be earned from 0% up to 100% and 75% of the target based on a mix of comparable sales achievement, net restaurant growth (“NRG”) achievement, and on organic Adjusted EBITDA achievement, each of which may be earned from a threshold of 50% to a maximum of 200%; with the weighting based on the applicable business unit. For corporate roles, the weighting is 15% NRG achievement, 20% comparable sales achievement and 40% organic adjusted EBITDA achievement. Overall, any annual incentive payout will require (1) achievement of the threshold amount of Adjusted EBITDA, (2) that individual achievement must also be earned at no less than 20% and (3) that certain general and administrative expense targets must be met.
On February 13, 2023, in addition to the grant of awards to Mr. Kobza as previously disclosed, the Compensation Committee approved performance based RSUs (“PSUs”) discretionary awards to Messrs. Dunnigan, Shear and Curtis, which consist of the following PSUs at target based on the closing price on February 21, 2023: $2,500,000 PSUs for Mr. Dunnigan, $5,000,000 PSUs for Mr. Shear and $3,000,000 PSUs for Mr. Curtis. The performance measure for purposes of determining the number of PSUs earned by each of Messrs. Dunnigan, Shear and Curtis is the relative total shareholder return of RBI shares on the NYSE compared to the S&P 500 for the period from December 31, 2022 to December 31, 2025. The Compensation Committee established a target performance level at the 50th percentile, a performance threshold at or above which 50% of target is earned and below which no shares are earned at the 25th percentile, and a maximum performance level at the 85th percentile at or above which 150% of the target is earned.
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Amounts earned between threshold and target or target and maximum will be based on linear interpolation. Once earned, the PSUs will cliff vest on February 22, 2026. In addition, if an executive’s service to RBI is terminated (other than due to death or disability) prior to February 22, 2025, he or she will forfeit the entire award. A copy of the form of the Performance Award Agreement between RBI and each of the NEOs is filed herewith as Exhibit 10.36(g). This summary is qualified in its entirety to the full text of the form of award agreement.
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item other than the information regarding the executive officers of RBI set forth under the heading "Executive Officers of the Registrant" in Part I of this Form 10-K, as general partner of Partnership, 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, 2019.2022. We refer to this proxy statement as the RBI Definitive Proxy Statement.
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
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, 20192022 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(1) | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | ||||||||||||||
| RBI Equity Compensation Plans Approved by Security Holders | 17,484 | $ | 58.00 | 3,714 | |||||||||||||
| RBI Equity Compensation Plans Not Approved by Security Holders | — | — | — | ||||||||||||||
| Total | 17,484 | $ | 58.00 | 3,714 | |||||||||||||
(1)The weighted average exercise price does not take into account the RBI common shares issuable upon outstanding RSUs vesting, which have no exercise price.
| (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(1) | 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 | 15,576 | $ | 45.29 | 14,148 | |||||
| Equity Compensation Plans Not Approved by Security Holders | — | — | — | ||||||
| Total | 15,576 | $ | 45.29 | 14,148 | |||||
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 14. Principal Accounting Fees and Services
Our independent registered public accounting firm is KPMG LLP, Miami, FL, Auditor Firm ID: 185.
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.
(a)(3)Exhibits
The following exhibits are filed as part of this report.
Exhibit Number | Description | Incorporated by Reference | ||||||||||||
109
110
111
112
113
114
115
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | Filed herewith. | ||||||||||||
| XBRL Taxonomy Extension Schema Document. | Filed herewith. | |||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | Filed herewith. | ||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | Filed herewith. | ||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | Filed herewith. | ||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | Filed herewith. | ||||||||||||
| 104 | Cover Page Interactive File | Formatted as Inline XBRL and contained in Exhibit 101. | ||||||||||||
| * 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.
Signatures
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.
| Restaurant Brands International Limited Partnership | ||||||||
| By: | Restaurant Brands International Inc., its general partner | |||||||
| By: | /s/ José E. Cil | |||||||
| Name: | José E. Cil | |||||||
| Title: | Chief Executive Officer | |||||||
Date: February 21, 202022, 2023
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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.
| Signature | Title | Date | ||||||||||||
| /s/ José E. Cil | Chief Executive Officer of Restaurant Brands International Inc. (principal executive officer) | February | ||||||||||||
| José E. Cil | ||||||||||||||
| /s/ Matthew Dunnigan | Chief Financial Officer of Restaurant Brands International Inc. (principal financial officer) | February | ||||||||||||
| Matthew Dunnigan | ||||||||||||||
| /s/ Jacqueline Friesner | Controller and Chief Accounting Officer of Restaurant Brands International Inc. (principal accounting officer) | February | ||||||||||||
| Jacqueline Friesner | ||||||||||||||
| /s/ | ||||||||||||||
| February | ||||||||||||||
| /s/ | Director of Restaurant Brands International Inc. | February | ||||||||||||
| /s/ | Director of Restaurant Brands International Inc. | February | ||||||||||||
| /s/ | Director of Restaurant Brands International Inc. | February | ||||||||||||
| /s/ | Director of Restaurant Brands International Inc. | February | ||||||||||||
| /s/ | Director of Restaurant Brands International Inc. | February | ||||||||||||
| /s/ | Director of Restaurant Brands International Inc. | February | ||||||||||||
| /s/ | Director of Restaurant Brands International Inc. | February | ||||||||||||
| /s/ | Director of Restaurant Brands International Inc. | February | ||||||||||||
| /s/ Cristina Farjallat | Director of Restaurant Brands International Inc. | February 22, 2023 | ||||||||||||
| Cristina Farjallat | ||||||||||||||
| /s/ Daniel Schwartz | Director of Restaurant Brands International Inc. | February 22, 2023 | ||||||||||||
| Daniel Schwartz | ||||||||||||||
| /s/ Thecla Sweeney | Director of Restaurant Brands International Inc. | February 22, 2023 | ||||||||||||
| Thecla Sweeney | ||||||||||||||