10-Q 1 qsp_2019331x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 
Form 10-Q
 
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-36787

 
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in its Charter)
 
 
 
Canada
 
98-1206431
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
130 King Street West, Suite 300
Toronto, Ontario
  
M5X 1E1
(Address of Principal Executive Offices)
  
(Zip Code)
(905) 845-6511
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
Title of each class
 
Trading Symbols
 
Name of each exchange on which registered
Class B exchangeable limited partnership units
 
QSP
 
Toronto Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
 
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
☐ 
  
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of April 22, 2019, there were 207,380,043 Class B exchangeable limited partnership units and 202,006,067 Class A common units outstanding.



RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
TABLE OF CONTENTS
 


2


PART I — Financial Information
Item 1. Financial Statements
RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions of U.S. dollars, except unit data)
(Unaudited)
 
As of
 
March 31,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
902

 
$
913

Accounts and notes receivable, net of allowance of $14 and $14, respectively
441

 
452

Inventories, net
74

 
75

Prepaids and other current assets
63

 
60

Total current assets
1,480

 
1,500

Property and equipment, net of accumulated depreciation and amortization of $645 and $704, respectively
2,011

 
1,996

Operating lease assets
1,148

 

Intangible assets, net
10,427

 
10,463

Goodwill
5,555

 
5,486

Net investment in property leased to franchisees
50

 
54

Other assets, net
622

 
642

Total assets
$
21,293

 
$
20,141

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts and drafts payable
$
451

 
$
513

Other accrued liabilities
689

 
637

Gift card liability
112

 
167

Current portion of long term debt and finance leases
94

 
91

Total current liabilities
1,346

 
1,408

Term debt, net of current portion
11,747

 
11,823

Finance leases, net of current portion
287

 
226

Operating lease liabilities, net of current portion
1,046

 

Other liabilities, net
1,531

 
1,547

Deferred income taxes, net
1,563

 
1,519

Total liabilities
17,520

 
16,523

Partners’ capital:
 
 
 
Class A common units; 202,006,067 issued and outstanding at March 31, 2019 and December 31, 2018
4,423

 
4,323

Partnership exchangeable units; 207,382,401 issued and outstanding at March 31, 2019; 207,523,591 issued and outstanding at December 31, 2018
737

 
730

Accumulated other comprehensive income (loss)
(1,389
)
 
(1,437
)
Total Partners’ capital
3,771

 
3,616

Noncontrolling interests
2

 
2

Total equity
3,773

 
3,618

Total liabilities and equity
$
21,293

 
$
20,141


See accompanying notes to condensed consolidated financial statements.

3


RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In millions of U.S. dollars, except per unit data)
(Unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Sales
$
522

 
$
548

Franchise and property revenues
744

 
706

Total revenues
1,266

 
1,254

Operating costs and expenses:
 
 
 
Cost of sales
406

 
429

Franchise and property expenses
133

 
104

Selling, general and administrative expenses
312

 
301

(Income) loss from equity method investments
(2
)
 
(14
)
Other operating expenses (income), net
(17
)
 
13

Total operating costs and expenses
832

 
833

Income from operations
434

 
421

Interest expense, net
132

 
140

Income before income taxes
302

 
281

Income tax expense
56

 
2

Net income
246

 
279

Net income attributable to noncontrolling interests

 

Net income attributable to common unitholders
$
246

 
$
279

Earnings per unit - basic and diluted
 
 
 
Class A common units
$
0.67

 
$
0.73

Partnership exchangeable units
$
0.53

 
$
0.60

Weighted average units outstanding - basic and diluted
 
 
 
Class A common units
202

 
202

Partnership exchangeable units
208

 
218

See accompanying notes to condensed consolidated financial statements.


4


RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In millions of U.S. dollars)
(Unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
246

 
$
279

 
 
 
 
Foreign currency translation adjustment
159

 
(217
)
Net change in fair value of net investment hedges, net of tax of $26 and $(9)
(76
)
 
3

Net change in fair value of cash flow hedges, net of tax of $12 and $(9)
(34
)
 
25

Amounts reclassified to earnings of cash flow hedges, net of tax of $0 and $(2)
(1
)
 
6

Other comprehensive income (loss)
48

 
(183
)
Comprehensive income (loss)
294

 
96

Comprehensive income (loss) attributable to noncontrolling interests

 

Comprehensive income (loss) attributable to common unitholders
$
294

 
$
96

See accompanying notes to condensed consolidated financial statements.


5


RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
(In millions of U.S. dollars, except units)
(Unaudited)

 
Class A Common
Units
 
Partnership
Exchangeable Units
 
Accumulated 
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
 
Units
 
Amount
 
Units
 
Amount
 
Balances at December 31, 2018
202,006,067

 
$
4,323

 
207,523,591

 
$
730

 
$
(1,437
)
 
$
2

 
$
3,618

Cumulative effect adjustment

 
12

 

 
9

 

 

 
21

Distributions declared on Class A common units ($0.63 per unit)

 
(127
)
 

 

 

 

 
(127
)
Distributions declared on partnership exchangeable units ($0.50 per unit)

 

 

 
(104
)
 

 

 
(104
)
Exchange of Partnership exchangeable units for RBI common shares

 
9

 
(141,190
)
 
(9
)
 

 

 

Capital contribution from RBI Inc.

 
71

 

 

 

 

 
71

Net income

 
135

 

 
111

 

 

 
246

Other comprehensive income (loss)

 

 

 

 
48

 

 
48

Balances at March 31, 2019
202,006,067

 
$
4,423

 
207,382,401

 
$
737

 
$
(1,389
)
 
$
2

 
$
3,773


 
Class A Common
Units
 
Partnership
Exchangeable Units
 
Accumulated 
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
 
Units
 
Amount
 
Units
 
Amount
 
Balances at December 31, 2017
202,006,067

 
$
4,168

 
217,708,924

 
$
1,276

 
$
(884
)
 
$
1

 
$
4,561

Cumulative effect adjustment

 
(132
)
 

 
(118
)
 

 

 
(250
)
Distributions declared on Class A common units ($0.55 per unit)

 
(112
)
 

 

 

 

 
(112
)
Distributions declared on partnership exchangeable units ($0.45 per unit)

 

 

 
(98
)
 

 

 
(98
)
Exchange of Partnership exchangeable units for RBI common shares

 
2

 
(29,432
)
 
(2
)
 

 

 

Capital contribution from RBI Inc.

 
44

 

 

 

 

 
44

Restaurant VIE contributions (distributions)

 

 

 

 

 
1

 
1

Net income

 
148

 

 
131

 

 

 
279

Other comprehensive income (loss)

 

 

 

 
(183
)
 

 
(183
)
Balances at March 31, 2018
202,006,067

 
$
4,118

 
217,679,492

 
$
1,189

 
$
(1,067
)
 
$
2

 
$
4,242

See accompanying notes to condensed consolidated financial statements.


6


RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
246

 
$
279

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
47

 
47

Amortization of deferred financing costs and debt issuance discount
7

 
7

(Income) loss from equity method investments
(2
)
 
(14
)
Loss (gain) on remeasurement of foreign denominated transactions
(15
)
 
16

Net (gains) losses on derivatives
(20
)
 
2

Share-based compensation expense
22

 
13

Deferred income taxes
38

 
(19
)
Other
3

 
4

Changes in current assets and liabilities, excluding acquisitions and dispositions:
 
 
 
Accounts and notes receivable
14

 
15

Inventories and prepaids and other current assets
(13
)
 
(7
)
Accounts and drafts payable
(69
)
 
(73
)
Other accrued liabilities and gift card liability
(126
)
 
(374
)
Tenant inducements paid to franchisees

 
(2
)
Other long-term assets and liabilities
22

 
(36
)
Net cash provided by (used for) operating activities
154

 
(142
)
Cash flows from investing activities:
 
 
 
Payments for property and equipment
(5
)
 
(7
)
Net proceeds from disposal of assets, restaurant closures, and refranchisings
4

 
2

Settlement/sale of derivatives, net
11

 
3

Other investing activities, net
1

 
4

Net cash provided by (used for) investing activities
11

 
2

Cash flows from financing activities:
 
 
 
Repayments of long-term debt and finance leases
(23
)
 
(22
)
Distributions on Class A common and Partnership exchangeable units
(207
)
 
(97
)
Distributions to RBI for payments in connection with redemption of preferred shares

 
(34
)
Capital contribution from RBI Inc.
42

 
25

Other financing activities, net
6

 

Net cash (used for) provided by financing activities
(182
)
 
(128
)
Effect of exchange rates on cash and cash equivalents
6

 
(8
)
Increase (decrease) in cash and cash equivalents
(11
)
 
(276
)
Cash and cash equivalents at beginning of period
913

 
1,097

Cash and cash equivalents at end of period
$
902

 
$
821

Supplemental cash flow disclosures:
 
 
 
Interest paid
$
140

 
$
129

Income taxes paid
$
45

 
$
304

See accompanying notes to condensed consolidated financial statements.

7


RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1. Description of Business and Organization
Restaurant Brands International Limited Partnership (“Partnership”, “we”, “us” or “our”) was formed on August 25, 2014 as a general partnership and was registered on October 27, 2014 as a limited partnership in accordance with the laws of the Province of Ontario. We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King® brand (“Burger King” or “BK”), and chicken under the Popeyes® brand (“Popeyes” or “PLK”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of March 31, 2019, we franchised or owned 4,866 Tim Hortons restaurants, 17,823 Burger King restaurants, and 3,120 Popeyes restaurants, for a total of 25,809 restaurants, and operate in more than 100 countries and U.S. territories. Approximately 100% of current system-wide restaurants are franchised.
We are a subsidiary of Restaurant Brands International Inc. (“RBI”). RBI is our sole general partner, and as such, RBI has the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership in accordance with the partnership agreement of Partnership (“partnership agreement”) and applicable laws.
All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated.
Note 2. Basis of Presentation and Consolidation
We have prepared the accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC and Canadian securities regulatory authorities on February 22, 2019.
The Financial Statements include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All material intercompany balances and transactions have been eliminated in consolidation. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method.
We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our maximum exposure to loss resulting from involvement with VIEs is attributable to accounts and notes receivable balances, outstanding loan guarantees and future lease payments, where applicable.
As our franchise and master franchise arrangements provide the franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE.
Tim Hortons has historically entered into certain arrangements in which an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. We perform an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of March 31, 2019 and December 31, 2018, we determined that we are the primary beneficiary of 18 and 17 Restaurant VIEs, respectively, and accordingly, have consolidated the results of operations, assets and liabilities, and cash flows of these Restaurant VIEs in our Financial Statements. Material intercompany accounts and transactions have been eliminated in consolidation.

8


In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year.
The preparation of consolidated financial statements in conformity with U.S. GAAP and related rules and regulations of the SEC requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Certain prior year amounts in the accompanying Financial Statements and notes to the Financial Statements have been reclassified in order to be comparable with the current year classifications. These consist of the reclassification of $2 million from changes in Other long-term assets and liabilities in the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2018 to Tenant inducements paid to franchisees. These reclassifications had no effect on previously reported net income.
Note 3. New Accounting Pronouncements
Lease Accounting – In February 2016, the Financial Accounting Standard Board (the “FASB”) issued new guidance on leases. We adopted this new guidance on January 1, 2019. See Note 4, Leases, for further information about our transition to this new lease accounting standard.
Goodwill Impairment – In January 2017, the FASB issued guidance to simplify how an entity measures goodwill impairment by removing the second step of the two-step quantitative goodwill impairment test. An entity will no longer be required to perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured at the amount by which the carrying value exceeds the fair value of a reporting unit; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendment requires prospective adoption and is effective commencing in 2020 with early adoption permitted. The adoption of this new guidance will not have a material impact on our Financial Statements.
Reclassification of Certain Tax Effects – In February 2018, the FASB issued guidance which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for the tax effects of certain items within accumulated other comprehensive income (loss). The amendment is effective commencing in 2019 with early adoption permitted. The adoption of this new guidance did not have a material impact on our Financial Statements.
Share-based payment arrangements with nonemployees – In June 2018, the FASB issued guidance which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The amendment is effective commencing in 2019 with early adoption permitted. The adoption of this new guidance did not have a material impact on our Financial Statements.


9


Note 4. Leases
As of March 31, 2019, we leased or subleased 5,339 restaurant properties to franchisees and 155 non-restaurant properties to third parties under operating leases and direct financing leases where we are the lessor. Initial lease terms generally range from 10 to 20 years. Most leases to franchisees provide for fixed monthly payments and many provide for future rent escalations and renewal options. Certain leases also include provisions for variable rent, determined as a percentage of sales, generally when annual sales exceed specified levels. Lessees typically bear the cost of maintenance, insurance and property taxes.
We lease land, buildings, equipment, office space and warehouse space. Land and building leases generally have an initial term of 10 to 30 years, while land-only lease terms can extend longer, and most leases provide for fixed monthly payments. Many of these leases provide for future rent escalations and renewal options. Certain leases also include provisions for variable rent payments, determined as a percentage of sales, generally when annual sales exceed specified levels. Most leases also obligate us to pay the cost of maintenance, insurance and property taxes.
We transitioned to FASB Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), from ASC Topic 840, Leases (the “Previous Standard”) on January 1, 2019 on a modified retrospective basis using the effective date transition method. Our 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 the Previous Standard. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases with lease terms of more than 12 months, amends various other aspects of accounting for leases by lessees and lessors, and requires enhanced disclosures. Our transition to ASC 842 resulted in the gross presentation of property tax and maintenance expenses and related lessee reimbursements as franchise and property expenses and franchise and property revenues, respectively. These expenses and reimbursements were presented on a net basis under the Previous Standard.
In connection with our transition to ASC 842, we elected the package of practical expedients under which we did not reassess the classification of our existing leases, reevaluate whether any expired or existing contracts are or contain leases or reassess initial direct costs under the new guidance. We also elected lessee and lessor practical expedients to not separate non-lease components comprised of maintenance from lease components for real estate leases that commenced prior to our transition to ASC 842, as well as for leases that commence or that are modified subsequent to our transition to ASC 842. We did not elect the practical expedient that permitted a reassessment of lease terms for existing leases.


10


Financial Statement Impact of Transition to ASC 842
Transition Impact on January 1, 2019 Condensed Consolidated Balance Sheet
Our transition to ASC 842 represents a change in accounting principle. The $21 million cumulative effect of our transition to ASC 842 is reflected as an adjustment to January 1, 2019 Partners' capital.
Our transition to ASC 842 resulted in the following adjustments to our condensed consolidated balance sheet as of January 1, 2019 (in millions):
 
As Reported
 
Total
 
Adjusted
 
December 31, 2018
 
Adjustments
 
January 1, 2019
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
913

 
$

 
$
913

Accounts and notes receivable, net
452

 

 
452

Inventories, net
75

 

 
75

Prepaids and other current assets
60

 

 
60

Total current assets
1,500

 

 
1,500

Property and equipment, net
1,996

 
26

(a)
2,022

Operating lease assets

 
1,143

(b)
1,143

Intangible assets, net
10,463

 
(133
)
(c)
10,330

Goodwill
5,486

 

 
5,486

Net investment in property leased to franchisees
54

 

 
54

Other assets, net
642

 

 
642

Total assets
$
20,141

 
$
1,036

 
$
21,177

LIABILITIES AND EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts and drafts payable
$
513

 
$

 
$
513

Other accrued liabilities
637

 
114

(e)
751

Gift card liability
167

 

 
167

Current portion of long term debt and finance leases
91

 

 
91

Total current liabilities
1,408

 
114

 
1,522

Term debt, net of current portion
11,823

 
(65
)
(f)
11,758

Finance leases, net of current portion
226

 
62

(f)
288

Operating lease liabilities, net of current portion

 
1,028

(g)
1,028

Other liabilities, net
1,547

 
(132
)
(d)
1,415

Deferred income taxes, net
1,519

 
8

(h)
1,527

Total liabilities
16,523

 
1,015

 
17,538

Partners' capital:
 
 
 
 
 
Class A common units
4,323

 
12

(i)
4,335

Partnership exchangeable units
730

 
9

(i)
739

Accumulated other comprehensive income (loss)
(1,437
)
 

 
(1,437
)
Total Partners' capital
3,616

 
21

 
3,637

Noncontrolling interests
2

 

 
2

Total equity
3,618

 
21

 
3,639

Total liabilities and equity
$
20,141

 
$
1,036

 
$
21,177

(a)
Represents the net change in assets recorded in connection with build-to-suit leases.
(b)
Represents the capitalization of operating lease right-of-use (“ROU”) assets equal to the amount of recognized operating lease liability, adjusted by the net carrying amounts of related favorable lease assets and unfavorable lease liabilities in which we are the lessee and straight-line rent accruals, which were reclassified to operating lease ROU assets.

11


(c)
Represents the net carrying amount of favorable lease assets associated with leases in which we are the lessee, which have been reclassified to operating lease ROU assets.
(d)
Represents the net carrying amount of unfavorable lease liabilities associated with leases in which we are the lessee and $64 million of straight-line rent accruals which have been reclassified to operating lease ROU assets.
(e)
Represents the current portion of operating lease liabilities.
(f)
Represents the net change in liabilities recorded in connection with build-to-suit leases.
(g)
Represents the recognition of operating lease liabilities, net of current portion.
(h)
Represents the net tax effects of the adjustments noted above, with a corresponding adjustment to Partners' capital.
(i)
Represents net change in assets and liabilities recorded in connection with built-to-suit leases and the tax effects of adjustments noted above.
Changes to Lease Accounting Significant Accounting Policies Under ASC 842
In all leases, whether we are the lessor or lessee, we define lease term as the noncancellable term of the lease plus any renewals covered by renewal options that are reasonably certain of exercise based on our assessment of the economic factors relevant to the lessee. The noncancellable term of the lease commences on the date the lessor makes the underlying property in the lease available to the lessee, irrespective of when lease payments begin under the contract.
Lessor Accounting
We recognize lease payments for operating leases as property revenue on a straight-line basis over the lease term and property revenue is presented net of any related sales tax. Lease incentive payments we make to lessees are amortized as a reduction in property revenue over the lease term. We account for reimbursements of maintenance and property tax costs paid to us by lessees as variable lease payment property revenue.
We also have net investments in properties leased to franchisees, which met the criteria of direct financing leases under the Previous Standard. Investments in direct financing leases are recorded on a net basis, consisting of the gross investment and estimated residual value in the lease, less unearned income. Unearned income on direct financing leases is recognized over the lease term yielding a constant periodic rate of return on the net investment in the lease. We do not remeasure the net investment in a direct financing lease unless the lease is modified and that modification is not accounted for as a separate contract.
We recognize variable lease payment income for operating and direct financing leases in the period when changes in facts and circumstances on which the variable lease payments are based occur.
Lessee Accounting
In leases where we are the lessee, we recognize a ROU asset and lease liability at lease commencement, which is measured by discounting lease payments using our incremental borrowing rate applicable to the lease term and currency of the lease as the discount rate. Subsequent amortization of the ROU asset and accretion of the lease liability for an operating lease is recognized as a single lease cost, on a straight-line basis, over the lease term. A finance lease ROU asset is depreciated on a straight-line basis over the lesser of the useful life of the leased asset or lease term. Interest on each finance lease liability is determined as the amount that results in a constant periodic discount rate on the remaining balance of the liability. ROU assets are assessed for impairment in accordance with our long-lived asset impairment policy. We reassess lease classification and remeasure ROU assets and lease liabilities when a lease is modified and that modification is not accounted for as a separate contract or upon certain other events that require reassessment in accordance with ASC 842. Maintenance and property tax expenses are accounted for on an accrual basis as variable lease cost.
We recognize variable lease cost for operating and finance leases in the period when changes in facts and circumstances on which the variable lease payments are based occur.

12


Partnership as Lessor
Assets leased to franchisees and others under operating leases where we are the lessor and which are included within our property and equipment, net are as follows (in millions):
 
As of
 
March 31, 2019
Land
$
912

Buildings and improvements
1,127

Restaurant equipment
18

 
2,057

Accumulated depreciation and amortization
(415
)
Property and equipment leased, net
$
1,642

Our net investment in direct financing leases is as follows (in millions):
 
As of
 
March 31, 2019
Future rents to be received:
 
Future minimum lease receipts
$
57

Contingent rents (a)
25

Estimated unguaranteed residual value
16

Unearned income
(32
)
 
66

Current portion included within accounts receivables
(16
)
Net investment in property leased to franchisees
$
50


(a)
Amounts represent estimated contingent rents recorded in connection with the acquisition method of accounting.
Property revenues are comprised primarily of lease income from operating leases and earned income on direct financing leases with franchisees as follows (in millions):
 
 
Three months ended March 31, 2019
Lease income - operating leases
 
 
Minimum lease payments
 
$
111

Variable lease payments
 
84

Amortization of favorable and unfavorable income lease contracts, net
 
2

Subtotal - lease income from operating leases
 
197

Earned income on direct financing leases
 
2

Total property revenues
 
$
199


13


Partnership as Lessee
Lease cost and other information associated with these lease commitments is as follows (in millions):
Lease Cost (Income)
 
 
Three months ended March 31, 2019
Operating lease cost
 
$
53

Operating lease variable lease cost
 
50

Finance lease cost:
 
 
Amortization of right-of-use assets
 
7

Interest on lease liabilities
 
5

Sublease income
 
(155
)
Total lease cost (income)
 
$
(40
)
Lease Term and Discount Rate
Weighted-average remaining lease term (in years):
 
 
Operating leases
 
11.3 years

Finance leases
 
11.2 years

Weighted-average discount rate:
 
 
Operating leases
 
7.6
%
Finance leases
 
6.6
%
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
47

Operating cash flows from finance leases
 
$
5

Financing cash flows from finance leases
 
$
7

Right-of-use assets obtained in exchange for new finance lease obligations
 
$
1

Right-of-use assets obtained in exchange for new operating lease obligations
 
$
30

Maturity Analysis
As of March 31, 2019, future minimum lease receipts and commitments are as follows (in millions):
 
Lease Receipts
 
Lease Commitments (a)
 
Direct
Financing
Leases
 
Operating
Leases
 
Finance
Leases
 
Operating
Leases
Remainder of 2019
$
11

 
$
314

 
$
35

 
$
143

2020
10

 
396

 
45

 
183

2021
7

 
371

 
43

 
171

2022
5

 
346

 
42

 
158

2023
5

 
324

 
39

 
144

Thereafter
19

 
1,821

 
264

 
909

Total minimum receipts / payments
$
57

 
$
3,572

 
468

 
1,708

Less amount representing interest (b)
 
 
 
 
(155
)
 
(543
)
Present value of minimum lease payments
 
 
 
 
313

 
1,165

Current portion of lease obligations
 
 
 
 
(26
)
 
(119
)
Long-term portion of lease obligations
 
 
 
 
$
287

 
$
1,046

(a)
Minimum lease payments have not been reduced by minimum sublease rentals of $2,332 million due in the future under non-cancelable subleases.
(b)
Calculated using the interest rate for each lease.

14


As of December 31, 2018, future minimum lease receipts and commitments are as follows (in millions):
 
Lease Receipts
 
Lease Commitments (a)
 
Direct
Financing
Leases
 
Operating
Leases
 
Finance
Leases
 
Operating
Leases
2019
$
14

 
$
416

 
$
38

 
$
183

2020
10

 
388

 
36

 
172

2021
7

 
360

 
34

 
158

2022
5

 
331

 
33

 
145

2023
5

 
306

 
30

 
130

Thereafter
19

 
1,704

 
201

 
831

Total minimum receipts / payments
$
60

 
$
3,505

 
372

 
$
1,619

Less amount representing interest
 
 
 
 
(125
)
 
 
Present value of minimum finance lease payments
 
 
 
 
247

 
 
Current portion of finance lease obligation
 
 
 
 
(21
)
 
 
Long-term portion of finance lease obligation
 
 
 
 
$
226

 
 
(a)
Minimum lease payments have not been reduced by minimum sublease rentals of $2,290 million due in the future under non-cancelable subleases.
Note 5. Revenue Recognition
Contract Liabilities
Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We classify these contract liabilities as Other liabilities, net in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities between December 31, 2018 and March 31, 2019 (in millions):
Contract Liabilities
 
TH
 
BK
 
PLK
 
Consolidated
Balance at December 31, 2018
 
$
62

 
$
405

 
$
19

 
$
486

Revenue recognized that was included in the contract liability balance at the beginning of the year
 
(2
)
 
(9
)
 

 
(11
)
Increase, excluding amounts recognized as revenue during the period
 
2

 
5

 
1

 
8

Impact of foreign currency translation
 
1

 
(4
)
 

 
(3
)
Balance at March 31, 2019
 
$
63

 
$
397

 
$
20

 
$
480

The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2019 (in millions):
Contract liabilities expected to be recognized in
 
TH
 
BK
 
PLK
 
Consolidated
Remainder of 2019
 
$
6

 
$
22

 
$
1

 
$
29

2020
 
7

 
28

 
2

 
37

2021
 
7

 
28

 
1

 
36

2022
 
7

 
27

 
1

 
35

2023
 
6

 
27

 
1

 
34

Thereafter
 
30

 
265

 
14

 
309

Total
 
$
63

 
$
397

 
$
20

 
$
480


15


Disaggregation of Total Revenues
Total revenues consist of the following (in millions):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Sales
 
$
522

 
$
548

Royalties
 
528

 
510

Property revenues
 
199

 
178

Franchise fees and other revenue
 
17

 
18

Total revenues
 
$
1,266

 
$
1,254

Note 6. Earnings per Unit
Partnership uses the two-class method in the computation of earnings per unit. Pursuant to the terms of the partnership agreement, RBI, as the holder of the Class A common units, is entitled to receive distributions from Partnership in an amount equal to the aggregate dividends payable by RBI to holders of RBI common shares, and the holders of Class B exchangeable limited partnership units (the “Partnership exchangeable units”) are entitled to receive distributions from Partnership in an amount per unit equal to the dividends payable by RBI on each RBI common share. Partnership’s net income available to common unitholders is allocated between the Class A common units and Partnership exchangeable units on a fully-distributed basis and reflects residual net income after noncontrolling interests and Partnership preferred unit distributions. Basic and diluted earnings per Class A common unit is determined by dividing net income allocated to Class A common unit holders by the weighted average number of Class A common units outstanding for the period. Basic and diluted earnings per Partnership exchangeable unit is determined by dividing net income allocated to the Partnership exchangeable units by the weighted average number of Partnership exchangeable units outstanding during the period.
There are no dilutive securities for Partnership as RBI equity awards will not affect the number of Class A common units or Partnership exchangeable units outstanding. However, the issuance of shares by RBI in future periods will affect the allocation of net income attributable to common unitholders between Partnership’s Class A common units and Partnership exchangeable units.
The following table summarizes the basic and diluted earnings per unit calculations (in millions, except per unit amounts):

 
Three Months Ended March 31,
 
2019
 
2018
Allocation of net income among partner interests:
 
 
 
Net income allocated to Class A common unitholders
$
135

 
$
148

Net income allocated to Partnership exchangeable unitholders
111

 
131

Net income attributable to common unitholders
$
246

 
$
279

 
 
 
 
Denominator - basic and diluted partnership units:
 
 
 
Weighted average Class A common units
202

 
202

Weighted average Partnership exchangeable units
208

 
218

 
 
 
 
Earnings per unit - basic and diluted:
 
 
 
Class A common units (a)
$
0.67

 
$
0.73

Partnership exchangeable units (a)
$
0.53

 
$
0.60

(a) Earnings per unit may not recalculate exactly as it is calculated based on unrounded numbers.

16


Note 7. Intangible Assets, net and Goodwill
Intangible assets, net and goodwill consist of the following (in millions):

 
As of
 
March 31, 2019
 
December 31, 2018
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Identifiable assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
   Franchise agreements
$
706

 
$
(200
)
 
$
506

 
$
705

 
$
(194
)
 
$
511

   Favorable leases (a)
133

 
(62
)
 
71

 
407

 
(200
)
 
207

      Subtotal
839

 
(262
)
 
577

 
1,112

 
(394
)
 
718

Indefinite lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
   Tim Hortons brand
$
6,378

 
$

 
$
6,378

 
$
6,259

 
$

 
$
6,259

   Burger King brand
2,117

 

 
2,117

 
2,131

 

 
2,131

   Popeyes brand
1,355

 

 
1,355

 
1,355

 

 
1,355

      Subtotal
9,850

 

 
9,850

 
9,745

 

 
9,745

Intangible assets, net
 
 
 
 
$
10,427

 
 
 
 
 
$
10,463

 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
 
 
 
 
 
 
 
 
 
   Tim Hortons segment
$
4,111

 
 
 
 
 
$
4,038

 
 
 
 
   Burger King segment
598

 
 
 
 
 
602

 
 
 
 
   Popeyes segment
846

 
 
 
 
 
846

 
 
 
 
      Total
$
5,555

 
 
 
 
 
$
5,486

 
 
 
 
(a)
The decrease in favorable leases reflects the reclassification of favorable leases where we are the lessee to operating lease right-of-use assets in connection with our transition to ASC 842. See Note 4, Leases.
Amortization expense on intangible assets totaled $11 million for the three months ended March 31, 2019 and $18 million for the same period in the prior year. The change in the brands and goodwill balances during the three months ended March 31, 2019 was due to the impact of foreign currency translation.


17


Note 8. Equity Method Investments
The aggregate carrying amount of our equity method investments was $256 million and $259 million as of March 31, 2019 and December 31, 2018, respectively, and is included as a component of Other assets, net in our accompanying condensed consolidated balance sheets. TH and BK both have equity method investments. PLK does not have any equity method investments.
With respect to our TH business, the most significant equity method investment is our 50% joint venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. Distributions received from this joint venture were $2 million and $3 million during the three months ended March 31, 2019 and 2018, respectively.
The aggregate market value of our 20.5% equity interest in Carrols Restaurant Group, Inc. (“Carrols”) based on the quoted market price on March 31, 2019 was approximately $94 million. The aggregate market value of our 10.1% equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on March 31, 2019 was approximately $127 million. No quoted market prices are available for our other equity method investments.
We have equity interests in entities that own or franchise Tim Hortons or Burger King restaurants. Franchise and property revenues recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions):

 
Three Months Ended March 31,
 
2019
 
2018
Revenues from affiliates:
 
 
 
Royalties
$
78

 
$
68

Property revenues
8

 
9

Franchise fees and other revenue
3

 
2

Total
$
89

 
$
79

We recognized $4 million and $5 million of rent expense associated with the TIMWEN Partnership during the three months ended March 31, 2019 and 2018, respectively.
At March 31, 2019 and December 31, 2018, we had $33 million and $41 million, respectively, of accounts receivable, net from our equity method investments which were recorded in Accounts and notes receivable, net in our condensed consolidated balance sheets.
(Income) loss from equity method investments reflects our share of investee net income or loss, non-cash dilution gains or losses from changes in our ownership interests in equity method investees and basis difference amortization. During the three months ended March 31, 2019 we did not record a non-cash dilution gain. During the three months ended March 31, 2018 we recorded an increase to the carrying value of our equity method investment balance and a non-cash dilution gain of $20 million on the initial public offering by one of our equity method investees.

18


Note 9. Other Accrued Liabilities and Other Liabilities, net
Other accrued liabilities (current) and other liabilities, net (noncurrent) consist of the following (in millions):

 
As of
 
March 31,
2019
 
December 31,
2018
Current:
 
 
 
Dividend payable
$
231

 
$
207

Interest payable
92

 
87

Accrued compensation and benefits
41

 
69

Taxes payable
66

 
113

Deferred income
37

 
27

Accrued advertising expenses
11

 
30

Restructuring and other provisions
9

 
11

Current portion of operating lease liabilities (a)
119

 

Other
83

 
93

Other accrued liabilities
$
689

 
$
637

Noncurrent:
 
 
 
Taxes payable
$
512

 
$
493

Contract liabilities, net
480

 
486

Unfavorable leases (b)
118

 
192

Derivatives liabilities
278

 
179

Accrued pension
64

 
64

Accrued lease straight-lining liability (b)

 
69

Deferred income
32

 
22

Other
47

 
42

Other liabilities, net
$
1,531

 
$
1,547

(a)
Represents the current portion of operating lease liabilities recognized in connection with our transition to ASC 842. See Note 4, Leases.
(b)
The decrease in unfavorable leases and accrued lease straight-lining liability reflects the reclassification of unfavorable leases and lease straight-lining liability where we are the lessee in the underlying operating lease to the right-of-use assets recorded for the underlying lease in connection with our transition to ASC 842. See Note 4, Leases.


19


Note 10. Long-Term Debt
Long-term debt consists of the following (in millions):

 
As of
 
March 31,
2019
 
December 31,
2018
Term Loan Facility (due February 17, 2024)
$
6,322

 
$
6,338

2017 4.25% Senior Notes (due May 15, 2024)
1,500

 
1,500

2015 4.625% Senior Notes (due January 15, 2022)
1,250

 
1,250

2017 5.00% Senior Notes (due October 15, 2025)
2,800

 
2,800

Other (a)
81

 
150

Less: unamortized deferred financing costs and deferred issue discount
(138
)
 
(145
)
Total debt, net
11,815

 
11,893

    Less: current maturities of debt
(68
)
 
(70
)
Total long-term debt
$
11,747

 
$
11,823

(a)
The decrease in Other reflects the de-recognition of obligations associated with build-to-suit leases recorded under the Previous Standard. Liabilities associated with build-to-suit leases were remeasured and recorded as finance lease liabilities in conjunction with our transition to ASC 842.
Revolving Credit Facility
As of March 31, 2019, we had no amounts outstanding under our senior secured revolving credit facility (the "Revolving Credit Facility"). Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or RBI 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. As of March 31, 2019, we had $2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability was $498 million.
TH Facility
During 2018, one of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$100 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40% or the Prime Rate plus an applicable margin equal to 0.40%, at our option. Obligations under the TH Facility are guaranteed by three of our subsidiaries, and amounts borrowed under the TH Facility are and will be secured by certain parcels of real estate. As of March 31, 2019, we had drawn down the entire C$100 million available under the TH Facility with a weighted average interest rate of 3.37%.
Fair Value Measurement
The following table presents the fair value of our variable rate term debt and senior notes, estimated using inputs based on bid and offer prices that are Level 2 inputs, and principal carrying amount (in billions):
 
As of
 
March 31,
2019
 
December 31,
2018
Fair value of our variable term debt and senior notes
$
12

 
$
11

Principal carrying amount of our variable term debt and senior notes
12

 
12


20


Interest Expense, net
Interest expense, net consists of the following (in millions):
 
Three Months Ended March 31,
 
2019
 
2018
Debt (a)
$
124

 
$
130

Finance lease obligations
5

 
6

Amortization of deferred financing costs and debt issuance discount
7

 
7

Interest income
(4
)
 
(3
)
    Interest expense, net
$
132

 
$
140

(a)
Amount includes $18 million and $4 million benefit during the three months ended March 31, 2019 and 2018, respectively, from our adoption of a new hedge accounting standard in 2018.
Note 11. Income Taxes
Our effective tax rate was 18.7% for the three months ended March 31, 2019. The effective tax rate for this period was primarily a result of the mix of income from multiple tax jurisdictions and the impact of internal financing arrangements and stock option exercises.
Our effective tax rate was 0.6% for the three months ended March 31, 2018. The effective tax rate during this period was primarily a result of the mix of income from multiple tax jurisdictions and the favorable impact from stock option exercises and reserve releases from audit settlements. Specifically, the benefit associated with stock option exercises reduced the effective tax rate by 22.7%.
Note 12. Equity
During the three months ended March 31, 2019, Partnership exchanged 141,190 Partnership exchangeable units pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging these Partnership exchangeable units for the same number of newly issued RBI common shares. The issuances of shares was accounted for as a capital contribution by RBI to Partnership. The exchanges of Partnership exchangeable units were recorded as increases to the Class A common units balance within partner’s capital in our consolidated balance sheet in an amount equal to the market value of the newly issued RBI common shares and a reduction to the Partnership exchangeable units balance within partner’s capital of our consolidated balance sheet in an amount equal to the cash paid by Partnership and the market value of the newly issued RBI common shares. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit was cancelled concurrently with the exchange.
Accumulated Other Comprehensive Income (Loss)
The following table displays the changes in the components of accumulated other comprehensive income (loss) (“AOCI”) (in millions):

 
Derivatives
 
Pensions
 
Foreign Currency Translation
 
Accumulated Other Comprehensive Income (Loss)
Balances at December 31, 2018
$
454

 
$
(27
)
 
$
(1,864
)
 
$
(1,437
)
Foreign currency translation adjustment

 

 
159

 
159

Net change in fair value of derivatives, net of tax
(110
)
 

 

 
(110
)
Amounts reclassified to earnings of cash flow hedges, net of tax
(1
)
 

 

 
(1
)
Balances at March 31, 2019
$
343

 
$
(27
)
 
$
(1,705
)
 
$
(1,389
)


21


Note 13. Derivative Instruments
Disclosures about Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges, derivatives designated as net investment hedges and those utilized as economic hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates.
Interest Rate Swaps
During 2018, we entered into a series of receive-variable, pay-fixed interest rate swaps with a notional value of $3,500 million to hedge the variability in the interest payments on a portion of our senior secured term loan facility (the "Term Loan Facility") beginning March 29, 2018 through the expiration of the final swap on February 17, 2024, resetting each March. At inception, these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value are recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.
During 2015, we entered into a series of receive-variable, pay-fixed interest rate swaps with a notional value of $2,500 million to hedge the variability in the interest payments on a portion of our Term Loan Facility beginning May 28, 2015. All of these interest rate swaps were settled on April 26, 2018 for an insignificant cash receipt. At inception, these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value were recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.
During 2015, we settled certain interest rate swaps and recognized a net unrealized loss of $85 million in AOCI at the date of settlement. This amount gets reclassified into Interest expense, net as the original hedged forecasted transaction affects earnings. The amount of pre-tax losses in AOCI as of March 31, 2019 that we expect to be reclassified into interest expense within the next 12 months is $12 million.
Cross-Currency Rate Swaps
To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At March 31, 2019, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates are economically offset by movements in the fair value of our cross-currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in AOCI, net of tax. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations.
At March 31, 2019, we had outstanding fixed-to-fixed cross-currency rate swaps to partially hedge the net investment in our Canadian subsidiaries. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as net investment hedges. These swaps are contracts to exchange quarterly fixed-rate interest payments we make on the Canadian dollar notional amount of C$6,754 million for quarterly fixed-rate interest payments we receive on the U.S. dollar notional amount of $5,000 million through the maturity date of June 30, 2023.
At March 31, 2019, we also had outstanding cross-currency rate swaps in which we pay quarterly fixed-rate interest payments on the Euro notional value of €1,108 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. During 2018, we extended the term of the swaps from March 31, 2021 to the maturity date of February 17, 2024. The extension of the term resulted in a re-designation of the hedge and the swaps continue to be accounted for as a net investment hedge. Additionally, during 2018 we entered into cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $400 million through the maturity date of February 17, 2024. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge.
The fixed to fixed cross-currency rate swaps hedging Canadian dollar and Euro net investments utilized the forward method of effectiveness assessment prior to March 15, 2018. On March 15, 2018, we dedesignated and subsequently redesignated the outstanding fixed to fixed cross-currency rate swaps to prospectively use the spot method of hedge effectiveness assessment. Additionally, as a result of adopting new hedge accounting guidance during 2018, we elected to exclude the interest component (the “Excluded Component”) from the accounting hedge without affecting net investment hedge accounting and elected to amortize the Excluded Component over the life of the derivative instrument. The amortization of the Excluded Component is recognized in Interest expense, net in the condensed consolidated statement of operations. The

22


change in fair value that is not related to the Excluded Component is recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated.
Foreign Currency Exchange Contracts
We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At March 31, 2019, we had outstanding forward currency contracts to manage this risk in which we sell Canadian dollars and buy U.S. dollars with a notional value of $130 million with maturities to May 2020. We have designated these instruments as cash flow hedges, and as such, the unrealized changes in market value of effective hedges are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.
Credit Risk
By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty.
Credit-Risk Related Contingent Features
Our derivative instruments do not contain any credit-risk related contingent features.

23


Quantitative Disclosures about Derivative Instruments and Fair Value Measurements
The following tables present the required quantitative disclosures for our derivative instruments, including their estimated fair values (all estimated using Level 2 inputs) and their location on our condensed consolidated balance sheets (in millions):
 
Gain or (Loss) Recognized in Other Comprehensive Income (Loss)
 
Three Months Ended March 31,
 
2019
 
2018
Derivatives designated as cash flow hedges(1)
 
 
 
Interest rate swaps
$
(44
)
 
$
29

Forward-currency contracts
$
(2
)
 
$
5

Derivatives designated as net investment hedges
 
 
 
Cross-currency rate swaps
$
(102
)
 
$
11

(1)
We did not exclude any components from the cash flow hedge relationships presented in this table.
 
 
Location of Gain or (Loss) Reclassified from AOCI into Earnings
 
Gain or (Loss) Reclassified from AOCI into Earnings
 
 
 
Three Months Ended March 31,
 
 
 
 
2019
 
2018
Derivatives designated as cash flow hedges
 
 
 
 
 
 
Interest rate swaps
 
Interest expense, net
 
$
(1
)
 
$
(6
)
Forward-currency contracts
 
Cost of sales
 
$
2

 
$
(2
)
 
 
 
 
 
 
 
 
 
Location of Gain or (Loss) Recognized in Earnings
 
Gain or (Loss) Recognized in Earnings
(Amount Excluded from Effectiveness Testing)
 
 
 
Three Months Ended March 31,
 
 
 
 
2019
 
2018
Derivatives designated as net investment hedges
 
 
 
 
 
 
Cross-currency rate swaps
 
Interest expense, net
 
$
18

 
$
4

 
Fair Value as of
 
 
 
 
 
March 31, 2019
 
December 31, 2018
 
Balance Sheet Location
Assets:
 
 
 
 
 
Derivatives designated as cash flow hedges
 
 
 
 
 
Foreign currency
$
3

 
$
7

 
Prepaids and other current assets
Derivatives designated as net investment hedges
 
 
 
 
 
Foreign currency
17

 
58

 
Other assets, net
Total assets at fair value
$
20

 
$
65

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivatives designated as cash flow hedges
 
 
 
 
 
Interest rate
$
118

 
$
72

 
Other liabilities, net
Derivatives designated as net investment hedges
 
 
 
 
 
Foreign currency
160

 
107

 
Other liabilities, net
Total liabilities at fair value
$
278

 
$
179

 
 


24


Note 14. Other Operating Expenses (Income), net
Other operating expenses (income), net consist of the following (in millions):

 
Three Months Ended March 31,
 
2019
 
2018
Net losses (gains) on disposal of assets, restaurant closures, and refranchisings
$
3

 
$
2

Litigation settlements (gains) and reserves, net

 
(6
)
Net losses (gains) on foreign exchange
(15
)
 
16

Other, net
(5
)
 
1

     Other operating expenses (income), net
$
(17
)
 
$
13

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 (gains) 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.

Note 15. Commitments and Contingencies
Litigation
From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property.
In March 2019, Partnership settled the two class action lawsuits filed in the Ontario Superior Court of Justice against The TDL Group Corp., a subsidiary of Partnership (“TDL”), and certain other defendants, as described in Partnership’s Annual Report on Form 10-K filed with the SEC on February 22, 2019. Under the terms of the settlement, TDL will contribute C$10 million to the Tim Hortons Advertising Fund in Canada over two years, such amount to be spent on marketing activities. In addition, TDL will pay C$2 million for legal and administrative expenses. The court approved the settlement on April 29, 2019. These amounts were accrued by TDL during 2018.


25


Note 16. Segment Reporting
As stated in Note 1, Description of Business and Organization, we manage three brands. Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Under the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. Our business generates revenue from the following sources: (i) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us ("Company restaurants"). In addition, our TH business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers. We manage each of our brands as an operating segment and each operating segment represents a reportable segment.
The following tables present revenues, by segment and by country (in millions):
 
Three Months Ended March 31,
 
2019
 
2018
Revenues by operating segment:
 
 
 
     TH
$
749

 
$
763

     BK
411

 
390

     PLK
106

 
101

Total revenues
$
1,266

 
$
1,254


 
Three Months Ended March 31,
 
2019
 
2018
Revenues by country (a):
 
 
 
     Canada
$
676

 
$
692

     United States
444

 
421

     Other
146

 
141

Total revenues
$
1,266

 
$
1,254


(a)
Only Canada and the United States represented 10% or more of our total revenues in each period presented.

26


Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest expense, net, (gain) loss on early extinguishment of debt, income tax expense, and depreciation and amortization, adjusted to exclude the non-cash impact of share-based compensation and non-cash incentive compensation expense and (income) loss from equity method investments, net of cash distributions received from equity method investments, as well as other operating expenses (income), net. Other specifically identified costs associated with non-recurring projects are also excluded from Adjusted EBITDA, including fees and expenses associated with the Popeyes Acquisition (“PLK Transaction costs”), Corporate restructuring and tax advisory fees related to the interpretation and implementation of comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act enacted by the U.S. government on December 22, 2017 and non-operational Office centralization and relocation costs in connection with the centralization and relocation of our Canadian and U.S. restaurant support centers to new offices in Toronto, Ontario, and Miami, Florida, respectively. Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of operating performance or the performance of an acquired business. A reconciliation of segment income to net income (loss) consists of the following (in millions):

 
Three Months Ended March 31,
 
2019
 
2018
Segment income:
 
 
 
     TH
$
237

 
$
245

     BK
222

 
214

     PLK
41

 
39

          Adjusted EBITDA
500

 
498

Share-based compensation and non-cash incentive compensation expense
25

 
15

PLK Transaction costs

 
5

Corporate restructuring and tax advisory fees
6

 
7

Office centralization and relocation costs
4

 

Impact of equity method investments (a)
1

 
(10
)
Other operating expenses (income), net
(17
)
 
13

          EBITDA
481

 
468

Depreciation and amortization
47

 
47

          Income from operations
434

 
421

Interest expense, net
132

 
140

Income tax expense
56

 
2

          Net income
$
246

 
$
279

(a)
Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income.


27


Note 17. Supplemental Financial Information
On February 17, 2017, 1011778 B.C. Unlimited Liability Company (the “Parent Issuer”) and New Red Finance Inc. (the “Co-Issuer” and together with the Parent Issuer, the “Issuers”) entered into an amended credit agreement that provides for obligations under the Credit Facilities. On August 28, 2017, the Issuers entered into the 2017 5.00% Senior Notes Indenture with respect to the 2017 5.00% Senior Notes. On May 17, 2017, the Issuers entered into the 2017 4.25% Senior Notes Indenture with respect to the 2017 4.25% Senior Notes. On May 22, 2015, the Issuers entered into the 2015 4.625% Senior Notes Indenture with respect to the 2015 4.625% Senior Notes.
The agreement governing our Credit Facilities, the 2017 5.00% Senior Notes Indenture, the 2017 4.25% Senior Notes Indenture and the 2015 4.625% Senior Notes Indenture allow the financial reporting obligation of the Parent Issuer to be satisfied through the reporting of Partnership’s consolidated financial information, provided that the consolidated financial information of the Parent Issuer and its restricted subsidiaries is presented on a standalone basis.
The following represents the condensed consolidating financial information for the Parent Issuer and its restricted subsidiaries (“Consolidated Borrowers”) on a consolidated basis, together with eliminations, as of and for the periods indicated. The condensed consolidating financial information of Partnership is combined with the financial information of its wholly-owned subsidiaries that are also parent entities of the Parent Issuer and presented in a single column under the heading “RBILP”. The consolidating financial information may not necessarily be indicative of the financial position, results of operations or cash flows had the Issuers and Partnership operated as independent entities.


28


RESTAURANT BRANDS INTERNATIONAL LIMITED PARTNERSHIP AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
(In millions of U.S. dollars)
As of March 31, 2019
 
Consolidated Borrowers
 
RBILP
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
902

 
$

 
$

 
$
902

Accounts and notes receivable, net
441

 

 

 
441

Inventories, net
74

 

 

 
74

Prepaids and other current assets
63

 

 

 
63

Total current assets
1,480

 

 

 
1,480

Property and equipment, net
2,011

 

 

 
2,011

Operating lease assets
1,148

 

 

 
1,148

Intangible assets, net
10,427

 

 

 
10,427

Goodwill
5,555

 

 

 
5,555

Net investment in property leased to franchisees
50

 

 

 
50

Intercompany receivable

 
231

 
(231
)
 

Investment in subsidiaries

 
3,773

 
(3,773
)
 

Other assets, net
622

 

 

 
622

Total assets
$
21,293

 
$
4,004

 
$
(4,004
)
 
$
21,293

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts and drafts payable
$
451

 
$

 
$

 
$
451

Other accrued liabilities
458

 
231

 

 
689

Gift card liability
112

 

 

 
112

Current portion of long term debt and finance leases
94

 

 

 
94

Total current liabilities
1,115

 
231

 

 
1,346

Term debt, net of current portion
11,747

 

 

 
11,747

Finance leases, net of current portion
287

 

 

 
287

Operating lease liabilities, net of current portion
1,046

 

 

 
1,046

Other liabilities, net
1,531

 

 

 
1,531

Payables to affiliates
231

 

 
(231
)
 

Deferred income taxes, net
1,563

 

 

 
1,563

Total liabilities
17,520

 
231

 
(231
)
 
17,520

Partners’ capital:
 
 
 
 
 
 
 
Class A common units

 
4,423

 

 
4,423

Partnership exchangeable units

 
737

 

 
737

Common shares
3,142

 

 
(3,142
)
 

Retained Earnings
2,018

 

 
(2,018
)
 

Accumulated other comprehensive income (loss)
(1,389
)
 
(1,389
)
 
1,389

 
(1,389
)
Total Partners' capital/shareholders' equity
3,771

 
3,771

 
(3,771
)