RESTAURANT BRANDS INTERNATIONAL INC. You should read the following discussion together with Part II, Item 6 "Selected Financial Data" of our Annual Report for the year endedDecember 31, 2019 (our "Annual Report") and our audited Consolidated Financial Statements and the related notes thereto included in Part II, Item 8 "Financial Statements and Supplementary Data" of our Annual Report. The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of the Canadian securities laws as described in further detail under "Special Note Regarding Forward-Looking Statements" that is set forth below. Actual results may differ materially from the results discussed in the forward-looking statements because of a number of risks and uncertainties, including the matters discussed in the "Special Note Regarding Forward-Looking Statements" below. In addition, please refer to the risks set forth under the caption "Risk Factors" included in our Annual Report for a further description of risks and uncertainties affecting our business and financial results. Historical trends should not be taken as indicative of future operations and financial results. Other than as required under theU.S. Federal securities laws or the Canadian securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. We prepare our financial statements in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP" or "GAAP"). However, this Management's Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance withU.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors. Unless the context otherwise requires, all references in this section to "Partnership," "we," "us," or "our" are toRestaurant Brands International Limited Partnership and its subsidiaries, collectively. Overview We are a Canadian corporation originally formed onAugust 25, 2014 to serve as the indirect holding company for Tim Hortons and its consolidated subsidiaries and for Burger King and its consolidated subsidiaries. OnMarch 27, 2017 , we acquiredPopeyes Louisiana Kitchen, Inc. and its consolidated subsidiaries. We are one of the world's largest quick service restaurant ("QSR") companies with more than$34 billion in system-wide sales and over 27,000 restaurants in more than 100 countries andU.S. territories as ofDecember 31, 2019 . Our Tim Hortons®, Burger King®, and Popeyes® brands have similar franchise business models with complementary daypart mixes and product platforms. Our three iconic brands are managed independently while benefiting from global scale and sharing of best practices. Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, Timbits®, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other affordably-priced food items.Popeyes restaurants are quick service restaurants featuring a unique "Louisiana" style menu that includes fried chicken, chicken tenders, fried shrimp and other seafood, red beans and rice, and other regional items. We have three operating and reportable segments: (1) Tim Hortons ("TH"); (2) Burger King ("BK"); and (3)Popeyes Louisiana Kitchen ("PLK"). Our business generates revenue from the following sources: (i) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us ("Company restaurants"). In addition, our Tim Hortons business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers. 31
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Recent Events and Factors Affecting Comparability
Transition to New Lease Accounting Standard
We transitioned to Accounting Standards Codification Topic 842, Leases ("ASC
842"), effective January 1, 2019 on a modified retrospective basis using the
effective date transition method. Our consolidated financial statements reflect
the application of ASC 842 guidance beginning in 2019, while our consolidated
financial statements for prior periods were prepared under the guidance of a
previously applicable accounting standard.
The most significant effects of this transition that affect comparability of our results of operations between 2019 and 2018 include the following:
• Beginning on
gross basis for lessee reimbursements of costs such as property taxes and
maintenance when we are the lessor in the lease. Although there was no net
impact to our consolidated statement of operations from this change, the
presentation resulted in total increases to both franchise and property
revenues and franchise and property expenses of
related to our TH segment, $43 million related to our BK segment and $2
million related to our PLK segment) during 2019, compared to 2018 and
2017, when such amounts were recorded on a net basis.
• As described in Note 10, Leases, to the accompanying audited consolidated
financial statements, the transition provisions of ASC 842 required the
reclassification of favorable lease assets and unfavorable lease
liabilities where we are the lessee in the underlying lease to theright-of-use ("ROU") asset recorded for the underlying lease. As a result
of this reclassification, the amortization period for certain favorable
lease assets and unfavorable lease liabilities was reduced, resulting in a
compared to 2018 and 2017. Favorable lease assets and unfavorable lease
liabilities associated with leases where we are the lessor were not
impacted by our transition to ASC 842.
Please refer to Note 10, Leases, to the accompanying audited consolidated
financial statements for further details of the effects of this change in
accounting principle.
Transition to New Revenue Recognition Accounting Standard
We transitioned to Accounting Standards Codification Topic 606, Revenue from
Contracts with Customers ("ASC 606"), effective January 1, 2018 using the
modified retrospective method. Our consolidated financial statements for 2019
and 2018 reflect the application of ASC 606 guidance, while our consolidated
financial statements for 2017 were prepared under the guidance of previously
applicable accounting standards.
Tax Reform
In December 2017 , the U.S. government enacted comprehensive tax legislation
commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act") that
significantly revised the U.S. tax code generally effective January 1, 2018 by,
among other changes, lowering the corporate income tax rate from 35% to 21%,
limiting deductibility of interest expense and performance based incentive
compensation and implementing a modified territorial tax system. As a Canadian
entity, we generally would be classified as a foreign entity (and, therefore, a
non-U.S. tax resident) under general rules of U.S. federal income taxation.
However, we have subsidiaries subject to U.S. federal income taxation and
therefore the Tax Act impacted our consolidated results of operations in 2019,
2018 and 2017, and is expected to continue to impact our consolidated results of
operations in future periods.
The impacts to our consolidated statements of operations consist of the
following ("Tax Act Impact"):
• A provisional benefit of $420 million recorded in our provision from
income taxes for 2017 and a final favorable adjustment of
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
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
recorded in 2017, most of which had been previously accrued with
respect to certain undistributed foreign earnings, and a final
favorable adjustment of
of foreign tax credits) recorded in 2018.
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• No adjustment to these charges and benefits was made in 2019. However,
the provisions of the Tax Act are complex and likely will be the
subject of further regulatory and administrative guidance, which wewill evaluate as released and may require us to record an additional
charge or benefit.
We recorded$31 million ,$25 million and$2 million of costs during 2019, 2018 and 2017, respectively, which are classified as selling, general and administrative expenses in our consolidated statements of operations, arising primarily from professional advisory and consulting services associated with corporate restructuring initiatives related to the interpretation and implementation of the Tax Act ("Corporate restructuring and tax advisory fees"). Popeyes Acquisition and PLK Transaction Costs As described in Note 3 to the accompanying consolidated financial statements, onMarch 27, 2017 , we completed the acquisition ofPopeyes Louisiana Kitchen, Inc. (the "Popeyes Acquisition"). Our 2019 and 2018 consolidated statements of operations includes PLK revenues and segment income for a full fiscal year. Our 2017 consolidated statements of operations includes PLK revenues and segment income fromMarch 28, 2017 throughDecember 31, 2017 . In connection with the Popeyes Acquisition, we incurred certain non-recurring fees and expenses ("PLK Transaction costs") totaling$10 million during 2018 and$62 million during 2017 consisting primarily of professional fees and compensation related expenses, all of which are classified as selling, general and administrative expenses in the consolidated statements of operations. We did not incur any PLK Transaction costs during 2019. Office Centralization and Relocation Costs In connection with the centralization and relocation of our Canadian andU.S. restaurant support centers to new offices inToronto, Ontario , andMiami, Florida , respectively, we incurred certain non-operational expenses ("Office centralization and relocation costs") totaling$6 million during 2019 and$20 million during 2018 consisting primarily of moving costs, relocation-driven compensation expenses, and duplicate rent expenses during 2018, which are classified as selling, general and administrative expenses in the consolidated statement of operations. We do not expect to incur any additional Office centralization and relocation costs during 2020. 33
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Results of Operations
Tabular amounts in millions of
2019 vs. 2018 2018 vs. 2017
Variance Variance
FX Excluding FX Excluding
Consolidated 2019 2018 2017 Variance Impact (a) FX Impact Variance Impact FX Impact
Favorable / (Unfavorable)
Revenues:
Sales $ 2,362 $ 2,355 $ 2,390 $ 7 $
(44 )
(9 ) 790
Operating costs
and expenses:
Cost of sales 1,813 1,818 1,850 5 34 (29 ) 32 - 32
Franchise and
property expenses 540 422 478 (118 ) 7 (125 ) 56 - 56
Selling, general
and
administrative
expenses 1,264 1,214 416 (50 ) 10 (60 ) (798 ) - (798 )
(Income) loss
from equity
method
investments (11 ) (22 ) (12 ) (11 ) (3 ) (8 ) 10 - 10
Other operating
expenses
(income), net (10 ) 8 109 18 (3 ) 21 101 (5 ) 106
Total operating
costs and
expenses 3,596 3,440 2,841 (156 ) 45 (201 ) (599 ) (5 ) (594 )
Income from
operations 2,007 1,917 1,735 90 (51 ) 141 182 (14 ) 196
Interest expense,
net 532 535 512 3 - 3 (23 ) - (23 )
Loss on early
extinguishment of
debt 23 - 122 (23 ) - (23 ) 122 - 122
Income before
income taxes 1,452 1,382 1,101 70 (51 ) 121 281 (14 ) 295
Income tax
(benefit) expense 341 238 (134 ) (103 ) 12 (115 ) (372 ) (12 ) (360 )
Net income $ 1,111 $ 1,144 $ 1,235 $ (33 ) $ (39 ) $ 6 $ (91 ) $ (26 ) $ (65 ) (a) We calculate the FX Impact by translating prior year results at current
year monthly average exchange rates. We analyze these results on a
constant currency basis as this helps identify underlying business trends,
without distortion from the effects of currency movements.
2019 vs. 2018 2018 vs. 2017
Variance Variance
FX Excluding FX Excluding
TH Segment 2019 2018 2017 Variance Impact (a) FX Impact Variance Impact FX Impact
Favorable / (Unfavorable)
Revenues:
Sales $ 2,204 $ 2,201 $ 2,229 $ 3 $ (44 ) $ 47 $ (28 ) $ 1 $ (29 )
Franchise and
property revenues 1,140 1,091 926 49 (22 ) 71 165 (2 ) 167
Total revenues 3,344 3,292 3,155 52 (66 ) 118 137 (1 ) 138
Cost of sales 1,677 1,688 1,707 11 34 (23 ) 19 - 19
Franchise and
property expenses 358 279 336 (79 ) 6 (85 ) 57 1 56
Segment SG&A 309 314 91 5 6 (1 ) (223 ) - (223 )
Segment
depreciation and
amortization (b) 106 102 103 (4 ) 2 (6 ) 1 1 -
Segment income
(c) 1,122 1,127 1,136 (5 ) (22 ) 17 (9 ) (1 ) (8 )
(b) Segment depreciation and amortization consists of depreciation and
amortization included in cost of sales and franchise and property
expenses.
(c) TH segment income includes $16 million , $15 million and $13 million of
cash distributions received from equity method investments for 2019, 2018
and 2017, respectively.
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2019 vs. 2018 2018 vs. 2017
Variance Variance
FX Excluding FX Excluding
BK Segment 2019 2018 2017 Variance Impact (a) FX Impact Variance Impact FX Impact
Favorable / (Unfavorable)
Revenues:
Sales $ 76 $ 75 $ 94 $ 1 $ - $ 1 $ (19 ) $ - $ (19 )
Franchise and
property revenues 1,701 1,576 1,125 125 (30 ) 155 451 (7 ) 458
Total revenues 1,777 1,651 1,219 126 (30 ) 156 432 (7 ) 439
Cost of sales 71 67 86 (4 ) - (4 ) 19 - 19
Franchise and
property expenses 168 131 135 (37 ) 1 (38 ) 4 (1 ) 5
Segment SG&A 600 577 143 (23 ) 3 (26 ) (434 ) (2 ) (432 )
Segment
depreciation and
amortization (b) 49 48 47 (1 ) - (1 ) (1 ) (1 ) -
Segment income
(d) 994 928 903 66 (26 ) 92 25 (9 ) 34
(d) BK segment income includes $6 million , $5 million and $1 million of cash
distributions received from equity method investments for 2019, 2018 and
2017, respectively.
2019 vs. 2018 2018 vs. 2017
Variance Variance
FX Excluding FX Excluding
PLK Segment 2019 2018 2017 (e) Variance Impact (a) FX Impact Variance Impact FX Impact
Favorable / (Unfavorable)
Revenues:
Sales $ 82 $ 79 $ 67 $ 3 $ - $ 3 $ 12 $ - $ 12
Franchise and
property
revenues 400 335 135 65 (1 ) 66 200 (1 ) 201
Total revenues 482 414 202 68 (1 ) 69 212 (1 ) 213
Cost of sales 65 63 57 (2 ) - (2 ) (6 ) - (6 )
Franchise and
property
expenses 14 12 7 (2 ) - (2 ) (5 ) - (5 )
Segment SG&A 225 193 40 (32 ) - (32 ) (153 ) - (153 )
Segment
depreciation and
amortization (b) 11 10 9 (1 ) - (1 ) (1 ) - (1 )
Segment income 188 157 107 31 (1 ) 32 50 (1 ) 51
(e) PLK revenues and segment income from the acquisition date of
2017 through
of operations for 2017.
Comparable Sales TH comparable sales were (1.5)% during 2019, includingCanada comparable sales of (1.4)%. BK comparable sales were 3.4% during 2019, includingU.S. comparable sales of 1.7%. PLK comparable sales were 12.1% during 2019, includingU.S. comparable sales of 13.0%. 35
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Sales and Cost of Sales Sales include TH supply chain sales and sales from Company restaurants. TH supply chain sales represent sales of products, supplies and restaurant equipment, as well as sales to retailers. In periods prior toJanuary 1, 2018 , we classified revenues derived from sales of equipment packages at the establishment of a restaurant and in connection with renewal or renovation as franchise and property revenues. Sales from Company restaurants, including sales by our consolidated TH Restaurant VIEs, represent restaurant-level sales to our guests. Cost of sales includes costs associated with the management of our TH supply chain, including cost of goods, direct labor and depreciation, as well as the cost of products sold to retailers. Cost of sales also includes food, paper and labor costs of Company restaurants. In periods prior toJanuary 1, 2018 , we classified costs related to sales of equipment packages at the establishment of a restaurant and in connection with renewal or renovation as franchise and property expenses. During 2019, the increase in sales was driven by an increase of$47 million in our TH segment, primarily as a result of an increase in supply chain sales, an increase of$3 million in our PLK segment and an increase of$1 million in our BK segment, partially offset by an unfavorable FX Impact of$44 million . During 2018, the decrease in sales was driven by a decrease of$29 million in our TH segment and a decrease of$19 million in our BK segment, partially offset by an increase of$12 million in our PLK segment, primarily as a result of including PLK for a full year in 2018 compared to nine months in 2017, and a favorable FX Impact of$1 million . The decrease in our TH segment was driven by a$48 million decrease in ourTH Company restaurant revenue, primarily from the conversion of Restaurant VIEs to franchise restaurants, partially offset by a$19 million increase in supply chain sales. The increase in supply chain sales was primarily due to the reclassification of revenue from the sales of equipment packages from franchise and property revenues to sales beginningJanuary 1, 2018 , partially offset by the non-recurrence of the roll-out of espresso equipment and related espresso inventory in 2017. The decrease in our BK segment was due to Company restaurant refranchisings in prior periods. During 2019, the decrease in cost of sales was driven primarily by a$34 million favorable FX Impact, partially offset by an increase of$23 million in our TH segment, an increase of$4 million in our BK segment and an increase of$2 million in our PLK segment. The increase in our TH segment was driven primarily by an increase in supply chain cost of sales due to the increase in supply chain sales. During 2018, the decrease in cost of sales was driven primarily by a decrease of$19 million in each of our TH and BK segments, partially offset by an increase of$6 million in our PLK segment, primarily as a result of including PLK for a full year in 2018 compared to nine months in 2017. The decrease in our TH segment was primarily due to a decrease of$41 million in Company restaurant cost of sales, primarily from the conversion of Restaurant VIEs to franchise restaurants, partially offset by an increase of$22 million in supply chain cost of sales. The increase in supply chain cost of sales was primarily due to the reclassification of costs from the sales of equipment packages from franchise and property expenses to costs of sales beginningJanuary 1, 2018 , partially offset by a decrease in costs in connection with the non-recurrence of the roll-out of espresso equipment in 2017. The decrease in our BK segment was due to Company restaurant refranchisings in prior periods. Franchise and Property Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or subleased to franchisees, franchise fees, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization of franchise agreements, and bad debt expense (recoveries). In periods prior toJanuary 1, 2018 , franchise and property revenues and franchise and property expenses included revenues and cost of sales, respectively, related to equipment packages sold at establishment of a restaurant and in connection with renewals or renovations. During 2019, the increase in franchise and property revenues was driven by an increase of$155 million in our BK segment, an increase of$71 million in our TH segment, and an increase of$66 million in our PLK segment, partially offset by a$52 million unfavorable FX Impact. The increases in our BK and PLK segments were primarily driven by increases in royalties as a result of system-wide sales growth. Additionally, the increase in franchise and property revenues in all of our segments during 2019 reflected the gross recognition of property income from lessee reimbursements of costs such as property taxes and maintenance when we are the lessor in the lease as a result of the application of ASC 842 beginningJanuary 1, 2019 . During 2018, the increase in franchise and property revenues was driven by an increase of$458 million in our BK segment, an increase of$201 million in our PLK segment, and an increase of$167 million in our TH segment, partially offset by a$10 million unfavorable FX Impact. The increase in our BK, TH and PLK segments reflects the inclusion of advertising fund contributions from franchisees as a result of the application of ASC 606 beginningJanuary 1, 2018 , an increase in PLK franchise and property revenues 36
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as a result of including PLK for a full year in 2018 compared to nine months in 2017, and an increase in royalties driven by system-wide sales growth. These factors were partially offset by a decrease in franchise fees and other revenue, primarily due to the deferral of initial and renewal franchise fees as a result of the application of ASC 606 and for our TH segment, the reclassification of revenue from the sales of equipment packages from franchise and property revenues to sales beginningJanuary 1, 2018 . During 2019, the increase in franchise and property expenses was driven by an increase of$85 million in our TH segment, an increase of$38 million in our BK segment, and an increase of$2 million in our PLK segment, partially offset by a$7 million favorable FX Impact. The increase in all of our segments during 2019 was driven by the gross recognition of property expenses for costs such as property taxes and maintenance paid by us and reimbursed by lessees when we are the lessor in the lease as a result of the application of ASC 842 beginningJanuary 1, 2019 . During 2018, the decrease in franchise and property expenses was driven by a decrease of$56 million in our TH segment and a decrease of$5 million in our BK segment, partially offset by an increase of$5 million in our PLK segment, primarily as a result of including PLK for a full year in 2018 compared to nine months in 2017. The decrease in our TH segment was primarily due to the reclassification of expenses from sales of equipment packages from franchise and property expenses to cost of sales beginningJanuary 1, 2018 . Selling, General and Administrative Expenses Our selling, general and administrative expenses were comprised of the following: 2019 vs. 2018 2018 vs. 2017 2019 2018 2017 $ % $ % Favorable / (Unfavorable) TH Segment SG&A$ 309 $ 314 $ 91 $ 5 1.6 %$ (223 ) NM BK Segment SG&A 600 577 143 (23 ) (4.0 )% (434 ) NM PLK Segment SG&A 225 193 40 (32 ) (16.6 )% (153 ) NM Share-based compensation and non-cash incentive compensation expense 74 55 55 (19 ) (34.5 )% - - % Depreciation and amortization 19 20 23 1 5.0 % 3 13.0 % PLK Transaction costs - 10 62 10 100.0 % 52 83.9 % Corporate restructuring and tax advisory fees 31 25 2 (6 ) NM (23 ) NM Office centralization and relocation costs 6 20 - 14 NM (20 ) NM
Selling, general and
administrative expenses
NM - Not Meaningful Upon our transition to ASC 606 onJanuary 1, 2018 , segment selling, general and administrative expenses ("Segment SG&A") include segment selling expenses, which consist primarily of advertising fund expenses, and segment general and administrative expenses, which are comprised primarily of salary and employee-related costs for non-restaurant employees, professional fees, information technology systems, and general overhead for our corporate offices. Prior to our transition to ASC 606 onJanuary 1, 2018 , our statement of operations did not reflect advertising fund contributions or advertising fund expenses, since such amounts were netted under previously applicable accounting standards. Segment SG&A excludes share-based compensation and non-cash incentive compensation expense, depreciation and amortization, PLK Transaction costs, Corporate restructuring and tax advisory fees, and Office centralization and relocation costs. During 2019, the increase in Segment SG&A in our BK and PLK segments is primarily due to an increase in advertising fund expenses. During 2018, TH, BK and PLK Segment SG&A increased primarily due to the inclusion of advertising fund expenses from the application of ASC 606 beginningJanuary 1, 2018 . During 2019, the increase in share-based compensation and non-cash incentive compensation expense was primarily due to an increase in the number of equity awards granted during 2019. 37
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(Income) Loss from Equity Method Investments (Income) loss from equity method investments reflects our share of investee net income or loss, non-cash dilution gains or losses from changes in our ownership interests in equity method investees, and basis difference amortization. The change in (income) loss from equity method investments during 2019 was primarily driven by the recognition of a$20 million non-cash dilution gain during 2018 on the initial public offering by one of our equity method investees, partially offset by an$11 million non-cash dilution gain during 2019 from the issuance of additional shares in connection with a merger by one of our equity method investees. The change in (income) loss from equity method investments during 2018 was primarily driven by the recognition of a$20 million non-cash dilution gain during 2018 (described above), partially offset by an increase in equity method investment net losses that we recognized during 2018. Other Operating Expenses (Income), net Our other operating expenses (income), net were comprised of the following: 2019 2018
2017
Net losses (gains) on disposal of assets, restaurant closures and refranchisings$ 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
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 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 inTreasury regulations. Interest Expense, net 2019 2018 2017 Interest expense, net$ 532 $ 535 $ 512
Weighted average interest rate on long-term debt 5.0 % 5.0 % 4.8 %
Interest expense, net for 2019 was consistent with 2018. During 2018, interest expense, net increased primarily due to higher outstanding debt from the incurrence of incremental term loans and the issuance of senior notes during 2017 and a decrease in interest income, partially offset by a$60 million benefit during 2018 related to the amortization of amounts other than currency movements of our net investment hedges, which is excluded from the accounting hedge. Loss on Early Extinguishment of Debt During 2019, we redeemed the entire outstanding principal balance of$1,250 million of 4.625% first lien secured notes dueJanuary 15, 2022 , made partial principal amount prepayments of our existing senior secured term loan and refinanced our existing senior secured term loan. In connection with these transactions, we recorded a loss on early extinguishment of debt of$23 million that primarily reflects the write-off of unamortized debt issuance costs and discounts and fees incurred. During 2017, we recorded a$122 million loss on early extinguishment of debt which primarily reflects the payment of premiums to fully redeem our second lien notes and the write-off of unamortized debt issuance costs and discounts in connection with the refinancing of our Term Loan Facility. 38
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Income Tax Expense Our effective tax rate was 23.5% in 2019 and 17.2% in 2018. The effective tax rate was reduced by 2.2% and 5.0% for 2019 and 2018, respectively, as a result of benefits from stock option exercises. The comparison between 2019 and 2018 was also unfavorably impacted by 2018 reserve releases and settlements, which reduced the 2018 effective tax rate by a net 2.8%. Additionally, the effective tax rate for 2019 increased by 1.1% due to the impact of an increase in our tax provision related to revaluing our Swiss net deferred tax liability due to Swiss tax reform. In 2019, the beneficial impact of internal financing arrangements in various jurisdictions was offset by an increase in the provision for unrecognized tax benefits related to a financing arrangement that is not applicable to ongoing operations. The change in our effective income tax rate to 17.2% in 2018 from (12.1)% in 2017 is primarily due to the impact of certain aspects of the Tax Act, realignment of certain intercompany financings and changes in foreign currency exchange rates, partially offset by the release of a valuation allowance related to use of capital losses. Net Income We reported net income of$1,111 million for 2019 compared to net income of$1,144 million for 2018. The decrease in net income is primarily due to a$103 million increase in income tax expense, a$23 million loss on early extinguishment of debt in the current year, a$19 million increase in share-based compensation and non-cash incentive compensation expense, a$14 million unfavorable change from the impact of equity method investments, a$6 million increase in Corporate restructuring and tax advisory fees, and a$5 million decrease in TH segment income. These factors were partially offset by a$66 million increase in BK segment income, a$31 million increase in PLK segment income, an$18 million favorable change in the results from other operating expenses (income), net, a$14 million decrease in Office centralization and relocation costs and the non-recurrence of$10 million of PLK Transaction costs incurred in the prior period. Amounts above include a total unfavorable FX Impact to net income of$39 million . We reported net income of$1,144 million for 2018 compared to net income of$1,235 million for 2017. The decrease in net income is primarily due to a$372 million increase in income tax expense, a$23 million increase in interest expense, net, a$23 million increase in Corporate restructuring and tax advisory fees, the inclusion of$20 million of Office centralization and relocation costs, and a$9 million decrease in TH segment income. These factors were partially offset by the non-recurrence of$122 million of loss on early extinguishment of debt recognized in the prior period, a$101 million favorable change in results from other operating expenses (income), net, a$52 million decrease in PLK Transaction costs, a$50 million increase in PLK segment income, primarily as a result of including PLK for a full year in 2018 compared to nine months in 2017, and a$25 million increase in BK segment income. Amounts above include a total unfavorable FX Impact to net income of$26 million . Non-GAAP Reconciliations The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. These non-GAAP measures do not have a standardized meaning underU.S. GAAP and may differ from similar captioned measures of other companies in our industry. We believe that these non-GAAP measures are useful to investors in assessing our operating performance, as it provides them with the same tools that management uses to evaluate our performance and is responsive to questions we receive from both investors and analysts. By disclosing these non-GAAP measures, we intend to provide investors with a consistent comparison of our operating results and trends for the periods presented. EBITDA is defined as earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization and is used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA excluding 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 PLK Transaction costs, Corporate restructuring and tax advisory fees, and Office centralization and relocation costs. 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. Adjusted EBITDA, as defined above, also represents our measure of segment income for each of our three operating segments. 39
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2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Favorable / (Unfavorable)
Segment income:
TH $ 1,122 $ 1,127 $ 1,136 $ (5 ) $ (9 )
BK 994 928 903 66 25
PLK 188 157 107 31 50
Adjusted EBITDA 2,304 2,212 2,146 92 66
Share-based compensation and
non-cash incentive
compensation expense 74 55 55 (19 ) -
PLK Transaction costs - 10 62 10 52
Corporate restructuring and
tax advisory fees 31 25 2 (6 ) (23 )
Office centralization and
relocation costs 6 20 - 14 (20 )
Impact of equity method
investments (a) 11 (3 ) 1 (14 ) 4
Other operating expenses
(income), net (10 ) 8 109 18 101
EBITDA 2,192 2,097 1,917 95 180
Depreciation and amortization 185 180 182 (5 ) 2
Income from operations 2,007 1,917 1,735 90 182
Interest expense, net 532 535 512 3 (23 )
Loss on early extinguishment
of debt 23 - 122 (23 ) 122
Income tax (benefit) expense 341 238 (134 ) (103 ) (372 )
Net income $ 1,111 $ 1,144 $ 1,235 $ (33 ) $ (91 ) (a) Represents (i) (income) loss from equity method investments and (ii) cash
distributions received from our equity method investments. Cash distributions
received from our equity method investments are included in segment income.
Segment income is affected by the application of ASC 606 beginningJanuary 1, 2018 , including the deferral of initial and renewal franchise fees and the timing of advertising fund related revenues and expenses. The increase in Adjusted EBITDA for 2019 and 2018 reflects the increases in segment income in our BK and PLK segments, partially offset by decreases in our TH segment. The increase in PLK segment for 2018 is primarily a result of including PLK for a full year in 2018 compared to nine months in 2017. The increase in EBITDA for 2019 is primarily due to an increase in segment income in our BK and PLK segments, favorable results from other operating expenses (income), net in the current period, a decrease in office centralization and relocation costs, and the non-recurrence of PLK Transaction costs, partially offset by an increase in share-based compensation and non-cash incentive compensation expense, unfavorable results from the impact of equity method investments, an increase in Corporate restructuring and tax advisory fees, and a decrease in segment income in our TH segment. The increase in EBITDA for 2018 is primarily due to a decrease in other operating expenses (income), net, an increase in segment income in our BK and PLK segments, primarily as a result of including PLK for a full year in 2018 compared to nine months in 2017, a decrease in PLK Transaction costs, and favorable results from the impact of equity method investments in the current period, partially offset by the increase in Corporate restructuring and tax advisory fees, the inclusion of Office centralization and relocation costs and a decrease in segment income in our TH segment. 40
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Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash generated by operations
and borrowings available under our Revolving Credit Facility (as defined below).
We have used, and may in the future use, our liquidity to make required interest
and/or principal payments, to make distributions to RBI for RBI to repurchase
its common shares, to repurchase Class B exchangeable limited partnership units
("Partnership exchangeable units"), to voluntarily prepay and repurchase our or
one of our affiliate's outstanding debt, to fund our investing activities, and
to make distributions on Class A common units and distributions on the
Partnership exchangeable units. As a result of our borrowings, we are highly
leveraged. Our liquidity requirements are significant, primarily due to debt
service requirements.
At December 31, 2019 , we had cash and cash equivalents of $1,533 million and
working capital of $493 million . In addition, at December 31, 2019 , we had
borrowing availability of $998 million under our Revolving Credit Facility
(defined below). During 2019, we issued $750 million of 3.875% first lien senior
notes and the net proceeds, as well as proceeds received from the Term Loan A
(defined below), were used to redeem the entire outstanding principal balance of
$1,250 million of our 2015 4.625% Senior Notes (defined below) and prepay $235
million of the Term Loan B (defined below) outstanding aggregate principal
balance. Also, in connection with these transactions, the aggregate principal
amount of the commitments under our Revolving Credit Facility (defined below)
were increased to $1,000 million . Additionally, during 2019, we issued $750
million of 4.375% second lien senior notes and the net proceeds were used to
repay $720 million of the Term Loan B outstanding aggregate principal balance.
Based on our current level of operations and available cash, we believe our cash
flow from operations, combined with availability under our Revolving Credit
Facility, will provide sufficient liquidity to fund our current obligations,
debt service requirements and capital spending over the next twelve months.
During 2019, we received exchange notices representing 42,016,392 Partnership
exchangeable units, including 22,623 received during the fourth quarter of 2019.
Pursuant to the terms of the partnership agreement, we satisfied the exchange
notices by exchanging the Partnership exchangeable units for the same number of
newly issued RBI common shares.
On August 2, 2016 , the RBI board of directors approved a share repurchase
authorization that allows RBI to purchase up to $300 million of RBI common
shares through July 2021 . Repurchases under this authorization will be made in
the open market or through privately negotiated transactions. On August 2, 2019 ,
RBI announced that the Toronto Stock Exchange (the "TSX") had accepted the
notice of RBI's intention to renew the normal course issuer bid. Under this
normal course issuer bid, RBI is permitted to repurchase up to 24,853,565 RBI
common shares for the one-year period commencing on August 8, 2019 and ending on
August 7, 2020 , or earlier if RBI completes the repurchases prior to such date.
Share repurchases under the normal course issuer bid will be made through the
facilities of the TSX, the New York Stock Exchange (the "NYSE") and/or other
exchanges and alternative Canadian or foreign trading systems, if eligible, or
by such other means as may be permitted by the TSX and/or the NYSE under
applicable law. Partnership unitholders and RBI shareholders may obtain a copy
of the prior notice, free of charge, by contacting us. If RBI repurchases any
RBI common shares, pursuant to the partnership agreement, Partnership will,
immediately prior to such repurchase, make a distribution to RBI on its Class A
common units in an amount sufficient for RBI to fund such repurchase. As of the
date of this report, there have been no RBI common share repurchases under the
normal course issuer bid.
Prior to the Tax Act, we provided deferred taxes on certain undistributed
foreign earnings. Under our transition to a modified territorial tax system
whereby all previously untaxed undistributed foreign earnings were subject to a
transition tax charge at reduced rates and future repatriations of foreign
earnings generally will be exempt from U.S. tax, we wrote off the existing
deferred tax liability on undistributed foreign earnings and recorded the impact
of the new transition tax charge on foreign earnings during the fourth quarter
of 2017. We will continue to monitor available evidence and our plans for
foreign earnings and expect to continue to provide any applicable deferred taxes
based on the tax liability or withholding taxes that would be due upon
repatriation of amounts not considered permanently reinvested.
Debt Instruments and Debt Service Requirements
As of December 31, 2019 , our long-term debt consists primarily of borrowings
under our Credit Facilities, amounts outstanding under our 2017 4.25% Senior
Notes, 2019 3.875% Senior Notes, 2017 5.00% Senior Notes, 2019 4.375% Senior
Notes and TH Facility (each as defined below), and obligations under finance
leases. For further information about our long-term debt, see Note 9 to the
accompanying consolidated financial statements included in Part II, Item 8
"Financial Statements and Supplementary Data" of our Annual Report.
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
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date ofOctober 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 fromOctober 13, 2022 toOctober 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%. The principal amount of the Term Loan A amortizes in quarterly installments equal to$5 million untilOctober 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. Prior to obtaining the Term Loan A, our Credit Facilities included only one senior secured term loan facility (the "Term Loan B"). InSeptember 2019 , we voluntarily prepaid$235 million principal amount of our Term Loan B. OnNovember 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 fromFebruary 17, 2024 toNovember 19, 2026 . 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. As ofDecember 31, 2019 , there was$6,100 million outstanding principal amount under the Term Loan Facilities with a weighted average interest rate of 3.49%. Based on the amounts outstanding under the Term Loan Facilities and LIBOR as ofDecember 31, 2019 , subject to a floor of 0.00%, required debt service for the next twelve months is estimated to be approximately$215 million in interest payments and$72 million in principal payments. In addition, based on LIBOR as ofDecember 31, 2019 , net cash settlements that we expect to pay on our$4,000 million interest rate swaps are estimated to be approximately$23 million for the next twelve months. The Term Loan A matures onOctober 7, 2024 and the Term Loan B matures onNovember 19, 2026 , and we may prepay the Term Loan Facilities in whole or in part at any time. Additionally, subject to certain exceptions, the Term Loan Facilities may be subject to mandatory prepayments using (i) proceeds from non-ordinary course asset dispositions, (ii) proceeds from certain incurrences of debt or (iii) a portion of our annual excess cash flows based upon certain leverage ratios. As ofDecember 31, 2019 , we had no amounts outstanding under the Revolving Credit Facility, had$2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability was$998 million . Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or share repurchases, fund acquisitions or capital expenditures, and for other general corporate purposes. We have a$125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. We are also required to pay (i) letters of credit fees on the aggregate face amounts of outstanding letters of credit plus a fronting fee to the issuing bank and (ii) administration fees. Under the Fourth Incremental Amendment, 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. 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 andU.S. subsidiaries, including TheTDL Group Corp. ,Burger King Worldwide, Inc. ,Popeyes Louisiana Kitchen, Inc. and substantially all of their respective Canadian andU.S. subsidiaries (the "Credit Guarantors"). Amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future property (subject to certain exceptions) of each Borrower and Credit Guarantor. Senior Notes InMay 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 secured notes dueMay 15, 2024 (the "2017 4.25% Senior Notes"). No principal payments are due until maturity and interest is paid semi-annually. During 2017, the Borrowers entered into an indenture (the "2017 5.00% Senior Notes Indenture") in connection with the issuance inAugust 2017 andOctober 2017 of an aggregate of$2,800 million of 5.00% second lien senior secured notes dueOctober 15, 2025 (the "2017 5.00% Senior Notes"). No principal payments are due until maturity and interest is paid semi-annually. OnSeptember 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 dueJanuary 15, 2028 (the "2019 3.875% Senior Notes"). No 42
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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 dueJanuary 15, 2022 (the "2015 4.625% Senior Notes") and to pay related fees and expenses. OnNovember 19, 2019 , the Borrowers entered into an indenture (the "2019 4.375% Senior Notes Indenture" and together with the above indentures the "Senior Notes Indentures") in connection with the issuance of$750 million of 4.375% second lien senior notes dueJanuary 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 Term Loan B outstanding aggregate principal balance and to pay related fees and expenses in connection with the Fourth Amendment. The Borrowers may redeem a series of Senior Notes, in whole or in part, at any time prior toMay 15, 2020 for the 2017 4.25% Senior Notes,September 15, 2022 for the 2019 3.875% Senior Notes,October 15, 2020 for the 2017 5.00% Senior Notes, andNovember 15, 2022 for the 2019 4.375% Senior Notes, at a price equal to 100% of the principal amount redeemed plus a "make-whole" premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, the Borrowers may redeem, in whole or in part, the 2017 4.25% Senior Notes, 2019 3.875% Senior Notes, 2017 5.00% Senior Notes, and 2019 4.375% Senior Notes on or after the applicable date noted above, at the redemption prices set forth in the applicable Senior Notes Indenture. The Senior Notes Indentures also contain redemption provisions related to tender offers, change of control and equity offerings, among others. Based on the amounts outstanding atDecember 31, 2019 , required debt service for the next twelve months on all of the Senior Notes outstanding is approximately$266 million in interest payments. TH Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount ofC$225 million (increased fromC$100 million during 2019) with a maturity date ofOctober 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 ofDecember 31, 2019 , we had outstandingC$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 untilMay 23, 2020 . Restrictions and Covenants Our Credit Facilities and the Senior Notes Indentures contain a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability and the ability of certain of our subsidiaries to: incur additional indebtedness; incur liens; engage in mergers, consolidations, liquidations and dissolutions; sell assets; pay dividends and make other payments in respect of capital stock; make investments, loans and advances; pay or modify the terms of certain indebtedness; and engage in certain transactions with affiliates. In addition, under the Credit Facilities, the Borrowers are not permitted to exceed a net first lien senior secured leverage ratio of 6.50 to 1.00 when, as of the end of any fiscal quarter beginning with the first quarter of 2020, any amounts are outstanding under the Term Loan A and/or outstanding revolving loans, swingline loans and certain letters of credit exceed 30.0% of the commitments under the Revolving Credit Facility. The restrictions under the Credit Facilities and the Senior Notes Indentures have resulted in substantially all of our consolidated assets being restricted. As ofDecember 31, 2019 , we were in compliance with applicable debt covenants under the Credit Facilities, the TH Facility, and the Senior Notes Indentures, and there were no limitations on our ability to draw on the remaining availability under our Revolving Credit Facility and TH Facility. Cash Distributions OnJanuary 3, 2020 , RBI paid a dividend of$0.50 per RBI common share and Partnership made a distribution on the same day to RBI as holder of Class A common units in the amount of the aggregate dividends paid by RBI on RBI common shares. OnJanuary 3, 2020 , Partnership also made a distribution in respect of each Partnership exchangeable unit in the amount of$0.50 per Partnership exchangeable unit. OnFebruary 10, 2020 , we announced that the RBI board of directors had declared a dividend of$0.52 per common share for the first quarter of 2020, payable onApril 3, 2020 to RBI shareholders of record onMarch 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. 43
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Pursuant to the terms of the partnership agreement, each Partnership exchangeable unit is entitled to distributions from Partnership in an amount equal to any dividends or distributions that have been declared and are payable in respect of an RBI common share. The record date and payment date for these distributions on the Partnership exchangeable units are to be the same as the relevant record date and payment date for the corresponding dividends on RBI common shares. Accordingly, Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of$0.52 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. RBI and Partnership are targeting a total of$2.08 in declared dividends per common share and distributions in respect of each Partnership exchangeable unit for 2020. Because we are a holding company, our ability to pay cash distributions on our Partnership exchangeable units may be limited by restrictions under our debt agreements. Outstanding Security Data As ofFebruary 10, 2020 , we had outstanding 202,006,067 Class A common units issued to RBI and 165,372,429 Partnership exchangeable units. One special voting share of RBI is held by a trustee, entitling the trustee to that number of votes on matters on which holders of RBI common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting of RBI, holders of RBI common shares vote together as a single class with the special voting share except as otherwise provided by law. For information on our share-based compensation and RBI's outstanding equity awards, see Note 15 to the accompanying consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" of our Annual Report. SinceDecember 12, 2015 , the holders of Partnership exchangeable units have had the right to require Partnership to exchange all or any portion of such holder's Partnership exchangeable units for RBI common shares at a ratio of one share for each Partnership exchangeable unit, subject to RBI's right as the general partner of Partnership to determine to settle any such exchange for a cash payment in lieu of RBI common shares. Comparative Cash Flows Operating Activities Cash provided by operating activities was$1,476 million in 2019, compared to$1,165 million in 2018. The increase in cash provided by operating activities was driven by a decrease in income tax payments, primarily due to the 2018 payment of accrued income taxes related to theDecember 2017 redemption of RBI preferred shares, an increase in BK and PLK segment income and a decrease in cash used for working capital. These factors were partially offset by an increase in interest payments and a decrease in TH segment income. Cash provided by operating activities was$1,165 million in 2018, compared to$1,431 million in 2017. The decrease in cash provided by operating activities was driven by an increase in income tax payments, primarily due to the payment of accrued income taxes related to theDecember 2017 redemption of RBI preferred shares, increases in interest payments and Corporate restructuring and tax advisory fees and Office centralization and relocation costs incurred in the current year. These factors were partially offset by an increase in PLK segment income, primarily as a result of including PLK for a full year in 2018 compared to nine months in 2017, an increase in BK segment income, a decrease in PLK Transaction costs and a decrease in cash used for working capital. Investing Activities Cash used for investing activities was$30 million in 2019, compared to$44 million in 2018. The change in investing activities was driven primarily by a decrease in capital expenditures. Cash used for investing activities was$44 million in 2018, compared to$858 million in 2017. The change in investing activities was driven primarily by net cash used for the Popeyes Acquisition during 2017, partially offset by proceeds from the settlement of derivatives in 2017 and an increase in capital expenditures during 2018. Financing Activities Cash used for financing activities was$842 million in 2019, compared to$1,285 million in 2018. The change in financing activities was driven primarily by proceeds from the Term Loan A and the issuances of the 2019 3.875% Senior Notes and the 2019 4.375% Senior Notes during 2019, an increase in capital contributions from RBI, proceeds from derivatives and the non-recurrence of the 2018 distributions to RBI to fund payments related to theDecember 2017 redemption of the RBI preferred shares. These factors 44
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were partially offset by the redemption of the 2015 4.625% Senior Notes during 2019, Term Loan B prepayments and refinancing during 2019, an increase in distributions on common units and Partnership exchangeable units and payment of financing costs. Cash used for financing activities was$1,285 million in 2018, compared to$936 million in 2017. The change in financing activities was driven primarily by an increase in distributions on common units and Partnership exchangeable units during 2018, an increase in payments in connection with the repurchase of Partnership exchangeable units, the 2018 distributions to RBI to fund payments related to theDecember 2017 redemption of the RBI preferred shares and a decrease in proceeds from the issuance of long-term debt. These factors were partially offset by non-recurring uses of cash for financing activities in 2017, including the distribution to RBI in connection with the redemption of the preferred shares, payment of financing costs, and distributions on preferred units, a decrease in debt repayments in 2018 and an increase in capital contributions from RBI in 2018. Contractual Obligations and Commitments Our significant contractual obligations and commitments as ofDecember 31, 2019 are shown in the following table. Payment Due by
Period
Less Than More Than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
(In millions)
Credit Facilities, including interest (a)$ 7,474 $ 289 $ 575 $ 1,422 $ 5,188 Senior Notes, including interest 7,387 266 531 4,964 1,626 Other long-term debt 91 4 12 75 - Operating lease obligations (b) 1,760 204 371 313 872 Purchase commitments (c) 659 612 43 4 - Finance lease obligations 462 46 88 79 249 Total$ 17,833 $ 1,421 $ 1,620 $ 6,857 $ 7,935
(a) We have estimated our interest payments through the maturity of our Credit
Facilities based on the one-month LIBOR as of
(b) Operating lease payment obligations have not been reduced by the amount of
payments due in the future under subleases.
(c) Includes open purchase orders, as well as commitments to purchase certain
food ingredients and advertising expenditures, and obligations related to
information technology and service agreements.
We have not included in the contractual obligations table approximately$598 million of gross liabilities for unrecognized tax benefits relating to various tax positions we have taken. These liabilities may increase or decrease over time primarily as a result of tax examinations, and given the status of the examinations, we cannot reliably estimate the period of any cash settlement with the respective taxing authorities. For additional information on unrecognized tax benefits, see Note 11 to the accompanying consolidated financial statements included in Part II, Item 8 "Financial Statements and Supplementary Data" of our Annual Report. Other Commercial Commitments and Off-Balance Sheet Arrangements From time to time, we enter into agreements under which we guarantee loans made by third parties to qualified franchisees. As ofDecember 31, 2019 , no material amounts are outstanding under these guarantees. 45
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Critical Accounting Policies and Estimates This discussion and analysis of financial condition and results of operations is based on our audited consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosures of contingent assets and liabilities. We evaluate our estimates on an ongoing basis and we base our estimates on historical experience and various other assumptions we deem reasonable to the situation. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in our estimates could materially impact our results of operations and financial condition in any particular period. We consider our critical accounting policies and estimates to be as follows based on the high degree of judgment or complexity in their application:Goodwill and Intangible Assets Not Subject to AmortizationGoodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in acquisitions. Our indefinite-lived intangible assets consist of the Tim Hortons brand, the Burger King brand, and the Popeyes brand (each a "Brand" and together, the "Brands").Goodwill and the Brands are tested for impairment at least annually as ofOctober 1 of each year and more often if an event occurs or circumstances change, which indicate impairment might exist. Our annual impairment tests of goodwill and the Brands may be completed through qualitative assessments. We may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test, for any reporting unit or Brand, in any period. We can resume the qualitative assessment for any reporting unit or Brand in any subsequent period. Under a qualitative approach, our impairment review for goodwill consists of an assessment of whether it is more-likely-than-not that a reporting unit's fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for any reporting units, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a reporting unit exceeds its fair value, we perform a quantitative goodwill impairment test that requires us to estimate the fair value of the reporting unit. If the fair value of the reporting unit is less than its carrying amount, we will measure any goodwill impairment loss as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. We use an income approach and a market approach, when available, to estimate a reporting unit's fair value, which discounts the reporting unit's projected cash flows using a discount rate we determine from a market participant's perspective under the income approach or utilizing similar publicly traded companies as guidelines for determining fair value under the market approach. We make significant assumptions when estimating a reporting unit's projected cash flows, including revenue, driven primarily by net restaurant growth, comparable sales growth and average royalty rates, general and administrative expenses, capital expenditures and income tax rates. Under a qualitative approach, our impairment review for the Brands consists of an assessment of whether it is more-likely-than-not that a Brand's fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for any of our Brands, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a Brand exceeds its fair value, we estimate the fair value of the Brand and compare it to its carrying amount. If the carrying amount exceeds fair value, an impairment loss is recognized in an amount equal to that excess. We use an income approach to estimate a Brand's fair value, which discounts the projected Brand-related cash flows using a discount rate we determine from a market participant's perspective. We make significant assumptions when estimating Brand-related cash flows, including system-wide sales, driven by net restaurant growth and comparable sales growth, average royalty rates, brand maintenance costs and income tax rates. We completed our impairment reviews for goodwill and the Brands as ofOctober 1, 2019 , 2018 and 2017 and no impairment resulted. The estimates and assumptions we use to estimate fair values when performing quantitative assessments are highly subjective judgments based on our experience and knowledge of our operations. Significant changes in the assumptions used in our analysis could result in an impairment charge related to goodwill or the Brands. Circumstances that could result in changes to future estimates and assumptions include, but are not limited to, expectations of lower system-wide sales growth, which can be caused by a variety of factors, increases in income tax rates and increases in discount rates. 46
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Long-lived Assets Long-lived assets (including intangible assets subject to amortization) are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value. When assessing the recoverability of our long-lived assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of rental income, capital requirements for maintaining property and residual values of asset groups. We formulate estimates from historical experience and assumptions of future performance, based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge. Accounting for Income Taxes We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carry-forwards. When considered necessary, we record a valuation allowance to reduce deferred tax assets to the balance that is more-likely-than-not to be realized. We must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine the proper valuation allowance. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflect the change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments that are involved in determining the proper valuation allowance, differences between actual future events and prior estimates and judgments could result in adjustments to this valuation allowance. During 2017, we recorded provisional estimates for the income tax effects of the Tax Act in accordance withSAB 118, which established a one-year measurement period where a provisional amount could be subject to adjustment. We finalized these provisional estimates during 2018 and reflected such refinements as discrete items along with the 2018 income tax effects of the Tax Act based on applicable regulations and guidance issued to date. No further adjustments to the charges were made in 2019. Given the complexity of the changes in the tax law resulting from the Tax Act, further regulations and guidance are expected to be issued by applicable authorities (e.g.,Treasury ,IRS , state taxing authorities) subsequent to the date of filing. Accordingly, it is possible that the amounts recorded may be impacted by such future developments. Any adjustments to the amounts recorded will be reflected as discrete items in the provision for income taxes in the period in which those adjustments become reasonably estimable. We file income tax returns, including returns for our subsidiaries, with federal, provincial, state, local and foreign jurisdictions. We are subject to routine examination by taxing authorities in these jurisdictions. We apply a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate available evidence to determine if it appears more-likely-than-not that an uncertain tax position will be sustained on an audit by a taxing authority, based solely on the technical merits of the tax position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settling the uncertain tax position. Although we believe we have adequately accounted for our uncertain tax positions, from time to time, audits result in proposed assessments where the ultimate resolution may result in us owing additional taxes. We adjust our uncertain tax positions in light of changing facts and circumstances, such as the completion of a tax audit, expiration of a statute of limitations, the refinement of an estimate, and interest accruals associated with uncertain tax positions until they are resolved. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters. However, to the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. In prior periods, we provided deferred taxes on certain undistributed foreign earnings. Under our transition to a modified territorial tax system whereby all previously untaxed undistributed foreign earnings are subject to a transition tax charge at reduced rates and future repatriations of foreign earnings will generally be exempt fromU.S. tax, we wrote off the existing deferred tax 47
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liability on undistributed foreign earnings and recorded the impact of the new transition tax charge on foreign earnings. We will continue to monitor available evidence and our plans for foreign earnings and expect to continue to provide any applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of amounts not considered permanently reinvested. We use an estimate of the annual effective income tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective income tax rate is calculated at year-end. See Note 11 to the accompanying consolidated financial statements included in Part II, Item 8 "Financial Statements and Supplementary Data" of our Annual Report for additional information about accounting for income taxes. New Accounting Pronouncements See Note 2, "Significant Accounting Policies - New Accounting Pronouncements," to the accompanying consolidated financial statements included in Part II, Item 8 "Financial Statements and Supplementary Data" of our Annual Report for a discussion of new accounting pronouncements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market Risk We are exposed to market risks associated with currency exchange rates, interest rates, commodity prices and inflation. In the normal course of business and in accordance with our policies, we manage these risks through a variety of strategies, which may include the use of derivative financial instruments to hedge our underlying exposures. Our policies prohibit the use of derivative instruments for speculative purposes, and we have procedures in place to monitor and control their use. Currency Exchange Risk We report our results inU.S. dollars, which is our reporting currency. The operations of each of TH, BK, and PLK that are denominated in currencies other than theU.S. dollar are impacted by fluctuations in currency exchange rates and changes in currency regulations. The majority of TH's operations, income, revenues, expenses and cash flows are denominated in Canadian dollars, which we translate toU.S. dollars for financial reporting purposes. Royalty payments from BK franchisees in our European markets and in certain other countries are denominated in currencies other thanU.S. dollars. Furthermore, franchise royalties from each of TH's, BK's, and PLK's international franchisees are calculated based on local currency sales; consequently franchise revenues are still impacted by fluctuations in currency exchange rates. Each of their respective revenues and expenses are translated using the average rates during the period in which they are recognized and are impacted by changes in currency exchange rates. We have numerous investments in our foreign subsidiaries, the net assets of which are exposed to volatility in foreign currency exchange rates. We have entered into cross-currency rate swaps to hedge a portion of our net investment in such foreign operations against adverse movements in foreign currency exchange rates. We designated cross-currency rate swaps with a notional value of$5,000 million between Canadian dollar andU.S. dollar and cross-currency rate swaps with a notional value of$2,100 million between the Euro andU.S. dollar, as net investment hedges of a portion of our equity in foreign operations in those currencies. The fair value of the cross-currency rate swaps is calculated each period with changes in the fair value of these instruments reported in AOCI to economically offset the change in the value of the net investment in these designated foreign operations driven by changes in foreign currency exchange rates. The net fair value of these derivative instruments was a liability of$144 million as ofDecember 31, 2019 . The net unrealized losses, net of tax, related to these derivative instruments included in AOCI totaled$122 million as ofDecember 31, 2019 . Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. We use forward currency contracts to manage the impact of foreign exchange fluctuations onU.S. dollar purchases and payments, such as coffee and certain intercompany purchases, made by our TH Canadian operations. However, for a variety of reasons, we do not hedge our revenue exposure in other currencies. Therefore, we are exposed to volatility in those other currencies, and this volatility may differ from period to period. As a result, the foreign currency impact on our operating results for one period may not be indicative of future results. During 2019, income from operations would have decreased or increased approximately$119 million if all foreign currencies uniformly weakened or strengthened 10% relative to theU.S. dollar, holding other variables constant, including sales volumes. The effect of a uniform movement of all currencies by 10% is provided to illustrate a hypothetical scenario and related effect on operating income. Actual results will differ as foreign currencies may move in uniform or different directions and in different magnitudes. 48
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Interest Rate Risk We are exposed to changes in interest rates related to our Term Loan Facilities and Revolving Credit Facility, which bear interest at LIBOR plus a spread, subject to a LIBOR floor. Generally, interest rate changes could impact the amount of our interest paid and, therefore, our future earnings and cash flows, assuming other factors are held constant. To mitigate the impact of changes in LIBOR on interest expense for a portion of our variable rate debt, we have entered into interest rate swaps. We account for these derivatives as cash flow hedges, and as such, the unrealized changes in market value are recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. AtDecember 31, 2019 , we had a series of receive-variable, pay-fixed interest rate swaps to hedge the variability in the interest payments on$4,000 million of our Term Loan Facilities. The total notional value of these interest rate swaps is$4,000 million , of which$3,500 million expire onNovember 19, 2026 and$500 million expire onSeptember 30, 2026 . Based on the portion of our variable rate debt balance in excess of the notional amount of the interest rate swaps and LIBOR as ofDecember 31, 2019 , a hypothetical 1.00% increase in LIBOR would increase our annual interest expense by approximately$21 million . There is currently uncertainty about whether LIBOR will continue to exist after 2021. The discontinuation of LIBOR after 2021 and the replacement with an alternative reference rate may adversely impact interest rates and our interest expense could increase. Commodity Price Risk We purchase certain products, which are subject to price volatility that is caused by weather, market conditions and other factors that are not considered predictable or within our control. However, in our TH business, we employ various purchasing and pricing contract techniques, such as setting fixed prices for periods of up to one year with suppliers, in an effort to minimize volatility of certain of these commodities. Given that we purchase a significant amount of green coffee, we typically have purchase commitments fixing the price for a minimum of six to twelve months depending upon prevailing market conditions. We also typically hedge against the risk of foreign exchange on green coffee prices. We occasionally take forward pricing positions through our suppliers to manage commodity prices. As a result, we purchase commodities and other products at market prices, which fluctuate on a daily basis and may differ between different geographic regions, where local regulations may affect the volatility of commodity prices. We do not make use of financial instruments to hedge commodity prices. As we make purchases beyond our current commitments, we may be subject to higher commodity prices depending upon prevailing market conditions at such time. Generally, increases and decreases in commodity costs are largely passed through to franchisee owners, resulting in higher or lower revenues and higher or lower costs of sales from our business. These changes may impact margins as many of these products are typically priced based on a fixed-dollar mark-up. We and our franchisees have some ability to increase product pricing to offset a rise in commodity prices, subject to acceptance by franchisees and guests. Impact of Inflation We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation did not have a material impact on our operations in 2019, 2018 or 2017. However, severe increases in inflation could affect the global, Canadian andU.S. economies and could have an adverse impact on our business, financial condition and results of operations. If several of the various costs in our business experience inflation at the same time, such as commodity price increases beyond our ability to control and increased labor costs, we and our franchisees may not be able to adjust prices to sufficiently offset the effect of the various cost increases without negatively impacting consumer demand. 49
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Disclosures Regarding Partnership Pursuant to Canadian Exemptive Relief RBI is the sole general partner of Partnership. To address certain disclosure conditions to the exemptive relief that Partnership received from the Canadian securities regulatory authorities, RBI provides a summary of certain terms of the Partnership exchangeable units in its annual report on Form 10-K. The same summary is provided below. This summary is not complete and is qualified in its entirety by the complete text of theAmended and Restated Limited Partnership Agreement, datedDecember 11, 2014 , between RBI, 8997896Canada Inc. and each person who is admitted as a Limited Partner in accordance with the terms of the agreement (the "partnership agreement") and the Voting Trust Agreement, datedDecember 12, 2014 , between RBI, Partnership andComputershare Trust Company of Canada (the "voting trust agreement"), copies of which are available on SEDAR at www.sedar.com and at www.sec.gov. The Partnership Exchangeable Units The capital of Partnership consists of three classes of units: the Partnership Class A common units, the Partnership preferred units and the Partnership exchangeable units. The interest of RBI, as the sole general partner of Partnership, is represented by Class A common units and preferred units. The interests of the limited partners is represented by the Partnership exchangeable units. Summary of Economic and Voting RightsThe Partnership exchangeable units are intended to provide economic rights that are substantially equivalent, and voting rights with respect to RBI that are equivalent, to the corresponding rights afforded to holders of RBI common shares. Under the terms of the partnership agreement, the rights, privileges, restrictions and conditions attaching to the Partnership exchangeable units include the following:
• The Partnership exchangeable units are exchangeable at any time, at the
option of the holder (the "exchange right"), on a one-for-one basis for
common shares of RBI (the "exchanged shares"), subject to RBI's right
as the general partner (subject to the approval of the conflicts
committee in certain circumstances) to determine to settle any such
exchange for a cash payment in lieu of RBI common shares. If RBI electsto make a cash payment in lieu of issuing common shares, the amount of
the cash payment will be the weighted average trading price of the
common shares on the NYSE for the 20 consecutive trading days ending on
the last business day prior to the exchange date (the "exchangeable
units cash amount"). Written notice of the determination of the form of
consideration shall be given to the holder of the Partnership
exchangeable units exercising the exchange right no later than ten
business days prior to the exchange date.
• If a dividend or distribution has been declared and is payable inrespect of a common share of RBI, Partnership will make a distribution
in respect of each Partnership exchangeable unit in an amount equal to
the dividend or distribution in respect of a common share. The recorddate and payment date for distributions on the Partnership exchangeable
units will be the same as the relevant record date and payment date for
the dividends or distributions on RBI common shares.
• If RBI issues any common shares in the form of a dividend or
distribution on the RBI common shares, Partnership will issue to each
holder of Partnership exchangeable units, in respect of each
exchangeable unit held by such holder, a number of Partnership
exchangeable units equal to the number of common shares issued in
respect of each common share.
• If RBI issues or distributes rights, options or warrants or other
securities or assets of RBI to all or substantially all of the holdersof its common shares, Partnership is required to make a corresponding
distribution to holders of the Partnership exchangeable units.
• No subdivision or combination of RBI's outstanding common shares is
permitted unless a corresponding subdivision or combination of
Partnership exchangeable units is made.
• RBI and its board of directors are prohibited from proposing orrecommending an offer for its common shares or for the Partnership
exchangeable units unless the holders of the Partnership exchangeable
units and the holders of common shares are entitled to participate to
the same extent and on equitably equivalent basis.
• Upon a dissolution and liquidation of Partnership, if Partnership
exchangeable units remain outstanding and have not been exchanged for
RBI common shares, then the distribution of the assets of Partnership
between holders of RBI common shares and holders of Partnership
exchangeable units will be made on a pro rata basis based on the
numbers of common shares and Partnership exchangeable units
outstanding. Assets distributable to holders of Partnership
exchangeable units will be distributed directly to such holders. Assets
distributable in respect of RBI common shares will be distributed to
RBI. Prior to this pro rata distribution, Partnership is required to
pay to RBI sufficient amounts to fund RBI's expenses or other
obligations (to the extent related to RBI's role as the general partneror its business and affairs that are conducted through Partnership or
its subsidiaries) to ensure that any property and cash distributed to
RBI in respect of the common shares will be available for distribution
to holders of common shares in an amount per share equal to
distributions in respect of each Partnership exchangeable unit. The
terms of the Partnership exchangeable units do not provide for an
automatic exchange of Partnership exchangeable units into common shares
upon a dissolution or liquidation of Partnership or RBI.
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• Approval of holders of the Partnership exchangeable units is required
for an action (such as an amendment to the partnership agreement) that
would affect the economic rights of a Partnership exchangeable unit
relative to a common share of RBI.
• The holders of Partnership exchangeable units are indirectly entitledto vote in respect of matters on which holders of RBI common shares are
entitled to vote, including in respect of the election of RBI's
directors, through a special voting share of RBI. The special voting
share is held by a trustee, entitling the trustee to that number of
votes on matters on which holders of common shares are entitled to voteequal to the number of Partnership exchangeable units outstanding. The
trustee is required to cast such votes in accordance with voting
instructions provided by holders of Partnership exchangeable units. The
trustee will exercise each vote attached to the special voting share
only as directed by the relevant holder of Partnership exchangeable
units and, in the absence of instructions from a holder of an
exchangeable unit as to voting, will not exercise those votes. Except
as otherwise required by the partnership agreement, voting trust
agreement or applicable law, the holders of the Partnership
exchangeable units are not directly entitled to receive notice of or to
attend any meeting of the unitholders of Partnership or to vote at any
such meeting.
Exercise of Optional Exchange Right
In order to exercise the exchange right referred to above, a holder of
Partnership exchangeable units must deliver to Partnership's transfer agent a
duly executed exchange notice together with such additional documents and
instruments as the transfer agent and Partnership may reasonably require. The
exchange notice must (i) specify the number of Partnership exchangeable units in
respect of which the holder is exercising the exchange right and (ii) state the
business day on which the holder desires to have Partnership exchange the
subject units, provided that the exchange date must not be less than 15 business
days nor more than 30 business days after the date on which the exchange notice
is received by Partnership. If no exchange date is specified in an exchange
notice, the exchange date will be deemed to be the 15th business day after the
date on which the exchange notice is received by Partnership. An exercise of the
exchange right may be revoked by the exercising holder by notice in writing
given to Partnership before the close of business on the fifth business day
immediately preceding the exchange date. On the exchange date, Partnership will
deliver or cause the transfer agent to deliver to the relevant holder, as
applicable (i) the applicable number of exchanged shares, or (ii) a cheque
representing the applicable exchangeable units cash amount, in each case, less
any amounts withheld on account of tax.
Offers for Units or Shares
The partnership agreement contains provisions to the effect that if a take-over
bid is made for all of the outstanding Partnership exchangeable units and not
less than 90% of the Partnership exchangeable units (other than units of
Partnership held at the date of the take-over bid by or on behalf of the offeror
or its associates, affiliates or persons acting jointly or in concert with the
offeror) are taken up and paid for by the offeror, the offeror will be entitled
to acquire the Partnership exchangeable units held by unitholders who did not
accept the offer on the terms offered by the offeror. The partnership agreement
further provides that for so long as Partnership exchangeable units remain
outstanding, (i) RBI will not propose or recommend a formal bid for RBI common
shares, and no such bid will be effected with the consent or approval of RBI's
board of directors, unless holders of Partnership exchangeable units are
entitled to participate in the bid to the same extent and on an equitably
equivalent basis as the holders of RBI's common shares, and (ii) RBI will not
propose or recommend a formal bid for Partnership exchangeable units, and no
such bid will be effected with the consent or approval of RBI's board of
directors, unless holders of the RBI common shares are entitled to participate
in the bid to the same extent and on an equitably equivalent basis as the
holders of Partnership exchangeable units. Canadian securities regulatory
authorities may intervene in the public interest (either on application by an
interested party or by staff of a Canadian securities regulatory authority) to
prevent an offer to holders of RBI common shares, Preferred Shares or
Partnership exchangeable units being made or completed where such offer is
abusive of the holders of one of those security classes that are not subject to
that offer.
Merger, Sale or Other Disposition of Assets
As long as any Partnership exchangeable units are outstanding, RBI cannot
consummate a transaction in which all or substantially all of its assets would
become the property of any other person or entity. This does not apply to a
transaction if such other person or entity becomes bound by the partnership
agreement and assumes RBI's obligations, as long as the transaction does not
impair in any material respect the rights, duties, powers and authorities of
other parties to the partnership agreement.
Mandatory Exchange
Partnership may cause a mandatory exchange of the outstanding Partnership
exchangeable units into the RBI common shares in the event that (1) at any time
there remain outstanding fewer than 5% of the number of Partnership exchangeable
units outstanding as of the effective time of the Merger (other than Partnership
exchangeable units held by RBI and its subsidiaries and as such number of
Partnership exchangeable units may be adjusted in accordance with the
partnership agreement); (2) any one of the following occurs: (i) any person,
firm or corporation acquires directly or indirectly any voting security of RBI
and immediately after such acquisition, the acquirer has voting securities
representing more than 50% of the total voting power of all the then outstanding
voting securities of RBI on a fully diluted basis, (ii) the shareholders of RBI
shall approve a merger, consolidation, recapitalization or reorganization of
RBI, other than any transaction which would result in the holders of outstanding
voting securities of RBI immediately prior to such
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transaction having at least a majority of the total voting power represented by
the voting securities of the surviving entity outstanding immediately after such
transaction, with the voting power of each such continuing holder relative to
other continuing holders not being altered substantially in the transaction; or
(iii) the shareholders of RBI shall approve a plan of complete liquidation of
RBI or an agreement for the sale or disposition of RBI of all or substantially
all of RBI's assets, provided that, in each case, RBI, in its capacity as the
general partner of Partnership, determines, in good faith and in its sole
discretion, that such transaction involves a bona fide third party and is not
for the primary purpose of causing the exchange of the Partnership exchangeable
units in connection with such transaction; or (3) a matter arises in respect of
which applicable law provides holders of Partnership exchangeable units with a
vote as holders of units of Partnership in order to approve or disapprove, as
applicable, any change to, or in the rights of the holders of, the Partnership
exchangeable units, where the approval or disapproval, as applicable, of such
change would be required to maintain the economic equivalence of the Partnership
exchangeable units and the RBI common shares, and the holders of the Partnership
exchangeable units fail to take the necessary action at a meeting or other vote
of holders of Partnership exchangeable units to approve or disapprove, as
applicable, such matter in order to maintain economic equivalence of the
Partnership exchangeable units and the RBI common shares.
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Special Note Regarding Forward-Looking Statements Certain information contained in our Annual Report, including information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of the Canadian securities laws. We refer to all of these as forward-looking statements. Forward-looking statements are forward-looking in nature and, accordingly, are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as "believe", "anticipate", "expect", "intend", "estimate", "plan", "continue", "will", "may", "could", "would", "target", "potential" and other similar expressions and include, without limitation, statements regarding our expectations or beliefs regarding (i) our ability to become one of the most efficient franchised QSR operators in the world; (ii) the benefits of our fully franchised business model; (iii) the domestic and international growth opportunities for the Tim Hortons, Burger King and Popeyes brands, both in existing and new markets; (iv) our ability to accelerate international development through joint venture structures and master franchise and development agreements and the impact on future growth and profitability of our brands; (v) our continued use of joint ventures structures and master franchise and development agreements in connection with our domestic and international expansion; (vi) the impact of our strategies on the growth of our Tim Hortons, Burger King and Popeyes brands and our profitability; (vii) our commitment to technology and innovation and our plans and strategies with respect to our information systems and technology offerings and investments; (viii) the correlation between our sales, guest traffic and profitability to consumer discretionary spending and the factors that influence spending; (ix) our ability to drive traffic, expand our customer base and allow restaurants to expand into new dayparts through new product innovation; (x) the benefits accrued from sharing and leveraging best practices among our Tim Hortons, Burger King and Popeyes brands; (xi) the drivers of the long-term success for and competitive position of each of our brands as well as increased sales and profitability of our franchisees; (xii) the impact of our cost management initiatives at each of our brands; (xiii) the continued use of certain franchise incentives and their impact on our financial results; (xiv) the impact of our modern image remodel initiative; (xv) our future financial obligations, including annual debt service requirements and capital expenditures, the source of liquidity needed to satisfy such obligations, and our ability to meet such obligations; (xvi) our future uses of liquidity, including distribution payments and repurchases of Partnership exchange units; (xvii) future Corporate restructuring and tax advisory fees; (xviii) our plans to build new warehouses and renovate existing warehouses and the anticipated timing for completion; (xix) our exposure to changes in interest rates and foreign currency exchange rates and the impact of changes in interest rates and foreign currency exchange rates on the amount of our interest payments, future earnings and cash flows; (xx) our tax positions and their compliance with applicable tax laws; (xxi) certain accounting matters, including the impact of changes in accounting standards; (xxii) certain tax matters, such as our estimates with respect to tax matters as a result of the Tax Act, including our effective tax rate for 2020 and the impacts of the Tax Act; (xxiii) the impact of inflation on our results of operations; (xxiv) the impact of governmental regulation, both domestically and internationally, on our business and financial and operational results; (xxv) the adequacy of our facilities to meet our current requirements; (xxvi) our future financial and operational results; (xxvii) certain litigation matters; (xxviii) our target total distributions for 2020; and (xxix) our sustainability initiatives and the impact of government sustainability regulation and initiatives. These forward looking statements represent management's expectations as of the date hereof. These forward-looking statements are based on certain assumptions and analyses that we made in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. However, these forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, among other things, risks related to: (1) our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations; (2) global economic or other business conditions that may affect the desire or ability of our customers to purchase our products such as inflationary pressures, high unemployment levels, declines in median income growth, consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety; (3) our relationship with, and the success of, our franchisees and risks related to our fully franchised business model; (4) the effectiveness of our marketing and advertising programs and franchisee support of these programs; (5) significant and rapid fluctuations in interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (6) our ability to successfully implement our domestic and international growth strategy for each of our brands and risks related to our international operations; (7) our reliance on master franchisees and subfranchisees to accelerate restaurant growth; (8) the ability of the counterparties to our credit facilities' and derivatives' to fulfill their commitments and/or obligations; (9) changes in applicable tax laws or interpretations thereof; and (10) risks related to the complexity of the Tax Act and our ability to accurately interpret and predict its impact on our financial condition and results. Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in the section entitled "Item 1A - Risk Factors" of our Annual Report as well as other materials that we from time to time file with, or furnish to, theSEC or file with Canadian securities regulatory authorities on SEDAR. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere 53
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in this annual report. Other than as required under securities laws, we do not
assume a duty to update these forward-looking statements, whether as a result of
new information, subsequent events or circumstances, changes in expectations or
otherwise.
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