Notes to Consolidated Financial Statements
Note 1. Description of Business and Organization
Description of Business
Restaurant Brands International Limited Partnership (“Partnership”, “we”, “us” or “our”) was formed on August 25, 2014 as a general partnership and was registered on October 27, 2014 as a limited partnership in accordance with the laws of the Province of Ontario. Pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended, Partnership is a successor issuer to Burger King Worldwide, Inc. We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King® brand (“Burger King” or “BK”), and chicken under the Popeyes® brand (“Popeyes” or “PLK”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of December 31, 2019, we franchised or owned 4,932 Tim Hortons restaurants, 18,838 Burger King restaurants, and 3,316 Popeyes restaurants, for a total of 27,086 restaurants, and operate in more than 100 countries and U.S. territories. Approximately 100% of current system-wide restaurants are franchised.
We are a subsidiary of Restaurant Brands International Inc. (“RBI”). RBI is our sole general partner, and as such, RBI has the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership in accordance with the partnership agreement of Partnership (“partnership agreement”) and applicable laws.
All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated.
Note 2. Significant Accounting Policies
Basis of Presentation
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements (the "Financial Statements") include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All material intercompany balances and transactions have been eliminated in consolidation. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method.
We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our maximum exposure to loss resulting from involvement with VIEs is attributable to accounts and notes receivable balances, outstanding loan guarantees and future lease payments, where applicable.
As our franchise and master franchise arrangements provide the franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE.
Tim Hortons has historically entered into certain arrangements in which an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. In these arrangements, Tim Hortons has the ability to determine which operators manage the restaurants and for what duration. We perform an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of December 31, 2019 and 2018, we determined that we are the primary beneficiary of 35 and 17 Restaurant VIEs, respectively, and accordingly, have consolidated the results of operations, assets and liabilities, and cash flows of these Restaurant VIEs in our Financial Statements.
Assets and liabilities related to consolidated VIEs are not significant to our total consolidated assets and liabilities. Liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims by our creditors as they are not legally included within our general assets.
Reclassifications
Certain prior year amounts in the accompanying consolidated financial statements and notes to the consolidated financial statements have been reclassified in order to be comparable with the current year classifications.
Foreign Currency Translation and Transaction Gains and Losses
Our functional currency is the U.S. dollar, since our term loans and senior secured notes are denominated in U.S. dollars. The functional currency of each of our operating subsidiaries is generally the currency of the economic environment in which the subsidiary primarily does business. Our foreign subsidiaries’ financial statements are translated into U.S. dollars using the foreign exchange rates applicable to the dates of the financial statements. Assets and liabilities are translated using the end-of-period spot foreign exchange rates. Income, expenses and cash flows are translated at the average foreign exchange rates for each period. Equity accounts are translated at historical foreign exchange rates. The effects of these translation adjustments are reported as a component of accumulated other comprehensive income (loss) (“AOCI”) in the consolidated statements of equity.
For any transaction that is denominated in a currency different from the entity’s functional currency, we record a gain or loss based on the difference between the foreign exchange rate at the transaction date and the foreign exchange rate at the transaction settlement date (or rate at period end, if unsettled) which is included within other operating expenses (income), net in the consolidated statements of operations.
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less and credit card receivables are considered cash equivalents.
Inventories
Inventories are carried at the lower of cost or net realizable value and consist primarily of raw materials such as green coffee beans and finished goods such as new equipment, parts, paper supplies and restaurant food items. The moving average method is used to determine the cost of raw material and finished goods inventories held for sale to Tim Hortons franchisees.
Property and Equipment, net
We record property and equipment at historical cost less accumulated depreciation and amortization, which is recognized using the straight-line method over the following estimated useful lives: (i) buildings and improvements – up to 40 years; (ii) restaurant equipment – up to 17 years; (iii) furniture, fixtures and other – up to 10 years; and (iv) manufacturing equipment – up to 25 years. Leasehold improvements to properties where we are the lessee are amortized over the lesser of the remaining term of the lease or the estimated useful life of the improvement.
Major improvements are capitalized, while maintenance and repairs are expensed when incurred.
Leases
We transitioned to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), from ASC Topic 840, Leases (the “Previous Standard”) on January 1, 2019. Our Financial Statements reflect the application of ASC 842 guidance beginning in 2019, while our Financial Statements for prior periods were prepared under the guidance of the Previous Standard. See Note 10, Leases, for further information about our transition to this new lease guidance on a modified retrospective basis using the effective date transition method.
In all leases, whether we are the lessor or lessee, we define lease term as the noncancellable term of the lease plus any renewals covered by renewal options that are reasonably certain of exercise based on our assessment of the economic factors relevant to the lessee. The noncancellable term of the lease commences on the date the lessor makes the underlying property in the lease available to the lessee, irrespective of when lease payments begin under the contract.
Lessor Accounting
We recognize lease payments for operating leases as property revenue on a straight-line basis over the lease term, and property revenue is presented net of any related sales tax. Lease incentive payments we make to lessees are amortized as a reduction in property
revenue over the lease term. In accordance with ASC 842, we account for reimbursements of maintenance and property tax costs paid to us by lessees as property revenue. These expenses and reimbursements were presented on a net basis under the Previous Standard.
We also have net investments in properties leased to franchisees, which met the criteria of direct financing leases under the Previous Standard. Investments in direct financing leases are recorded on a net basis, consisting of the gross investment and estimated residual value in the lease, less unearned income. Unearned income on direct financing leases is recognized over the lease term yielding a constant periodic rate of return on the net investment in the lease. We do not remeasure the net investment in a direct financing lease unless the lease is modified and that modification is not accounted for as a separate contract.
We recognize variable lease payment income for operating and direct financing leases in the period when changes in facts and circumstances on which the variable lease payments are based occur.
Lessee Accounting
In accordance with ASC 842, in leases where we are the lessee, we recognize a right-of-use ("ROU") asset and lease liability at lease commencement, which are measured by discounting lease payments using our incremental borrowing rate as the discount rate. We determine the incremental borrowing rate applicable to each lease by reference to our outstanding secured borrowings and implied spreads over the risk-free discount rates that correspond to the term of each lease, as adjusted for the currency of the lease. Subsequent amortization of the ROU asset and accretion of the lease liability for an operating lease is recognized as a single lease cost, on a straight-line basis, over the lease term. Reductions of the ROU asset and the change in the lease liability are included in changes in Other long-term assets and liabilities in the Consolidated Statement of Cash Flows.
Under the Previous Standard, we did not recognize assets and liabilities for the rights and obligations created by operating leases and recorded rental expense for operating leases on a straight-line basis over the lease term, net of any applicable lease incentive amortization.
A finance lease ROU asset is depreciated on a straight-line basis over the lesser of the useful life of the leased asset or lease term. Interest on each finance lease liability is determined as the amount that results in a constant periodic discount rate on the remaining balance of the liability. Operating lease and finance lease ROU assets are assessed for impairment in accordance with our long-lived asset impairment policy.
We reassess lease classification and remeasure ROU assets and lease liabilities when a lease is modified and that modification is not accounted for as a separate contract or upon certain other events that require reassessment in accordance with ASC 842. Maintenance and property tax expenses are accounted for on an accrual basis as variable lease cost.
We recognize variable lease cost for operating and finance leases in the period when changes in facts and circumstances on which the variable lease payments are based occur.
Goodwill and Intangible Assets Not Subject to Amortization
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in connection with the acquisition of Popeyes in 2017, the acquisition of Tim Hortons in 2014 and the acquisition of Burger King Holdings, Inc. by 3G Capital Partners Ltd. in 2010. Our indefinite-lived intangible assets consist of the Tim Hortons brand, the Burger King brand, and the Popeyes brand (each a “Brand” and together, the “Brands”). Goodwill and the Brands are tested for impairment at least annually as of October 1 of each year and more often if an event occurs or circumstances change which indicate impairment might exist. Our annual impairment tests of goodwill and the Brands may be completed through qualitative assessments. We may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test for any reporting unit or Brand in any period. We can resume the qualitative assessment for any reporting unit or Brand in any subsequent period.
Under a qualitative approach, our impairment review for goodwill consists of an assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for any reporting unit, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a reporting unit exceeds its fair value, we perform a quantitative goodwill impairment test that requires us to estimate the fair value of the reporting unit. If the fair value of the reporting unit is less than its carrying amount, we will measure any goodwill impairment loss as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Under a qualitative approach, our impairment review for the Brands consists of an assessment of whether it is more-likely-than-not that a Brand’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for a Brand, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a Brand exceeds its fair value, we estimate the fair value of the Brand and compare it to its carrying amount. If the carrying amount exceeds fair value, an impairment loss is recognized in an amount equal to that excess.
We completed our impairment tests for goodwill and the Brands as of October 1, 2019, 2018 and 2017 and no impairment resulted.
Long-Lived Assets
Long-lived assets, such as property and equipment and intangible assets subject to amortization, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. Some of the events or changes in circumstances that would trigger an impairment review include, but are not limited to, bankruptcy proceedings or other significant financial distress of a lessee; significant negative industry or economic trends; knowledge of transactions involving the sale of similar property at amounts below the carrying value; or our expectation to dispose of long-lived assets before the end of their estimated useful lives. The impairment test for long-lived assets requires us to assess the recoverability of long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from use and eventual disposition of the assets or asset group. Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we record an impairment charge equal to the excess, if any, of the net carrying value over fair value.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) (“OCI”) refers to revenues, expenses, gains and losses that are included in comprehensive income (loss), but are excluded from net income (loss) as these amounts are recorded directly as an adjustment to equity, net of tax. Our other comprehensive income (loss) is primarily comprised of unrealized gains and losses on foreign currency translation adjustments and unrealized gains and losses on hedging activity, net of tax.
Derivative Financial Instruments
We recognize and measure all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. We may enter into derivatives that are not initially designated as hedging instruments for accounting purposes, but which largely offset the economic impact of certain transactions.
Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income (loss) and recognized in the consolidated statements of operations when the hedged item affects earnings, depending on the purpose of the derivatives and whether they qualify for, and we have applied, hedge accounting treatment.
When applying hedge accounting, we designate at a derivative’s inception, the specific assets, liabilities or future commitments being hedged, and assess the hedge’s effectiveness at inception and on an ongoing basis. We discontinue hedge accounting when: (i) we determine that the cash flow derivative is no longer effective in offsetting changes in the cash flows of a hedged item; (ii) the derivative expires or is sold, terminated or exercised; (iii) it is no longer probable that the forecasted transaction will occur; or (iv) management determines that designation of the derivatives as a hedge instrument is no longer appropriate. We do not enter into or hold derivatives for speculative purposes.
Disclosures about Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market, or if none exists, the most advantageous market, for the specific asset or liability at the measurement date (the exit price). The fair value is based on assumptions that market participants would use when pricing the asset or liability. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the calculation, as follows:
Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.
Level 3 Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
The carrying amounts for cash and cash equivalents, accounts and notes receivable and accounts and drafts payable approximate fair value based on the short-term nature of these amounts.
We carry all of our derivatives at fair value and value them using various pricing models or discounted cash flow analysis that incorporate observable market parameters, such as interest rate yield curves and currency rates, which are Level 2 inputs. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or us. For disclosures about the fair value measurements of our derivative instruments, see Note 12, Derivative Instruments.
The following table presents the fair value of our variable rate term debt and senior notes, estimated using inputs based on bid and offer prices that are Level 2 inputs, and principal carrying amount (in millions):
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As of December 31,
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2019
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2018
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Fair value of our variable term debt and senior notes
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$
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12,075
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|
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$
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11,237
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Principal carrying amount of our variable term debt and senior notes
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11,900
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11,888
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The determinations of fair values of certain tangible and intangible assets for purposes of the application of the acquisition method of accounting to the acquisition of Popeyes were based upon Level 3 inputs. The determination of fair values of our reporting units and the determination of the fair value of the Brands for impairment testing using a quantitative approach during 2019 and 2018 were based upon Level 3 inputs.
Revenue Recognition
We transitioned to FASB ASC Topic 606, Revenue From Contracts with Customers (“ASC 606”), from ASC Topic 605, Revenue Recognition and ASC Subtopic 952-605, Franchisors - Revenue Recognition (together, the “Previous Standards”) on January 1, 2018 using the modified retrospective transition method. Our Financial Statements reflect the application of ASC 606 guidance beginning in 2018, while our Financial Statements for periods prior to 2018 were prepared under the guidance of the Previous Standards.
Sales
Sales consist primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and are presented net of any related sales tax. Orders placed by customers specify the goods to be delivered and transaction prices for supply chain sales. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to the customer, which is when the customer obtains physical possession of the goods, legal title is transferred, the customer has all risks and rewards of ownership and an obligation to pay for the goods is created. Shipping and handling costs associated with outbound freight for supply chain sales are accounted for as fulfillment costs and classified as cost of sales.
Commencing on January 1, 2018, we classify all sales of restaurant equipment to franchisees as Sales and related cost of equipment sold as Cost of sales. In periods prior to January 1, 2018, we classified sales of restaurant equipment at establishment of a restaurant and in connection with renewal or renovation as Franchise and property revenues and related costs as Franchise and property expense.
To a much lesser extent, sales also include Company restaurant sales (including Restaurant VIEs), which consist of sales to restaurant guests. Revenue from Company restaurant sales is recognized at the point of sale. Taxes assessed by a governmental authority that we collect are excluded from revenue.
Franchise revenues
Franchise revenues consist primarily of royalties, advertising fund contributions, initial and renewal franchise fees and upfront fees from development agreements and master franchise and development agreements (“MFDAs”). Under franchise agreements, we provide franchisees with (i) a franchise license, which includes a license to use our intellectual property and, in those markets where our subsidiaries manage an advertising fund, advertising and promotion management, (ii) pre-opening services, such as training and inspections, and (iii) ongoing services, such as development of training materials and menu items and restaurant monitoring and inspections. The services we provide under franchise agreements are highly interrelated and dependent upon the franchise license and we concluded the services do not represent individually distinct performance obligations. Consequently, we bundle the franchise license performance obligation and promises to provide services into a single performance obligation under ASC 606, which we satisfy by providing a right to use our intellectual property over the term of each franchise agreement.
Royalties, including franchisee contributions to advertising funds managed by our subsidiaries, are calculated as a percentage of franchise restaurant sales over the term of the franchise agreement. Under our franchise agreements, advertising contributions paid by franchisees must be spent on advertising, product development, marketing and related activities. Initial and renewal franchise fees are payable by the franchisee upon a new restaurant opening or renewal of an existing franchise agreement. Our franchise agreement royalties, inclusive of advertising fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and are recognized as franchise sales occur. Additionally, under ASC 606, initial and renewal franchise fees are recognized as revenue on a straight-line basis over the term of the respective agreement. Under the Previous Standards, initial franchise fees were recognized as revenue when the related restaurant commenced operations and our completion of all material services and conditions. Renewal franchise fees were recognized as revenue upon execution of a new franchise agreement. Our performance obligation under development agreements other than MFDAs generally consists of an obligation to grant exclusive development rights over a stated term. These development rights are not distinct from franchise agreements, so upfront fees paid by
franchisees for exclusive development rights are deferred and apportioned to each franchise restaurant opened by the franchisee. The pro rata amount apportioned to each restaurant is accounted for as an initial franchise fee.
We have a distinct performance obligation under our MFDAs to grant subfranchising rights over a stated term. Under the terms of MFDAs, we typically either receive an upfront fee paid in cash and/or receive noncash consideration in the form of an equity interest in the master franchisee or an affiliate of the master franchisee. Under the Previous Standards, we accounted for noncash consideration as a nonmonetary exchange and did not record revenue or a basis in the equity interest received in arrangements where we received noncash consideration. These transactions now fall within the scope of ASC 606, which requires us to record investments in the applicable equity method investee and recognize revenue in an amount equal to the fair value of the equity interest received. In accordance with ASC 606, upfront fees from master franchisees, including the fair value of noncash consideration, are deferred and amortized over the MFDA term on a straight-line basis. We may recognize unamortized upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract.
The portion of gift cards sold to customers which are never redeemed is commonly referred to as gift card breakage. Under ASC 606, we recognize gift card breakage income proportionately as each gift card is redeemed using an estimated breakage rate based on our historical experience. Under the Previous Standards, we recognized gift card breakage income for each gift card's remaining balance when redemption of that balance was deemed remote.
Property revenues
Property revenues consists of rental income from properties we lease or sublease to franchisees. Property revenues are accounted for in accordance with applicable accounting guidance for leases and are excluded from the scope of ASC 606.
Advertising and Promotional Costs
Company restaurants and franchise restaurants contribute to advertising funds that our subsidiaries manage in the United States and Canada and certain other international markets. The advertising funds expense the production costs of advertising when the advertisements are first aired or displayed. All other advertising and promotional costs are expensed in the period incurred. Under our franchise agreements, advertising contributions received from franchisees must be spent on advertising, product development, marketing and related activities. As a result of our transition to ASC 606, advertising contributions received from franchisees are included in franchise and property revenues and advertising expenses are included as selling, general and administrative expenses commencing on January 1, 2018. Advertising expenses included in selling, general and administrative expenses totaled $858 million for 2019 and $793 million for 2018. Prior to January 1, 2018, since we were deemed to be acting as an agent for these specifically designated contributions in accordance with the Previous Standards, the revenues and expenses of the advertising funds were generally netted in our consolidated statements of operations.
Prior to our transition to ASC 606, advertising expenses, which primarily consisted of advertising contributions by Company restaurants (including Restaurant VIEs) based on a percentage of gross sales, totaled $7 million for 2017 and were included in selling, general and administrative expenses in the accompanying consolidated statements of operations. As a result of our transition to ASC 606, the advertising contributions by Company restaurants (including Restaurant VIEs) are eliminated in consolidation in 2019 and 2018.
Deferred Financing Costs
Deferred financing costs are amortized over the term of the related debt agreement into interest expense using the effective interest method.
Income Taxes
Amounts in the Financial Statements related to income taxes are calculated using the principles of ASC Topic 740, Income Taxes. Under these principles, deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes, as well as tax credit carry-forwards and loss carry-forwards. These deferred taxes are measured by applying currently enacted tax rates. A deferred tax asset is recognized when it is considered more-likely-than-not to be realized. The effects of changes in tax rates on deferred tax assets and liabilities are recognized in income in the year in which the law is enacted. A valuation allowance reduces deferred tax assets when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.
We recognize positions taken or expected to be taken in a tax return in the financial statements when it is more-likely-than-not (i.e., a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit with greater than 50% likelihood of being realized upon ultimate settlement.
Translation gains and losses resulting from the remeasurement of foreign deferred tax assets or liabilities denominated in a currency other than the functional currency are classified as other operating expenses (income), net in the consolidated statements of operations.
Share-based Compensation
Compensation expense related to the issuance of share-based awards to our employees is measured at fair value on the grant date. We use the Black-Scholes option pricing model to value stock options. The compensation expense for awards that vest over a future service period is recognized over the requisite service period on a straight-line basis, adjusted for estimated forfeitures of awards that are not expected to vest. We use historical data to estimate forfeitures for share-based awards. The compensation expense for awards that do not require future service is recognized immediately. Upon the end of the service period, compensation expense is adjusted to account for the actual forfeiture rate. Cash settled share-based awards are classified as liabilities and are re-measured at the end of each reporting period. The compensation expense for awards that contain performance conditions is recognized when it is probable that the performance conditions will be achieved.
Restructuring
The determination of when we accrue for employee involuntary termination benefits depends on whether the termination benefits are provided under an on-going benefit arrangement or under a one-time benefit arrangement. We record charges for ongoing benefit arrangements in accordance with ASC Topic 712, Nonretirement Postemployment Benefits. We record charges for one-time benefit arrangements in accordance with ASC Topic 420, Exit or Disposal Cost Obligations.
New Accounting Pronouncements
Lease Accounting – In February 2016, the FASB issued new guidance on leases. We adopted this new guidance on January 1, 2019. See Note 10, Leases, for further information about our transition to this new lease accounting standard.
Goodwill Impairment – In January 2017, the FASB issued guidance to simplify how an entity measures goodwill impairment by removing the second step of the two-step quantitative goodwill impairment test. An entity will no longer be required to perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured at the amount by which the carrying value exceeds the fair value of a reporting unit; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendment requires prospective adoption and is effective commencing in 2020 with early adoption permitted. We early adopted this new guidance and it did not have a material impact on our Financial Statements.
Reclassification of Certain Tax Effects – In February 2018, the FASB issued guidance which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for the tax effects of certain items within accumulated other comprehensive income (loss). The amendment was effective commencing in 2019 with early adoption permitted. The adoption of this new guidance did not have a material impact on our Financial Statements.
Share-based payment arrangements with nonemployees – In June 2018, the FASB issued guidance which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The amendment was effective commencing in 2019 with early adoption permitted. The adoption of this new guidance did not have a material impact on our Financial Statements.
Credit Losses – In June 2016, the FASB issued guidance that requires companies to measure and recognize lifetime expected credit losses for certain financial instruments, including trade accounts receivable and net investments in direct financing and sales-type leases. Expected credit losses are estimated using relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This amendment is effective commencing in 2020, using a modified retrospective approach. We are currently evaluating the impact that the adoption of this new guidance will have on our Financial Statements, but do not currently anticipate this adoption will have a material impact on our Financial Statements.
Simplifying the Accounting for Income Taxes – In December 2019, the FASB issued guidance which simplifies the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance applicable to accounting for income taxes. The amendment is effective commencing in 2021 with early adoption permitted. We are currently evaluating the impact that the adoption of this new guidance will have on our Financial Statements.
Note 3. Popeyes Acquisition
On March 27, 2017, we completed the acquisition of all of the outstanding shares of common stock of Popeyes Louisiana Kitchen, Inc. (the “Popeyes Acquisition”). Popeyes Louisiana Kitchen, Inc. is one of the world’s largest chicken quick service restaurant companies and its global footprint complements RBI’s existing portfolio. Like our other brands, the Popeyes brand is managed independently, while benefiting from our global scale and resources. The Popeyes Acquisition was accounted for as a business combination using the acquisition method of accounting.
Total consideration in connection with the Popeyes Acquisition was $1,655 million, which includes $33 million for the settlement of equity awards. The consideration was funded through (1) cash on hand of approximately $355 million, and (2) $1,300 million from incremental borrowings under our Term Loan Facility.
Fees and expenses related to the Popeyes Acquisition and related financings totaled $34 million consisting primarily of professional fees and compensation related expenses, all of which are classified as selling, general and administrative expenses in the accompanying consolidated statements of operations. These fees and expenses were funded through cash on hand.
The final allocation of consideration to the net tangible and intangible assets acquired is presented in the table below (in millions):
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March 27, 2017
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Total current assets
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$
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64
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Property and equipment
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114
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Intangible assets
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1,405
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Other assets
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1
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Total current liabilities
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(73
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)
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Total debt and capital lease obligations
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(159
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)
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Deferred income taxes
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(523
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)
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Other liabilities
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(20
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)
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Total identifiable net assets
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809
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Goodwill
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846
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Total consideration
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$
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1,655
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Intangible assets include $1,355 million related to the Popeyes brand, $41 million related to franchise agreements and $9 million related to favorable leases. The Popeyes brand has been assigned an indefinite life and, therefore, will not be amortized, but rather tested annually for impairment. Franchise agreements have a weighted average amortization period of 17 years. Favorable leases have a weighted average amortization period of 14 years.
Goodwill attributable to the Popeyes Acquisition will not be amortizable or deductible for tax purposes. Goodwill is considered to represent the value associated with the workforce and synergies anticipated to be realized as a combined company.
The Popeyes Acquisition is not material to our Financial Statements, and therefore, supplemental pro forma financial information related to the acquisition is not included herein.
Note 4. Earnings Per Unit
Partnership uses the two-class method in the computation of earnings per unit. Pursuant to the terms of the partnership agreement, RBI, as the holder of the Class A common units, is entitled to receive distributions from Partnership in an amount equal to the aggregate dividends payable by RBI to holders of RBI common shares, and the holders of Class B exchangeable limited partnership units (the “Partnership exchangeable units”) are entitled to receive distributions from Partnership in an amount per unit equal to the dividends payable by RBI on each RBI common share. Partnership’s net income available to common unitholders is allocated between the Class A common units and Partnership exchangeable units on a fully-distributed basis and reflects residual net income after noncontrolling interests, Partnership preferred unit distributions and gain on redemption of Partnership preferred units. Basic and diluted earnings per Class A common unit is determined by dividing net income allocated to Class A common unitholders by the weighted average number of Class A common units outstanding for the period. Basic and diluted earnings per Partnership exchangeable unit is determined by dividing net income allocated to the Partnership exchangeable units by the weighted average number of Partnership exchangeable units outstanding during the period.
There are no dilutive securities for Partnership as the exercise of stock options will not affect the numbers of Class A common units or Partnership exchangeable units outstanding. However, the issuance of shares by RBI in future periods will affect the allocation of net income attributable to common unitholders between Partnership’s Class A common units and Partnership exchangeable units.
The following table summarizes the basic and diluted earnings per unit calculations (in millions, except per unit amounts):
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2019
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2018
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2017
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Allocation of net income among partner interests:
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Net income allocated to Class A common unitholders
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$
|
643
|
|
|
$
|
612
|
|
|
$
|
626
|
|
Net income allocated to Partnership exchangeable unitholders
|
466
|
|
|
531
|
|
|
585
|
|
Net income attributable to common unitholders
|
$
|
1,109
|
|
|
$
|
1,143
|
|
|
$
|
1,211
|
|
Denominator - basic and diluted partnership units:
|
|
|
|
|
|
Weighted average Class A common units
|
202
|
|
|
202
|
|
|
202
|
|
Weighted average Partnership exchangeable units
|
194
|
|
|
216
|
|
|
226
|
|
Earnings per unit - basic and diluted:
|
|
|
|
|
|
Class A common units (a)
|
$
|
3.18
|
|
|
$
|
3.03
|
|
|
$
|
3.10
|
|
Partnership exchangeable units (a)
|
$
|
2.40
|
|
|
$
|
2.46
|
|
|
$
|
2.59
|
|
|
|
(a)
|
Earnings per unit may not recalculate exactly as it is calculated based on unrounded numbers.
|
Note 5. Property and Equipment, net
Property and equipment, net, consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Land
|
$
|
1,006
|
|
|
$
|
998
|
|
Buildings and improvements
|
1,148
|
|
|
1,145
|
|
Restaurant equipment
|
109
|
|
|
99
|
|
Furniture, fixtures, and other
|
210
|
|
|
182
|
|
Finance leases
|
245
|
|
|
257
|
|
Construction in progress
|
35
|
|
|
19
|
|
|
2,753
|
|
|
2,700
|
|
Accumulated depreciation and amortization
|
(746
|
)
|
|
(704
|
)
|
Property and equipment, net
|
$
|
2,007
|
|
|
$
|
1,996
|
|
Depreciation and amortization expense on property and equipment totaled $136 million for 2019, $148 million for 2018 and $150 million for 2017.
Included in our property and equipment, net at December 31, 2019 and 2018 are $222 million and $180 million, respectively, of assets leased under finance leases (mostly buildings and improvements), net of accumulated depreciation and amortization of $23 million and $77 million, respectively.
Note 6. Intangible Assets, net and Goodwill
Intangible assets, net and goodwill consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Identifiable assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Franchise agreements
|
$
|
720
|
|
|
$
|
(225
|
)
|
|
$
|
495
|
|
|
$
|
705
|
|
|
$
|
(194
|
)
|
|
$
|
511
|
|
Favorable leases (a)
|
127
|
|
|
(65
|
)
|
|
62
|
|
|
407
|
|
|
(200
|
)
|
|
207
|
|
Subtotal
|
847
|
|
|
(290
|
)
|
|
557
|
|
|
1,112
|
|
|
(394
|
)
|
|
718
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Tim Hortons brand
|
$
|
6,534
|
|
|
$
|
—
|
|
|
$
|
6,534
|
|
|
$
|
6,259
|
|
|
$
|
—
|
|
|
$
|
6,259
|
|
Burger King brand
|
2,117
|
|
|
—
|
|
|
2,117
|
|
|
2,131
|
|
|
—
|
|
|
2,131
|
|
Popeyes brand
|
1,355
|
|
|
—
|
|
|
1,355
|
|
|
1,355
|
|
|
—
|
|
|
1,355
|
|
Subtotal
|
10,006
|
|
|
—
|
|
|
10,006
|
|
|
9,745
|
|
|
—
|
|
|
9,745
|
|
Intangible assets, net
|
|
|
|
|
$
|
10,563
|
|
|
|
|
|
|
$
|
10,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
Tim Hortons segment
|
$
|
4,207
|
|
|
|
|
|
|
$
|
4,038
|
|
|
|
|
|
Burger King segment
|
598
|
|
|
|
|
|
|
602
|
|
|
|
|
|
Popeyes segment
|
846
|
|
|
|
|
|
|
846
|
|
|
|
|
|
Total
|
$
|
5,651
|
|
|
|
|
|
|
$
|
5,486
|
|
|
|
|
|
|
|
(a)
|
The decrease in favorable leases primarily reflects the reclassification of favorable leases where we are the lessee to operating lease right-of-use assets in connection with our transition to ASC 842. See Note 10, Leases.
|
Amortization expense on intangible assets totaled $44 million for 2019, $70 million for 2018, and $72 million for 2017. The change in the brands and goodwill balances during 2019 was due principally to the impact of foreign currency translation.
As of December 31, 2019, the estimated future amortization expense on identifiable assets subject to amortization is as follows (in millions):
|
|
|
|
|
Twelve-months ended December 31,
|
Amount
|
2020
|
$
|
44
|
|
2021
|
41
|
|
2022
|
40
|
|
2023
|
38
|
|
2024
|
36
|
|
Thereafter
|
358
|
|
Total
|
$
|
557
|
|
Note 7. Equity Method Investments
The aggregate carrying amount of our equity method investments was $266 million and $259 million as of December 31, 2019 and 2018, respectively, and is included as a component of Other assets, net in our consolidated balance sheets. TH and BK both have equity method investments. PLK does not have any equity method investments.
With respect to our TH business, the most significant equity method investment is our 50.0% joint venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. Distributions received from this joint venture were $13 million, $13 million and $12 million during 2019, 2018 and 2017, respectively.
The aggregate market value of our 15.4% equity interest in Carrols Restaurant Group, Inc. (“Carrols”) based on the quoted market price on December 31, 2019 is approximately $66 million. The aggregate market value of our 9.8% equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on December 31, 2019 is approximately $99 million. No quoted market prices are available for our other equity method investments.
We have equity interests in entities that own or franchise Tim Hortons or Burger King restaurants. Franchise and property revenue recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Revenues from affiliates:
|
|
|
|
|
|
Royalties
|
$
|
345
|
|
|
$
|
310
|
|
|
$
|
175
|
|
Property revenues
|
33
|
|
|
36
|
|
|
27
|
|
Franchise fees and other revenue
|
10
|
|
|
11
|
|
|
26
|
|
Total
|
$
|
388
|
|
|
$
|
357
|
|
|
$
|
228
|
|
We recognized rent expense associated with the TIMWEN Partnership of $19 million, $20 million, and $20 million during 2019, 2018 and 2017, respectively.
At December 31, 2019 and 2018, we had $47 million and $41 million, respectively, of accounts receivable from our equity method investments which were recorded in accounts and notes receivable, net in our consolidated balance sheets.
(Income) loss from equity method investments reflects our share of investee net income or loss, non-cash dilution gains or losses from changes in our ownership interests in equity method investees and basis difference amortization. We recorded increases to the carrying value of our equity method investment balances and non-cash dilution gains in the amounts of $11 million and $20 million during 2019 and 2018, respectively. No non-cash dilution gains were recorded during 2017. The dilution gains resulted from the issuance of capital stock by our equity method investees, which reduced our ownership interests in these equity method investments. The dilution gains we recorded in connection with the issuance of capital stock reflect adjustments to the differences between the amount of underlying equity in the net assets of equity method investees before and after their issuance of capital stock.
Note 8. Other Accrued Liabilities and Other Liabilities
Other accrued liabilities (current) and other liabilities, net (non-current) consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Current:
|
|
|
|
Dividend payable
|
$
|
232
|
|
|
$
|
207
|
|
Interest payable
|
71
|
|
|
87
|
|
Accrued compensation and benefits
|
57
|
|
|
69
|
|
Taxes payable
|
126
|
|
|
113
|
|
Deferred income
|
35
|
|
|
27
|
|
Accrued advertising expenses
|
40
|
|
|
30
|
|
Restructuring and other provisions
|
8
|
|
|
11
|
|
Current portion of operating lease liabilities (a)
|
126
|
|
|
—
|
|
Other
|
95
|
|
|
93
|
|
Other accrued liabilities
|
$
|
790
|
|
|
$
|
637
|
|
Non-current:
|
|
|
|
Taxes payable
|
$
|
579
|
|
|
$
|
493
|
|
Contract liabilities (see Note 16)
|
541
|
|
|
486
|
|
Derivatives liabilities
|
341
|
|
|
179
|
|
Unfavorable leases (b)
|
103
|
|
|
192
|
|
Accrued pension
|
65
|
|
|
64
|
|
Accrued lease straight-lining liability (b)
|
—
|
|
|
69
|
|
Deferred income
|
25
|
|
|
22
|
|
Other
|
44
|
|
|
42
|
|
Other liabilities, net
|
$
|
1,698
|
|
|
$
|
1,547
|
|
|
|
(a)
|
Represents the current portion of operating lease liabilities recognized in connection with our transition to ASC 842. See Note 10, Leases.
|
|
|
(b)
|
The decreases in unfavorable leases and accrued lease straight-lining liability reflect the reclassification of unfavorable leases and lease straight-lining liability where we are the lessee in the underlying operating lease to the right-of-use assets recorded for the underlying lease in connection with our transition to ASC 842. See Note 10, Leases.
|
Note 9. Long-Term Debt
Long-term debt consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Term Loan B (due November 19, 2026)
|
$
|
5,350
|
|
|
$
|
6,338
|
|
Term Loan A (due October 7, 2024)
|
750
|
|
|
—
|
|
2015 4.625% Senior Notes (due January 15, 2022)
|
—
|
|
|
1,250
|
|
2017 4.25% Senior Notes (due May 15, 2024)
|
1,500
|
|
|
1,500
|
|
2019 3.875% Senior Notes (due January 15, 2028)
|
750
|
|
|
—
|
|
2017 5.00% Senior Notes (due October 15, 2025)
|
2,800
|
|
|
2,800
|
|
2019 4.375% Senior Notes (due January 15, 2028)
|
750
|
|
|
—
|
|
Other (a)
|
81
|
|
|
150
|
|
Less: unamortized deferred financing costs and deferred issuance discount
|
(148
|
)
|
|
(145
|
)
|
Total debt, net
|
11,833
|
|
|
11,893
|
|
Less: current maturities of debt
|
(74
|
)
|
|
(70
|
)
|
Total long-term debt
|
$
|
11,759
|
|
|
$
|
11,823
|
|
|
|
(a)
|
The decrease in Other reflects the derecognition of obligations associated with build-to-suit leases recorded under the Previous Standard. Liabilities associated with build-to-suit leases were remeasured and recorded as finance lease liabilities in conjunction with our transition to ASC 842.
|
Credit Facilities
On September 6, 2019, two of our subsidiaries (the "Borrowers") entered into a fourth incremental facility amendment (the "Fourth Incremental Amendment") to the credit agreement governing our senior secured term loan facilities (the "Term Loan Facilities") and our senior secured revolving credit facility (including revolving loans, swingline loans and letters of credit) (the "Revolving Credit Facility" and together with the Term Loan Facilities, the "Credit Facilities"). Under the Fourth Incremental Amendment, (i) we obtained a new term loan in the aggregate principal amount of $750 million (the "Term Loan A") with a maturity date of October 7, 2024 (subject to earlier maturity in specified circumstances), (ii) the interest rate applicable to the Term Loan A and Revolving Credit Facility is, at our option, either (a) a base rate, subject to a floor of 1.00%, plus an applicable margin varying from 0.00% to 0.50%, or (b) a Eurocurrency rate, subject to a floor of 0.00%, plus an applicable margin varying between 0.75% and 1.50%, in each case, determined by reference to a net first lien leverage based pricing grid, (iii) the aggregate principal amount of the commitments under our Revolving Credit Facility was increased to $1,000 million, (iv) the maturity date of the Revolving Credit Facility was extended from October 13, 2022 to October 7, 2024 (subject to earlier maturity in specified circumstances), and (v) the commitment fee on the unused portion of the Revolving Credit Facility was decreased from 0.25% to 0.15%. At December 31, 2019, the weighted average interest rate on the Term Loan A was 3.05%. The principal amount of the Term Loan A amortizes in quarterly installments equal to $5 million until October 7, 2022 and thereafter in quarterly installments equal to $9 million until maturity, with the balance payable at maturity. The Term Loan A will require compliance with a net first lien leverage ratio (described below). Except as described herein, the Fourth Incremental Amendment did not materially change the terms of the Credit Facilities. In connection with the Fourth Incremental Amendment, we capitalized approximately $7 million in debt issuance costs.
Prior to obtaining the Term Loan A, our Credit Facilities included only one senior secured term loan facility (the "Term Loan B"). In September 2019, we voluntarily prepaid $235 million principal amount of our Term Loan B and, in connection with this prepayment, we recorded a loss on early extinguishment of debt of $4 million that primarily reflects the write-off of related unamortized debt issuance costs and discounts.
On November 19, 2019, the Borrowers entered into a fourth amendment (the "Fourth Amendment") to the credit agreement governing our Credit Facilities. Under the Fourth Amendment, (i) the outstanding aggregate principal amount under our Term Loan B was decreased to $5,350 million as a result of a repayment of $720 million from a portion of the net proceeds of the 2019 4.375% Senior Notes (defined below), (ii) the interest rate applicable to our Term Loan B was reduced to, at our option, either (a) a base rate, subject to a floor of 1.00%, plus an applicable margin of 0.75%, or (b) a Eurocurrency rate, subject to a floor of 0.00%, plus an applicable margin of 1.75%, and (iii) the maturity date of our Term Loan B was extended from February 17, 2024 to November 19, 2026. At December 31, 2019, the weighted average interest rate on the Term Loan B was 3.55%. The principal amount of the Term Loan B amortizes in quarterly installments equal to $13 million until maturity, with the balance payable at maturity. Except as described herein, the Fourth Amendment did not materially change the terms of the Credit Facilities.
In connection with the Fourth Amendment, we capitalized approximately $24 million in debt issuance costs and original issue discount and recorded a loss on early extinguishment of debt of $16 million that primarily reflects the write-off of related unamortized debt issuance costs and discounts and fees incurred.
Revolving Credit Facility
As of December 31, 2019, we had no amounts outstanding under our Revolving Credit Facility. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or to make distributions to RBI for RBI to repurchase its common shares, to repurchase Class B exchangeable limited partnership units, to fund acquisitions or capital expenditures and for other general corporate purposes. We have a $125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. Under the Fourth Incremental Amendment, the interest rate applicable to amounts drawn under each letter of credit decreased from a range of 1.25% to 2.00% to a range of 0.75% to 1.50%, depending on our net first lien leverage ratio. As of December 31, 2019, we had $2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability was $998 million.
Obligations under the Credit Facilities are guaranteed on a senior secured basis, jointly and severally, by the direct parent company of one of the Borrowers and substantially all of its Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Worldwide, Inc., Popeyes Louisiana Kitchen, Inc. and substantially all of their respective Canadian and U.S. subsidiaries (the “Credit Guarantors”). Amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future property (subject to certain exceptions) of each Borrower and Credit Guarantor.
2017 4.25% Senior Notes
During 2017, the Borrowers entered into 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”). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 2017 4.25% Senior Notes, together with other sources of liquidity, were used to redeem all of the outstanding RBI Class A 9.0% cumulative compounding perpetual voting preferred shares (see Note 13, Partnership Preferred Units) and for other general corporate purposes. In connection with the issuance of the 2017 4.25% Senior Notes, we capitalized approximately $13 million in debt issuance costs.
Obligations under the 2017 4.25% Senior Notes are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of the Borrowers' Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Worldwide, Inc., Popeyes Louisiana Kitchen, Inc. and substantially all of their respective Canadian and U.S. subsidiaries (the “Note Guarantors”). The 2017 4.25% Senior Notes are first lien senior secured obligations and rank equal in right of payment with all of the existing and future senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities.
Our 2017 4.25% Senior Notes may be redeemed in whole or in part, on or after May 15, 2020 at the redemption prices set forth in the 2017 4.25% Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 2017 4.25% Senior Notes Indenture also contains redemption provisions related to tender offers, change of control and equity offerings, among others.
2019 3.875% Senior Notes
On September 24, 2019, the Borrowers entered into 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"). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 2019 3.875% Senior Notes and a portion of the net proceeds from the Term Loan A were used to redeem the entire outstanding principal balance of $1,250 million of 4.625% first lien secured notes due January 15, 2022 (the "2015 4.625% Senior Notes") and to pay related fees and expenses. In connection with the issuance of the 2019 3.875% Senior Notes, we capitalized approximately $10 million in debt issuance costs. In connection with the redemption of the entire outstanding principal balance of the 2015 4.625% Senior Notes, we recorded a loss on early extinguishment of debt of $3 million that primarily reflects the write-off of related unamortized debt issuance costs.
Obligations under the 2019 3.875% Senior Notes are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of the Borrowers' Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Worldwide, Inc., Popeyes Louisiana Kitchen, Inc. and substantially all of their respective Canadian and U.S. subsidiaries (the "Note Guarantors"). The 2019 3.875% Senior Notes are first lien senior secured obligations and rank equal in right of payment with all of the existing and future first lien senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities.
Our 2019 3.875% Senior Notes may be redeemed in whole or in part, on or after September 15, 2022 at the redemption prices set forth in the 2019 3.875% Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 2019 3.875% Senior Notes Indenture also contains redemption provisions related to tender offers, change of control and equity offerings, among others.
2017 5.00% Senior Notes
During 2017, the Borrowers entered into an indenture (the “2017 5.00% Senior Notes Indenture”) in connection with the issuance of $2,800 million of 5.00% second lien senior notes due October 15, 2025 (the “2017 5.00% Senior Notes”). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 2017 5.00% Senior Notes were used to redeem the entire outstanding principal balance of $2,250 million of 6.00% second lien secured notes due April 1, 2022 (the “2014 6.00% Senior Notes”), pay related redemption premiums, fees and expenses, and for general corporate purposes. In connection with the issuance of the 2017 5.00% Senior Notes, we capitalized approximately $15 million in debt issuance costs. In connection with the full redemption of the 2014 6.00% Senior Notes, we recorded a loss on early extinguishment of debt of $102 million that primarily reflects the payment of premiums to redeem the notes and the write-off of unamortized debt issuance costs.
Obligations under the 2017 5.00% Senior Notes are guaranteed on a second priority senior secured basis, jointly and severally, by the Note Guarantors. The 2017 5.00% Senior Notes are second lien senior secured obligations and rank equal in right of payment with all of the existing and future senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities.
Our 2017 5.00% Senior Notes may be redeemed in whole or in part, on or after October 15, 2020 at the redemption prices set forth in the 2017 5.00% Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 2017 5.00% Senior Notes Indenture also contains redemption provisions related to tender offers, change of control and equity offerings, among others.
2019 4.375% Senior Notes
On November 19, 2019, the Borrowers entered into an indenture (the “2019 4.375% Senior Notes Indenture”) 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”). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 2019 4.375% Senior Notes, together with cash on hand, were used to repay $720 million of the Term Loan B outstanding aggregate principal balance and to pay related fees and expenses in connection with the Fourth Amendment. In connection with the issuance of the 2019 4.375% Senior Notes, we capitalized approximately $6 million in debt issuance costs.
Obligations under the 2019 4.375% Senior Notes are guaranteed on a second priority senior secured basis, jointly and severally, by the Note Guarantors. The 2019 4.375% Senior Notes are second lien senior secured obligations and rank equal in right of payment with all of the existing and future senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities.
Our 2019 4.375% Senior Notes may be redeemed in whole or in part, on or after November 15, 2022 at the redemption prices set forth in the 2019 4.375% Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 2019 4.375% Senior Notes Indenture also contains redemption provisions related to tender offers, change of control and equity offerings, among others.
Restrictions and Covenants
Our Credit Facilities, 2017 4.25% Senior Notes Indenture, 2019 3.875% Senior Notes Indenture, 2017 5.00% Senior Notes Indenture and 2019 4.375% Senior Notes Indenture contain a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability and the ability of certain of our subsidiaries to: incur additional indebtedness; incur liens; engage in mergers, consolidations, liquidations and dissolutions; sell assets; pay dividends and make other payments in respect of capital stock; make investments, loans and advances; pay or modify the terms of certain indebtedness; and engage in certain transactions with affiliates. In addition, under the Credit Facilities, the Borrowers are not permitted to exceed a first lien senior secured leverage ratio of 6.50 to 1.00 when, as of the end of any fiscal quarter beginning with the first fiscal quarter of 2020, (1) any amounts are outstanding under the Term Loan A and/or (2) the sum of (i) the amount of letters of credit outstanding exceeding $50 million (other than those that are cash collateralized); (ii) outstanding amounts under the Revolving Credit Facility and (iii) outstanding amounts of swing line loans, exceeds 30.0% of the commitments under the Revolving Credit Facility.
The restrictions under the Credit Facilities, the 2017 4.25% Senior Notes Indenture, the 2019 3.875% Senior Notes Indenture, the 2017 5.00% Senior Notes Indenture, and the 2019 4.375% Senior Notes Indenture have resulted in substantially all of our consolidated assets being restricted.
As of December 31, 2019, we were in compliance with applicable debt covenants under the Credit Facilities, 2017 4.25% Senior Notes Indenture, 2019 3.875% Senior Notes Indenture, 2017 5.00% Senior Notes Indenture and 2019 4.375% Senior Notes Indenture and there were no limitations on our ability to draw on the remaining availability under our Revolving Credit Facility.
TH Facility
One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$225 million (increased from C$100 million during 2019) with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40% or the Prime Rate plus an applicable margin equal to 0.40%, at our option. Obligations under the TH Facility are guaranteed by three of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of December 31, 2019, we had outstanding C$100 million under the TH Facility with a weighted average interest rate of 3.45% and we are permitted to draw down on the TH Facility until May 23, 2020.
Other
On March 27, 2017, we repaid $156 million of debt assumed in connection with the Popeyes Acquisition. Additionally, $36 million of Tim Hortons Series 1 notes were repaid on June 1, 2017, the original maturity date.
Debt Issuance Costs
During 2019 and 2017, we incurred aggregate deferred financing costs of $50 million and $63 million, respectively. No significant deferred financing costs were incurred in 2018.
Loss on Early Extinguishment of Debt
During 2019, we recorded a $23 million loss on early extinguishment of debt, which primarily reflects the write-off of unamortized debt issuance costs and discounts in connection with the prepayment and refinancing of the Term Loan B and the redemption of our 2015 4.625% Senior Notes. During 2017, we recorded a $122 million loss on early extinguishment of debt, which primarily reflects the payment of premiums to redeem our 2014 6.00% Senior Notes and the write-off of unamortized debt issuance costs and discounts in connection with the refinancing of our Term Loan Facility and the redemption of our 2014 6.00% Senior Notes.
Maturities
The aggregate maturities of our long-term debt as of December 31, 2019 are as follows (in millions):
|
|
|
|
|
Year Ended December 31,
|
Principal Amount
|
2020
|
$
|
74
|
|
2021
|
75
|
|
2022
|
81
|
|
2023
|
98
|
|
2024
|
2,212
|
|
Thereafter
|
9,441
|
|
Total
|
$
|
11,981
|
|
Interest Expense, net
Interest expense, net consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Debt (a)
|
$
|
503
|
|
|
$
|
498
|
|
|
$
|
484
|
|
Finance lease obligations
|
20
|
|
|
23
|
|
|
21
|
|
Amortization of deferred financing costs and debt issuance discount
|
29
|
|
|
29
|
|
|
33
|
|
Interest income
|
(20
|
)
|
|
(15
|
)
|
|
(26
|
)
|
Interest expense, net
|
$
|
532
|
|
|
$
|
535
|
|
|
$
|
512
|
|
|
|
(a)
|
Amount includes $70 million and $60 million benefit during 2019 and 2018, respectively, related to the amortization of the Excluded Component as defined in Note 12, Derivatives.
|
Note 10. Leases
As of December 31, 2019, we leased or subleased 5,272 restaurant properties to franchisees and 182 non-restaurant properties to third parties under operating leases and direct financing leases where we are the lessor. Initial lease terms generally range from 10 to 20 years. Most leases to franchisees provide for fixed monthly payments and many provide for future rent escalations and renewal options. Certain leases also include provisions for variable rent, determined as a percentage of sales, generally when annual sales exceed specific levels. Lessees typically bear the cost of maintenance, insurance and property taxes.
We lease land, buildings, equipment, office space and warehouse space from third parties. Land and building leases generally have an initial term of 10 to 20 years, while land-only leases generally have an initial term of 20 years, and most leases provide for fixed monthly payments. Many of these leases provide for future rent escalations and renewal options. Certain leases also include provisions for variable rent payments, determined as a percentage of sales, generally when annual sales exceed specified levels. Most leases also obligate us to pay, as lessee, variable lease cost related to maintenance, insurance and property taxes.
We transitioned to ASC 842 on January 1, 2019 on a modified retrospective basis using the effective date transition method. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases with lease terms of more than 12 months and amends various other aspects of accounting for leases by lessees and lessors. In connection with our transition to ASC 842, we elected the package of practical expedients under which we did not reassess the classification of our existing leases, reevaluate whether any expired or existing contracts are or contain leases or reassess initial direct costs under the new guidance. We also elected lessee and lessor practical expedients to not separate non-lease components comprised of maintenance from lease components for real estate leases that commenced prior to our transition to ASC 842, as well as for real estate leases that commence or that are modified subsequent to our transition to ASC 842. We did not elect the practical expedient that permitted a reassessment of lease terms for existing leases.
Financial Statement Impact of Transition to ASC 842
Transition Impact on January 1, 2019 Condensed Consolidated Balance Sheet
Our transition to ASC 842 represents a change in accounting principle. The $21 million cumulative effect of our transition to ASC 842 is reflected as an adjustment to January 1, 2019 Partners' capital.
Our transition to ASC 842 resulted in the following adjustments to our consolidated balance sheet as of January 1, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Total
|
|
Adjusted
|
|
December 31, 2018
|
|
Adjustments
|
|
January 1, 2019
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
913
|
|
|
$
|
—
|
|
|
$
|
913
|
|
Accounts and notes receivable, net
|
452
|
|
|
—
|
|
|
452
|
|
Inventories, net
|
75
|
|
|
—
|
|
|
75
|
|
Prepaids and other current assets
|
60
|
|
|
—
|
|
|
60
|
|
Total current assets
|
1,500
|
|
|
—
|
|
|
1,500
|
|
Property and equipment, net
|
1,996
|
|
|
26
|
|
(a)
|
2,022
|
|
Operating lease assets, net
|
—
|
|
|
1,143
|
|
(b)
|
1,143
|
|
Intangible assets, net
|
10,463
|
|
|
(133
|
)
|
(c)
|
10,330
|
|
Goodwill
|
5,486
|
|
|
—
|
|
|
5,486
|
|
Net investment in property leased to franchisees
|
54
|
|
|
—
|
|
|
54
|
|
Other assets, net
|
642
|
|
|
—
|
|
|
642
|
|
Total assets
|
$
|
20,141
|
|
|
$
|
1,036
|
|
|
$
|
21,177
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts and drafts payable
|
$
|
513
|
|
|
$
|
—
|
|
|
$
|
513
|
|
Other accrued liabilities
|
637
|
|
|
114
|
|
(d)
|
751
|
|
Gift card liability
|
167
|
|
|
—
|
|
|
167
|
|
Current portion of long term debt and finance leases
|
91
|
|
|
—
|
|
|
91
|
|
Total current liabilities
|
1,408
|
|
|
114
|
|
|
1,522
|
|
Term debt, net of current portion
|
11,823
|
|
|
(65
|
)
|
(e)
|
11,758
|
|
Finance leases, net of current portion
|
226
|
|
|
62
|
|
(e)
|
288
|
|
Operating lease liabilities, net of current portion
|
—
|
|
|
1,028
|
|
(f)
|
1,028
|
|
Other liabilities, net
|
1,547
|
|
|
(132
|
)
|
(g)
|
1,415
|
|
Deferred income taxes, net
|
1,519
|
|
|
8
|
|
(h)
|
1,527
|
|
Total liabilities
|
16,523
|
|
|
1,015
|
|
|
17,538
|
|
Partners' capital:
|
|
|
|
|
|
Class A common units
|
4,323
|
|
|
12
|
|
(i)
|
4,335
|
|
Partnership exchangeable units
|
730
|
|
|
9
|
|
(i)
|
739
|
|
Accumulated other comprehensive income (loss)
|
(1,437
|
)
|
|
—
|
|
|
(1,437
|
)
|
Total Partners' capital
|
3,616
|
|
|
21
|
|
|
3,637
|
|
Noncontrolling interests
|
2
|
|
|
—
|
|
|
2
|
|
Total equity
|
3,618
|
|
|
21
|
|
|
3,639
|
|
Total liabilities and equity
|
$
|
20,141
|
|
|
$
|
1,036
|
|
|
$
|
21,177
|
|
|
|
(a)
|
Represents the net change in assets recorded in connection with build-to-suit leases.
|
|
|
(b)
|
Represents the capitalization of operating lease right-of-use (“ROU”) assets equal to the amount of recognized operating lease liability, adjusted by the net carrying amounts of related favorable lease assets and unfavorable lease liabilities in which we are the lessee and straight-line rent accruals, which were reclassified to operating lease ROU assets.
|
|
|
(c)
|
Represents the net carrying amount of favorable lease assets associated with leases in which we are the lessee, which have been reclassified to operating lease ROU assets.
|
|
|
(d)
|
Represents the current portion of operating lease liabilities.
|
|
|
(e)
|
Represents the net change in liabilities recorded in connection with build-to-suit leases.
|
|
|
(f)
|
Represents the recognition of operating lease liabilities, net of current portion.
|
|
|
(g)
|
Represents the net carrying amount of unfavorable lease liabilities associated with leases in which we are the lessee and $64 million of straight-line rent accruals which have been reclassified to operating lease ROU assets.
|
|
|
(h)
|
Represents the net tax effects of the adjustments noted above, with a corresponding adjustment to Partners’ capital.
|
|
|
(i)
|
Represents net change in assets and liabilities recorded in connection with build-to-suit leases and the tax effects of adjustments noted above.
|
Partnership as Lessor
Assets leased to franchisees and others under operating leases where we are the lessor and which are included within our property and equipment, net are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Land
|
$
|
905
|
|
|
$
|
906
|
|
Buildings and improvements
|
1,142
|
|
|
1,175
|
|
Restaurant equipment
|
18
|
|
|
17
|
|
|
2,065
|
|
|
2,098
|
|
Accumulated depreciation and amortization
|
(472
|
)
|
|
(475
|
)
|
Property and equipment leased, net
|
$
|
1,593
|
|
|
$
|
1,623
|
|
Our net investment in direct financing leases is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
ASC 842
|
|
Previous Standard
|
Future rents to be received:
|
|
|
|
Future minimum lease receipts
|
$
|
49
|
|
|
$
|
60
|
|
Contingent rents (a)
|
19
|
|
|
29
|
|
Estimated unguaranteed residual value
|
15
|
|
|
16
|
|
Unearned income
|
(26
|
)
|
|
(35
|
)
|
|
57
|
|
|
70
|
|
Current portion included within accounts receivables
|
(9
|
)
|
|
(16
|
)
|
Net investment in property leased to franchisees
|
$
|
48
|
|
|
$
|
54
|
|
|
|
(a)
|
Amounts represent estimated contingent rents recorded in connection with the acquisition method of accounting.
|
Property revenues are comprised primarily of rental income from operating leases and earned income on direct financing leases with franchisees as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
ASC 842
|
|
Previous Standard
|
Rental income:
|
|
|
|
|
|
Minimum lease payments
|
$
|
448
|
|
|
$
|
454
|
|
|
$
|
464
|
|
Variable lease payments
|
370
|
|
|
273
|
|
|
284
|
|
Amortization of favorable and unfavorable income lease contracts, net
|
7
|
|
|
8
|
|
|
8
|
|
Subtotal - lease income from operating leases
|
825
|
|
|
735
|
|
|
756
|
|
Earned income on direct financing leases
|
8
|
|
|
9
|
|
|
9
|
|
Total property revenues
|
$
|
833
|
|
|
$
|
744
|
|
|
$
|
765
|
|
Partnership as Lessee
Lease cost, rent expense and other information associated with these lease commitments is as follows (in millions):
Lease Cost (Income)
|
|
|
|
|
|
2019
|
|
ASC 842
|
Operating lease cost
|
$
|
210
|
|
Operating lease variable lease cost
|
198
|
|
Finance lease cost:
|
|
Amortization of right-of-use assets
|
27
|
|
Interest on lease liabilities
|
20
|
|
Sublease income
|
(631
|
)
|
Total lease cost (income)
|
$
|
(176
|
)
|
Rent Expense
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Previous Standard
|
Rental expense:
|
|
|
|
Minimum
|
$
|
201
|
|
|
$
|
198
|
|
Contingent
|
71
|
|
|
71
|
|
Amortization of favorable and unfavorable payable lease contracts, net
|
9
|
|
|
10
|
|
Total rental expense (a)
|
$
|
281
|
|
|
$
|
279
|
|
|
|
(a)
|
Amounts include rental expense related to properties subleased to franchisees of $263 million for 2018 and 2017.
|
Lease Term and Discount Rate as of December 31, 2019
|
|
|
|
|
Weighted-average remaining lease term (in years):
|
|
|
Operating leases
|
|
10.9 years
|
|
Finance leases
|
|
11.2 years
|
|
Weighted-average discount rate:
|
|
|
Operating leases
|
|
6.2
|
%
|
Finance leases
|
|
7.1
|
%
|
Other Information for 2019
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
194
|
|
Operating cash flows from finance leases
|
|
$
|
20
|
|
Financing cash flows from finance leases
|
|
$
|
26
|
|
Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets:
|
|
|
Right-of-use assets obtained in exchange for new finance lease obligations
|
|
$
|
18
|
|
Right-of-use assets obtained in exchange for new operating lease obligations
|
|
$
|
163
|
|
As of December 31, 2019, future minimum lease receipts and commitments are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Receipts
|
|
Lease Commitments (a)
|
|
Direct
Financing
Leases
|
|
Operating
Leases
|
|
Finance
Leases
|
|
Operating
Leases
|
2020
|
$
|
9
|
|
|
$
|
429
|
|
|
$
|
46
|
|
|
$
|
204
|
|
2021
|
7
|
|
|
406
|
|
|
45
|
|
|
192
|
|
2022
|
5
|
|
|
383
|
|
|
43
|
|
|
179
|
|
2023
|
5
|
|
|
359
|
|
|
40
|
|
|
164
|
|
2024
|
4
|
|
|
327
|
|
|
39
|
|
|
149
|
|
Thereafter
|
19
|
|
|
1,672
|
|
|
249
|
|
|
872
|
|
Total minimum receipts / payments
|
$
|
49
|
|
|
$
|
3,576
|
|
|
462
|
|
|
1,760
|
|
Less amount representing interest
|
|
|
|
|
(147
|
)
|
|
(545
|
)
|
Present value of minimum lease payments
|
|
|
|
|
315
|
|
|
1,215
|
|
Current portion of lease obligations
|
|
|
|
|
(27
|
)
|
|
(126
|
)
|
Long-term portion of lease obligations
|
|
|
|
|
$
|
288
|
|
|
$
|
1,089
|
|
|
|
(a)
|
Minimum lease payments have not been reduced by minimum sublease rentals of $2,397 million due in the future under non-cancelable subleases.
|
As of December 31, 2018, future minimum lease receipts and commitments are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Receipts
|
|
Lease Commitments (a)
|
|
Direct
Financing
Leases
|
|
Operating
Leases
|
|
Finance
Leases
|
|
Operating
Leases
|
2019
|
$
|
14
|
|
|
$
|
416
|
|
|
$
|
38
|
|
|
$
|
183
|
|
2020
|
10
|
|
|
388
|
|
|
36
|
|
|
172
|
|
2021
|
7
|
|
|
360
|
|
|
34
|
|
|
158
|
|
2022
|
5
|
|
|
331
|
|
|
33
|
|
|
145
|
|
2023
|
5
|
|
|
306
|
|
|
30
|
|
|
130
|
|
Thereafter
|
19
|
|
|
1,704
|
|
|
201
|
|
|
831
|
|
Total minimum receipts / payments
|
$
|
60
|
|
|
$
|
3,505
|
|
|
372
|
|
|
$
|
1,619
|
|
Less amount representing interest
|
|
|
|
|
(125
|
)
|
|
|
Present value of minimum finance lease payments
|
|
|
|
|
247
|
|
|
|
Current portion of finance lease obligation
|
|
|
|
|
(21
|
)
|
|
|
Long-term portion of finance lease obligation
|
|
|
|
|
$
|
226
|
|
|
|
|
|
(a)
|
Minimum lease commitments have not been reduced by minimum sublease rentals of $2,290 million due in the future under non-cancelable subleases.
|
Note 11. Income Taxes
In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that significantly revises the U.S. tax code generally effective January 1, 2018 by, among other changes, lowering the corporate income tax rate from 35% to 21%, limiting deductibility of interest expense and performance based incentive compensation and implementing a modified territorial tax system. As a Canadian entity, we generally would be classified as a foreign entity (and, therefore, a non-U.S. tax resident) under general rules of U.S. federal income taxation. However, we have subsidiaries subject to U.S. federal income taxation and therefore the Tax Act impacted our consolidated results of operations beginning 2017 and is expected to continue to impact our consolidated results of operations in future periods.
The impacts to our consolidated statement of operations consist of the following (the “Tax Act Impact”):
|
|
•
|
A provisional benefit of $420 million recorded in our provision from income taxes for 2017 and a final favorable adjustment of $9 million recorded for 2018, as a result of the remeasurement of net deferred tax liabilities.
|
|
|
•
|
Provisional charges of $103 million recorded in 2017 and a final favorable adjustment of $3 million recorded in 2018, related to certain deductions allowed to be carried forward before the Tax Act, which potentially may not be carried forward and deductible under the Tax Act.
|
|
|
•
|
A provisional estimate for a one-time transitional repatriation tax on unremitted foreign earnings (the “Transition Tax”) of $119 million recorded in 2017, most of which had been previously accrued with respect to certain undistributed foreign earnings, and a final favorable adjustment of $15 million (primarily related to utilization of foreign tax credits) recorded in 2018.
|
In accordance with Staff Accounting Bulletin No. 118 issued by the staff of the SEC and as discussed in the bullet points above, we completed our analysis in 2018 and made adjustments to provisional amounts during 2018 as discrete items in the quarter such estimates were finalized.
Companies subject to the Global Intangible Low-Taxed Income provision (GILTI) have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for outside basis temporary differences expected to reverse as GILTI. The Company has elected to account for GILTI as a period cost.
The ultimate impact of the Tax Act on our effective tax rate in future periods will depend on interpretations and regulatory changes from the Internal Revenue Service, the SEC, the FASB and various tax jurisdictions, or actions we may take.
Income (loss) before income taxes, classified by source of income (loss), is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Canadian
|
$
|
685
|
|
|
$
|
1,111
|
|
|
$
|
1,223
|
|
Foreign
|
767
|
|
|
271
|
|
|
(122
|
)
|
Income before income taxes
|
$
|
1,452
|
|
|
$
|
1,382
|
|
|
$
|
1,101
|
|
Income tax (benefit) expense attributable to income from continuing operations consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Canadian
|
$
|
47
|
|
|
$
|
25
|
|
|
$
|
438
|
|
U.S. Federal
|
122
|
|
|
95
|
|
|
113
|
|
U.S. state, net of federal income tax benefit
|
20
|
|
|
17
|
|
|
3
|
|
Other Foreign
|
94
|
|
|
72
|
|
|
54
|
|
|
$
|
283
|
|
|
$
|
209
|
|
|
$
|
608
|
|
Deferred:
|
|
|
|
|
|
Canadian
|
$
|
43
|
|
|
$
|
78
|
|
|
$
|
(302
|
)
|
U.S. Federal
|
8
|
|
|
(65
|
)
|
|
(473
|
)
|
U.S. state, net of federal income tax benefit
|
—
|
|
|
13
|
|
|
34
|
|
Other Foreign
|
7
|
|
|
3
|
|
|
(1
|
)
|
|
$
|
58
|
|
|
$
|
29
|
|
|
$
|
(742
|
)
|
Income tax expense (benefit)
|
$
|
341
|
|
|
$
|
238
|
|
|
$
|
(134
|
)
|
The statutory rate reconciles to the effective income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Statutory rate
|
26.5
|
%
|
|
26.5
|
%
|
|
26.5
|
%
|
Costs and taxes related to foreign operations
|
5.8
|
|
|
4.2
|
|
|
8.9
|
|
Foreign exchange gain (loss)
|
0.1
|
|
|
(0.1
|
)
|
|
(7.7
|
)
|
Foreign tax rate differential
|
(10.8
|
)
|
|
(6.1
|
)
|
|
(1.9
|
)
|
Change in valuation allowance
|
0.5
|
|
|
3.2
|
|
|
12.0
|
|
Change in accrual for tax uncertainties
|
5.0
|
|
|
0.1
|
|
|
(0.4
|
)
|
Intercompany financing
|
(2.4
|
)
|
|
(4.4
|
)
|
|
(19.5
|
)
|
Impact of Tax Act
|
(0.1
|
)
|
|
(1.9
|
)
|
|
(27.4
|
)
|
Benefit from stock option exercises
|
(2.2
|
)
|
|
(5.0
|
)
|
|
(4.9
|
)
|
Other
|
1.1
|
|
|
0.7
|
|
|
2.3
|
|
Effective income tax rate
|
23.5
|
%
|
|
17.2
|
%
|
|
(12.1
|
)%
|
In a referendum held on May 19, 2019, Swiss voters adopted the Federal Act on Tax Reform and AVS Financing (“TRAF”), under which certain long-standing preferential cantonal tax regimes were abolished effective January 1, 2020. Further in November 2019, the canton of Zug formally adopted the measures of TRAF requiring Partnership to consider the effects of TRAF. Partnership has subsidiaries in the canton of Zug subject to TRAF and therefore the TRAF impacted our consolidated results of operations during 2019 through the remeasurement of net deferred tax liabilities as of December 31, 2019. The amount recorded for the effects of the changes from the TRAF is approximately $16 million, which increased our 2019 effective tax rate by approximately 1.1% (a one-time, non-cash item).
Income tax (benefit) expense allocated to continuing operations and amounts separately allocated to other items was (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Income tax (benefit) expense from continuing operations
|
$
|
341
|
|
|
$
|
238
|
|
|
$
|
(134
|
)
|
Cash flow hedge in accumulated other comprehensive income (loss)
|
(23
|
)
|
|
(2
|
)
|
|
5
|
|
Net investment hedge in accumulated other comprehensive income (loss)
|
(32
|
)
|
|
101
|
|
|
(13
|
)
|
Pension liability in accumulated other comprehensive income (loss)
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
Total
|
$
|
285
|
|
|
$
|
337
|
|
|
$
|
(144
|
)
|
The significant components of deferred income tax (benefit) expense attributable to income from continuing operations are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Deferred income tax (benefit) expense
|
$
|
30
|
|
|
$
|
(14
|
)
|
|
$
|
(449
|
)
|
Change in valuation allowance
|
7
|
|
|
43
|
|
|
133
|
|
Change in effective Canadian income tax rate
|
(1
|
)
|
|
(3
|
)
|
|
—
|
|
Change in effective U.S. federal income tax rate
|
—
|
|
|
(8
|
)
|
|
(433
|
)
|
Change in effective U.S. state income tax rate
|
6
|
|
|
15
|
|
|
4
|
|
Change in effective foreign income tax rate
|
16
|
|
|
(4
|
)
|
|
3
|
|
Total
|
$
|
58
|
|
|
$
|
29
|
|
|
$
|
(742
|
)
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Accounts and notes receivable
|
$
|
4
|
|
|
$
|
5
|
|
Accrued employee benefits
|
48
|
|
|
49
|
|
Unfavorable leases
|
99
|
|
|
123
|
|
Operating lease liabilities
|
332
|
|
|
—
|
|
Liabilities not currently deductible for tax
|
198
|
|
|
176
|
|
Tax loss and credit carryforwards
|
493
|
|
|
509
|
|
Derivatives
|
83
|
|
|
25
|
|
Other
|
3
|
|
|
8
|
|
Total gross deferred tax assets
|
1,260
|
|
|
895
|
|
Valuation allowance
|
(329
|
)
|
|
(325
|
)
|
Net deferred tax assets
|
931
|
|
|
570
|
|
Less deferred tax liabilities:
|
|
|
|
Property and equipment, principally due to differences in depreciation
|
40
|
|
|
43
|
|
Intangible assets
|
1,792
|
|
|
1,734
|
|
Leases
|
88
|
|
|
105
|
|
Operating lease assets
|
325
|
|
|
—
|
|
Statutory impairment
|
28
|
|
|
31
|
|
Outside basis difference
|
42
|
|
|
35
|
|
Total gross deferred tax liabilities
|
2,315
|
|
|
1,948
|
|
Net deferred tax liability
|
$
|
1,384
|
|
|
$
|
1,378
|
|
The valuation allowance had a net increase of $4 million during 2019 primarily due to the change in provisional estimates related to the utilization of foreign tax credits. This increase was partially offset by the utilization of capital losses that had been previously valued.
Changes in the valuation allowance are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
325
|
|
|
$
|
282
|
|
|
$
|
133
|
|
Additions due to acquisition
|
—
|
|
|
—
|
|
|
9
|
|
Change in estimates recorded to deferred income tax expense
|
8
|
|
|
43
|
|
|
133
|
|
Changes from foreign currency exchange rates
|
—
|
|
|
—
|
|
|
6
|
|
Changes in losses and credits
|
(2
|
)
|
|
—
|
|
|
1
|
|
Additions related to other comprehensive income
|
(2
|
)
|
|
—
|
|
|
—
|
|
Ending balance
|
$
|
329
|
|
|
$
|
325
|
|
|
$
|
282
|
|
The gross amount and expiration dates of operating loss and tax credit carry-forwards as of December 31, 2019 are as follows (in millions):
|
|
|
|
|
|
|
|
Amount
|
|
Expiration Date
|
Canadian net operating loss carryforwards
|
$
|
697
|
|
|
2036-2039
|
Canadian capital loss carryforwards
|
975
|
|
|
Indefinite
|
U.S. state net operating loss carryforwards
|
562
|
|
|
2020-2036
|
U.S. foreign tax credits
|
97
|
|
|
2020-2029
|
Other foreign net operating loss carryforwards
|
185
|
|
|
Indefinite
|
Other foreign net operating loss carryforwards
|
80
|
|
|
2020-2039
|
Other foreign capital loss carryforward
|
31
|
|
|
Indefinite
|
Foreign credits
|
1
|
|
|
2020-2036
|
Total
|
$
|
2,628
|
|
|
|
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. We will continue to monitor available evidence and our plans for foreign earnings and expect to continue to provide any applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of amounts not considered permanently reinvested. We are generally permanently reinvested (but for unremitted earnings and profits) in any other potential outside basis differences. A determination of the deferred tax liability on this amount is not practicable due to the complexities, variables and assumptions inherent in the hypothetical calculations. Thus we have not provided taxes, including U.S. federal and state income, foreign income, or foreign withholding taxes, for any outside basis differences that we believe are permanently invested.
We had $506 million of unrecognized tax benefits at December 31, 2019, which if recognized, would favorably affect the effective income tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
441
|
|
|
$
|
461
|
|
|
$
|
241
|
|
Additions for tax positions related to the current year
|
9
|
|
|
1
|
|
|
186
|
|
Additions for tax positions of prior years
|
56
|
|
|
18
|
|
|
41
|
|
Additions for tax positions taken in conjunction with acquisition of Tim Hortons
|
—
|
|
|
—
|
|
|
2
|
|
Reductions for tax positions of prior year
|
—
|
|
|
(18
|
)
|
|
—
|
|
Reductions for settlement
|
—
|
|
|
(18
|
)
|
|
(2
|
)
|
Reductions due to statute expiration
|
—
|
|
|
(3
|
)
|
|
(7
|
)
|
Ending balance
|
$
|
506
|
|
|
$
|
441
|
|
|
$
|
461
|
|
During the twelve months beginning January 1, 2020, it is reasonably possible we will reduce unrecognized tax benefits by approximately $6 million, primarily as a result of the expiration of certain statutes of limitations and the resolution of audits.
We recognize interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of accrued interest and penalties was $92 million and $51 million at December 31, 2019 and 2018, respectively. Potential interest and penalties associated with uncertain tax positions in various jurisdictions recognized was $41 million during 2019, $14 million during 2018 and $10 million during 2017. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.
We file income tax returns with Canada and its provinces and territories. Generally we are subject to routine examinations by the Canada Revenue Agency (“CRA”). The CRA is conducting examinations of the 2013 through 2015 taxation years. Additionally, income tax returns filed with various provincial jurisdictions are generally open to examination for periods up to six years subsequent to the filing of the respective return.
We also file income tax returns, including returns for our subsidiaries, with U.S. federal, U.S. state, and foreign jurisdictions. Generally we are subject to routine examination by taxing authorities in the U.S. jurisdictions, as well as foreign tax jurisdictions. None of the foreign jurisdictions should be individually material. The examination of our U.S. federal income tax returns for fiscal 2009, 2010, the period July 1, 2010 through October 18, 2010 and the period October 19, 2010 through December 31, 2010 was closed during the first half of 2018. The U.S. federal income tax returns for our U.S. companies for fiscal years 2014, 2015 and 2016 are currently under audit by the U.S. Internal Revenue Service. We have various U.S. state and foreign income tax returns in the process of examination. From time to time, these audits result in proposed assessments where the ultimate resolution may result in owing additional taxes. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters.
Note 12. Derivative Instruments
Disclosures about Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges, derivatives designated as net investment hedges and those utilized as economic hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates.
Interest Rate Swaps
At December 31, 2019, we had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $3,500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities beginning October 31, 2019 through the termination date of November 19, 2026. Additionally, at December 31, 2019, we also had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities effective September 30, 2019 through the termination date of September 30, 2026. At inception, all of these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value are recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.
During 2019, we extended the term of our previous $3,500 million receive-variable, pay-fixed interest rate swaps to align the maturity date of the new interest rate swaps with the maturity date of our Term Loan B under the Fourth Amendment. The extension of the term resulted in a de-designation and re-designation of the interest rate swaps and the swaps continue to be accounted for as a cash flow hedge for hedge accounting. In connection with the de-designation, we recognized a net unrealized loss of $213 million in AOCI and this amount gets reclassified into Interest expense, net as the original hedged forecasted transaction affects earnings. The amount of pre-tax losses in AOCI as of December 31, 2019 that we expect to be reclassified into interest expense within the next 12 months is $51 million.
During 2015, we entered into a series of receive-variable, pay-fixed interest rate swaps with a notional value of $2,500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities beginning May 28, 2015. All of these interest rate swaps were settled on April 26, 2018 for an insignificant cash receipt. At inception, these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value were recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.
During 2015, we settled certain interest rate swaps and recognized a net unrealized loss of $85 million in AOCI at the date of settlement. This amount gets reclassified into Interest expense, net as the original hedged forecasted transaction affects earnings. The
amount of pre-tax losses in AOCI as of December 31, 2019 that we expect to be reclassified into interest expense within the next 12 months is $12 million.
Cross-Currency Rate Swaps
To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At December 31, 2019, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates are economically partly offset by movements in the fair value of our cross-currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in AOCI, net of tax. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations.
During 2017, we terminated and settled our previous cross-currency rate swaps with an aggregate notional value of $5,000 million, between the Canadian dollar and U.S. dollar. In connection with this termination, we received $764 million which is reflected as a source of cash provided by investing activities in the consolidated statement of cash flows. The unrealized gains totaled $533 million, net of tax, as of the termination date and will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. Additionally during 2017, we entered into new fixed-to-fixed cross-currency rate swaps to partially hedge the net investment in our Canadian subsidiaries. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as net investment hedges. These swaps are contracts to exchange quarterly fixed-rate interest payments we make on the Canadian dollar notional amount of C$6,754 million for quarterly fixed-rate interest payments we receive on the U.S. dollar notional amount of $5,000 million through the maturity date of June 30, 2023. In making such changes, we effectively realigned our Canadian dollar hedges to reflect our current cash flow mix and capital structure maturity profile.
At December 31, 2019, we had outstanding cross-currency rate swaps in which we pay quarterly fixed-rate interest payments on the Euro notional amount of €1,108 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional amount of $1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. During 2018, we extended the term of the swaps from March 31, 2021 to the maturity date of February 17, 2024. The extension of the term resulted in a re-designation of the hedge and the swaps continue to be accounted for as a net investment hedge. Additionally, at December 31, 2019, we also had outstanding cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $400 million, entered during 2018, and $500 million, entered during 2019, through the maturity date of February 17, 2024. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge.
The fixed to fixed cross-currency rate swaps hedging Canadian dollar and Euro net investments utilized the forward method of effectiveness assessment prior to March 15, 2018. On March 15, 2018, we de-designated and subsequently re-designated the outstanding fixed to fixed cross-currency rate swaps to prospectively use the spot method of hedge effectiveness assessment. Additionally, as a result of adopting new hedge accounting guidance during 2018, we elected to exclude the interest component (the "Excluded Component") from the accounting hedge without affecting net investment hedge accounting and elected to amortize the Excluded Component over the life of the derivative instrument. The amortization of the Excluded Component is recognized in Interest expense, net in the consolidated statement of operations. The change in fair value that is not related to the Excluded Component is recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated.
Foreign Currency Exchange Contracts
We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At December 31, 2019, we had outstanding forward currency contracts to manage this risk in which we sell Canadian dollars and buy U.S. dollars with a notional value of $112 million with maturities to December 2020. We have designated these instruments as cash flow hedges, and as such, the unrealized changes in market value of effective hedges are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.
Credit Risk
By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty.
Credit-Risk Related Contingent Features
Our derivative instruments do not contain any credit-risk related contingent features.
Quantitative Disclosures about Derivative Instruments and Fair Value Measurements
The following tables present the required quantitative disclosures for our derivative instruments, including their estimated fair values (all estimated using Level 2 inputs) and their location on our consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (Loss) Recognized in
Other Comprehensive Income (Loss)
|
|
2019
|
|
2018
|
|
2017
|
Derivatives designated as cash flow hedges(1)
|
|
|
|
|
|
Interest rate swaps
|
$
|
(102
|
)
|
|
$
|
(37
|
)
|
|
$
|
(6
|
)
|
Forward-currency contracts
|
$
|
(4
|
)
|
|
$
|
11
|
|
|
$
|
(9
|
)
|
Derivatives designated as net investment hedges
|
|
|
|
|
|
Cross-currency rate swaps
|
$
|
(118
|
)
|
|
$
|
383
|
|
|
$
|
(384
|
)
|
|
|
(1)
|
We did not exclude any components from the cash flow hedge relationships presented in this table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or (Loss) Reclassified from AOCI into Earnings
|
|
Gain or (Loss) Reclassified from AOCI into
Earnings
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest expense, net
|
|
$
|
(26
|
)
|
|
$
|
(19
|
)
|
|
$
|
(31
|
)
|
Forward-currency contracts
|
|
Cost of sales
|
|
$
|
5
|
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or (Loss) Recognized in Earnings
|
|
Gain or (Loss) Recognized in Earnings (Amount Excluded from Effectiveness Testing)
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Derivatives designated as net investment hedges
|
|
|
|
|
|
|
|
|
Cross-currency rate swaps
|
|
Interest expense, net
|
|
$
|
70
|
|
|
$
|
60
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
December 31,
|
|
|
|
2019
|
|
2018
|
|
Balance Sheet Location
|
Assets:
|
|
|
|
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
Interest rate
|
$
|
7
|
|
|
$
|
—
|
|
|
Other assets, net
|
Foreign currency
|
—
|
|
|
7
|
|
|
Prepaids and other current assets
|
Derivatives designated as net investment hedges
|
|
|
|
|
|
Foreign currency
|
22
|
|
|
58
|
|
|
Other assets, net
|
Total assets at fair value
|
$
|
29
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
Interest rate
|
$
|
175
|
|
|
$
|
72
|
|
|
Other liabilities, net
|
Foreign currency
|
2
|
|
|
—
|
|
|
Other accrued liabilities
|
Derivatives designated as net investment hedges
|
|
|
|
|
|
Foreign currency
|
166
|
|
|
107
|
|
|
Other liabilities, net
|
Total liabilities at fair value
|
$
|
343
|
|
|
$
|
179
|
|
|
|
Note 13. Partnership Preferred Units
On December 12, 2014 we issued 68,530,939 Partnership preferred units to RBI. Under the terms of the partnership agreement, Partnership was required to make distributions to RBI on the Partnership preferred units in amounts equal to (i) preferred dividends declared and payable by RBI on the 68,530,939 Class A 9.0% cumulative compounding perpetual voting preferred shares issued by RBI (the “Preferred Shares”) and (ii) in the event RBI redeemed the Preferred Shares, the redemption amount of the Preferred Shares. Upon payment of a distribution to RBI to fund the redemption of the Preferred Shares, the Partnership preferred units remain outstanding, but provide no economic rights to RBI, other than a nominal dividend of $100 per year.
The distribution provisions of the partnership agreement requiring Partnership to fund RBI's redemption of the Preferred Shares were accounted for as an in-substance redemption provision of the Partnership preferred units. The Partnership preferred units were classified as temporary equity as a result of Partnership's lack of control over this distribution provision. In 2014, Partnership adjusted the carrying value of the Partnership preferred units to reflect the Preferred Shares redemption price of $48.109657 per Preferred Share (the “redemption price”).
On December 12, 2017 (the “Redemption Date”), RBI redeemed all of the issued and outstanding Preferred Shares for aggregate consideration of $3,116 million (the “Redemption Consideration”), including $54 million of accrued and unpaid Preferred Share dividends up to the Redemption Date. Partnership made a distribution to RBI in an equal amount under the terms of the partnership agreement described above. Partnership accounted for $54 million of this distribution as a preferred unit distribution, with the remainder accounted for as an in-substance redemption of the Partnership preferred units. The difference between (i) the Redemption Consideration and related transaction costs, net of the $54 million preferred unit distribution and (ii) the carrying amount of the Partnership preferred units on the Redemption Date is reflected as a $234 million increase in net income attributable to common unitholders and partner's capital.
During 2018, RBI made a payment, which was funded by Partnership through a distribution, in connection with the settlement of certain provisions associated with the 2017 redemption of the Preferred Shares as a result of recently proposed Treasury regulations included within Other operating expense (income), net in our consolidated statements of operations.
Note 14. Equity
Pursuant to the terms of the partnership agreement, RBI, as the holder of Class A common units, is entitled to distributions from Partnership in an amount equal to the aggregate dividends payable by RBI to holders of RBI common shares, and the holders of Partnership exchangeable units are entitled to receive distributions from Partnership in an amount per unit equal to the dividend payable by RBI on each RBI common share. Additionally, if RBI proposes to redeem, repurchase or otherwise acquire any RBI common shares, the partnership agreement requires that Partnership, immediately prior to such redemption, repurchase or acquisition, make a distribution to RBI on the Class A common units in an amount sufficient for RBI to fund such redemption, repurchase or acquisition, as the case may be. Each holder of a Partnership exchangeable unit is entitled to vote in respect of matters on which holders of RBI common shares are entitled to vote through one special voting share of RBI. Since December 12, 2015, a holder of a Partnership exchangeable unit may require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for RBI common shares at a ratio of one common share for each Partnership exchangeable unit, subject to RBI’s right as the general partner of Partnership, in its sole discretion, to deliver a cash payment in lieu of RBI common shares. If RBI elects to make a cash payment in lieu of issuing common shares, the amount of the payment will be the weighted average trading price of the RBI common shares on the New York Stock Exchange for the 20 consecutive trading days ending on the last business day prior to the exchange date.
During 2019, Partnership exchanged 42,016,392 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging 42,016,392 Partnership exchangeable units for the same number of newly issued RBI common shares. During 2018, Partnership exchanged 10,185,333 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by repurchasing 10,000,000 Partnership exchangeable units for approximately $561 million in cash and exchanging 185,333 Partnership exchangeable units for the same number of newly issued RBI common shares. During 2017, Partnership exchanged 9,286,480 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by repurchasing 5,000,000 Partnership exchangeable units for approximately $330 million in cash and exchanging 4,286,480 Partnership exchangeable units for the same number of newly issued RBI common shares. The exchanges of Partnership exchangeable units were recorded as increases to the Class A common units balance within partner’s capital in our consolidated balance sheets in an amount equal to the market value of the newly issued RBI common shares and a reduction to the Partnership exchangeable units balance within partner’s capital of our consolidated balance sheets in an amount equal to the cash paid by Partnership and the market value of the newly issued RBI common shares. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit was cancelled concurrently with the exchange.
Accumulated Other Comprehensive Income (Loss)
The following table displays the change in the components of AOCI (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
Pensions
|
|
Foreign
Currency
Translation
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Balances at December 31, 2016
|
$
|
534
|
|
|
$
|
(32
|
)
|
|
$
|
(1,857
|
)
|
|
$
|
(1,355
|
)
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
824
|
|
|
824
|
|
Net change in fair value of derivatives, net of tax
|
(382
|
)
|
|
—
|
|
|
—
|
|
|
(382
|
)
|
Amounts reclassified to earnings of cash flow hedges, net of tax
|
25
|
|
|
—
|
|
|
—
|
|
|
25
|
|
Pension and post-retirement benefit plans, net of tax
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Balances at December 31, 2017
|
$
|
177
|
|
|
$
|
(28
|
)
|
|
$
|
(1,033
|
)
|
|
$
|
(884
|
)
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
(831
|
)
|
|
(831
|
)
|
Net change in fair value of derivatives, net of tax
|
263
|
|
|
—
|
|
|
—
|
|
|
263
|
|
Amounts reclassified to earnings of cash flow hedges, net of tax
|
14
|
|
|
—
|
|
|
—
|
|
|
14
|
|
Pension and post-retirement benefit plans, net of tax
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Balances at December 31, 2018
|
$
|
454
|
|
|
$
|
(27
|
)
|
|
$
|
(1,864
|
)
|
|
$
|
(1,437
|
)
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
409
|
|
|
409
|
|
Net change in fair value of derivatives, net of tax
|
(163
|
)
|
|
—
|
|
|
—
|
|
|
(163
|
)
|
Amounts reclassified to earnings of cash flow hedges, net of tax
|
15
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Pension and post-retirement benefit plans, net of tax
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Balances at December 31, 2019
|
$
|
306
|
|
|
$
|
(29
|
)
|
|
$
|
(1,455
|
)
|
|
$
|
(1,178
|
)
|
Note 15. Share-based Compensation
Share-based compensation expense associated with the participation of Partnership and its subsidiaries in RBI’s share-based compensation plans is recognized in Partnership’s Financial Statements.
On January 30, 2015, RBI’s board of directors approved: (i) adoption of the Restaurant Brands International Inc. 2014 Omnibus Incentive Plan, currently the Amended and Restated 2014 Omnibus Incentive Plan (the “Omnibus Plan”), to provide for the grant of awards to employees, directors, consultants and other persons who provide services to RBI and its affiliates; (ii) assumption and amendment of various legacy plans of BK, and assumption of the obligation for all BK stock options and restricted stock units (“RSUs”) outstanding; and (iii) assumption and amendment of various legacy plans of TH, and assumption of the obligation for each vested and unvested TH stock option issued with tandem stock appreciation rights (“SARs”) that was not surrendered in connection with the Tim Hortons transaction on the same terms and conditions of the original awards, as adjusted. No new awards may be granted under these legacy BK plans or legacy TH plans.
RBI is currently issuing awards under the Omnibus Plan and the number of shares available for issuance under such plan as of December 31, 2019 was 14,148,316. The Omnibus Plan permits the grant of several types of awards with respect to RBI common shares, including stock options, time-vested RSUs, and performance-based RSUs, which may include RBI and/or individual performance based-vesting conditions. Under the terms of the Omnibus Plan, RSUs are entitled to dividend equivalents, unless otherwise noted. Dividends are not distributed unless the awards vest. Upon vesting, the amount of the dividend, which is distributed in additional RSUs, except in the case of RSUs awarded to non-management members of RBI's board of directors, is equal to the equivalent of the aggregate dividends declared on common shares during the period from the date of grant of the award compounded until the date the shares underlying the award are delivered.
Stock option awards are granted with an exercise price or market value equal to the closing price of RBI's common shares on the trading day preceding the date of grant. RBI satisfies stock option exercises through the issuance of authorized but previously unissued common shares. New stock option grants generally cliff vest 5 years from the original grant date, provided the employee is continuously employed by RBI or one of our affiliates, and the stock options expire 10 years following the grant date. Additionally, if RBI terminates the employment of a stock option holder without cause prior to the vesting date, or if the employee retires or becomes disabled, the employee will become vested in the number of stock options as if the stock options vested 20% on each anniversary of the grant date. If the employee dies, the employee will become vested in the number of stock options as if the stock options vested 20% on the first anniversary of the grant date, 40% on the second anniversary of the grant date and 100% on the third anniversary of
the grant date. If an employee is terminated with cause or resigns before vesting, all stock options are forfeited. If there is an event such as a return of capital or dividend that is determined to be dilutive, the exercise price of the awards will be adjusted accordingly.
Share-based compensation expense consists of the following for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Stock options, stock options with tandem SARs and RSUs (a)
|
$
|
68
|
|
|
$
|
48
|
|
|
$
|
48
|
|
Accelerated vesting of Popeyes stock options (b)
|
—
|
|
|
—
|
|
|
12
|
|
Total share-based compensation expense (c)
|
$
|
68
|
|
|
$
|
48
|
|
|
$
|
60
|
|
|
|
(a)
|
Includes $4 million, $2 million, and $5 million due to modification of awards in 2019, 2018 and 2017, respectively.
|
|
|
(b)
|
Represents expense attributed to the post-combination service associated with the accelerated vesting of stock options in connection with the Popeyes Acquisition.
|
|
|
(c)
|
Generally classified as selling, general and administrative expenses in the consolidated statements of operations.
|
As of December 31, 2019, total unrecognized compensation cost related to share-based compensation arrangements was $183 million and is expected to be recognized over a weighted-average period of approximately 3.4 years.
The following assumptions were used in the Black-Scholes option-pricing model to determine the fair value of stock option awards at the grant date:
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Risk-free interest rate
|
1.82%
|
|
2.13%
|
|
1.23% - 1.25%
|
Expected term (in years)
|
6.19
|
|
6.39
|
|
6.74
|
Expected volatility
|
25.5%
|
|
25.2%
|
|
24.5%
|
Expected dividend yield
|
3.09%
|
|
3.08%
|
|
1.37%
|
The risk-free interest rate was based on the U.S. Treasury or Canadian Sovereign bond yield with a remaining term equal to the expected option life assumed at the date of grant. The expected term was calculated based on the analysis of a three to five-year vesting period coupled with RBI's expectations of exercise activity. Expected volatility was based on the historical equity volatility of RBI and a review of the equity volatilities of publicly-traded guideline companies. The expected dividend yield is based on the annual dividend yield at the time of grant.
The following is a summary of stock option activity under our plans for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
Options
(in 000’s)
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Intrinsic
Value (a)
(in 000’s)
|
|
Weighted
Average
Remaining
Contractual Term
(Years)
|
Outstanding at January 1, 2019
|
13,603
|
|
|
$
|
36.41
|
|
|
|
|
|
Granted
|
1,160
|
|
|
$
|
64.86
|
|
|
|
|
|
Exercised
|
(4,496
|
)
|
|
$
|
22.62
|
|
|
|
|
|
Forfeited
|
(509
|
)
|
|
$
|
55.18
|
|
|
|
|
|
Outstanding at December 31, 2019
|
9,758
|
|
|
$
|
45.29
|
|
|
$
|
181,478
|
|
|
6.0
|
Exercisable at December 31, 2019
|
1,754
|
|
|
$
|
26.43
|
|
|
$
|
65,486
|
|
|
2.6
|
Vested or expected to vest at December 31, 2019
|
8,976
|
|
|
$
|
44.70
|
|
|
$
|
172,145
|
|
|
5.9
|
|
|
(a)
|
The intrinsic value represents the amount by which the fair value of RBI's stock exceeds the option exercise price at December 31, 2019.
|
The weighted-average grant date fair value per stock option granted was $11.83, $10.82, and $12.57 during 2019, 2018 and 2017, respectively. The total intrinsic value of stock options exercised was $200 million during 2019, $371 million during 2018, and $288 million during 2017.
The fair value of the time-vested RSUs and performance-based RSUs is based on the closing price of RBI’s common shares on the trading day preceding the date of grant. New grants generally cliff vest five years from the original grant date. RBI has awarded a limited number of time-vested RSUs and performance-based RSUs that proportionally vest over a period shorter than five years. Time-vested RSUs and performance-based RSUs are expensed over the vesting period, based upon the probability that the performance target will be met. RBI grants fully vested RSUs, with dividend equivalent rights that accrue in cash, to non-employee members of RBI's board of directors in lieu of a cash retainer and committee fees. All such RSUs will settle and common shares of RBI will be issued upon termination of service by the board member.
The time-vested RSUs generally cliff vest five years from December 31st of the year preceding the grant date and performance-based RSUs generally cliff vest five years from the grant date (the starting date for the applicable five year vesting period is referred to as the “Anniversary Date”). If the employee is terminated for any reason within the first two years of the Anniversary Date, 100% of the time-vested RSUs granted will be forfeited. If RBI terminates the employment of a time-vested RSU holder without cause two years after the Anniversary Date, or if the employee retires, the employee will become vested in the number of time-vested RSUs as if the time-vested RSUs vested 20% for each year after the Anniversary Date. If the employee is terminated for any reason within the first three years of the Anniversary Date, 100% of the performance-based RSUs granted will be forfeited. If RBI terminates the employment of a performance-based RSU holder without cause between three and five years after the Anniversary Date, or if the employee retires, the employee will become vested in 50% of the performance-based RSUs. An alternate ratable vesting schedule applies to the extent the participant ends employment by reason of death or disability.
The following is a summary of time-vested RSUs and performance-based RSUs activity for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-vested RSUs
|
|
Performance-based RSUs
|
|
Total Number of
Shares
(in 000’s)
|
|
Weighted Average
Grant Date Fair
Value
|
|
Total Number of
Shares
(in 000’s)
|
|
Weighted Average
Grant Date Fair
Value
|
Outstanding at January 1, 2019
|
1,500
|
|
|
$
|
41.88
|
|
|
2,407
|
|
|
$
|
45.25
|
|
Granted
|
405
|
|
|
$
|
64.82
|
|
|
1,884
|
|
|
$
|
65.54
|
|
Vested and settled
|
(96
|
)
|
|
$
|
42.34
|
|
|
(25
|
)
|
|
$
|
33.77
|
|
Dividend equivalents granted
|
38
|
|
|
$
|
—
|
|
|
104
|
|
|
$
|
—
|
|
Forfeited
|
(95
|
)
|
|
$
|
56.82
|
|
|
(304
|
)
|
|
$
|
54.10
|
|
Outstanding at December 31, 2019
|
1,752
|
|
|
$
|
46.50
|
|
|
4,066
|
|
|
$
|
53.78
|
|
The weighted-average grant date fair value of time-vested RSUs granted was $57.68 and $56.54 during 2018 and 2017, respectively. The weighted-average grant date fair value of performance-based RSUs granted was $58.49 and $55.55 during 2018 and 2017, respectively. The total fair value, determined as of the date of vesting, of RSUs vested and converted to common shares of RBI during 2019, 2018 and 2017 was $8 million, $7 million and $6 million, respectively.
Note 16. Revenue Recognition
Revenue from Contracts with Customers
We transitioned to ASC 606 from the Previous Standards on January 1, 2018 using the modified retrospective transition method. Our Financial Statements reflect the application of ASC 606 guidance beginning in 2018, while our Financial Statements for periods prior to 2018 were prepared under the guidance of the Previous Standards. Our transition to ASC 606 represented a change in accounting principle. The $250 million cumulative effect of our transition to ASC 606 is reflected as an adjustment to January 1, 2018 Partners' capital.
ASC 606 eliminates industry-specific guidance and provides a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of ASC 606 is that a reporting entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the reporting entity expects to be entitled for the exchange of those goods or services.
Contract Liabilities
Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We classify these contract liabilities as Other liabilities, net in our consolidated balance sheets. The following table reflects the change in contract liabilities by segment and on a consolidated basis between December 31, 2018 and December 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Liabilities
|
|
TH
|
|
BK
|
|
PLK
|
|
Consolidated
|
Balance at December 31, 2018
|
|
$
|
62
|
|
|
$
|
405
|
|
|
$
|
19
|
|
|
$
|
486
|
|
Revenue recognized that was included in the contract liability balance at the beginning of the year
|
|
(9
|
)
|
|
(38
|
)
|
|
(2
|
)
|
|
(49
|
)
|
Increase, excluding amounts recognized as revenue during the period
|
|
9
|
|
|
86
|
|
|
11
|
|
|
106
|
|
Impact of foreign currency translation
|
|
2
|
|
|
(4
|
)
|
|
—
|
|
|
(2
|
)
|
Balance at December 31, 2019
|
|
$
|
64
|
|
|
$
|
449
|
|
|
$
|
28
|
|
|
$
|
541
|
|
The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) by segment and on a consolidated basis as of December 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities expected to be recognized in
|
|
TH
|
|
BK
|
|
PLK
|
|
Consolidated
|
2020
|
|
$
|
8
|
|
|
$
|
34
|
|
|
$
|
2
|
|
|
$
|
44
|
|
2021
|
|
8
|
|
|
33
|
|
|
2
|
|
|
43
|
|
2022
|
|
7
|
|
|
33
|
|
|
2
|
|
|
42
|
|
2023
|
|
7
|
|
|
32
|
|
|
2
|
|
|
41
|
|
2024
|
|
7
|
|
|
31
|
|
|
2
|
|
|
40
|
|
Thereafter
|
|
27
|
|
|
286
|
|
|
18
|
|
|
331
|
|
Total
|
|
$
|
64
|
|
|
$
|
449
|
|
|
$
|
28
|
|
|
$
|
541
|
|
Disaggregation of Total Revenues
Total revenues consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Sales
|
$
|
2,362
|
|
|
$
|
2,355
|
|
|
$
|
2,390
|
|
Royalties
|
2,319
|
|
|
2,165
|
|
|
1,215
|
|
Property revenues
|
833
|
|
|
744
|
|
|
765
|
|
Franchise fees and other revenue
|
89
|
|
|
93
|
|
|
206
|
|
Total revenues
|
$
|
5,603
|
|
|
$
|
5,357
|
|
|
$
|
4,576
|
|
Financial Statement Impact of Transition to ASC 606
As noted above, we transitioned to ASC 606 using the modified retrospective method on January 1, 2018. The cumulative effect of this transition to applicable contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to Partners’ capital as of this date. As a result of applying the modified retrospective method to transition to ASC 606, the following adjustments were made to the consolidated balance sheet as of January 1, 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Total
|
|
Adjusted
|
|
December 31, 2017
|
|
Adjustments
|
|
January 1, 2018
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,097
|
|
|
$
|
—
|
|
|
$
|
1,097
|
|
Accounts and notes receivable, net
|
489
|
|
|
—
|
|
|
489
|
|
Inventories, net
|
78
|
|
|
—
|
|
|
78
|
|
Prepaids and other current assets
|
86
|
|
|
(23
|
)
|
|
63
|
|
Total current assets
|
1,750
|
|
|
(23
|
)
|
|
1,727
|
|
Property and equipment, net
|
2,133
|
|
|
—
|
|
|
2,133
|
|
Intangible assets, net
|
11,062
|
|
|
—
|
|
|
11,062
|
|
Goodwill
|
5,782
|
|
|
—
|
|
|
5,782
|
|
Net investment in property leased to franchisees
|
71
|
|
|
—
|
|
|
71
|
|
Other assets, net
|
426
|
|
|
107
|
|
|
533
|
|
Total assets
|
$
|
21,224
|
|
|
$
|
84
|
|
|
$
|
21,308
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts and drafts payable
|
$
|
496
|
|
|
$
|
—
|
|
|
$
|
496
|
|
Other accrued liabilities
|
866
|
|
|
9
|
|
|
875
|
|
Gift card liability
|
215
|
|
|
(43
|
)
|
|
172
|
|
Current portion of long term debt and capital leases
|
78
|
|
|
—
|
|
|
78
|
|
Total current liabilities
|
1,655
|
|
|
(34
|
)
|
|
1,621
|
|
Term debt, net of current portion
|
11,801
|
|
|
—
|
|
|
11,801
|
|
Capital leases, net of current portion
|
244
|
|
|
—
|
|
|
244
|
|
Other liabilities, net
|
1,455
|
|
|
426
|
|
|
1,881
|
|
Deferred income taxes, net
|
1,508
|
|
|
(58
|
)
|
|
1,450
|
|
Total liabilities
|
16,663
|
|
|
334
|
|
|
16,997
|
|
Partners' capital
|
|
|
|
|
|
Class A common units
|
4,168
|
|
|
(132
|
)
|
|
4,036
|
|
Partnership exchangeable units
|
1,276
|
|
|
(118
|
)
|
|
1,158
|
|
Accumulated other comprehensive income (loss)
|
(884
|
)
|
|
—
|
|
|
(884
|
)
|
Total Partners' capital
|
4,560
|
|
|
(250
|
)
|
|
4,310
|
|
Noncontrolling interests
|
1
|
|
|
—
|
|
|
1
|
|
Total equity
|
4,561
|
|
|
(250
|
)
|
|
4,311
|
|
Total liabilities and equity
|
$
|
21,224
|
|
|
$
|
84
|
|
|
$
|
21,308
|
|
Franchise Fees
The cumulative adjustment for franchise fees consists of the following:
|
|
•
|
A $321 million increase in Other liabilities, net for the cumulative reversal and deferral of previously recognized franchise fees related to franchise agreements in effect at January 1, 2018 that were entered into subsequent to the acquisitions of BK in 2010, TH in 2014 and PLK in 2017 (net of the cumulative revenue attributable for the period through January 1, 2018), with a corresponding decrease to Partners’ capital.
|
|
|
•
|
A $107 million increase in Other assets, net for the previously unrecognized value of equity interests received in connection with MFDA arrangements. This increase resulted in a corresponding increase in Other liabilities, net of $105 million and an increase to Partners’ capital of $2 million for the cumulative effect of revenue attributable for the period between the inception of each such arrangement and January 1, 2018.
|
|
|
•
|
A $67 million decrease to Deferred income taxes, net for the tax effects of the two adjustments noted above, with a corresponding increase to Partners’ capital.
|
Advertising Funds
The cumulative adjustment for advertising funds reflects the recognition of cumulative advertising expenditures temporarily in excess of cumulative advertising fund contributions as of January 1, 2018, which is reflected as a $23 million decrease in Prepaids and other current assets and a $23 million decrease to Partners’ capital.
Gift Card Breakage
The adjustment for gift card breakage reflects the impact of the change to recognize gift card breakage proportionately as gift card balances are used rather than when it is deemed remote that the unused gift card balance would be redeemed, as done under the Previous Standards. The cumulative effect of applying ASC 606 accounting to gift card balances outstanding at January 1, 2018 is reflected as a $43 million decrease in Gift card liability, a $9 million increase in Other accrued liabilities, a $9 million increase in Deferred income taxes, net and a $25 million increase in January 1, 2018 Partners’ capital.
Comparison to Amounts if Previous Standards Had Been in Effect
The following tables reflect the impact of adoption of ASC 606 on our consolidated statements of operations for 2018 and cash flows from operating activities for 2018 and our consolidated balance sheet as of December 31, 2018 and the amounts as if the Previous Standards were in effect (“Amounts Under Previous Standards”) (in millions):
Consolidated Statement of Operations for 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Total Adjustments
|
|
Amounts Under Previous Standards
|
Revenues:
|
|
|
|
|
|
Sales
|
$
|
2,355
|
|
|
$
|
—
|
|
|
$
|
2,355
|
|
Franchise and property revenues
|
3,002
|
|
|
(750
|
)
|
|
2,252
|
|
Total revenues
|
5,357
|
|
|
(750
|
)
|
|
4,607
|
|
Operating costs and expenses:
|
|
|
|
|
|
Cost of sales
|
1,818
|
|
|
—
|
|
|
1,818
|
|
Franchise and property expenses
|
422
|
|
|
—
|
|
|
422
|
|
Selling, general and administrative expenses
|
1,214
|
|
|
(785
|
)
|
|
429
|
|
(Income) loss from equity method investments
|
(22
|
)
|
|
(6
|
)
|
|
(28
|
)
|
Other operating expenses (income), net
|
8
|
|
|
(1
|
)
|
|
7
|
|
Total operating costs and expenses
|
3,440
|
|
|
(792
|
)
|
|
2,648
|
|
Income from operations
|
1,917
|
|
|
42
|
|
|
1,959
|
|
Interest expense, net
|
535
|
|
|
1
|
|
|
536
|
|
Income before income taxes
|
1,382
|
|
|
41
|
|
|
1,423
|
|
Income tax expense
|
238
|
|
|
9
|
|
|
247
|
|
Net income
|
1,144
|
|
|
32
|
|
|
1,176
|
|
Net income attributable to noncontrolling interests
|
1
|
|
|
—
|
|
|
1
|
|
Net income attributable to common unitholders
|
$
|
1,143
|
|
|
$
|
32
|
|
|
$
|
1,175
|
|
|
|
|
|
|
|
Earnings per unit - basic and diluted:
|
|
|
|
|
|
Class A common units
|
$
|
3.03
|
|
|
|
|
$
|
3.12
|
|
Partnership exchangeable units
|
$
|
2.46
|
|
|
|
|
$
|
2.53
|
|
The following summarizes the adjustments to our condensed consolidated statement of operations for 2018 to reflect our consolidated statement of operations as if we had continued to recognize revenue under the Previous Standards:
|
|
•
|
As described above, our transition to ASC 606 resulted in the deferral of franchise fees, recognition of franchise fees in connection with MFDAs where we received an equity interest in the equity method investee, and a change in the timing of recognizing gift card breakage income. The adjustments for 2018 to reflect the recognition of this revenue as if the Previous Standards were in effect consists of a $43 million increase in Franchise and property revenue and a $11 million increase in Income tax expense.
|
|
|
•
|
The adjustments to (income) loss from equity method investments for 2018 reflect the amount of losses from equity method investments we would not have recognized if the Previous Standards were in effect. There is no tax impact related to these adjustments.
|
|
|
•
|
As described above, under the Previous Standards our statement of operations did not reflect gross presentations of advertising fund contributions and expenses. Our transition to ASC 606 requires the presentation of advertising fund contributions and advertising fund expenses on a gross basis. The adjustments for 2018 reflect advertising fund contributions and expenses as if the Previous Standards were in effect consist of a $793 million decrease in Franchise and property revenues, a $785 million decrease in Selling, general and administrative expenses, a $1 million decrease in Other operating expenses (income), net, a $1 million increase in Interest expense, net, and a $2 million decrease in Income tax expense.
|
Consolidated Statement of Cash Flows for 2018
The transition to ASC 606 had no net impact on our cash provided by operating activities and no impact on our cash used for investing activities or cash used for financing activities during 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Total Adjustments
|
|
Amounts Under Previous Standards
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
1,144
|
|
|
$
|
32
|
|
|
$
|
1,176
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
180
|
|
|
—
|
|
|
180
|
|
Amortization of deferred financing costs and debt issuance discount
|
|
29
|
|
|
—
|
|
|
29
|
|
(Income) loss from equity method investments
|
|
(22
|
)
|
|
(6
|
)
|
|
(28
|
)
|
Loss (gain) on remeasurement of foreign denominated transactions
|
|
(33
|
)
|
|
—
|
|
|
(33
|
)
|
Net (gains) losses on derivatives
|
|
(40
|
)
|
|
—
|
|
|
(40
|
)
|
Share-based compensation expense
|
|
48
|
|
|
—
|
|
|
48
|
|
Deferred income taxes
|
|
29
|
|
|
9
|
|
|
38
|
|
Other
|
|
5
|
|
|
—
|
|
|
5
|
|
Changes in current assets and liabilities, excluding acquisitions and dispositions:
|
|
|
|
|
|
|
Accounts and notes receivable
|
|
19
|
|
|
—
|
|
|
19
|
|
Inventories and prepaids and other current assets
|
|
(7
|
)
|
|
6
|
|
|
(1
|
)
|
Accounts and drafts payable
|
|
41
|
|
|
7
|
|
|
48
|
|
Other accrued liabilities and gift card liability
|
|
(219
|
)
|
|
(6
|
)
|
|
(225
|
)
|
Tenant inducements paid to franchisees
|
|
(52
|
)
|
|
—
|
|
|
(52
|
)
|
Other long-term assets and liabilities
|
|
43
|
|
|
(42
|
)
|
|
1
|
|
Net cash provided by operating activities
|
|
$
|
1,165
|
|
|
$
|
—
|
|
|
$
|
1,165
|
|
Consolidated Balance Sheet as of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported December 31, 2018
|
|
Total Adjustments
|
|
Amounts Under Previous Standards
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
913
|
|
|
$
|
—
|
|
|
$
|
913
|
|
Accounts and notes receivable, net
|
452
|
|
|
—
|
|
|
452
|
|
Inventories, net
|
75
|
|
|
—
|
|
|
75
|
|
Prepaids and other current assets
|
60
|
|
|
17
|
|
|
77
|
|
Total current assets
|
1,500
|
|
|
17
|
|
|
1,517
|
|
Property and equipment, net
|
1,996
|
|
|
—
|
|
|
1,996
|
|
Intangible assets, net
|
10,463
|
|
|
—
|
|
|
10,463
|
|
Goodwill
|
5,486
|
|
|
—
|
|
|
5,486
|
|
Net investment in property leased to franchisees
|
54
|
|
|
—
|
|
|
54
|
|
Other assets, net
|
642
|
|
|
(101
|
)
|
|
541
|
|
Total assets
|
$
|
20,141
|
|
|
$
|
(84
|
)
|
|
$
|
20,057
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts and drafts payable
|
$
|
513
|
|
|
$
|
7
|
|
|
$
|
520
|
|
Other accrued liabilities
|
637
|
|
|
(15
|
)
|
|
622
|
|
Gift card liability
|
167
|
|
|
42
|
|
|
209
|
|
Current portion of long term debt and capital leases
|
91
|
|
|
—
|
|
|
91
|
|
Total current liabilities
|
1,408
|
|
|
34
|
|
|
1,442
|
|
Term debt, net of current portion
|
11,823
|
|
|
—
|
|
|
11,823
|
|
Capital leases, net of current portion
|
226
|
|
|
—
|
|
|
226
|
|
Other liabilities, net
|
1,547
|
|
|
(468
|
)
|
|
1,079
|
|
Deferred income taxes, net
|
1,519
|
|
|
67
|
|
|
1,586
|
|
Total liabilities
|
16,523
|
|
|
(367
|
)
|
|
16,156
|
|
Partners' capital
|
|
|
|
|
|
Class A common units
|
4,323
|
|
|
155
|
|
|
4,478
|
|
Partnership exchangeable units
|
730
|
|
|
128
|
|
|
858
|
|
Accumulated other comprehensive income (loss)
|
(1,437
|
)
|
|
—
|
|
|
(1,437
|
)
|
Total Partners' capital
|
3,616
|
|
|
283
|
|
|
3,899
|
|
Noncontrolling interests
|
2
|
|
|
—
|
|
|
2
|
|
Total equity
|
3,618
|
|
|
283
|
|
|
3,901
|
|
Total liabilities and equity
|
$
|
20,141
|
|
|
$
|
(84
|
)
|
|
$
|
20,057
|
|
Note 17. Other Operating Expenses (Income), net
Other operating expenses (income), net, consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net losses (gains) on disposal of assets, restaurant closures and refranchisings
|
$
|
7
|
|
|
$
|
19
|
|
|
$
|
29
|
|
Litigation settlements and reserves, net
|
2
|
|
|
11
|
|
|
2
|
|
Net losses (gains) on foreign exchange
|
(15
|
)
|
|
(33
|
)
|
|
77
|
|
Other, net
|
(4
|
)
|
|
11
|
|
|
1
|
|
Other operating expenses (income), net
|
$
|
(10
|
)
|
|
$
|
8
|
|
|
$
|
109
|
|
Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods.
Litigation settlements and reserves, net primarily reflects accruals and payments made and proceeds received in connection with litigation matters.
Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities.
Other, net during 2018 is comprised primarily of a payment in connection with the settlement of certain provisions associated with the 2017 redemption of RBI's preferred shares as a result of changes in Treasury regulations.
Note 18. Commitments and Contingencies
Letters of Credit
As of December 31, 2019, we had $15 million in irrevocable standby letters of credit outstanding, which were issued primarily to certain insurance carriers to guarantee payments of deductibles for various insurance programs, such as health and commercial liability insurance. Of these letters of credit outstanding, $2 million are secured by the collateral under our Revolving Credit Facility and the remainder are secured by cash collateral. As of December 31, 2019, no amounts had been drawn on any of these irrevocable standby letters of credit.
Purchase Commitments
We have arrangements for information technology and telecommunication services with an aggregate contractual obligation of $18 million over the next two years, some of which have early termination fees. We also enter into commitments to purchase advertising. As of December 31, 2019, these commitments totaled $359 million and run through 2024.
Litigation
From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property.
On October 5, 2018, a class action complaint was filed against Burger King Worldwide, Inc. (“BKW”) and Burger King Corporation (“BKC”) in the U.S. District Court for the Southern District of Florida by Jarvis Arrington, individually and on behalf of all others similarly situated. On October 18, 2018, a second class action complaint was filed against the Company, BKW and BKC in the U.S. District Court for the Southern District of Florida by Monique Michel, individually and on behalf of all others similarly situated. On October 31, 2018, a third class action complaint was filed against BKC and BKW in the U.S. District Court for the Southern District of Florida by Geneva Blanchard and Tiffany Miller, individually and on behalf of all others similarly situated. On November 2, 2018, a fourth class action complaint was filed against the Company, BKW and BKC in the U.S. District Court for the Southern District of Florida by Sandra Muster, individually and on behalf of all others similarly situated. These complaints allege that the defendants violated Section 1 of the Sherman Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Burger King franchisees are required to sign. Each plaintiff seeks injunctive relief and damages for himself or herself and other members of the class. These actions have been consolidated.
In July 2019, a class action complaint was filed against The TDL Group Corp. ("TDL"), a subsidiary of RBI, in the Supreme Court of British Columbia by Samir Latifi, individually and on behalf of all others similarly situated. The complaint alleges that TDL violated the Canadian Competition Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Tim Hortons franchisees are required to sign. The plaintiff seeks damages and restitution, on behalf of himself and other members of the class.
While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of these cases or estimate the range of possible loss, if any.
On June 19, 2017, a claim was filed in the Ontario Superior Court of Justice against TDL, the Company, the Tim Hortons Ad Fund and certain individual defendants. The plaintiff, a franchisee of two Tim Hortons restaurants, seeks to certify a class of all persons who have carried on business as a Tim Hortons franchisee in Canada at any time after December 15, 2014. The claim alleges various causes of action against the defendants in relation to the purported misuse of amounts paid by members of the proposed class to the Tim Hortons Canada advertising fund (the “Ad Fund”). The plaintiff seeks to have the Ad Fund franchisee contributions held in trust for the benefit of members of the proposed class, an accounting of the Ad Fund, as well as damages for breach of contract, breach of trust, breach of the statutory duty of fair dealing, and breach of fiduciary duties.
On October 6, 2017, a claim was filed in the Ontario Superior Court of Justice against the same defendants as named above. The plaintiffs, two franchisees of Tim Hortons restaurants, seek to certify a class of all persons who have carried on business as a Tim Hortons franchisee at any time after March 8, 2017. The claim alleges various causes of action against the defendants in relation to the purported adverse treatment of member and potential member franchisees of the Great White North Franchisee Association. The plaintiffs seek damages for, among other things, breach of contract, breach of the statutory duty of fair dealing, and breach of the franchisees’ statutory right of association.
In connection with these two lawsuits, the court granted our motion to strike the individuals named in the lawsuits, the Company and the Tim Hortons Ad Fund on October 22, 2018. The only defendant that remained in the lawsuits was TDL. In March 2019, the Company settled these two class action lawsuits. The court approved the settlement on April 29, 2019. Under the terms of the settlement, TDL is contributing C$6 million to the Tim Hortons Advertising Fund in Canada over two years, such amount to be spent on marketing activities. In addition, TDL has paid C$6 million for legal, administrative and other third-party expenses. These amounts were accrued by TDL during 2018.
Note 19. Segment Reporting and Geographical Information
As stated in Note 1, Description of Business and Organization, we manage three brands. Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Under the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. 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.
Our management structure and financial reporting is organized around our three brands, including the information regularly reviewed by our Chief Executive Officer, who is our Chief Operating Decision Maker. Therefore, we have three operating segments: (1) TH, which includes all operations of our Tim Hortons brand, (2) BK, which includes all operations of our Burger King brand, and (3) PLK, which includes all operations of our Popeyes brand. Our three operating segments represent our reportable segments.
As stated in Note 16, Revenue Recognition, we transitioned to ASC 606 on January 1, 2018 using the modified retrospective transition method. Our Financial Statements reflect the application of ASC 606 guidance beginning in 2018, while our Financial Statements for periods prior to 2018 were prepared under the guidance of the Previous Standards. Additionally, as stated in Note 10, Leases, we transitioned to ASC 842 from the Previous Standard on January 1, 2019. Our Financial Statements reflect the application of ASC 842 guidance beginning in 2019, while our Financial Statements for prior periods were prepared under the guidance of the Previous Standard.
PLK revenues and segment income from the acquisition date of March 27, 2017 through December 31, 2017 are included in our consolidated statement of operations for 2017. The following tables present revenues, by segment and by country, depreciation and amortization, (income) loss from equity method investments, and capital expenditures by segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Revenues by operating segment:
|
|
|
|
|
|
TH
|
$
|
3,344
|
|
|
$
|
3,292
|
|
|
$
|
3,155
|
|
BK
|
1,777
|
|
|
1,651
|
|
|
1,219
|
|
PLK
|
482
|
|
|
414
|
|
|
202
|
|
Total
|
$
|
5,603
|
|
|
$
|
5,357
|
|
|
$
|
4,576
|
|
|
|
|
|
|
|
Revenues by country (a):
|
|
|
|
|
|
Canada
|
$
|
3,037
|
|
|
$
|
2,984
|
|
|
$
|
2,832
|
|
United States
|
1,930
|
|
|
1,785
|
|
|
1,190
|
|
Other
|
636
|
|
|
588
|
|
|
554
|
|
Total
|
$
|
5,603
|
|
|
$
|
5,357
|
|
|
$
|
4,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
TH
|
$
|
112
|
|
|
$
|
108
|
|
|
$
|
110
|
|
BK
|
62
|
|
|
61
|
|
|
62
|
|
PLK
|
11
|
|
|
11
|
|
|
10
|
|
Total
|
$
|
185
|
|
|
$
|
180
|
|
|
$
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss from equity method investments:
|
|
|
|
|
|
TH
|
$
|
(7
|
)
|
|
$
|
(6
|
)
|
|
$
|
(8
|
)
|
BK
|
(4
|
)
|
|
(16
|
)
|
|
(4
|
)
|
Total
|
$
|
(11
|
)
|
|
$
|
(22
|
)
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
TH
|
$
|
37
|
|
|
$
|
59
|
|
|
$
|
13
|
|
BK
|
20
|
|
|
25
|
|
|
23
|
|
PLK
|
5
|
|
|
2
|
|
|
1
|
|
Total
|
$
|
62
|
|
|
$
|
86
|
|
|
$
|
37
|
|
(a)Only Canada and the United States represented 10% or more of our total revenues in each period presented.
Total assets by segment, and long-lived assets by segment and country are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Long-Lived Assets
|
|
As of December 31,
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
By operating segment:
|
|
|
|
|
|
|
|
TH
|
$
|
13,894
|
|
|
$
|
12,666
|
|
|
$
|
1,972
|
|
|
$
|
1,226
|
|
BK
|
5,149
|
|
|
4,514
|
|
|
1,130
|
|
|
729
|
|
PLK
|
2,490
|
|
|
2,420
|
|
|
129
|
|
|
95
|
|
Unallocated
|
827
|
|
|
541
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
22,360
|
|
|
$
|
20,141
|
|
|
$
|
3,231
|
|
|
$
|
2,050
|
|
By country:
|
|
|
|
|
|
|
|
Canada
|
|
|
|
|
$
|
1,665
|
|
|
$
|
945
|
|
United States
|
|
|
|
|
1,542
|
|
|
1,098
|
|
Other
|
|
|
|
|
24
|
|
|
7
|
|
Total
|
|
|
|
|
$
|
3,231
|
|
|
$
|
2,050
|
|
Long-lived assets include property and equipment, net, finance and operating lease right of use assets, net and net investment in property leased to franchisees. Only Canada and the United States represented 10% or more of our total long-lived assets as of December 31, 2019 and December 31, 2018.
Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax expense (benefit), and depreciation and amortization, adjusted to exclude the non-cash impact of share-based compensation and non-cash incentive compensation expense and (income) loss from equity method investments, net of cash distributions received from equity method investments, as well as other operating expenses (income), net. Other specifically identified costs associated with non-recurring projects are also excluded from Adjusted EBITDA, including fees and expenses associated with the Popeyes Acquisition (“PLK Transaction costs”), Corporate restructuring and tax advisory fees related to the interpretation and implementation of the Tax Act, including Treasury regulations proposed in late 2018, and non-operational Office centralization and relocation costs in connection with the centralization and relocation of our Canadian and U.S. restaurant support centers to new offices in Toronto, Ontario, and Miami, Florida, respectively. Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of operating performance or the performance of an acquired business. A reconciliation of segment income to net income (loss) consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Segment income:
|
|
|
|
|
|
TH
|
$
|
1,122
|
|
|
$
|
1,127
|
|
|
$
|
1,136
|
|
BK
|
994
|
|
|
928
|
|
|
903
|
|
PLK
|
188
|
|
|
157
|
|
|
107
|
|
Adjusted EBITDA
|
2,304
|
|
|
2,212
|
|
|
2,146
|
|
Share-based compensation and non-cash incentive compensation expense
|
74
|
|
|
55
|
|
|
55
|
|
PLK Transaction costs
|
—
|
|
|
10
|
|
|
62
|
|
Corporate restructuring and tax advisory fees
|
31
|
|
|
25
|
|
|
2
|
|
Office centralization and relocation costs
|
6
|
|
|
20
|
|
|
—
|
|
Impact of equity method investments (a)
|
11
|
|
|
(3
|
)
|
|
1
|
|
Other operating expenses (income), net
|
(10
|
)
|
|
8
|
|
|
109
|
|
EBITDA
|
2,192
|
|
|
2,097
|
|
|
1,917
|
|
Depreciation and amortization
|
185
|
|
|
180
|
|
|
182
|
|
Income from operations
|
2,007
|
|
|
1,917
|
|
|
1,735
|
|
Interest expense, net
|
532
|
|
|
535
|
|
|
512
|
|
Loss on early extinguishment of debt
|
23
|
|
|
—
|
|
|
122
|
|
Income tax expense (benefit)
|
341
|
|
|
238
|
|
|
(134
|
)
|
Net income
|
$
|
1,111
|
|
|
$
|
1,144
|
|
|
$
|
1,235
|
|
|
|
(a)
|
Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income.
|
Note 20. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data (in millions, except per unit data) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Total revenues
|
$
|
1,266
|
|
|
$
|
1,254
|
|
|
$
|
1,400
|
|
|
$
|
1,343
|
|
|
$
|
1,458
|
|
|
$
|
1,375
|
|
|
$
|
1,479
|
|
|
$
|
1,385
|
|
Income from operations
|
$
|
434
|
|
|
$
|
421
|
|
|
$
|
491
|
|
|
$
|
502
|
|
|
$
|
571
|
|
|
$
|
478
|
|
|
$
|
511
|
|
|
$
|
516
|
|
Net income
|
$
|
246
|
|
|
$
|
279
|
|
|
$
|
257
|
|
|
$
|
314
|
|
|
$
|
351
|
|
|
$
|
250
|
|
|
$
|
257
|
|
|
$
|
301
|
|
Basic and diluted earnings per unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common units
|
$
|
0.67
|
|
|
$
|
0.73
|
|
|
$
|
0.70
|
|
|
$
|
0.83
|
|
|
$
|
1.00
|
|
|
$
|
0.66
|
|
|
$
|
0.81
|
|
|
$
|
0.81
|
|
Partnership exchangeable units
|
$
|
0.53
|
|
|
$
|
0.60
|
|
|
$
|
0.55
|
|
|
$
|
0.67
|
|
|
$
|
0.76
|
|
|
$
|
0.53
|
|
|
$
|
0.55
|
|
|
$
|
0.65
|
|
Note 21. Supplemental Financial Information
On February 17, 2017, 1011778 B.C. Unlimited Liability Company (the “Parent Issuer”) and New Red Finance Inc. (the “Co-Issuer” and together with the Parent Issuer, the “Issuers”) entered into an amended credit agreement, as amended from time to time, that provides for obligations under the Credit Facilities. On November 19, 2019, the Issuers entered into the 2019 4.375% Senior Notes Indenture with respect to the 2019 4.375% Senior Notes. On September 24, 2019, the Issuers entered into the 2019 3.875% Senior Notes Indenture with respect to the 2019 3.875% Senior Notes. On August 28, 2017, the Issuers entered into the 2017 5.00% Senior Notes Indenture with respect to the 2017 5.00% Senior Notes. On May 17, 2017, the Issuers entered into the 2017 4.25% Senior Notes Indenture with respect to the 2017 4.25% Senior Notes.
The agreement governing our Credit Facilities, the 2019 4.375% Senior Notes Indenture, the 2019 3.875% Senior Notes Indenture, the 2017 5.00% Senior Notes Indenture, and the 2017 4.25% Senior Notes Indenture allow the financial reporting obligation of the Parent Issuer to be satisfied through the reporting of Partnership’s consolidated financial information, provided that the consolidated financial information of the Parent Issuer and its restricted subsidiaries is presented on a standalone basis.
The following represents the condensed consolidating financial information for the Parent Issuer and its restricted subsidiaries (“Consolidated Borrowers”) on a consolidated basis, together with eliminations, as of and for the periods indicated. The condensed consolidating financial information of Partnership is combined with the financial information of its wholly-owned subsidiaries that are also parent entities of the Parent Issuer and presented in a single column under the heading “RBILP”. The consolidating financial information may not necessarily be indicative of the financial position, results of operations or cash flows had the Issuers and Partnership operated as independent entities.
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
(In millions of U.S. dollars)
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Borrowers
|
|
RBILP
|
|
Eliminations
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,533
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,533
|
|
Accounts and notes receivable, net
|
527
|
|
|
—
|
|
|
—
|
|
|
527
|
|
Inventories, net
|
84
|
|
|
—
|
|
|
—
|
|
|
84
|
|
Prepaids and other current assets
|
52
|
|
|
—
|
|
|
—
|
|
|
52
|
|
Total current assets
|
2,196
|
|
|
—
|
|
|
—
|
|
|
2,196
|
|
Property and equipment, net
|
2,007
|
|
|
—
|
|
|
—
|
|
|
2,007
|
|
Operating lease assets, net
|
1,176
|
|
|
—
|
|
|
—
|
|
|
1,176
|
|
Intangible assets, net
|
10,563
|
|
|
—
|
|
|
—
|
|
|
10,563
|
|
Goodwill
|
5,651
|
|
|
—
|
|
|
—
|
|
|
5,651
|
|
Net investment in property leased to franchisees
|
48
|
|
|
—
|
|
|
—
|
|
|
48
|
|
Intercompany receivable
|
—
|
|
|
232
|
|
|
(232
|
)
|
|
—
|
|
Investment in subsidiaries
|
—
|
|
|
4,259
|
|
|
(4,259
|
)
|
|
—
|
|
Other assets, net
|
719
|
|
|
—
|
|
|
—
|
|
|
719
|
|
Total assets
|
$
|
22,360
|
|
|
$
|
4,491
|
|
|
$
|
(4,491
|
)
|
|
$
|
22,360
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts and drafts payable
|
$
|
644
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
644
|
|
Other accrued liabilities
|
558
|
|
|
232
|
|
|
—
|
|
|
790
|
|
Gift card liability
|
168
|
|
|
—
|
|
|
—
|
|
|
168
|
|
Current portion of long term debt and finance leases
|
101
|
|
|
—
|
|
|
—
|
|
|
101
|
|
Total current liabilities
|
1,471
|
|
|
232
|
|
|
—
|
|
|
1,703
|
|
Term debt, net of current portion
|
11,759
|
|
|
—
|
|
|
—
|
|
|
11,759
|
|
Finance leases, net of current portion
|
288
|
|
|
—
|
|
|
—
|
|
|
288
|
|
Operating lease liabilities, net of current portion
|
1,089
|
|
|
—
|
|
|
—
|
|
|
1,089
|
|
Other liabilities, net
|
1,698
|
|
|
—
|
|
|
—
|
|
|
1,698
|
|
Payables to affiliates
|
232
|
|
|
—
|
|
|
(232
|
)
|
|
—
|
|
Deferred income taxes, net
|
1,564
|
|
|
—
|
|
|
—
|
|
|
1,564
|
|
Total liabilities
|
18,101
|
|
|
232
|
|
|
(232
|
)
|
|
18,101
|
|
Partners’ capital:
|
|
|
|
|
|
|
|
Class A common units
|
—
|
|
|
7,786
|
|
|
—
|
|
|
7,786
|
|
Partnership exchangeable units
|
—
|
|
|
(2,353
|
)
|
|
—
|
|
|
(2,353
|
)
|
Common shares
|
3,248
|
|
|
—
|
|
|
(3,248
|
)
|
|
—
|
|
Retained earnings
|
2,185
|
|
|
—
|
|
|
(2,185
|
)
|
|
—
|
|
Accumulated other comprehensive income (loss)
|
(1,178
|
)
|
|
(1,178
|
)
|
|
1,178
|
|
|
(1,178
|
)
|
Total Partners’ capital/shareholders’ equity
|
4,255
|
|
|
4,255
|
|
|
(4,255
|
)
|
|
4,255
|
|
Noncontrolling interests
|
4
|
|
|
4
|
|
|
(4
|
)
|
|
4
|
|
Total equity
|
4,259
|
|
|
4,259
|
|
|
(4,259
|
)
|
|
4,259
|
|
Total liabilities and equity
|
$
|
22,360
|
|
|
$
|
4,491
|
|
|
$
|
(4,491
|
)
|
|
$
|
22,360
|
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
(In millions of U.S. dollars)
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Borrowers
|
|
RBILP
|
|
Eliminations
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
913
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
913
|
|
Accounts and notes receivable, net
|
452
|
|
|
—
|
|
|
—
|
|
|
452
|
|
Inventories, net
|
75
|
|
|
—
|
|
|
—
|
|
|
75
|
|
Prepaids and other current assets
|
60
|
|
|
—
|
|
|
—
|
|
|
60
|
|
Total current assets
|
1,500
|
|
|
—
|
|
|
—
|
|
|
1,500
|
|
Property and equipment, net
|
1,996
|
|
|
—
|
|
|
—
|
|
|
1,996
|
|
Intangible assets, net
|
10,463
|
|
|
—
|
|
|
—
|
|
|
10,463
|
|
Goodwill
|
5,486
|
|
|
—
|
|
|
—
|
|
|
5,486
|
|
Net investment in property leased to franchisees
|
54
|
|
|
—
|
|
|
—
|
|
|
54
|
|
Intercompany receivable
|
—
|
|
|
207
|
|
|
(207
|
)
|
|
—
|
|
Investment in subsidiaries
|
—
|
|
|
3,618
|
|
|
(3,618
|
)
|
|
—
|
|
Other assets, net
|
642
|
|
|
—
|
|
|
—
|
|
|
642
|
|
Total assets
|
$
|
20,141
|
|
|
$
|
3,825
|
|
|
$
|
(3,825
|
)
|
|
$
|
20,141
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts and drafts payable
|
$
|
513
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
513
|
|
Other accrued liabilities
|
430
|
|
|
207
|
|
|
—
|
|
|
637
|
|
Gift card liability
|
167
|
|
|
—
|
|
|
—
|
|
|
167
|
|
Current portion of long term debt and finance leases
|
91
|
|
|
—
|
|
|
—
|
|
|
91
|
|
Total current liabilities
|
1,201
|
|
|
207
|
|
|
—
|
|
|
1,408
|
|
Term debt, net of current portion
|
11,823
|
|
|
—
|
|
|
—
|
|
|
11,823
|
|
Finance leases, net of current portion
|
226
|
|
|
—
|
|
|
—
|
|
|
226
|
|
Other liabilities, net
|
1,547
|
|
|
—
|
|
|
—
|
|
|
1,547
|
|
Payables to affiliates
|
207
|
|
|
—
|
|
|
(207
|
)
|
|
—
|
|
Deferred income taxes, net
|
1,519
|
|
|
—
|
|
|
—
|
|
|
1,519
|
|
Total liabilities
|
16,523
|
|
|
207
|
|
|
(207
|
)
|
|
16,523
|
|
Partners’ capital:
|
|
|
|
|
|
|
|
Class A common units
|
—
|
|
|
4,323
|
|
|
—
|
|
|
4,323
|
|
Partnership exchangeable units
|
—
|
|
|
730
|
|
|
—
|
|
|
730
|
|
Common shares
|
3,071
|
|
|
—
|
|
|
(3,071
|
)
|
|
—
|
|
Retained earnings
|
1,982
|
|
|
—
|
|
|
(1,982
|
)
|
|
—
|
|
Accumulated other comprehensive income (loss)
|
(1,437
|
)
|
|
(1,437
|
)
|
|
1,437
|
|
|
(1,437
|
)
|
Total Partners’ capital/shareholders’ equity
|
3,616
|
|
|
3,616
|
|
|
(3,616
|
)
|
|
3,616
|
|
Noncontrolling interests
|
2
|
|
|
2
|
|
|
(2
|
)
|
|
2
|
|
Total equity
|
3,618
|
|
|
3,618
|
|
|
(3,618
|
)
|
|
3,618
|
|
Total liabilities and equity
|
$
|
20,141
|
|
|
$
|
3,825
|
|
|
$
|
(3,825
|
)
|
|
$
|
20,141
|
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
(In millions of U.S. dollars)
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Borrowers
|
|
RBILP
|
|
Eliminations
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
Sales
|
$
|
2,362
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,362
|
|
Franchise and property revenues
|
3,241
|
|
|
—
|
|
|
—
|
|
|
3,241
|
|
Total revenues
|
5,603
|
|
|
—
|
|
|
—
|
|
|
5,603
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Cost of sales
|
1,813
|
|
|
—
|
|
|
—
|
|
|
1,813
|
|
Franchise and property expenses
|
540
|
|
|
—
|
|
|
—
|
|
|
540
|
|
Selling, general and administrative expenses
|
1,264
|
|
|
—
|
|
|
—
|
|
|
1,264
|
|
(Income) loss from equity method investments
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
Other operating expenses (income), net
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
Total operating costs and expenses
|
3,596
|
|
|
—
|
|
|
—
|
|
|
3,596
|
|
Income from operations
|
2,007
|
|
|
—
|
|
|
—
|
|
|
2,007
|
|
Interest expense, net
|
532
|
|
|
—
|
|
|
—
|
|
|
532
|
|
Loss on early extinguishment of debt
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Income before income taxes
|
1,452
|
|
|
—
|
|
|
—
|
|
|
1,452
|
|
Income tax expense (benefit)
|
341
|
|
|
—
|
|
|
—
|
|
|
341
|
|
Net income
|
1,111
|
|
|
—
|
|
|
—
|
|
|
1,111
|
|
Equity in earnings of consolidated subsidiaries
|
—
|
|
|
1,111
|
|
|
(1,111
|
)
|
|
—
|
|
Net income (loss)
|
1,111
|
|
|
1,111
|
|
|
(1,111
|
)
|
|
1,111
|
|
Net income (loss) attributable to noncontrolling interests
|
2
|
|
|
2
|
|
|
(2
|
)
|
|
2
|
|
Net income (loss) attributable to common unitholders
|
$
|
1,109
|
|
|
$
|
1,109
|
|
|
$
|
(1,109
|
)
|
|
$
|
1,109
|
|
Total comprehensive income (loss)
|
$
|
1,370
|
|
|
$
|
1,370
|
|
|
$
|
(1,370
|
)
|
|
$
|
1,370
|
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
(In millions of U.S. dollars)
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Borrowers
|
|
RBILP
|
|
Eliminations
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
Sales
|
$
|
2,355
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,355
|
|
Franchise and property revenues
|
3,002
|
|
|
—
|
|
|
—
|
|
|
3,002
|
|
Total revenues
|
5,357
|
|
|
—
|
|
|
—
|
|
|
5,357
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Cost of sales
|
1,818
|
|
|
—
|
|
|
—
|
|
|
1,818
|
|
Franchise and property expenses
|
422
|
|
|
—
|
|
|
—
|
|
|
422
|
|
Selling, general and administrative expenses
|
1,214
|
|
|
—
|
|
|
—
|
|
|
1,214
|
|
(Income) loss from equity method investments
|
(22
|
)
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
Other operating expenses (income), net
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Total operating costs and expenses
|
3,440
|
|
|
—
|
|
|
—
|
|
|
3,440
|
|
Income from operations
|
1,917
|
|
|
—
|
|
|
—
|
|
|
1,917
|
|
Interest expense, net
|
535
|
|
|
—
|
|
|
—
|
|
|
535
|
|
Income before income taxes
|
1,382
|
|
|
—
|
|
|
—
|
|
|
1,382
|
|
Income tax expense (benefit)
|
238
|
|
|
—
|
|
|
—
|
|
|
238
|
|
Net income
|
1,144
|
|
|
—
|
|
|
—
|
|
|
1,144
|
|
Equity in earnings of consolidated subsidiaries
|
—
|
|
|
1,144
|
|
|
(1,144
|
)
|
|
—
|
|
Net income (loss)
|
1,144
|
|
|
1,144
|
|
|
(1,144
|
)
|
|
1,144
|
|
Net income (loss) attributable to noncontrolling interests
|
1
|
|
|
1
|
|
|
(1
|
)
|
|
1
|
|
Net income (loss) attributable to common unitholders
|
$
|
1,143
|
|
|
$
|
1,143
|
|
|
$
|
(1,143
|
)
|
|
$
|
1,143
|
|
Total comprehensive income (loss)
|
$
|
591
|
|
|
$
|
591
|
|
|
$
|
(591
|
)
|
|
$
|
591
|
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
(In millions of U.S. dollars)
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Borrowers
|
|
RBILP
|
|
Eliminations
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
Sales
|
$
|
2,390
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,390
|
|
Franchise and property revenues
|
2,186
|
|
|
—
|
|
|
—
|
|
|
2,186
|
|
Total revenues
|
4,576
|
|
|
—
|
|
|
—
|
|
|
4,576
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Cost of sales
|
1,850
|
|
|
—
|
|
|
—
|
|
|
1,850
|
|
Franchise and property expenses
|
478
|
|
|
—
|
|
|
—
|
|
|
478
|
|
Selling, general and administrative expenses
|
416
|
|
|
—
|
|
|
—
|
|
|
416
|
|
(Income) loss from equity method investments
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
Other operating expenses (income), net
|
109
|
|
|
—
|
|
|
—
|
|
|
109
|
|
Total operating costs and expenses
|
2,841
|
|
|
—
|
|
|
—
|
|
|
2,841
|
|
Income from operations
|
1,735
|
|
|
—
|
|
|
—
|
|
|
1,735
|
|
Interest expense, net
|
512
|
|
|
—
|
|
|
—
|
|
|
512
|
|
Loss on early extinguishment of debt
|
122
|
|
|
—
|
|
|
—
|
|
|
122
|
|
Income before income taxes
|
1,101
|
|
|
—
|
|
|
—
|
|
|
1,101
|
|
Income tax expense (benefit)
|
(134
|
)
|
|
—
|
|
|
—
|
|
|
(134
|
)
|
Net income
|
1,235
|
|
|
—
|
|
|
—
|
|
|
1,235
|
|
Equity in earnings of consolidated subsidiaries
|
—
|
|
|
1,235
|
|
|
(1,235
|
)
|
|
—
|
|
Net income (loss)
|
1,235
|
|
|
1,235
|
|
|
(1,235
|
)
|
|
1,235
|
|
Net income (loss) attributable to noncontrolling interests
|
2
|
|
|
2
|
|
|
(2
|
)
|
|
2
|
|
Partnership preferred unit distributions
|
—
|
|
|
256
|
|
|
—
|
|
|
256
|
|
Gain on redemption of Partnership preferred units
|
—
|
|
|
(234
|
)
|
|
—
|
|
|
(234
|
)
|
Net income (loss) attributable to common unitholders
|
$
|
1,233
|
|
|
$
|
1,211
|
|
|
$
|
(1,233
|
)
|
|
$
|
1,211
|
|
Total comprehensive income (loss)
|
$
|
1,706
|
|
|
$
|
1,706
|
|
|
$
|
(1,706
|
)
|
|
$
|
1,706
|
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
(In millions of U.S. dollars)
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Borrowers
|
|
RBILP
|
|
Eliminations
|
|
Consolidated
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net income
|
$
|
1,111
|
|
|
$
|
1,111
|
|
|
$
|
(1,111
|
)
|
|
$
|
1,111
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Equity in loss (earnings) of consolidated subsidiaries
|
—
|
|
|
(1,111
|
)
|
|
1,111
|
|
|
—
|
|
Depreciation and amortization
|
185
|
|
|
—
|
|
|
—
|
|
|
185
|
|
Premiums paid and non-cash loss on early extinguishment of debt
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
Amortization of deferred financing costs and debt issuance discount
|
29
|
|
|
—
|
|
|
—
|
|
|
29
|
|
(Income) loss from equity method investments
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
Loss (gain) on remeasurement of foreign denominated transactions
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
Net (gains) losses on derivatives
|
(49
|
)
|
|
—
|
|
|
—
|
|
|
(49
|
)
|
Share-based compensation expense
|
68
|
|
|
—
|
|
|
—
|
|
|
68
|
|
Deferred income taxes
|
58
|
|
|
—
|
|
|
—
|
|
|
58
|
|
Other
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Changes in current assets and liabilities, excluding acquisitions and dispositions:
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
(53
|
)
|
|
—
|
|
|
—
|
|
|
(53
|
)
|
Inventories and prepaids and other current assets
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
Accounts and drafts payable
|
112
|
|
|
—
|
|
|
—
|
|
|
112
|
|
Other accrued liabilities and gift card liability
|
(51
|
)
|
|
—
|
|
|
—
|
|
|
(51
|
)
|
Tenant inducements paid to franchisees
|
(54
|
)
|
|
—
|
|
|
—
|
|
|
(54
|
)
|
Other long-term assets and liabilities
|
138
|
|
|
—
|
|
|
—
|
|
|
138
|
|
Net cash provided by operating activities
|
1,476
|
|
|
—
|
|
|
—
|
|
|
1,476
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Payments for property and equipment
|
(62
|
)
|
|
—
|
|
|
—
|
|
|
(62
|
)
|
Net proceeds from disposal of assets, restaurant closures and refranchisings
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Settlement/sale of derivatives, net
|
24
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Net cash used for investing activities
|
(30
|
)
|
|
—
|
|
|
—
|
|
|
(30
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
2,250
|
|
|
—
|
|
|
—
|
|
|
2,250
|
|
Repayments of long-term debt and finance leases
|
(2,266
|
)
|
|
—
|
|
|
—
|
|
|
(2,266
|
)
|
Payment of financing costs
|
(50
|
)
|
|
—
|
|
|
—
|
|
|
(50
|
)
|
Distributions paid on Class A and Partnership exchangeable units
|
—
|
|
|
(901
|
)
|
|
—
|
|
|
(901
|
)
|
Capital contribution from RBI Inc.
|
102
|
|
|
—
|
|
|
—
|
|
|
102
|
|
Distributions from subsidiaries
|
(901
|
)
|
|
901
|
|
|
—
|
|
|
—
|
|
Proceeds from derivatives
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Net cash used for financing activities
|
(842
|
)
|
|
—
|
|
|
—
|
|
|
(842
|
)
|
Effect of exchange rates on cash and cash equivalents
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
Increase (decrease) in cash and cash equivalents
|
620
|
|
|
—
|
|
|
—
|
|
|
620
|
|
Cash and cash equivalents at beginning of period
|
913
|
|
|
—
|
|
|
—
|
|
|
913
|
|
Cash and cash equivalents at end of period
|
$
|
1,533
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,533
|
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
(In millions of U.S. dollars)
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Borrowers
|
|
RBILP
|
|
Eliminations
|
|
Consolidated
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net income
|
$
|
1,144
|
|
|
$
|
1,144
|
|
|
$
|
(1,144
|
)
|
|
$
|
1,144
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Equity in loss (earnings) of consolidated subsidiaries
|
—
|
|
|
(1,144
|
)
|
|
1,144
|
|
|
—
|
|
Depreciation and amortization
|
180
|
|
|
—
|
|
|
—
|
|
|
180
|
|
Amortization of deferred financing costs and debt issuance discount
|
29
|
|
|
—
|
|
|
—
|
|
|
29
|
|
(Income) loss from equity method investments
|
(22
|
)
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
Loss (gain) on remeasurement of foreign denominated transactions
|
(33
|
)
|
|
—
|
|
|
—
|
|
|
(33
|
)
|
Net (gains) losses on derivatives
|
(40
|
)
|
|
—
|
|
|
—
|
|
|
(40
|
)
|
Share-based compensation expense
|
48
|
|
|
—
|
|
|
—
|
|
|
48
|
|
Deferred income taxes
|
29
|
|
|
—
|
|
|
—
|
|
|
29
|
|
Other
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Changes in current assets and liabilities, excluding acquisitions and dispositions:
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
19
|
|
|
—
|
|
|
—
|
|
|
19
|
|
Inventories and prepaids and other current assets
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
Accounts and drafts payable
|
41
|
|
|
—
|
|
|
—
|
|
|
41
|
|
Other accrued liabilities and gift card liability
|
(219
|
)
|
|
—
|
|
|
—
|
|
|
(219
|
)
|
Tenant inducements paid to franchisees
|
(52
|
)
|
|
—
|
|
|
—
|
|
|
(52
|
)
|
Other long-term assets and liabilities
|
43
|
|
|
—
|
|
|
—
|
|
|
43
|
|
Net cash provided by operating activities
|
1,165
|
|
|
—
|
|
|
—
|
|
|
1,165
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Payments for property and equipment
|
(86
|
)
|
|
—
|
|
|
—
|
|
|
(86
|
)
|
Net proceeds from disposal of assets, restaurant closures and refranchisings
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Settlement/sale of derivatives, net
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Other investing activities, net
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Net cash used for investing activities
|
(44
|
)
|
|
—
|
|
|
—
|
|
|
(44
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
75
|
|
|
—
|
|
|
—
|
|
|
75
|
|
Repayments of long-term debt and finance leases
|
(74
|
)
|
|
—
|
|
|
—
|
|
|
(74
|
)
|
Distributions to RBI for payments in connection with redemption of RBI preferred shares
|
—
|
|
|
(60
|
)
|
|
—
|
|
|
(60
|
)
|
Payment of financing costs
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
Distributions paid on Class A and Partnership exchangeable units
|
—
|
|
|
(728
|
)
|
|
—
|
|
|
(728
|
)
|
Repurchase of Partnership exchangeable units
|
—
|
|
|
(561
|
)
|
|
—
|
|
|
(561
|
)
|
Capital contribution from RBI Inc.
|
61
|
|
|
—
|
|
|
—
|
|
|
61
|
|
Distributions from subsidiaries
|
(1,349
|
)
|
|
1,349
|
|
|
—
|
|
|
—
|
|
Other financing activities, net
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Net cash used for financing activities
|
(1,285
|
)
|
|
—
|
|
|
—
|
|
|
(1,285
|
)
|
Effect of exchange rates on cash and cash equivalents
|
(20
|
)
|
|
—
|
|
|
—
|
|
|
(20
|
)
|
Increase (decrease) in cash and cash equivalents
|
(184
|
)
|
|
—
|
|
|
—
|
|
|
(184
|
)
|
Cash and cash equivalents at beginning of period
|
1,097
|
|
|
—
|
|
|
—
|
|
|
1,097
|
|
Cash and cash equivalents at end of period
|
$
|
913
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
913
|
|
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
(In millions of U.S. dollars)
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Borrowers
|
|
RBILP
|
|
Eliminations
|
|
Consolidated
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net income
|
$
|
1,235
|
|
|
$
|
1,235
|
|
|
$
|
(1,235
|
)
|
|
$
|
1,235
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Equity in loss (earnings) of consolidated subsidiaries
|
—
|
|
|
(1,235
|
)
|
|
1,235
|
|
|
—
|
|
Depreciation and amortization
|
182
|
|
|
—
|
|
|
—
|
|
|
182
|
|
Premiums paid and non-cash loss on early extinguishment of debt
|
119
|
|
|
—
|
|
|
—
|
|
|
119
|
|
Amortization of deferred financing costs and debt issuance discount
|
33
|
|
|
—
|
|
|
—
|
|
|
33
|
|
(Income) loss from equity method investments
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
Loss (gain) on remeasurement of foreign denominated transactions
|
77
|
|
|
—
|
|
|
—
|
|
|
77
|
|
Net (gains) losses on derivatives
|
31
|
|
|
—
|
|
|
—
|
|
|
31
|
|
Share-based compensation expense
|
48
|
|
|
—
|
|
|
—
|
|
|
48
|
|
Deferred income taxes
|
(742
|
)
|
|
—
|
|
|
—
|
|
|
(742
|
)
|
Other
|
18
|
|
|
—
|
|
|
—
|
|
|
18
|
|
Changes in current assets and liabilities, excluding acquisitions and dispositions:
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
(30
|
)
|
|
—
|
|
|
—
|
|
|
(30
|
)
|
Inventories and prepaids and other current assets
|
19
|
|
|
—
|
|
|
—
|
|
|
19
|
|
Accounts and drafts payable
|
14
|
|
|
—
|
|
|
—
|
|
|
14
|
|
Other accrued liabilities and gift card liability
|
360
|
|
|
—
|
|
|
—
|
|
|
360
|
|
Tenant inducements paid to franchisees
|
(20
|
)
|
|
—
|
|
|
—
|
|
|
(20
|
)
|
Other long-term assets and liabilities
|
99
|
|
|
—
|
|
|
—
|
|
|
99
|
|
Net cash provided by operating activities
|
1,431
|
|
|
—
|
|
|
—
|
|
|
1,431
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Payments for property and equipment
|
(37
|
)
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
Net proceeds from disposal of assets, restaurant closures and refranchisings
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
Net payment for purchase of Popeyes, net of cash acquired
|
(1,636
|
)
|
|
—
|
|
|
—
|
|
|
(1,636
|
)
|
Settlement/sale of derivatives, net
|
772
|
|
|
—
|
|
|
—
|
|
|
772
|
|
Other investing activities, net
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Net cash used for investing activities
|
(858
|
)
|
|
—
|
|
|
—
|
|
|
(858
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
5,850
|
|
|
—
|
|
|
—
|
|
|
5,850
|
|
Repayments of long-term debt and finance leases
|
(2,742
|
)
|
|
—
|
|
|
—
|
|
|
(2,742
|
)
|
Distributions to RBI for payments in connection with redemption of preferred shares
|
—
|
|
|
(3,006
|
)
|
|
—
|
|
|
(3,006
|
)
|
Payment of financing costs
|
(63
|
)
|
|
—
|
|
|
—
|
|
|
(63
|
)
|
Distributions paid on Class A, preferred and Partnership exchangeable units
|
—
|
|
|
(664
|
)
|
|
—
|
|
|
(664
|
)
|
Repurchase of Partnership exchangeable units
|
—
|
|
|
(330
|
)
|
|
—
|
|
|
(330
|
)
|
Capital contribution from RBI Inc.
|
29
|
|
|
—
|
|
|
—
|
|
|
29
|
|
Distributions from subsidiaries
|
(4,000
|
)
|
|
4,000
|
|
|
—
|
|
|
—
|
|
Other financing activities, net
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
Net cash used for financing activities
|
(936
|
)
|
|
—
|
|
|
—
|
|
|
(936
|
)
|
Effect of exchange rates on cash and cash equivalents
|
24
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Increase (decrease) in cash and cash equivalents
|
(339
|
)
|
|
—
|
|
|
—
|
|
|
(339
|
)
|
Cash and cash equivalents at beginning of period
|
1,436
|
|
|
—
|
|
|
—
|
|
|
1,436
|
|
Cash and cash equivalents at end of period
|
$
|
1,097
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,097
|
|
Note 22. Subsequent Events
Dividends
On January 3, 2020, RBI paid a cash dividend of $0.50 per RBI common share to common shareholders of record on December 17, 2019. Partnership made a distribution to RBI as holder of Class A common units in the amount of the aggregate dividends declared and paid by RBI on RBI common shares and also made a distribution in respect of each Partnership exchangeable unit in the amount of $0.50 per exchangeable unit to holders of record on December 17, 2019.
On February 10, 2020, we announced that the RBI board of directors had declared a cash dividend of $0.52 per RBI common share for the first quarter of 2020. The dividend will be paid on April 3, 2020 to RBI common shareholders of record on March 16, 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.
*****