(In millions of U.S. dollars)
|
| | | | | | | | | | | | | | | |
| Consolidated Borrowers | | RBILP | | Eliminations | | Consolidated |
Revenues: | | | | | | | |
Sales | $ | 503 |
| | $ | — |
| | $ | — |
| | $ | 503 |
|
Franchise and property revenues | 722 |
| | — |
| | — |
| | 722 |
|
Total revenues | 1,225 |
| | — |
| | — |
| | 1,225 |
|
Operating costs and expenses: | | | | | | | |
Cost of sales | 399 |
| | — |
| | — |
| | 399 |
|
Franchise and property expenses | 126 |
| | — |
| | — |
| | 126 |
|
Selling, general and administrative expenses | 325 |
| | — |
| | — |
| | 325 |
|
(Income) loss from equity method investments | 2 |
| | — |
| | — |
| | 2 |
|
Other operating expenses (income), net | (16 | ) | | — |
| | — |
| | (16 | ) |
Total operating costs and expenses | 836 |
| | — |
| | — |
| | 836 |
|
Income from operations | 389 |
| | — |
| | — |
| | 389 |
|
Interest expense, net | 119 |
| | — |
| | — |
| | 119 |
|
Income before income taxes | 270 |
| | — |
| | — |
| | 270 |
|
Income tax expense | 46 |
| | — |
| | — |
| | 46 |
|
Net income | 224 |
| | — |
| | — |
| | 224 |
|
Equity in earnings of consolidated subsidiaries | — |
| | 224 |
| | (224 | ) | | — |
|
Net income (loss) | 224 |
| | 224 |
| | (224 | ) | | 224 |
|
Net income (loss) attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
|
Net income (loss) attributable to common unitholders | $ | 224 |
| | $ | 224 |
| | $ | (224 | ) | | $ | 224 |
|
Comprehensive income (loss) | $ | (319 | ) | | $ | (319 | ) | | $ | 319 |
| | $ | (319 | ) |
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
(In millions of U.S. dollars)
Six Months Ended June 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Borrowers | | RBILP | | Eliminations | | Consolidated |
Revenues: | | | | | | | |
Sales | $ | 909 | | | $ | — | | | $ | — | | | $ | 909 | |
Franchise and property revenues | 1,364 | | | — | | | — | | | 1,364 | |
Total revenues | 2,273 | | | — | | | — | | | 2,273 | |
Operating costs and expenses: | | | | | | | |
Cost of sales | 738 | | | — | | | — | | | 738 | |
Franchise and property expenses | 260 | | | — | | | — | | | 260 | |
Selling, general and administrative expenses | 620 | | | — | | | — | | | 620 | |
(Income) loss from equity method investments | 18 | | | — | | | — | | | 18 | |
Other operating expenses (income), net | 5 | | | — | | | — | | | 5 | |
Total operating costs and expenses | 1,641 | | | — | | | — | | | 1,641 | |
Income from operations | 632 | | | — | | | — | | | 632 | |
Interest expense, net | 247 | | | — | | | — | | | 247 | |
| | | | | | | |
Income before income taxes | 385 | | | — | | | — | | | 385 | |
Income tax (benefit) expense | (3) | | | — | | | — | | | (3) | |
Net income | 388 | | | — | | | — | | | 388 | |
Equity in earnings of consolidated subsidiaries | — | | | 388 | | | (388) | | | — | |
Net income (loss) | 388 | | | 388 | | | (388) | | | 388 | |
Net income (loss) attributable to noncontrolling interests | 1 | | | 1 | | | (1) | | | 1 | |
Net income (loss) attributable to common unitholders | $ | 387 | | | $ | 387 | | | $ | (387) | | | $ | 387 | |
Comprehensive income (loss) | $ | (6) | | | $ | (6) | | | $ | 6 | | | $ | (6) | |
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
(In millions of U.S. dollars)
Three Months Ended March 31,June 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Borrowers | | RBILP | | Eliminations | | Consolidated |
Revenues: | | | | | | | |
Sales | $ | 589 | | | $ | — | | | $ | — | | | $ | 589 | |
Franchise and property revenues | 811 | | | — | | | — | | | 811 | |
Total revenues | 1,400 | | | — | | | — | | | 1,400 | |
Operating costs and expenses: | | | | | | | |
Cost of sales | 453 | | | — | | | — | | | 453 | |
Franchise and property expenses | 135 | | | — | | | — | | | 135 | |
Selling, general and administrative expenses | 316 | | | — | | | — | | | 316 | |
(Income) loss from equity method investments | 2 | | | — | | | — | | | 2 | |
Other operating expenses (income), net | 3 | | | — | | | — | | | 3 | |
Total operating costs and expenses | 909 | | | — | | | — | | | 909 | |
Income from operations | 491 | | | — | | | — | | | 491 | |
Interest expense, net | 137 | | | — | | | — | | | 137 | |
| | | | | | | |
Income before income taxes | 354 | | | — | | | — | | | 354 | |
Income tax expense | 97 | | | — | | | — | | | 97 | |
Net income | 257 | | | — | | | — | | | 257 | |
Equity in earnings of consolidated subsidiaries | — | | | 257 | | | (257) | | | — | |
Net income (loss) | 257 | | | 257 | | | (257) | | | 257 | |
Net income (loss) attributable to noncontrolling interests | — | | | — | | | — | | | — | |
Net income (loss) attributable to common unitholders | $ | 257 | | | $ | 257 | | | $ | (257) | | | $ | 257 | |
Comprehensive income (loss) | $ | 362 | | | $ | 362 | | | $ | (362) | | | $ | 362 | |
|
| | | | | | | | | | | | | | | |
| Consolidated Borrowers | | RBILP | | Eliminations | | Consolidated |
Revenues: | | | | | | | |
Sales | $ | 522 |
| | $ | — |
| | $ | — |
| | $ | 522 |
|
Franchise and property revenues | 744 |
| | — |
| | — |
| | 744 |
|
Total revenues | 1,266 |
| | — |
| | — |
| | 1,266 |
|
Operating costs and expenses: | | | | | | | |
Cost of sales | 406 |
| | — |
| | — |
| | 406 |
|
Franchise and property expenses | 133 |
| | — |
| | — |
| | 133 |
|
Selling, general and administrative expenses | 312 |
| | — |
| | — |
| | 312 |
|
(Income) loss from equity method investments | (2 | ) | | — |
| | — |
| | (2 | ) |
Other operating expenses (income), net | (17 | ) | | — |
| | — |
| | (17 | ) |
Total operating costs and expenses | 832 |
| | — |
| | — |
| | 832 |
|
Income from operations | 434 |
| | — |
| | — |
| | 434 |
|
Interest expense, net | 132 |
| | — |
| | — |
| | 132 |
|
Income before income taxes | 302 |
| | — |
| | — |
| | 302 |
|
Income tax expense | 56 |
| | — |
| | — |
| | 56 |
|
Net income | 246 |
| | — |
| | — |
| | 246 |
|
Equity in earnings of consolidated subsidiaries | — |
| | 246 |
| | (246 | ) | | — |
|
Net income (loss) | 246 |
| | 246 |
| | (246 | ) | | 246 |
|
Net income (loss) attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
|
Net income (loss) attributable to common unitholders | $ | 246 |
| | $ | 246 |
| | $ | (246 | ) | | $ | 246 |
|
Comprehensive income (loss) | $ | 294 |
| | $ | 294 |
| | $ | (294 | ) | | $ | 294 |
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
(In millions of U.S. dollars)
Six Months Ended June 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Borrowers | | RBILP | | Eliminations | | Consolidated |
Revenues: | | | | | | | |
Sales | $ | 1,111 | | | $ | — | | | $ | — | | | $ | 1,111 | |
Franchise and property revenues | 1,555 | | | — | | | — | | | 1,555 | |
Total revenues | 2,666 | | | — | | | — | | | 2,666 | |
Operating costs and expenses: | | | | | | | |
Cost of sales | 859 | | | — | | | — | | | 859 | |
Franchise and property expenses | 268 | | | — | | | — | | | 268 | |
Selling, general and administrative expenses | 628 | | | — | | | — | | | 628 | |
(Income) loss from equity method investments | — | | | — | | | — | | | — | |
Other operating expenses (income), net | (14) | | | — | | | — | | | (14) | |
Total operating costs and expenses | 1,741 | | | — | | | — | | | 1,741 | |
Income from operations | 925 | | | — | | | — | | | 925 | |
Interest expense, net | 269 | | | — | | | — | | | 269 | |
| | | | | | | |
Income before income taxes | 656 | | | — | | | — | | | 656 | |
Income tax expense | 153 | | | — | | | — | | | 153 | |
Net income | 503 | | | — | | | — | | | 503 | |
Equity in earnings of consolidated subsidiaries | — | | | 503 | | | (503) | | | — | |
Net income (loss) | 503 | | | 503 | | | (503) | | | 503 | |
Net income (loss) attributable to noncontrolling interests | — | | | — | | | — | | | — | |
Net income (loss) attributable to common unitholders | $ | 503 | | | $ | 503 | | | $ | (503) | | | $ | 503 | |
Comprehensive income (loss) | $ | 656 | | | $ | 656 | | | $ | (656) | | | $ | 656 | |
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
(In millions of U.S. dollars)
ThreeSix months ended March 31,June 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Borrowers | | RBILP | | Eliminations | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 388 | | | $ | 388 | | | $ | (388) | | | $ | 388 | |
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | | | | | |
Equity in loss (earnings) of consolidated subsidiaries | — | | | (388) | | | 388 | | | — | |
Depreciation and amortization | 91 | | | — | | | — | | | 91 | |
| | | | | | | |
Amortization of deferred financing costs and debt issuance discount | 12 | | | — | | | — | | | 12 | |
(Income) loss from equity method investments | 18 | | | — | | | — | | | 18 | |
(Gain) loss on remeasurement of foreign denominated transactions | 10 | | | — | | | — | | | 10 | |
Net (gains) losses on derivatives | (1) | | | — | | | — | | | (1) | |
Share-based compensation expense | 39 | | | — | | | — | | | 39 | |
Deferred income taxes | (131) | | | — | | | — | | | (131) | |
Other | 20 | | | — | | | — | | | 20 | |
Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | | | | | |
Accounts and notes receivable | (36) | | | — | | | — | | | (36) | |
Inventories and prepaids and other current assets | (28) | | | — | | | — | | | (28) | |
Accounts and drafts payable | (158) | | | — | | | — | | | (158) | |
Other accrued liabilities and gift card liability | (13) | | | — | | | — | | | (13) | |
Tenant inducements paid to franchisees | (5) | | | — | | | — | | | (5) | |
Other long-term assets and liabilities | (10) | | | — | | | — | | | (10) | |
Net cash provided by (used for) operating activities | 196 | | | — | | | — | | | 196 | |
Cash flows from investing activities: | | | | | | | |
Payments for property and equipment | (39) | | | — | | | — | | | (39) | |
Net proceeds from disposal of assets, restaurant closures, and refranchisings | 5 | | | — | | | — | | | 5 | |
| | | | | | | |
Settlement/sale of derivatives, net | 22 | | | — | | | — | | | 22 | |
| | | | | | | |
Net cash provided by (used for) investing activities | (12) | | | — | | | — | | | (12) | |
Cash flows from financing activities: | | | | | | | |
Proceeds from revolving line of credit and long-term debt | 1,585 | | | — | | | — | | | 1,585 | |
Repayments of revolving line of credit, long-term debt and finance leases | (1,045) | | | — | | | — | | | (1,045) | |
Payment of financing costs | (10) | | | — | | | — | | | (10) | |
Distributions on Class A common and Partnership exchangeable units | — | | | (716) | | | — | | | (716) | |
| | | | | | | |
Capital contribution from RBI | 41 | | | — | | | — | | | 41 | |
Distributions from subsidiaries | (716) | | | 716 | | | — | | | — | |
(Payments) proceeds from derivatives | (14) | | | — | | | — | | | (14) | |
Other financing activities, net | (2) | | | — | | | — | | | (2) | |
Net cash provided by (used for) financing activities | (161) | | | — | | | — | | | (161) | |
Effect of exchange rates on cash and cash equivalents | (16) | | | — | | | — | | | (16) | |
Increase (decrease) in cash and cash equivalents | 7 | | | — | | | — | | | 7 | |
Cash and cash equivalents at beginning of period | 1,533 | | | — | | | — | | | 1,533 | |
Cash and cash equivalents at end of period | $ | 1,540 | | | $ | — | | | $ | — | | | $ | 1,540 | |
|
| | | | | | | | | | | | | | | |
| Consolidated Borrowers | | RBILP | | Eliminations | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 224 |
| | $ | 224 |
| | $ | (224 | ) | | $ | 224 |
|
Adjustments to reconcile net income to net cash (used for) provided by operating activities: | | | | | | | |
Equity in loss (earnings) of consolidated subsidiaries | — |
| | (224 | ) | | 224 |
| | — |
|
Depreciation and amortization | 45 |
| | — |
| | — |
| | 45 |
|
Amortization of deferred financing costs and debt issuance discount | 6 |
| | — |
| | — |
| | 6 |
|
(Income) loss from equity method investments | 2 |
| | — |
| | — |
| | 2 |
|
(Gain) loss on remeasurement of foreign denominated transactions | (8 | ) | | — |
| | — |
| | (8 | ) |
Net (gains) losses on derivatives | (6 | ) | | — |
| | — |
| | (6 | ) |
Share-based compensation expense | 19 |
| | — |
| | — |
| | 19 |
|
Deferred income taxes | (31 | ) | | — |
| | — |
| | (31 | ) |
Other | (4 | ) | | — |
| | — |
| | (4 | ) |
Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | | | | | |
Accounts and notes receivable | 94 |
| | — |
| | — |
| | 94 |
|
Inventories and prepaids and other current assets | (13 | ) | | — |
| | — |
| | (13 | ) |
Accounts and drafts payable | (136 | ) | | — |
| | — |
| | (136 | ) |
Other accrued liabilities and gift card liability | (67 | ) | | — |
| | — |
| | (67 | ) |
Tenant inducements paid to franchisees | (3 | ) | | — |
| | — |
| | (3 | ) |
Other long-term assets and liabilities | 14 |
| | — |
| | — |
| | 14 |
|
Net cash provided by (used for) operating activities | 136 |
| | — |
| | — |
| | 136 |
|
Cash flows from investing activities: | | | | | | | |
Payments for property and equipment | (19 | ) | | — |
| | — |
| | (19 | ) |
Net proceeds from disposal of assets, restaurant closures, and refranchisings | 4 |
| | — |
| | — |
| | 4 |
|
Settlement/sale of derivatives, net | 12 |
| | — |
| | — |
| | 12 |
|
Net cash provided by (used for) investing activities | (3 | ) | | — |
| | — |
| | (3 | ) |
Cash flows from financing activities: | | | | | | | |
Proceeds from revolving line of credit and long-term debt | 1,085 |
| | — |
| | — |
| | 1,085 |
|
Repayments of long-term debt and finance leases | (25 | ) | | — |
| | — |
| | (25 | ) |
Distributions on Class A common and Partnership exchangeable units | — |
| | (232 | ) | | — |
| | (232 | ) |
Capital contribution from RBI Inc. | 30 |
| | — |
| | — |
| | 30 |
|
Distributions from subsidiaries | (232 | ) | | 232 |
| | — |
| | — |
|
(Payments) proceeds from derivatives | (2 | ) | | — |
| | — |
| | (2 | ) |
Other financing activities, net | (1 | ) | | — |
| | — |
| | (1 | ) |
Net cash provided by (used for) financing activities | 855 |
| | — |
| | — |
| | 855 |
|
Effect of exchange rates on cash and cash equivalents | (23 | ) | | — |
| | — |
| | (23 | ) |
Increase (decrease) in cash and cash equivalents | 965 |
| | — |
| | — |
| | 965 |
|
Cash and cash equivalents at beginning of period | 1,533 |
| | — |
| | — |
| | 1,533 |
|
Cash and cash equivalents at end of period | $ | 2,498 |
| | $ | — |
| | $ | — |
| | $ | 2,498 |
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
(In millions of U.S. dollars)
ThreeSix Months Ended March 31,June 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Borrowers | | RBILP | | Eliminations | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 503 | | | $ | 503 | | | $ | (503) | | | $ | 503 | |
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | | | | | |
Equity in loss (earnings) of consolidated subsidiaries | — | | | (503) | | | 503 | | | — | |
Depreciation and amortization | 92 | | | — | | | — | | | 92 | |
| | | | | | | |
Amortization of deferred financing costs and debt issuance discount | 15 | | | — | | | — | | | 15 | |
| | | | | | | |
(Gain) loss on remeasurement of foreign denominated transactions | (3) | | | — | | | — | | | (3) | |
Net (gains) losses on derivatives | (34) | | | — | | | — | | | (34) | |
Share-based compensation expense | 39 | | | — | | | — | | | 39 | |
Deferred income taxes | 23 | | | — | | | — | | | 23 | |
Other | (3) | | | — | | | — | | | (3) | |
Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | | | | | |
Accounts and notes receivable | (16) | | | — | | | — | | | (16) | |
Inventories and prepaids and other current assets | (10) | | | — | | | — | | | (10) | |
Accounts and drafts payable | (40) | | | — | | | — | | | (40) | |
Other accrued liabilities and gift card liability | (166) | | | — | | | — | | | (166) | |
Tenant inducements paid to franchisees | (8) | | | — | | | — | | | (8) | |
Other long-term assets and liabilities | 83 | | | — | | | — | | | 83 | |
Net cash provided by (used for) operating activities | 475 | | | — | | | — | | | 475 | |
Cash flows from investing activities: | | | | | | | |
Payments for property and equipment | (14) | | | — | | | — | | | (14) | |
Net proceeds from disposal of assets, restaurant closures, and refranchisings | 22 | | | — | | | — | | | 22 | |
| | | | | | | |
Settlement/sale of derivatives, net | 15 | | | — | | | — | | | 15 | |
| | | | | | | |
Net cash provided by (used for) investing activities | 23 | | | — | | | — | | | 23 | |
Cash flows from financing activities: | | | | | | | |
| | | | | | | |
Repayments of long-term debt and finance leases | (48) | | | — | | | — | | | (48) | |
| | | | | | | |
Distributions on Class A common and Partnership exchangeable units | — | | | (437) | | | — | | | (437) | |
| | | | | | | |
Capital contribution from RBI | 80 | | | — | | | — | | | 80 | |
Distributions from subsidiaries | (437) | | | 437 | | | — | | | — | |
(Payments) proceeds from derivatives | 11 | | | — | | | — | | | 11 | |
Other financing activities, net | (1) | | | — | | | — | | | (1) | |
Net cash (used for) provided by financing activities | (395) | | | — | | | — | | | (395) | |
Effect of exchange rates on cash and cash equivalents | 12 | | | — | | | — | | | 12 | |
Increase (decrease) in cash and cash equivalents | 115 | | | — | | | — | | | 115 | |
Cash and cash equivalents at beginning of period | 913 | | | — | | | — | | | 913 | |
Cash and cash equivalents at end of period | $ | 1,028 | | | $ | — | | | $ | — | | | $ | 1,028 | |
|
| | | | | | | | | | | | | | | |
| Consolidated Borrowers | | RBILP | | Eliminations | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 246 |
| | $ | 246 |
| | $ | (246 | ) | | $ | 246 |
|
Adjustments to reconcile net income to net cash (used for) provided by operating activities: | | | | | | | |
Equity in loss (earnings) of consolidated subsidiaries | — |
| | (246 | ) | | 246 |
| | — |
|
Depreciation and amortization | 47 |
| | — |
| | — |
| | 47 |
|
Amortization of deferred financing costs and debt issuance discount | 7 |
| | — |
| | — |
| | 7 |
|
(Income) loss from equity method investments | (2 | ) | | — |
| | — |
| | (2 | ) |
(Gain) loss on remeasurement of foreign denominated transactions | (15 | ) | | — |
| | — |
| | (15 | ) |
Net (gains) losses on derivatives | (20 | ) | | — |
| | — |
| | (20 | ) |
Share-based compensation expense | 22 |
| | — |
| | — |
| | 22 |
|
Deferred income taxes | 38 |
| | — |
| | — |
| | 38 |
|
Other | 3 |
| | — |
| | — |
| | 3 |
|
Changes in current assets and liabilities, excluding acquisitions and dispositions: | | | | | | | |
Accounts and notes receivable | 14 |
| | — |
| | — |
| | 14 |
|
Inventories and prepaids and other current assets | (13 | ) | | — |
| | — |
| | (13 | ) |
Accounts and drafts payable | (69 | ) | | — |
| | — |
| | (69 | ) |
Other accrued liabilities and gift card liability | (126 | ) | | — |
| | — |
| | (126 | ) |
Other long-term assets and liabilities | 22 |
| | — |
| | — |
| | 22 |
|
Net cash provided by (used for) operating activities | 154 |
| | — |
| | — |
| | 154 |
|
Cash flows from investing activities: | | | | | | | |
Payments for property and equipment | (5 | ) | | — |
| | — |
| | (5 | ) |
Net proceeds from disposal of assets, restaurant closures, and refranchisings | 4 |
| | — |
| | — |
| | 4 |
|
Settlement/sale of derivatives, net | 11 |
| | — |
| | — |
| | 11 |
|
Other investing activities, net | 1 |
| | — |
| | — |
| | 1 |
|
Net cash provided by (used for) investing activities | 11 |
| | — |
| | — |
| | 11 |
|
Cash flows from financing activities: | | | | | | | |
Repayments of long-term debt and finance leases | (23 | ) | | — |
| | — |
| | (23 | ) |
Distributions on Class A common and Partnership exchangeable units | — |
| | (207 | ) | | — |
| | (207 | ) |
Capital contribution from RBI Inc. | 42 |
| | — |
| | — |
| | 42 |
|
Distributions from subsidiaries | (207 | ) | | 207 |
| | — |
| | — |
|
(Payments) proceeds from derivatives | 5 |
| | — |
| | — |
| | 5 |
|
Other financing activities, net | 1 |
| | — |
| | — |
| | 1 |
|
Net cash (used for) provided by financing activities | (182 | ) | | — |
| | — |
| | (182 | ) |
Effect of exchange rates on cash and cash equivalents | 6 |
| | — |
| | — |
| | 6 |
|
Increase (decrease) in cash and cash equivalents | (11 | ) | | — |
| | — |
| | (11 | ) |
Cash and cash equivalents at beginning of period | 913 |
| | — |
| | — |
| | 913 |
|
Cash and cash equivalents at end of period | $ | 902 |
| | $ | — |
| | $ | — |
| | $ | 902 |
|
32
Note 18. Subsequent Events
Cash Distributions/Dividends
On April 3, 2020, RBI paid a cash dividend of $0.52 per RBI common share to common shareholders of record on March 16, 2020. 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 $0.52 per exchangeable unit to holders of record on March 16, 2020.
Subsequent to March 31,June 30, 2020, the RBI board of directors declared a cash dividend of $0.52 per RBI common share, which will be paid on June 30,October 2, 2020 to RBI common shareholders of record on June 17,September 18, 2020. 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 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.
Fifth Amendment to the Credit Agreement and Issuance of 2020 Senior Notes
As discussed in Note 10, Long-Term Debt, on April 2, 2020, the Borrowers entered into the Fifth Amendment to the Credit Agreement and on April 7, 2020, the Borrowers entered into the 2020 5.75% Senior Notes Indenture in connection with the issuance of the 2020 5.75% Senior Notes.
*****
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 “Financial Statements” of this report.
The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws as described in further detail under “Special Note Regarding Forward-Looking Statements” set forth below. Actual results may differ materially from the results discussed in the forward-looking statements. Please refer to the risks and further discussion in the “Special Note Regarding Forward-Looking Statements” below.
We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors.
Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the fiscal year and our key business measures, as discussed below, may decrease for any future period. Unless the context otherwise requires, all references in this section to “Partnership”, “we”, “us” or “our” are to Restaurant Brands International Limited Partnership and its subsidiaries, collectively.
Overview
We are one of the world’s largest quick service restaurant (“QSR”) companies with approximately $34$32 billion in annual system-wide sales and over 27,000 restaurants in more than 100 countries and U.S. territories as of March 31,June 30, 2020. Our Tim Hortons®, Burger King®, and Popeyes® brands have similar franchised business models with complementary daypart mixes and product platforms. Our three iconic brands are managed independently while benefiting from global scale and sharing of best practices.
Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, Timbits®, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups, and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken, and other specialty sandwiches, french fries, soft drinks, and other affordably-priced food items. Popeyes restaurants are 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.
We have three operating and reportable segments: (1) Tim Hortons (“TH”); (2) Burger King (“BK”); and (3) Popeyes Louisiana Kitchen (“PLK”). Our business generates revenue from the following sources: (i) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us (“Company restaurants”). In addition, our TH 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.
COVID-19
The global crisis resulting from the spread of coronavirus (COVID-19) has had a substantial impact on our global restaurant operations for the three and six months ended March 31,June 30, 2020, which is expected to continue with the timing of recovery uncertain. System-wide sales growth, system-wide sales and comparable sales were also negatively impacted for the three and six months ended March 31,June 30, 2020 as a result of the impact of COVID-19. During the first quarter,and second quarters, substantially all TH, BK and PLK restaurants remained open in North America with limited operations, such as Drive-thru, Takeout and Delivery (where applicable) and that currently remains the case. In Latin America and in Asia Pacific, someWhile certain markets have opened for dine-in guests, the capacity may be limited, and local conditions may lead to closures or increased limitations. Some international markets temporarily closed most or all restaurants and the restaurants that remainremained open across the regionor have reopened may have limited operations. However, Asia Pacific markets started temporarily closingAs of the end of July, in Asia-Pacific substantially all of the restaurants earlier in the quarter and a number of those restaurants have been able to reopen, including in China. Inare open; Europe, the Middle EastMiddle-East and Africa several major markets including Italy, Spain, France and the United Kingdom have closed restaurants, and the restaurants that remain open across the region may have limited operations. Recently, in some European markets a small number of restaurants are also beginning to reopennow more than 90% open and approximately 80% of the Latin America restaurants are open, in many cases with limited operations.
Our operating results substantially depend upon our franchisees’ sales volumes, restaurant profitability, and financial stability. The financial impact of COVID-19 has had, and is expected to continue to have, an adverse effect on many of our franchisees’ liquidity and we are working closely with our franchisees around the world to monitor and assist them with access to appropriate sources of liquidity in order to sustain their businesses throughout this crisis. During the threesix months ended March 31,June 30, 2020, we initiated a rent relief programprograms for eligible TH franchisees in Canada who lease property from us and also initiated rent relief programs effective April 1, 2020 for eligible BK franchisees in the U.S. and Canada who lease property from us. While in effect, these programs will provide working capital support to franchisees and will result in a reduction in our property revenues. See Note 4 to the accompanying unaudited Condensed Consolidated Financial Statements.
Beginning in AprilDuring the second quarter of 2020, we are providingprovided cash flow support by extending loans to eligible BK franchisees in the U.S. and advancing certain cash payments to eligible TH franchisees in Canada. We have also temporarily deferred franchisee capital investment commitments for restaurant renovations and new restaurant development globally, based on the individual circumstances of relevant markets and will consider when to restart these as circumstances unfold.restaurant owners. In addition, we have dedicated resources across all three of our brands to work one-on-one with restaurant owners and provide guidance and support to franchisees.
WeDuring the three and six months ended June 30, 2020, we recorded higher bad debt expense than the periods ended June 30, 2019. While all receivables remain contractually due and payable to us, the certainty of the amount and timing of payments has been impacted by the COVID-19 pandemic. Therefore, our bad debt expense during the three and six months ended June 30, 2020 reflects an adjustment to our historical collections experience to incorporate an estimate of the impact of current economic conditions resulting from the COVID-19 pandemic. Actual collections may be materially higher or lower than this estimate reflects since it is reasonably possible the duration and future impact of the COVID-19 pandemic on our business or our franchisees may differ from our assumptions.
While we cannot currently estimate the duration or future negative financial impact of the COVID-19 pandemic on our business however,or our franchisees, we expect that the COVID-19 pandemic will impact our system-wide sales growth, system-wide sales, comparable sales, results of operations and cash flows fornegative effects to continue into the three months ending June 30, 2020 more significantly than in the firstthird quarter of 2020.
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 and BK 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 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.
Recent Events and Factors Affecting Comparability
Tax Reform
In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that significantly revised the U.S. tax code generally effective January 1, 2018 by, among other changes, lowering the federal corporate income tax rate from 35% to 21%, limiting deductibility of interest expense and performance based incentive compensation and implementing a modified territorial tax system. As a Canadian entity, we generally would be classified as a foreign entity (and, therefore, a non-U.S. tax resident) under general rules of U.S. federal income taxation. However, we have subsidiaries subject to U.S. federal income taxation and therefore the Tax Act impacted our consolidated results of operations in 2019 and the current period, and is expected to continue to impact our consolidated results of operations in future periods.
We recorded $1$7 million and $6$11 million of costs during the three months ended March 31,June 30, 2020 and 2019, respectively, and $8 million and $17 million of costs during the six months ended June 30, 2020 and 2019, respectively, which are classified as selling, general and administrative expenses in our condensed consolidated statements of operations, arising primarily from professional advisory and consulting services associated with interpretation, analysis and corporate restructuring initiatives related to recently issued, final and proposed regulations and guidance issued by the U.S. Treasury, the IRS and state tax authorities in their ongoing efforts to interpret and implement the Tax Act and related state and local tax implications (“Corporate restructuring and tax advisory fees”).
In early AprilDuring the three months ended June 30, 2020, various final and proposed regulations wereguidance was issued by the U.S. Treasury relating to the Tax Act. We are still reviewing theseAfter review of such guidance, we recorded a deferred tax asset of approximately $64 million related to certain tax attribute carryforwards, which we now expect to be able to deduct in future years under recently issued regulations and their potential effect.implementing the Tax Act.
Office Centralization and Relocation Costs
In connection with the centralization and relocation of our Canadian and U.S. restaurant support centers to new offices in Toronto, Ontario, and Miami, Florida, respectively, we incurred certain non-operational expenses ("Office centralization and relocation costs") totaling $4$2 million and $6 million during the three and six months ended March 31,June 30, 2019 consisting primarily of moving costs and relocation-driven compensation expenses, which are classified as selling, general and administrative expenses in our condensed consolidated statements of operations. We did not incur any Office centralization and relocation costs during the three months ended March 31, 2020 and do not expect to incur any additional Office centralization and relocation costs during 2020.
Results of Operations for the Three and Six Months Ended March 31,June 30, 2020 and 2019
Tabular amounts in millions of U.S. dollars unless noted otherwise. Segment income may not calculate exactly due to rounding.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated | Three Months Ended June 30, | | | | Variance | | FX Impact (a) | | Variance Excluding FX Impact | | Six Months Ended June 30, | | | | Variance | | FX Impact (a) | | Variance Excluding FX Impact |
| 2020 | | 2019 | | Favorable / (Unfavorable) | | | | | | 2020 | | 2019 | | Favorable / (Unfavorable) | | | | |
Revenues: | | | | | | | | | | | | | | | | | | | |
Sales | $ | 406 | | | $ | 589 | | | $ | (183) | | | $ | (17) | | | $ | (166) | | | $ | 909 | | | $ | 1,111 | | | $ | (202) | | | $ | (22) | | | $ | (180) | |
Franchise and property revenues | 642 | | | 811 | | | (169) | | | (18) | | | (151) | | | 1,364 | | | 1,555 | | | (191) | | | (27) | | | (164) | |
Total revenues | 1,048 | | | 1,400 | | | (352) | | | (35) | | | (317) | | | 2,273 | | | 2,666 | | | (393) | | | (49) | | | (344) | |
Operating costs and expenses: | | | | | | | | | | | | | | | | | | | |
Cost of sales | 339 | | | 453 | | | 114 | | | 13 | | | 101 | | | 738 | | | 859 | | | 121 | | | 17 | | | 104 | |
Franchise and property expenses | 134 | | | 135 | | | 1 | | | 3 | | | (2) | | | 260 | | | 268 | | | 8 | | | 4 | | | 4 | |
Selling, general and administrative expenses | 295 | | | 316 | | | 21 | | | 3 | | | 18 | | | 620 | | | 628 | | | 8 | | | 5 | | | 3 | |
(Income) loss from equity method investments | 16 | | | 2 | | | (14) | | | — | | | (14) | | | 18 | | | — | | | (18) | | | (1) | | | (17) | |
Other operating expenses (income), net | 21 | | | 3 | | | (18) | | | — | | | (18) | | | 5 | | | (14) | | | (19) | | | (1) | | | (18) | |
Total operating costs and expenses | 805 | | | 909 | | | 104 | | | 19 | | | 85 | | | 1,641 | | | 1,741 | | | 100 | | | 24 | | | 76 | |
Income from operations | 243 | | | 491 | | | (248) | | | (16) | | | (232) | | | 632 | | | 925 | | | (293) | | | (25) | | | (268) | |
Interest expense, net | 128 | | | 137 | | | 9 | | | — | | | 9 | | | 247 | | | 269 | | | 22 | | | — | | | 22 | |
| | | | | | | | | | | | | | | | | | | |
Income before income taxes | 115 | | | 354 | | | (239) | | | (16) | | | (223) | | | 385 | | | 656 | | | (271) | | | (25) | | | (246) | |
Income tax (benefit) expense | (49) | | | 97 | | | 146 | | | 1 | | | 145 | | | (3) | | | 153 | | | 156 | | | 1 | | | 155 | |
Net income | $ | 164 | | | $ | 257 | | | $ | (93) | | | $ | (15) | | | $ | (78) | | | $ | 388 | | | $ | 503 | | | $ | (115) | | | $ | (24) | | | $ | (91) | |
|
| | | | | | | | | | | | | | | | | | | |
Consolidated | Three Months Ended March 31, | | Variance | | FX Impact (a) | | Variance Excluding FX Impact |
| 2020 | | 2019 | | Favorable / (Unfavorable) |
Revenues: | | | | | | | | | |
Sales | $ | 503 |
| | $ | 522 |
| | $ | (19 | ) | | $ | (5 | ) | | $ | (14 | ) |
Franchise and property revenues | 722 |
| | 744 |
| | (22 | ) | | (9 | ) | | (13 | ) |
Total revenues | 1,225 |
| | 1,266 |
| | (41 | ) | | (14 | ) | | (27 | ) |
Operating costs and expenses: | | | | | | | | | |
Cost of sales | 399 |
| | 406 |
| | 7 |
| | 4 |
| | 3 |
|
Franchise and property expenses | 126 |
| | 133 |
| | 7 |
| | 1 |
| | 6 |
|
Selling, general and administrative expenses | 325 |
| | 312 |
| | (13 | ) | | 2 |
| | (15 | ) |
(Income) loss from equity method investments | 2 |
| | (2 | ) | | (4 | ) | | (1 | ) | | (3 | ) |
Other operating expenses (income), net | (16 | ) | | (17 | ) | | (1 | ) | | (1 | ) | | — |
|
Total operating costs and expenses | 836 |
| | 832 |
| | (4 | ) | | 5 |
| | (9 | ) |
Income from operations | 389 |
| | 434 |
| | (45 | ) | | (9 | ) | | (36 | ) |
Interest expense, net | 119 |
| | 132 |
| | 13 |
| | — |
| | 13 |
|
Income before income taxes | 270 |
| | 302 |
| | (32 | ) | | (9 | ) | | (23 | ) |
Income tax expense | 46 |
| | 56 |
| | 10 |
| | — |
| | 10 |
|
Net income | $ | 224 |
| | $ | 246 |
| | $ | (22 | ) | | $ | (9 | ) | | $ | (13 | ) |
(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. | |
(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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TH Segment | Three Months Ended June 30, | | | | Variance | | FX Impact (a) | | Variance Excluding FX Impact | | Six Months Ended June 30, | | | | Variance | | FX Impact (a) | | Variance Excluding FX Impact |
| 2020 | | 2019 | | Favorable / (Unfavorable) | | | | | | 2020 | | 2019 | | Favorable / (Unfavorable) | | | | |
Revenues: | | | | | | | | | | | | | | | | | | | |
Sales | $ | 374 | | | $ | 551 | | | $ | (177) | | | $ | (17) | | | $ | (160) | | | $ | 839 | | | $ | 1,034 | | | $ | (195) | | | $ | (22) | | | $ | (173) | |
Franchise and property revenues | 193 | | | 291 | | | (98) | | | (9) | | | (89) | | | 427 | | | 557 | | | (130) | | | (11) | | | (119) | |
Total revenues | 567 | | | 842 | | | (275) | | | (26) | | | (249) | | | 1,266 | | | 1,591 | | | (325) | | | (33) | | | (292) | |
Cost of sales | 307 | | | 420 | | | 113 | | | 13 | | | 100 | | | 673 | | | 792 | | | 119 | | | 17 | | | 102 | |
Franchise and property expenses | 83 | | | 90 | | | 7 | | | 3 | | | 4 | | | 167 | | | 177 | | | 10 | | | 4 | | | 6 | |
Segment SG&A | 61 | | | 77 | | | 16 | | | 2 | | | 14 | | | 148 | | | 159 | | | 11 | | | 3 | | | 8 | |
Segment depreciation and amortization (b) | 28 | | | 26 | | | (2) | | | 1 | | | (3) | | | 54 | | | 52 | | | (2) | | | 1 | | | (3) | |
Segment income (c) | 147 | | | 287 | | | (140) | | | (9) | | | (131) | | | 336 | | | 524 | | | (188) | | | (11) | | | (177) | |
(b)Segment depreciation and amortization consists of depreciation and amortization included in cost of sales and franchise and property expenses.
(c)TH segment income includes $2 million and $5 million of cash distributions received from equity method investments for the three months ended June 30, 2020 and 2019, respectively. TH segment income includes $4 million and $8 million of cash distributions received from equity method investments for the six months ended June 30, 2020 and 2019, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BK Segment | Three Months Ended June 30, | | | | Variance | | FX Impact (a) | | Variance Excluding FX Impact | | Six Months Ended June 30, | | | | Variance | | FX Impact (a) | | Variance Excluding FX Impact |
| 2020 | | 2019 | | Favorable / (Unfavorable) | | | | | | 2020 | | 2019 | | Favorable / (Unfavorable) | | | | |
Revenues: | | | | | | | | | | | | | | | | | | | |
Sales | $ | 15 | | | $ | 19 | | | $ | (4) | | | $ | — | | | $ | (4) | | | $ | 32 | | | $ | 38 | | | $ | (6) | | | $ | — | | | $ | (6) | |
Franchise and property revenues | 332 | | | 428 | | | (96) | | | (9) | | | (87) | | | 703 | | | 820 | | | (117) | | | (16) | | | (101) | |
Total revenues | 347 | | | 447 | | | (100) | | | (9) | | | (91) | | | 735 | | | 858 | | | (123) | | | (16) | | | (107) | |
Cost of sales | 16 | | | 17 | | | 1 | | | — | | | 1 | | | 33 | | | 35 | | | 2 | | | — | | | 2 | |
Franchise and property expenses | 48 | | | 42 | | | (6) | | | — | | | (6) | | | 87 | | | 85 | | | (2) | | | — | | | (2) | |
Segment SG&A | 135 | | | 149 | | | 14 | | | — | | | 14 | | | 280 | | | 290 | | | 10 | | | 1 | | | 9 | |
Segment depreciation and amortization (b) | 12 | | | 12 | | | — | | | — | | | — | | | 24 | | | 25 | | | 1 | | | — | | | 1 | |
Segment income (d) | 160 | | | 252 | | | (92) | | | (9) | | | (83) | | | 360 | | | 474 | | | (114) | | | (15) | | | (99) | |
(d)BK segment income includes $1 million and $2 million of cash distributions received from equity method investments for the three and six months ended June 30, 2019, respectively. No significant amounts were received for the three and six months ended June 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PLK Segment | Three Months Ended June 30, | | | | Variance | | FX Impact (a) | | Variance Excluding FX Impact | | Six Months Ended June 30, | | | | Variance | | FX Impact (a) | | Variance Excluding FX Impact |
| 2020 | | 2019 | | Favorable / (Unfavorable) | | | | | | 2020 | | 2019 | | Favorable / (Unfavorable) | | | | |
Revenues: | | | | | | | | | | | | | | | | | | | |
Sales | $ | 17 | | | $ | 19 | | | $ | (2) | | | $ | — | | | $ | (2) | | | $ | 38 | | | $ | 39 | | | $ | (1) | | | $ | — | | | $ | (1) | |
Franchise and property revenues | 117 | | | 92 | | | 25 | | | — | | | 25 | | | 234 | | | 178 | | | 56 | | | — | | | 56 | |
Total revenues | 134 | | | 111 | | | 23 | | | — | | | 23 | | | 272 | | | 217 | | | 55 | | | — | | | 55 | |
Cost of sales | 16 | | | 16 | | | — | | | — | | | — | | | 32 | | | 32 | | | — | | | — | | | — | |
Franchise and property expenses | 3 | | | 3 | | | — | | | — | | | — | | | 6 | | | 6 | | | — | | | — | | | — | |
Segment SG&A | 65 | | | 54 | | | (11) | | | — | | | (11) | | | 131 | | | 103 | | | (28) | | | — | | | (28) | |
Segment depreciation and amortization (b) | 2 | | | 3 | | | 1 | | | — | | | 1 | | | 4 | | | 6 | | | 2 | | | — | | | 2 | |
Segment income | 51 | | | 41 | | | 10 | | | — | | | 10 | | | 106 | | | 82 | | | 24 | | | — | | | 24 | |
|
| | | | | | | | | | | | | | | | | | | |
TH Segment | Three Months Ended March 31, | | Variance | | FX Impact (a) | | Variance Excluding FX Impact |
| 2020 | | 2019 | | Favorable / (Unfavorable) |
Revenues: | | | | | | | | | |
Sales | $ | 465 |
| | $ | 483 |
| | $ | (18 | ) | | $ | (5 | ) | | $ | (13 | ) |
Franchise and property revenues | 234 |
| | 266 |
| | (32 | ) | | (2 | ) | | (30 | ) |
Total revenues | 699 |
| | 749 |
| | (50 | ) | | (7 | ) | | (43 | ) |
Cost of sales | 366 |
| | 372 |
| | 6 |
| | 4 |
| | 2 |
|
Franchise and property expenses | 84 |
| | 87 |
| | 3 |
| | 1 |
| | 2 |
|
Segment SG&A | 87 |
| | 82 |
| | (5 | ) | | 1 |
| | (6 | ) |
Segment depreciation and amortization (b) | 26 |
| | 26 |
| | — |
| | — |
| | — |
|
Segment income (c) | 189 |
| | 237 |
| | (48 | ) | | (2 | ) | | (46 | ) |
| |
(b) | Segment depreciation and amortization consists of depreciation and amortization included in cost of sales and franchise and property expenses. |
| |
(c) | TH segment income includes $2 million and $3 million of cash distributions received from equity method investments for the three months ended March 31, 2020 and 2019, respectively. |
|
| | | | | | | | | | | | | | | | | | | |
BK Segment | Three Months Ended March 31, | | Variance | | FX Impact (a) | | Variance Excluding FX Impact |
| 2020 | | 2019 | | Favorable / (Unfavorable) |
Revenues: | | | | | | | | | |
Sales | $ | 17 |
| | $ | 19 |
| | $ | (2 | ) | | $ | — |
| | $ | (2 | ) |
Franchise and property revenues | 371 |
| | 392 |
| | (21 | ) | | (7 | ) | | (14 | ) |
Total revenues | 388 |
| | 411 |
| | (23 | ) | | (7 | ) | | (16 | ) |
Cost of sales | 17 |
| | 18 |
| | 1 |
| | — |
| | 1 |
|
Franchise and property expenses | 39 |
| | 43 |
| | 4 |
| | — |
| | 4 |
|
Segment SG&A | 145 |
| | 141 |
| | (4 | ) | | 1 |
| | (5 | ) |
Segment depreciation and amortization (b) | 12 |
| | 13 |
| | 1 |
| | — |
| | 1 |
|
Segment income (d) | 200 |
| | 222 |
| | (22 | ) | | (6 | ) | | (16 | ) |
| |
(d) | BK segment income includes $1 million of cash distributions received from equity method investments for the three months ended March 31, 2019. No significant amounts were received for the three months ended March 31, 2020. |
|
| | | | | | | | | | | | | | | | | | | |
PLK Segment | Three Months Ended March 31, | | Variance | | FX Impact (a) | | Variance Excluding FX Impact |
| 2020 | | 2019 | | Favorable / (Unfavorable) |
Revenues: | | | | | | | | | |
Sales | $ | 21 |
| | $ | 20 |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
|
Franchise and property revenues | 117 |
| | 86 |
| | 31 |
| | — |
| | 31 |
|
Total revenues | 138 |
| | 106 |
| | 32 |
| | — |
| | 32 |
|
Cost of sales | 16 |
| | 16 |
| | — |
| | — |
| | — |
|
Franchise and property expenses | 3 |
| | 3 |
| | — |
| | — |
| | — |
|
Segment SG&A | 66 |
| | 49 |
| | (17 | ) | | — |
| | (17 | ) |
Segment depreciation and amortization (b) | 2 |
| | 3 |
| | 1 |
| | — |
| | 1 |
|
Segment income | 55 |
| | 41 |
| | 14 |
| | — |
| | 14 |
|
| | | Three Months Ended March 31, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
Key Business Metrics | 2020 | | 2019 | Key Business Metrics | 2020 | | 2019 | | 2020 | | 2019 |
System-wide sales growth | | | | System-wide sales growth | | | | | | | |
TH | (9.9 | )% | | 0.5 | % | TH | (33.4) | % | | 1.6 | % | | (22.1) | % | | 1.1 | % |
BK | (3.0 | )% | | 8.2 | % | BK | (25.2) | % | | 9.8 | % | | (14.5) | % | | 9.0 | % |
PLK | 32.3 | % | | 6.8 | % | PLK | 24.0 | % | | 8.8 | % | | 28.1 | % | | 7.8 | % |
Consolidated | 0.0 | % | | 6.4 | % | Consolidated | (20.9) | % | | 7.9 | % | | (10.8) | % | | 7.2 | % |
System-wide sales | | | | System-wide sales | |
TH | $ | 1,382 |
| | $ | 1,547 |
| TH | $ | 1,108 | | | $ | 1,716 | | | $ | 2,490 | | | $ | 3,263 | |
BK | $ | 4,999 |
| | $ | 5,289 |
| BK | $ | 4,127 | | | $ | 5,717 | | | $ | 9,126 | | | $ | 11,006 | |
PLK | $ | 1,258 |
| | $ | 955 |
| PLK | $ | 1,247 | | | $ | 1,012 | | | $ | 2,505 | | | $ | 1,967 | |
Consolidated | $ | 7,639 |
| | $ | 7,791 |
| Consolidated | $ | 6,482 | | | $ | 8,445 | | | $ | 14,121 | | | $ | 16,236 | |
Comparable sales | | | | Comparable sales | |
TH | (10.3 | )% | | (0.6 | )% | TH | (29.3) | % | | 0.5 | % | | (19.9) | % | | — | % |
BK | (3.7 | )% | | 2.2 | % | BK | (13.4) | % | | 3.6 | % | | (8.4) | % | | 2.9 | % |
PLK | 26.2 | % | | 0.6 | % | PLK | 24.8 | % | | 3.0 | % | | 25.5 | % | | 1.8 | % |
| | | | |
| As of March 31, | | As of June 30, | |
| 2020 | | 2019 | | 2020 | | 2019 |
Net restaurant growth | | | | Net restaurant growth | | | | |
TH | 1.2 | % | | 1.9 | % | TH | | 1.3 | % | | 1.6 | % |
BK | 5.8 | % | | 5.7 | % | BK | | 4.2 | % | | 5.8 | % |
PLK | 6.9 | % | | 6.6 | % | PLK | | 6.7 | % | | 6.1 | % |
Consolidated | 5.0 | % | | 5.1 | % | Consolidated | | 3.9 | % | | 5.0 | % |
Restaurant count | | | | Restaurant count | |
TH | 4,925 |
| | 4,866 |
| TH | | 4,934 | | | 4,872 | |
BK | 18,848 |
| | 17,823 |
| BK | | 18,756 | | | 18,008 | |
PLK | 3,336 |
| | 3,120 |
| PLK | | 3,369 | | | 3,156 | |
Consolidated | 27,109 |
| | 25,809 |
| Consolidated | | 27,059 | | | 26,036 | |
Comparable Sales
TH comparable sales were (10.3)(29.3)% during the three months ended March 31,June 30, 2020, including Canada comparable sales of (10.8)(29.9)%. TH comparable sales were (19.9)% during the six months ended June 30, 2020, including Canada comparable sales of (20.5)%.
BK comparable sales were (3.7)(13.4)% during the three months ended March 31,June 30, 2020, including U.S. comparable sales of (6.5)(9.9)%. BK comparable sales were (8.4)% during the six months ended June 30, 2020, including U.S. comparable sales of (8.2)%.
PLK comparable sales were 26.2%24.8% during the three months ended March 31,June 30, 2020, including U.S. comparable sales of 29.2%28.5%.
28.8%.
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. 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.
During the three months ended March 31,June 30, 2020, the decrease in sales was driven primarily by a decrease of $13$160 million in our TH segment, a decrease of $4 million in our BK segment, a decrease of $2 million in our BKPLK segment, and an unfavorable FX Impact of $5 million, partially offset by an increase of $1 million in our PLK segment.$17 million. The decrease in our TH segment was driven by a $21decrease in supply chain sales due to the decrease in system-wide sales, net of an increase in sales to retailers.
During the six months ended June 30, 2020, the decrease in sales was driven primarily by a decrease of $173 million in our TH segment, a decrease of $6 million in our BK segment, a decrease of $1 million in our PLK segment, and an unfavorable FX Impact of $22 million. The decrease in our TH segment was driven by a $183 million decrease in supply chain sales due to the decrease in system-wide sales, net of an increase in sales to retailers. The decrease in supply chain sales was partially offset by an increase of $8$10 million in Company restaurant revenue due to an increase in the number of Company restaurants. We
While we cannot currently expect thatestimate the duration or future negative impact of the COVID-19 pandemic will impacton our system-wide sales and sales revenue, forwe expect the three months ending June 30, 2020 more significantly than innegative effects to continue into the three months ended March 31,third quarter of 2020.
During the three months ended March 31,June 30, 2020, the decrease in cost of sales was driven primarily by a decrease of $2$100 million in our TH segment, a decrease of $1 million in our BK segment, and a $4$13 million favorable FX Impact. The decrease in our TH segment was driven primarily by a decrease of $9$103 million in supply chain cost of sales due to a decrease in system-wide sales, net of an increase in sales to retailers and a $3 million charge to write-off paper cup inventory for the 2020 Roll Up the Rim promotion due to COVID-19.an increase in bad debt expense. The decrease in supply chain cost of sales was partially offset by a $7$3 million increase in Company restaurant cost of sales due to an increase in the number of Company restaurants.
During the six months ended June 30, 2020, the decrease in cost of sales was driven primarily by a decrease of $102 million in our TH segment, a decrease of $2 million in our BK segment, and a $17 million favorable FX Impact. The decrease in our TH segment was driven primarily by a decrease of $112 million in supply chain cost of sales due to a decrease in system-wide sales, net of an increase in sales to retailers and an increase in bad debt expense. The decrease in supply chain cost of sales was partially offset by a $10 million increase in Company restaurant cost of sales due to an increase in the number of Company restaurants.
Franchise and Property
Franchise and property revenues consist primarily of royalties earned on franchise sales (including advertising fund revenues), 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).
During the three months ended March 31,June 30, 2020, the decrease in franchise and property revenues was driven by a decrease of $30$89 million in our TH segment, a decrease of $14$87 million in our BK segment, and a $9$18 million unfavorable FX Impact, partially offset by an increase of $31$25 million in our PLK segment. The decreasedecreases in our TH segment wasand BK segments were primarily driven by a decreasedecreases in royalties and rent and royalties from a decreasedecreases in system-wide sales and rent relief provided to eligible TH franchisees during the current period. The decrease in our BK segment was primarily driven by a decrease in royalties as a result of a decrease in system-wide sales. The increase in our PLK segment was primarily driven by an increase in royalties as a result of an increase in system-wide sales.
During the six months ended June 30, 2020, the decrease in franchise and property revenues was driven by a decrease of $119 million in our TH segment, a decrease of $101 million in our BK segment, and a $27 million unfavorable FX Impact, partially offset by an increase of $56 million in our PLK segment. The decreases in our TH and BK segments were primarily driven by decreases in royalties and rent from decreases in system-wide sales and rent relief provided to eligible franchisees during the current period. The increase in our PLK segment was primarily driven by an increase in royalties as a result of an increase in system-wide sales.
We cannot currently expect thatestimate the duration or future negative impact of the COVID-19 pandemic will impacton our system-wide sales and, along with rent concessions provided to eligible TH and BK franchisees as a result of COVID-19, willthe impact on our franchise and property revenue forrevenues. We expect these negative effects to continue into the three months ending June 30, 2020 more significantly than in the three months ended March 31,third quarter of 2020.
During the three months ended March 31,June 30, 2020, the decrease in franchise and property expenses was driven by a decrease of $2$4 million in our TH segment and a decrease$3 million favorable FX Impact, partially offset by an increase of $4$6 million in our BK segment. Overall, the decrease was driven by a decrease in property expenses partially offset by an increase in bad debt expense.
During the six months ended June 30, 2020, the decrease in franchise and property expenses was driven by a decrease of $6 million in our TH segment and a $1$4 million favorable FX Impact.
$2 million in our BK segment. Overall, the decrease was driven by a decrease in property expenses partially offset by an increase in bad debt expense.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses were comprised of the following:
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Variance |
| | $ | | % |
| 2020 | | 2019 | | Favorable / (Unfavorable) |
Segment SG&A: | | | | | | | |
TH | $ | 87 |
| | $ | 82 |
| | $ | (5 | ) | | (6.1 | )% |
BK | 145 |
| | 141 |
| | (4 | ) | | (2.8 | )% |
PLK | 66 |
| | 49 |
| | (17 | ) | | (34.7 | )% |
Share-based compensation and non-cash incentive compensation expense | 21 |
| | 25 |
| | 4 |
| | 16.0 | % |
Depreciation and amortization | 5 |
| | 5 |
| | — |
| | — | % |
Corporate restructuring and tax advisory fees | 1 |
| | 6 |
| | 5 |
| | 83.3 | % |
Office centralization and relocation costs | — |
| | 4 |
| | 4 |
| | 100.0 | % |
Selling, general and administrative expenses | $ | 325 |
| | $ | 312 |
| | $ | (13 | ) | | (4.2 | )% |
NM - not meaningful | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Variance | | | | Six Months Ended June 30, | | | | Variance | | |
| | | | | $ | | % | | | | | | $ | | % |
| 2020 | | 2019 | | Favorable / (Unfavorable) | | | | 2020 | | 2019 | | Favorable / (Unfavorable) | | |
Segment SG&A: | | | | | | | | | | | | | | | |
TH | $ | 61 | | | $ | 77 | | | $ | 16 | | | 20.8 | % | | $ | 148 | | | $ | 159 | | | $ | 11 | | | 6.9 | % |
BK | 135 | | | 149 | | | 14 | | | 9.4 | % | | 280 | | | 290 | | | 10 | | | 3.4 | % |
PLK | 65 | | | 54 | | | (11) | | | (20.4) | % | | 131 | | | 103 | | | (28) | | | (27.2) | % |
Share-based compensation and non-cash incentive compensation expense | 23 | | | 19 | | | (4) | | | (21.1) | % | | 44 | | | 44 | | | — | | | — | % |
Depreciation and amortization | 4 | | | 4 | | | — | | | — | % | | 9 | | | 9 | | | — | | | — | % |
| | | | | | | | | | | | | | | |
Corporate restructuring and tax advisory fees | 7 | | | 11 | | | 4 | | | 36.4 | % | | 8 | | | 17 | | | 9 | | | 52.9 | % |
Office centralization and relocation costs | — | | | 2 | | | 2 | | | 100.0 | % | | — | | | 6 | | | 6 | | | 100.0 | % |
Selling, general and administrative expenses | $ | 295 | | | $ | 316 | | | $ | 21 | | | 6.6 | % | | $ | 620 | | | $ | 628 | | | $ | 8 | | | 1.3 | % |
Segment selling, general and administrative expenses (“Segment SG&A”) include segment selling expenses, which consist primarily of advertising fund expenses, and segment general and administrative expenses, which are comprised primarily of salary and employee-related costs for non-restaurant employees, professional fees, information technology systems, and general overhead for our corporate offices. Segment SG&A excludes share-based compensation and non-cash incentive compensation expense, depreciation and amortization, Corporate restructuring and tax advisory fees, and Office centralization and relocation costs.
During the three and six months ended March 31,June 30, 2020, the decrease in Segment SG&A in our TH and BK segments is primarily due to a decrease in advertising fund expenses. During the three and six months ended June 30, 2020, the increase in Segment SG&A in our PLK segment is primarily due to an increase in advertising fund expenses resulting from an increase in advertising fund revenue.
During the three months ended March 31,June 30, 2020, the decreaseincrease in share-based compensation and non-cash incentive compensation expense was primarily due to a decrease associated withan increase in equity award modifications fromand an increase in the number of equity awards granted during 2020. During the six months ended June 30, 2020, share-based compensation and non-cash incentive compensation expense was consistent with prior year.
(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.
The change in (income) loss from equity method investments during the three and six months ended March 31,June 30, 2020 was primarily driven by a decreasean increase in equity method investment net incomelosses that we recognized during the current year.
Other Operating Expenses (Income), net
Our other operating expenses (income), net were comprised of the following:
| | | Three Months Ended March 31, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Net losses (gains) on disposal of assets, restaurant closures, and refranchisings | $ | (2 | ) | | $ | 3 |
| Net losses (gains) on disposal of assets, restaurant closures, and refranchisings | $ | — | | | $ | (10) | | | $ | (2) | | | $ | (7) | |
Litigation settlements (gains) and reserves, net | | Litigation settlements (gains) and reserves, net | 1 | | | — | | | 1 | | | — | |
Net losses (gains) on foreign exchange | (8 | ) | | (15 | ) | Net losses (gains) on foreign exchange | 18 | | | 12 | | | 10 | | | (3) | |
Other, net | (6 | ) | | (5 | ) | Other, net | 2 | | | 1 | | | (4) | | | (4) | |
Other operating expenses (income), net | $ | (16 | ) | | $ | (17 | ) | Other operating expenses (income), net | $ | 21 | | | $ | 3 | | | $ | 5 | | | $ | (14) | |
Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods.
Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities.
Interest Expense, net
Our interest expense, net and the weighted average interest rate on our long-term debt were as follows:
| | | Three Months Ended March 31, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Interest expense, net | $ | 119 |
| | $ | 132 |
| Interest expense, net | $ | 128 | | | $ | 137 | | | $ | 247 | | | $ | 269 | |
Weighted average interest rate on long-term debt | 4.6 | % | | 5.0 | % | Weighted average interest rate on long-term debt | 4.3 | % | | 5.2 | % | | 4.8 | % | | 5.1 | % |
During the three and six months ended March 31,June 30, 2020, interest expense, net decreased primarily due to a decrease in the weighted average interest rate in the current year driven by the decrease in interest rates and the 2019 refinancing of our senior secured debt, partially offset by an increase in long-term debt.
Income Tax Expense
Our effective tax rate was 16.8%(42.3)% and 18.7%27.4% for the three months ended March 31,June 30, 2020 and 2019, respectively. The decrease in our effective tax rate for the three months ended June 30, 2020 reflects a $64 million benefit due to an increase in deferred tax assets which decreased the effective tax rate by (55.2)%. Based on the analysis of final guidance related to the Tax Act received during the current quarter, a deferred tax asset was recorded. Our effective tax rate was also lower primarily relatesdue to changes to the relative amount and mix of our income from multiple tax jurisdictions and the impact of internal financing arrangements partly offset by a lower tax benefit from stock option exercises in the current quarter.arrangements. The effective tax rate was reduced by 0.1% and 4.1% for the three months ended March 31,June 30, 2019 included a non-recurring $37 million increase in the provision for unrecognized tax benefits related to a prior restructuring transaction that was not applicable to ongoing operations which increased the effective tax rate by 10.4%.
Our effective tax rate was (0.9)% and 23.4% for the six months ended June 30, 2020 and 2019, respectively, asrespectively. The effective tax rate for the six months ended June 30, 2020 reflects a result$64 million benefit discussed above which decreased the effective tax rate by (16.5)%. Our effective tax rate was also lower primarily due to changes to the relative mix of benefitsour income from stock option exercises. Additionally, theremultiple tax jurisdictions and the impact of internal financing arrangements. The effective tax rate for the six months ended June 30, 2019 included a non-recurring $37 million increase in the provision discussed above which increased the effective tax rate by 5.6% during the period.
There may be some quarter-to-quarter volatility of our effective tax rate in future quarters as our mix of income from multiple tax jurisdictions and related income forecasts change due to the potential effects of COVID-19.
Net Income
We reported net income of $224$164 million for the three months ended March 31,June 30, 2020, compared to net income of $246$257 million for the three months ended March 31,June 30, 2019. The decrease in net income is primarily due to a $48$140 million decrease in TH segment income, a $22$92 million decrease in BK segment income, a $3 million unfavorable change from the impact of equity method investments and a $1an $18 million unfavorable change in the results from other operating expenses (income), net. These factors were partially offset by a $14 million increase in PLK segment income, a $13 million decrease in interest expense, net, a $10$9 million decrease in income tax expense, a $5 million decrease in Corporate restructuring and tax advisory fees,unfavorable change from the impact of equity method investments, a $4 million decrease in Office Centralization and relocation costs, a $4 million decreaseincrease in share-based compensation and non-cash incentive compensation expense, and a $1 million increase in depreciation and amortization. These factors were partially offset by a $146 million favorable change in income taxes, a $10 million increase in PLK segment income, a $9 million decrease in interest expense, net, a $4 million decrease in Corporate restructuring and tax advisory fees, and the non-recurrence of $2 million in Office Centralization and relocation costs. Amounts above include a total unfavorable FX Impact to net income of $15 million.
We reported net income of $388 million for the six months ended June 30, 2020, compared to net income of $503 million for the six months ended June 30, 2019. The decrease in net income is primarily due to a $188 million decrease in TH segment income, a $114 million decrease in BK segment income, a $19 million unfavorable change in the results from other operating expenses (income), net, and a $12 million unfavorable change from the impact of equity method investments. These factors were partially offset by a $156 million favorable change in income taxes, a $24 million increase in PLK segment income, a $22 million decrease in interest expense, net, a $9 million decrease in Corporate restructuring and tax advisory fees, the non-recurrence of $6 million in Office Centralization and relocation costs, and a $1 million decrease in depreciation and amortization. Amounts above include a total unfavorable FX Impact to net income of $9$24 million. We
While we cannot currently expect thatestimate the duration or future negative impact of the COVID-19 pandemic will impacton our net income, forwe expect the three months ending June 30, 2020 more significantly thannegative effects to continue into the three months ended March 31,third quarter of 2020.
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 they provide them with the same tools that management uses to evaluate our performance and is responsive to questions we receive from both investors and analysts. By disclosing these non-GAAP measures, we intend to provide investors with a consistent comparison of our operating results and trends for the periods presented. EBITDA is defined as earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, 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 identified costs associated withnet and, (iv) income/expenses from non-recurring projects are also excluded from Adjusted EBITDA, including Corporate restructuring and tax advisory fees related tonon-operating activities. For the interpretation and implementation of the Tax Act, including Treasury regulations proposed and issued between 2018 and 2020, and non-operational Office centralization and relocationperiods referenced, this included costs incurred in connection with the centralization and relocation of our Canadian and U.S. restaurant support centers to new offices in Toronto, Ontario, and Miami, Florida, respectively. respectively and corporate restructuring and related tax advisory fees, including those arising as a result of the adoption of the Tax Act and the implementing regulations thereunder. 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 may cause volatility in our results unrelated to the performance of our core business that does not reflect trends of our core operations.
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. Adjusted EBITDA, as defined above, also represents our measure of segment income for each of our three operating segments.
| | | Three Months Ended March 31, | | Variance | | Three Months Ended June 30, | | | Variance | | | Six Months Ended June 30, | | | Variance | |
| | $ | | % | | | | $ | | % | | | | $ | | % |
| 2020 | | 2019 | | Favorable / (Unfavorable) | | 2020 | | 2019 | | Favorable / (Unfavorable) | | | 2020 | | 2019 | | Favorable / (Unfavorable) | |
Segment income: | | | | | | | | Segment income: | | | | | | | | | | | |
TH | $ | 189 |
| | $ | 237 |
| | $ | (48 | ) | | (20.1 | )% | TH | $ | 147 | | | $ | 287 | | | $ | (140) | | | (48.9) | % | | $ | 336 | | | $ | 524 | | | $ | (188) | | | (35.8) | % |
BK | 200 |
| | 222 |
| | (22 | ) | | (10.0 | )% | BK | 160 | | | 252 | | | (92) | | | (36.7) | % | | 360 | | | 474 | | | (114) | | | (24.1) | % |
PLK | 55 |
| | 41 |
| | 14 |
| | 34.2 | % | PLK | 51 | | | 41 | | | 10 | | | 23.9 | % | | 106 | | | 82 | | | 24 | | | 28.9 | % |
Adjusted EBITDA | 444 |
| | 500 |
| | (56 | ) | | (11.2 | )% | Adjusted EBITDA | 358 | | | 580 | | | (222) | | | (38.3) | % | | 802 | | | 1,080 | | | (278) | | | (25.8) | % |
Share-based compensation and non-cash incentive compensation expense | 21 |
| | 25 |
| | 4 |
| | 16.0 | % | Share-based compensation and non-cash incentive compensation expense | 23 | | | 19 | | | (4) | | | (21.1) | % | | 44 | | | 44 | | | — | | | — | % |
| Corporate restructuring and tax advisory fees | 1 |
| | 6 |
| | 5 |
| | 83.3 | % | Corporate restructuring and tax advisory fees | 7 | | | 11 | | | 4 | | | 36.4 | % | | 8 | | | 17 | | | 9 | | | 52.9 | % |
Office centralization and relocation costs | — |
| | 4 |
| | 4 |
| | 100.0 | % | Office centralization and relocation costs | — | | | 2 | | | 2 | | | 100.0 | % | | — | | | 6 | | | 6 | | | 100.0 | % |
Impact of equity method investments (a) | 4 |
| | 1 |
| | (3 | ) | | NM |
| Impact of equity method investments (a) | 18 | | | 9 | | | (9) | | | (100.0) | % | | 22 | | | 10 | | | (12) | | | (120.0) | % |
Other operating expenses (income), net | (16 | ) | | (17 | ) | | (1 | ) | | (5.9 | )% | Other operating expenses (income), net | 21 | | | 3 | | | (18) | | | (600.0) | % | | 5 | | | (14) | | | (19) | | | (135.7) | % |
EBITDA | 434 |
| | 481 |
| | (47 | ) | | (9.8 | )% | EBITDA | 289 | | | 536 | | | (247) | | | (46.1) | % | | 723 | | | 1,017 | | | (294) | | | (28.9) | % |
Depreciation and amortization | 45 |
| | 47 |
| | 2 |
| | 4.3 | % | Depreciation and amortization | 46 | | | 45 | | | (1) | | | (2.2) | % | | 91 | | | 92 | | | 1 | | | 1.1 | % |
Income from operations | 389 |
| | 434 |
| | (45 | ) | | (10.4 | )% | Income from operations | 243 | | | 491 | | | (248) | | | (50.5) | % | | 632 | | | 925 | | | (293) | | | (31.7) | % |
Interest expense, net | 119 |
| | 132 |
| | 13 |
| | 9.8 | % | Interest expense, net | 128 | | | 137 | | | 9 | | | 6.6 | % | | 247 | | | 269 | | | 22 | | | 8.2 | % |
Income tax expense | 46 |
| | 56 |
| | 10 |
| | 17.9 | % | |
| Income tax (benefit) expense | | Income tax (benefit) expense | (49) | | | 97 | | | 146 | | | 150.5 | % | | (3) | | | 153 | | | 156 | | | 102.0 | % |
Net income | $ | 224 |
| | $ | 246 |
| | $ | (22 | ) | | (8.9 | )% | Net income | $ | 164 | | | $ | 257 | | | $ | (93) | | | (36.2) | % | | $ | 388 | | | $ | 503 | | | $ | (115) | | | (22.9) | % |
NM - not meaningful(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.
| |
(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. |
The decrease in Adjusted EBITDA for the three and six months ended June 30, 2020 reflects the decreases in segment income in our TH and BK segments, which includes $20decreases of $12 million and $32 million for the three and six months ended June 30, 2020, respectively, related to the timing of advertising fund revenue and expenses, partially offset by an increase in segment income in our PLK segment.
The decrease in EBITDA for the three and six months ended March 31,June 30, 2020 is primarily due to decreases in segment income in our TH and BK segments, and unfavorable results from the impact of equity method investments and other operating expenses (income), net, and an increase in share-based compensation and non-cash incentive compensation expense in the current period, partially offset by an increase in segment income in our PLK segment, a decrease in Corporate restructuring and tax advisory fees, a decrease in share-based compensation and non-cash incentive compensation expense, and the non-recurrence of Office centralization and relocation costs in the current period.
We currently expect that the COVID-19 pandemic will impacton our segment income, Adjusted EBITDA and EBITDA, forwe expect the three months ending June 30, 2020 more significantly than innegative effects to continue into the three months ended March 31,third quarter of 2020.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, and cash generated by operations.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 of Partnership (“Partnership exchangeable units”), to voluntarily prepay and repurchase our or one of our affiliate’s outstanding debt, to fund our investing activities, 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.
As of March 31,June 30, 2020, we had cash and cash equivalents of $2,498$1,540 million, working capital of $1,587$943 million and borrowing availability of $3$998 million under our senior secured revolving credit facility (the "Revolving Credit Facility"). During the three months ended March 31,first quarter of 2020, we drew down $995 million on our Revolving Credit Facility, andwhich we repaid during the second quarter of 2020. During the first quarter of 2020, we also drew down the remaining availability of C$125 million under the TH Facility (defined below). Additionally, on April 7, 2020, two of our subsidiaries (the "Borrowers") entered into an indenture (the "2020 5.75% Senior Notes Indenture") in connection with the issuance of $500 million of 5.75% first lien notes due April 15, 2025 (the
(the "2020 5.75% Senior Notes"). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 2020 5.75% Senior Notes will bewere used for general corporate purposes and are not reflected in cash and cash equivalents of $2,498 million as of March 31, 2020.purposes. 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.
Our operating results substantially depend upon our franchisees’ sales volumes, restaurant profitability, and financial stability. The financial impact of COVID-19 has had, and is expected to continue for an uncertain period to have, an adverse effect on our franchisees’ liquidity and we are working closely with our franchisees around the world to monitor and assist them with access to appropriate sources of liquidity in order to sustain their businesses throughout this crisis. Beginning in AprilDuring the second quarter of 2020, we are providingprovided cash flow support by extending loans to eligible BK franchisees in the U.S. and advancing certain cash payments to eligible TH franchisees in Canada. During the threesix months ended March 31,June 30, 2020, we initiated a rent relief program for eligible TH franchisees in Canada and extended payment terms for eligible TH franchisees in Canada and the U.S. who lease property from us and also initiated rent relief programs and extended payment terms effective April 1 for eligible BK franchisees in the U.S. and Canada who lease property from us. We have also temporarily deferred franchisee capital investment commitments for restaurant renovations and new restaurant development.development globally, based on individual circumstances of relevant markets and restaurant owners. These actions are expected to adversely affect our cash flow and financial results at least through the secondthird quarter of 2020. In addition to these actions, we may decide to take additional steps to assist in the financial stabilization of our franchisees, which could impact our liquidity and our financial results.
On August 2, 2016, the RBI board of directors approved a share repurchase authorization wherein RBI may purchase up to $300 million of RBI common shares through July 2021. Repurchases under RBI’s authorization will be made in the open market or through privately negotiated transactions. 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.
Prior to the Tax Act, we provided deferred taxes on certain undistributed foreign earnings. Under our transition to a modified territorial tax system whereby all previously untaxed undistributed foreign earnings were subject to a transition tax charge at reduced rates and future repatriations of foreign earnings generally will be exempt from U.S. tax, we wrote off the existing deferred tax liability on undistributed foreign earnings and recorded the impact of the new transition tax charge on foreign earnings during the fourth quarter of 2017. We will continue to monitor available evidence and our plans for foreign earnings and expect to continue to provide any applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of amounts not considered permanently reinvested.
Debt Instruments and Debt Service Requirements
As of March 31,June 30, 2020, our long-term debt consists primarily of borrowings under our Credit Facilities, amounts outstanding under our 2017 4.25% Senior Notes, 2019 3.875% Senior Notes, 2020 5.75% Senior Notes, 2017 5.00% Senior Notes, 2019 4.375% Senior Notes and TH Facility (each as defined below), and obligations under finance leases. For further information about our long-term debt, see Note 10 to the accompanying unaudited condensed consolidated financial statements included in this report.
Credit Facilities
As of March 31,June 30, 2020, there was $6,082$6,064 million outstanding principal amount under our senior secured term loan facilities (the "Term Loan Facilities") with a weighted average interest rate of 2.68%1.84%. Based on the amounts outstanding under the Term Loan Facilities and LIBOR as of March 31,June 30, 2020, subject to a floor of 0.00%, required debt service for the next twelve months is estimated to be approximately $164$112 million in interest payments and $72 million in principal payments. In addition, based on LIBOR as of March 31,June 30, 2020, net cash settlements that we expect to pay on our $4,000 million interest rate swap are estimated to be approximately $57$89 million for the next twelve months.
On April 2, 2020, the Borrowers entered into a fifth amendment (the "Fifth Amendment") to the credit agreement (the "Credit Agreement") governing our Term Loan Facilities and Revolving Credit Facility. The Fifth Amendment provides the Borrowers with the option to comply with a $1,000 million minimum liquidity covenant in lieu of the 6.50:1.00 net first lien senior secured leverage ratio financial maintenance covenant for the period after June 30, 2020 and prior to September 30, 2021. Additionally, for the periods ending September 30, 2021 and December 31, 2021, to determine compliance with the net first lien senior secured leverage ratio, we are permitted to annualize the Adjusted EBITDA (as defined in the Credit Agreement) for the three months ending September 30, 2021 and six months ending December 31, 2021, respectively, in lieu of calculating the ratio based on Adjusted EBITDA for the prior four quarters. There were no other material changes to the terms of the Credit Agreement.
The interest rate applicable to borrowings under our Term Loan A and Revolving Credit Facility is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin varying from 0.00% to 0.50%, or (ii) a Eurocurrency rate, subject to a floor of 0.00%, plus an applicable margin varying between 0.75% to 1.50%, in each case, determined by reference to a net first lien leverage based pricing grid. The interest rate applicable to borrowings under our Term Loan B is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin of 0.75% or (ii) a Eurocurrency rate, subject to a floor of 0.00%, plus an applicable margin of 1.75%.
As of March 31,June 30, 2020, we had $995 millionno amounts outstanding under our Revolving Credit Facility, with an interest rate of 2.05%, had $2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability was $3$998 million. No principal payments are due on the Revolving Credit Facility until maturity. Based on the amounts outstanding under the Revolving Credit Facility and LIBOR as of March 31, 2020, subject to a floor of 0.00%, required debt service for the next twelve months is estimated to be approximately $23 million in interest payments. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt, make distributions to RBI for RBI to repurchase its common shares, repurchase Partnership exchangeable units, 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.
Senior Notes
The Borrowers are party to (i) an indenture (the “2017 4.25% Senior Notes Indenture”) in connection with the issuance of $1,500 million of 4.25% first lien senior notes due May 15, 2024 (the “2017 4.25% Senior Notes”), (ii) an indenture (the “2019 3.875% Senior Notes Indenture”) in connection with the issuance of $750 million of 3.875% first lien senior notes due January 15, 2028 (the “2019 3.875% Senior Notes”), (iii) an indenture (the “2017 5.00% Senior Notes Indenture”) in connection with the issuance of $2,800 million of 5.00% second lien senior notes due October 15, 2025 (the “2017 5.00% Senior Notes”), and (iv) an indenture (the “2019 4.375% Senior Notes Indenture” and together with the above indentures the "Senior Notes Indentures") in connection with the issuance of $750 million of 4.375% second lien senior notes due January 15, 2028 (the “2019 4.375% Senior Notes”). and (v) the 2020 5.75% Senior Notes Indenture described above. No principal payments are due on the 2017 4.25% Senior Notes, 2019 3.875% Senior Notes, 2017 5.00% Senior Notes, and 2019 4.375% Senior Notes and 2020 5.75% Senior Notes until maturity and interest is paid semi-annually.
Based on the amounts outstanding at March 31,June 30, 2020, required debt service for the next twelve months on all of the Senior Notes outstanding is approximately $266$294 million in interest payments.
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 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 March 31,June 30, 2020, we had outstanding C$225 million under the TH Facility with a weighted average interest rate of 3.06%1.93%.
Based on the amounts outstanding under the TH Facility as of March 31,June 30, 2020, required debt service for the next twelve months is estimated to be approximately $5$3 million in interest payments and $4 million in principal payments.
Restrictions and Covenants
As of March 31,June 30, 2020, we were in compliance with all applicable financial debt covenants under the Credit Facilities, the TH Facility, and the Senior Notes Indentures.
Cash Distributions/Dividends
On April 3, 2020, RBI paid a cash dividend of $0.52 per RBI common share. 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 $0.52 per exchangeable unit.
The RBI board of directors has declared a cash dividend of $0.52 per RBI common share, which will be paid on June 30,October 2, 2020 to RBI common shareholders of record on June 17,September 18, 2020. 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 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.
In addition, 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 April 24,July 31, 2020, we had outstanding 202,006,067 Class A common units issued to RBI and 164,935,193162,426,062 Partnership exchangeable units. During the threesix months ended March 31,June 30, 2020, Partnership exchanged 178,0462,672,900 Partnership exchangeable units pursuant to exchange notices received.
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 RBI's share-based compensation and its outstanding equity awards, see Note 15 to the audited consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC and Canadian securities regulatory authorities on February 21, 2020.
Since December 12, 2015, the holders of Partnership exchangeable units have had the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for RBI common shares at a ratio of one share for each Partnership exchangeable unit, subject to RBI’s right as the general partner of Partnership to determine to settle any such exchange for a cash payment in lieu of RBI common shares.
Comparative Cash Flows
Operating Activities
Cash provided by operating activities was $136$196 million for the threesix months ended March 31,June 30, 2020, compared to $154$475 million during the same period in the prior year. The decrease in cash provided by operating activities was driven by a decrease in TH segment income, and a decrease in BK segment income.income and an increase in cash used for working capital. These factors were partially offset by a decrease in income tax payments, a decrease in interest payments and an increase in PLK segment income.
Investing Activities
Cash used for investing activities was $3$12 million for the threesix months ended March 31,June 30, 2020, compared to $11$23 million of cash provided from investing activities during the same period in the prior year. The change in investing activities was driven by an increase in capital expenditures during the current period.period and a decrease in net proceeds from disposal of assets, restaurant closures and refranchisings.
Financing Activities
Cash provided byused for financing activities was $855$161 million for the threesix months ended March 31,June 30, 2020, compared to $182$395 million of cash used for financing activities during the same period in the prior year. The change in financing activities was driven primarily by proceeds from the draw down on our Revolving Credit Facilityissuance of the 2020 5.75% Senior Notes and proceeds from the draw down on the remaining availability under the TH Facility, partially offset by an increase in RBI common share dividends and distributions on Partnership exchangeable units and a decrease in proceedscapital contribution from stock option exercises.RBI.
Contractual Obligations and Commitments
Except as described herein, there were no material changes to our contractual obligations, which are detailed in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC and Canadian securities regulatory authorities on February 21, 2020, other than the following.
During the three months ended March 31,first quarter of 2020, we drew down $995 million on our Revolving Credit Facility and we also drew down the remaining availability of C$125 million under the TH Facility. Additionally, on April 7, 2020, we obtained the proceeds from the 2020 5.75% Senior Notes. Each of these terms is defined and described above. The following table provides contractual obligations as of March 31, 2020 and an update as of April 7, 2020, which reflects all of the debt transactions disclosed above, of the contractual obligations under our Credit Facilities, senior notes and other long term debt presented inas of June 30, 2020, which reflects all of the debt transactions disclosed above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payment Due by Period as of June 30, 2020 | | | | | | | | |
Contractual Obligations | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| (In millions) | | | | | | | | |
Credit Facilities, including interest (a) | $ | 6,750 | | | $ | 186 | | | $ | 383 | | | $ | 989 | | | $ | 5,192 | |
Senior Notes, including interest (b) | 7,891 | | | 294 | | | 589 | | | 2,511 | | | 4,497 | |
Other long term debt | 183 | | | 7 | | | 23 | | | 36 | | | 117 | |
(a)We have estimated our Annual Reportinterest payments through the maturity of our Credit Facilities based on Form 10-KLIBOR as of June 30, 2020.
(b)Amounts included herein for the year ended December 31, 2019.Senior Notes exclude amounts for the Tim Hortons Notes.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Payment Due by Period as of April 7, 2020 |
Contractual Obligations | Total as of March 31, 2020 | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| | | (In millions) |
Credit Facilities, including interest (a) | $ | 8,203 |
| | $ | 8,203 |
| | $ | 259 |
| | $ | 522 |
| | $ | 2,124 |
| | $ | 5,298 |
|
Senior Notes, including interest (b) | 7,320 |
| | 7,965 |
| | 294 |
| | 589 |
| | 2,033 |
| | 5,049 |
|
Other long term debt | 186 |
| | 186 |
| | 9 |
| | 24 |
| | 36 |
| | 117 |
|
| |
(a) | We have estimated our interest payments through the maturity of our Credit Facilities based on LIBOR as of March 31, 2020. |
| |
(b) | Amounts included herein for the Senior Notes exclude amounts for the Tim Hortons Notes. |
Critical Accounting Policies and Estimates
For information regarding our Critical Accounting Policies and Estimates, see the “Critical Accounting Policies and Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 21, 2020. Additionally, see the “COVID-19” section of Note 1 to the accompanying unaudited Condensed Consolidated Financial Statements for a discussion about the potential impact of the COVID-19 pandemic on asset impairment assessments.
New Accounting Pronouncements
See Note 3 – New Accounting Pronouncements in the notes to the accompanying unaudited condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes during the threesix months ended March 31,June 30, 2020 to the disclosures made in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC and Canadian securities regulatory authorities on February 21, 2020.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the participation of 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 Partnership’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and Exchange Act Rules 15d-15(e)) as of March 31,June 30, 2020. Based on that evaluation, the CEO and CFO of RBI concluded that Partnership’s disclosure controls and procedures were effective as of such date.
Internal Control Over Financial Reporting
The management of RBI, as general partner of Partnership, including the CEO and CFO, confirm there were no changes in Partnership’s internal control over financial reporting during the three months ended March 31,June 30, 2020 that have materially affected, or are reasonably likely to materially affect, Partnership’s internal control over financial reporting.
Special Note Regarding Forward-Looking Statements
Certain information contained in this 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 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) the effects of the COVID-19 pandemic on our results of operations, business, liquidity and prospects and those of our franchisees, (ii) our future financial obligations, including annual debt service requirements, capital expenditures and dividend payments, our ability to meet such obligations and the source of funds used to satisfy such obligations; (iii) our efforts to assist restaurant owners in maintaining liquidity; (iv) the amount and timing of additional Corporate restructuring and tax advisory fees related to the Tax Act and Office centralization and relocation costs; (v) certain tax matters, including the impact of the Tax Act on future periods; (vi) the amount of net cash settlements we expect to pay on our derivative instruments; and (vii) certain accounting matters.
Our forward-looking statements, included in this report and elsewhere, represent management’s expectations as of the date that they are made. Our forward-looking statements are based on assumptions and analyses made by Partnership in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it 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 and supply chain, 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) supply chain operations; (6) our ownership and leasing of real estate; (7) the effectiveness of our marketing and advertising programs and franchisee support of these programs; (8) significant and rapid fluctuations in interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (9) our ability to successfully implement our domestic and international growth strategy for our brands and risks related to our international operations; (10) our reliance on master franchisees and subfranchisees to accelerate restaurant growth; (11) the ability of the counterparties to our credit facilities and derivatives to fulfill their commitments and/or obligations; and (12) changes in applicable tax laws or interpretations thereof, and risks related to the complexity of the Tax Act and our ability to accurately interpret and predict its impact on our financial condition and results.
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 Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC and Canadian securities regulatory authorities on February 21, 2020, 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. 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 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.
Part II – Other Information
Item 1. Legal Proceedings
On June 30, 2020, a class action complaint was filed against Restaurant Brands International Inc., Restaurant Brands International Limited 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 Restaurant Brands International Inc., 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. Both of the complaints allege 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 mobile application. Each plaintiff seeks injunctive relief and monetary damages for himself or herself and other members of the class. We intend to vigorously defend against these lawsuits, but we are unable to predict the ultimate outcome of either case.
Item 1A. Risk Factors
The below updates the risk factor included in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 21, 2020.
Our results can be adversely affected by unforeseen events, such as adverse weather conditions, natural disasters, terrorist attacks or threats, 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 severe adverse weather conditions and health pandemics whether occurring in Canada, the United States or abroad, can keep customers in the affected area from dining out, cause damage to or closure of restaurants and result in lost opportunities for our restaurants.
In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures have adversely affected workforces, customers, consumer sentiment, economies and financial markets, and, along with decreased consumer spending, have led to an economic downturn in many of our markets. As a result of COVID-19, we and our franchisees have experienced significant store closures and instances of reduced store-level operations, including reduced operating hours and dining-room closures. As of the end of AprilDuring 2020, our restaurants in the U.S. and Canada have closed dine-in operations, continuing to offer drive-thru, delivery and take-out where possible, sometimes with limited hours, several markets in Asia, Europe (including France, Italy, Spain and the United Kingdom) haveLatin America closed all restaurants, and many other international markets also have limited operations. As of the end of July, restaurants in most markets have reopened, often with limited operations. While certain markets have opened for dine-in guests, the capacity may be limited, and local conditions may lead to closures or increased limitations. As a result of COVID-19, restaurant traffic and system-wide sales have been significantly negatively impacted.
Our operating results substantially depend upon our franchisees’ sales volumes, restaurant profitability, and financial stability. The impact of COVID-19 has, and is expected to continue to have, an adverse effect on our franchisees’ liquidity. As a result, we are providing cash flow support by extending loans to eligible BK franchisees in the U.S. and advancing certain cash payments to eligible TH franchisees in Canada. For approximately 3,700 eligible locations where we have property control at Tim Hortons in Canada and Burger King in the United States and Canada, we have temporarily converted our rent structure from a combination of fixed plus variable rent to 100% variable rent, which provides relief in the face of declining sales. In addition, we have deferred rent payments for up to 45 days for certain other franchisees. These actions are expected to continue to adversely affect our cash flow and financial results in the upcoming quarters.quarter. In addition to these actions, we may decide to take additional steps to assist in the financial stabilization of our franchisees, which could impact our liquidity and our financial results. In addition, we are delaying the capital expenditure obligations of our franchisees relating to new restaurants, remodels and significant equipment deployments, which could adversely affect our growth once the COVID-19 pandemic has passed. To the extent that our franchisees experience financial distress, it could negatively affect (i) our operating results as a result of delayed or reduced payments of royalties, advertising fund contributions and rents for properties we lease to them or claims under our lease guarantees, (ii) our future revenue, earnings and cash flow growth and (iii) our financial condition.
COVID-19 or other events could lead to delays or interruptions in the delivery of food or other supplies to our franchised restaurants arising from delays or restrictions on shipping and/or manufacturing, closures of supplier or distributor facilities or financial distress or insolvency of suppliers or distributors and also could lead to difficulties in maintaining appropriate staffing of restaurants. Food distributors and suppliers often operate with thin margins and therefore may be more vulnerable to governmental actions which result in significantly reduced activity or to general economic downturns. As of December 31,
2019, 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. Consequently, our operations could be adversely affected if any of these distributors were unable to fulfill their responsibilities and we were unable to locate a substitute distributor in a timely manner. In addition, as COVID-19 may be transmitted through human contact, the risk or perceived risk of contracting COVID-19 could adversely affect the ability, or the cost, of staffing restaurants, which could be exacerbated to the extent that we or our franchisees have employees who test positive for the virus.
We cannot predict the duration or scope of the COVID-19 pandemic or when operations will cease to be affected by it. Furthermore, we cannot predict the effects that actual or threatened armed conflicts, terrorist attacks, efforts to combat terrorism or heightened security requirements will have on our future operations. Because a significant portion of our restaurant operating costs are fixed or semi-fixed in nature, the loss of sales during these periods hurts our and our franchisees’ operating margins and can result in restaurant operating losses and our loss of royalties. We expect the COVID-19 pandemic to negatively impact our financial results and based on the duration and scope, such impact could be material.
Item 5. Other Information
Item 5.02 Departure of Directors or Certain Officers; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers
(e)
On January 21, 2020, the Compensation Committee of the RBI Board of Directors (the “Compensation Committee”) approved an increase in the base salary of Matthew Dunnigan, RBI's Chief Financial Officer, from $480,000 to $550,000.
On January 21, 2020, the Compensation Committee approved the 2020 Annual Bonus Program on substantially the same terms as the 2018 Annual Bonus Program, as described in RBI's quarterly report on Form 10-Q for the three months ended March 31, 2018.
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 terms of the 2019 Bonus Swap Program are substantially the same as the terms of the 2015 Bonus Swap Program, which are described in our quarterly report on Form 10-Q for the three months ended March 31, 2016. All of RBI’s NEOs elected to participate in the 2019 Bonus Swap Program at the 50% level. The matching RSUs will cliff vest on December 31, 2024. All of the 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 December 31, 2021. If an NEO sells more than 50% of the Investment Shares before the vesting date, he or she will forfeit 100% of the matching RSUs. An NEO who sells 50% or less of the Investment Shares before the vesting date will forfeit 50% of the matching RSUs and a proportional amount of the remaining matching RSUs.
On January 21, 2020, the Compensation Committee approved a grant of 50,000 RBI stock options to Matthew Dunnigan, RBI's Chief Financial Officer and 25,000 RBI stock options to Jill Granat, RBI's General Counsel. The RBI stock options cliff vest on February 21, 2025 and the exercise price is $66.31.
On January 21, 2020, the Compensation Committee approved discretionary awards of 250,000, 200,000, 50,000 and 25,000 performance based RSUs, or “PBRSUs”, to Messrs. Cil, Kobza, and Dunnigan and Ms. Granat, respectively. The performance measure for purposes of determining the number of units earned by Messrs. Cil and Kobza is Tim Hortons Canada’s annual year over year growth of same store sales for 2020 and 2021. If at the end of the two-year performance period, the threshold performance has not been achieved, the performance period will be extended for an additional year, and a 20% reduction to the payout will apply. The Compensation Committee established a 50% performance threshold below which no shares are earned and a 200% maximum performance level. If achievement falls between the threshold level and the target level or between the target level and the maximum level, the number of shares earned by Messrs. Cil, and Kobza would be calculated on a linear basis. Once earned, the PBRSUs will cliff vest on February 21, 2025. In addition, if an executive’s service to RBI is terminated (other than due to death or disability) prior to February 21, 2023, he or she will forfeit the entire award. A copy of the form of Performance Award Agreement between RBI and each of the NEOs is filed herewith as Exhibit 10.73. This summary is qualified in its entirety to the full text of the Performance Award Agreement.
The performance measure for purposes of determining the number of units earned by Mr. Dunnigan and Ms. Granat is the same as the PBRSUs granted in February 2019 as described in RBI's quarterly report on Form 10-Q for the three months ended March 31, 2019.
Jose Cil, RBI's Chief Executive Officer, has voluntarily elected to forgo half of his salary compensation for the six months ending September 30, 2020. RBI will redirect his forgone salary to be contributed among the foundations established by each of our brands to assist with COVID-19 relief.
Item 6. Exhibits
| | | | | | | | |
| | |
| | |
Exhibit Number | | Description |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
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 |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
104 | | Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements 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 | | |
| | | | | | | | |
Date: May 1,August 6, 2020 | | | | By: | | /s/ Matthew Dunnigan | | |
| | | | | | Name: | | Matthew Dunnigan |
| | | | | | Title: | | Chief Financial Officer of Restaurant Brands International Inc. (principal financial officer)
(duly authorized officer)
|