02314489-00000001-00036645-C@#SEDAR#FILINGS#RBI#fsMarch22015-PDF 002002001001Restaurant Brands International Inc. 2015030220150302121040101
02314489-00000001-00036645-C@#SEDAR#FILINGS#RBI#fsMarch22015-PDF
02314489
00000001
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Other Issuers
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Continuous Disclosure
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029004
Audited annual financial statements - English
20150302
20150302
BC
AB
SK
MB
ON
QC
NB
NS
PE
NF
NT
YT
NU
00036645
Restaurant Brands International Inc.
Restaurant Brands International Inc.
Lisa Giles-Klein
905
845-6511
905
845-0265
Canada
76131D
099199010000000000000090000090990099999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999
001
20141023
1231
036
01000000000000000999
10000000000009999999
KPMG LLP
KPMG LLP
Computershare Investor Services Inc.
Computershare Investor Services Inc.
006
20150113
10:45:03
1
QSR
20141231
001
874 Sinclair Road
Oakville
Ontario
Canada
L6K 2Y1
905
845-6511
905
845-0265
874 Sinclair Road
Oakville
Ontario
Canada
L6K 2Y1
905
845-6511
905
845-0265
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
60
Item 8.
Financial Statements and Supplementary Data
Page
Management’s Report on Internal Control Over Financial Reporting
61
Report of Independent Registered Public Accounting Firm
62
Consolidated Balance Sheets
63
Consolidated Statements of Operations
64
Consolidated Statements of Comprehensive Income (Loss)
65
Consolidated Statements of Shareholders’ Equity
66
Consolidated Statements of Cash Flows
67
Notes to Consolidated Financial Statements
68
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements, related notes
and other information included in this annual report. The financial statements were prepared in accordance with accounting principles
generally accepted in the United States of America and include certain amounts based on management’s estimates and assumptions.
Other financial information presented in the annual report is derived from the financial statements.
Management is also responsible for establishing and maintaining adequate internal control over financial reporting, and for
performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2014. Internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial
statements.
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2014 based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management
determined that the Company’s internal control over financial reporting was effective as of December 31, 2014.
The scope of management’s assessment of the effectiveness of the Company’s internal control over financial reporting included all of
the Company’s consolidated operations except for the operations of Tim Hortons Inc., which the Company acquired in December
2014. Tim Hortons Inc. operations represented $14,485.3 million of the Company’s consolidated total assets (which includes
purchase accounting adjustments within the scope of the assessment) and $142.1 million of the Company’s consolidated total
revenues as of and for the year ended December 31, 2014.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by KPMG
LLP, the Company’s independent registered public accounting firm, as stated in its report which is included herein.
61
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Restaurant Brands International Inc.:
We have audited the accompanying consolidated balance sheets of Restaurant Brands International Inc. and subsidiaries (the Company) as of
December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and
cash flows for each of the years in the three-year period ended December 31, 2014. We also have audited the Company’s internal control
over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these
consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Item 9A, “Management’s Report on Internal Control
Over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the
Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of
the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Restaurant Brands International Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, Restaurant Brands International Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Restaurant Brands International Inc. acquired Tim Hortons Inc. during 2014, and management excluded from its assessment of the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, Tim Hortons Inc.’s internal control over
financial reporting associated with total assets of $14,485.3 million (which includes purchase accounting adjustments within the scope of the
assessment) and total revenues of $142.1 million included in the consolidated financial statements of Restaurant Brands International Inc.
and subsidiaries as of and for the year ended December 31, 2014. Our audit of internal control over financial reporting of Restaurant Brands
International Inc. also excluded an evaluation of the internal control over financial reporting of Tim Hortons Inc.
(signed) KPMG LLP
March 2, 2015
Miami, Florida
Certified Public Accountants
62
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions of U.S. dollars, except share data)
See accompanying notes to consolidated financial statements.
As of
December 31,
2014
December 31,
2013
ASSETS
Current assets:
Cash and cash equivalents $ 1,803.2 $ 786.9
Restricted cash and cash equivalents 84.5 —
Trade and notes receivable, net 439.9 179.7
Inventories and other current assets, net 194.9 69.8
Advertising fund restricted assets 53.0 —
Deferred income taxes, net 85.6 38.0
Total current assets 2,661.1 1,074.4
Property and equipment, net of accumulated depreciation of $226.7 million and $187.9 million,
respectively 2,539.6 801.5
Intangible assets, net 9,441.1 2,796.0
Goodwill 5,851.3 630.0
Net investment in property leased to franchisees 140.5 163.1
Other assets, net 530.4 363.5
Total assets $ 21,164.0 $ 5,828.5
LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts and drafts payable $ 223.0 $ 31.1
Accrued advertising 25.9 56.5
Other accrued liabilities 318.8 155.0
Gift card liability 187.0 22.0
Advertising fund liabilities 45.6 —
Tim Hortons Notes 1,044.8 —
Current portion of long term debt and capital leases 80.1 81.4
Total current liabilities 1,925.2 346.0
Term debt, net of current portion 8,936.7 2,880.2
Capital leases, net of current portion 175.7 75.4
Other liabilities, net 644.1 317.9
Deferred income taxes, net 1,862.1 692.8
Total liabilities 13,543.8 4,312.3
Commitments and Contingencies (Note 23)
Redeemable preferred shares; $43.775848 par value; 68,530,939 shares authorized, issued and
outstanding at December 31, 2014; 0 authorized, issued and outstanding at December 31, 2013 3,297.0 —
Shareholders’ Equity:
Common shares, no par value at December 31, 2014, $0.01 par value at December 31, 2013,
unlimited shares authorized at December 31, 2014, 2,000,000,000 shares authorized at
December 31, 2013, 202,052,741 shares issued and outstanding at December 31, 2014;
352,161,950 shares issued at December 31, 2013 1,755.0 3.5
Additional paid-in capital — 1,239.9
(Accumulated deficit) retained earnings 227.6 225.5
Accumulated other comprehensive income (loss) (111.7) 54.6
Treasury stock, at cost; zero shares at December 31, 2014 and 345,286 shares at December 31,
2013 — (7.3)
Total Restaurant Brands International Inc. shareholders’ equity 1,870.9 1,516.2
Noncontrolling interests 2,452.3 —
Total shareholders’ equity 4,323.2 1,516.2
Total liabilities, redeemable preferred shares and shareholders’ equity $ 21,164.0 $ 5,828.5
Approved on behalf of the Board of Directors:
63
By: /s/ Alexandre Behring By: /s/ Paul J. Fribourg
Alexandre Behring, Executive Chairman Paul J. Fribourg, Director
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In millions of U.S. dollars, except per share data)
See accompanying notes to consolidated financial statements.
64
2014
2013
2012
Revenues:
Sales $ 167.4 $ 222.7 $1,169.0
Franchise and property revenues 1,029.9 923.6 801.9
Total revenues 1,197.3 1,146.3 1,970.9
Cost of sales 152.5 195.3 1,037.2
Franchise and property expenses 180.9 152.4 115.1
Selling, general and administrative expenses 345.4 242.4 347.6
(Income) loss from equity method investments 9.2 12.7 4.1
Other operating expenses (income), net 326.9 21.3 49.2
Total operating costs and expenses 1,014.9 624.1 1,553.2
Income from operations 182.4 522.2 417.7
Interest expense, net 280.1 200.0 223.8
Loss on early extinguishment of debt 155.4 — 34.2
Income (loss) before income taxes (253.1) 322.2 159.7
Income tax expense 24.3 88.5 42.0
Net income (loss) (277.4) 233.7 117.7
Net income (loss) attributable to noncontrolling interests (Note 17) (435.4) — —
Net income (loss) attributable to Restaurant Brands International Inc. 158.0 233.7 117.7
Preferred shares dividends 13.8 — —
Accretion of preferred shares to redemption value 546.4 — —
Net income (loss) attributable to common shareholders $ (402.2) $ 233.7 $ 117.7
Earnings (loss) per common share:
Basic $ (1.17) $ 0.67 $ 0.34
Diluted $ (2.34) $ 0.65 $ 0.33
Weighted average shares outstanding
Basic 343.7 351.0 349.7
Diluted 358.2 357.8 354.1
Dividends per common share $ 0.30 $ 0.24 $ 0.04
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In millions of U.S. dollars)
See accompanying notes to consolidated financial statements.
65
2014
2013
2012
Net income (loss) $(277.4) $233.7 $117.7
Foreign currency translation adjustment (227.2) 50.1 15.5
Reclassification of foreign currency translation adjustment into net income — (3.0) —
Net change in fair value of net investment hedges (net of tax of $20.9, $5.7 and $4.2) 45.4 (9.1) (6.6)
Net change in fair value of cash flow hedges (net of tax of $57.6, $65.8 and $6.4) (98.7) 103.3 (10.0)
Amounts reclassified to earnings of cash flow hedges (net of tax of $2.7, $2.3 and $4.6) (4.1) 3.8 7.0
Pension and post-retirement benefit plans (net of tax of $12.3, $10.7 and $0.2) (23.8) 20.8 (1.3)
Amortization of prior service (credits) costs (net of tax of $1.1, $1.2 and $1.0) (1.8) (1.8) (1.6)
Amortization of actuarial (gains) losses (net of tax of $0.0, $0.4 and $0.0) (1.0) 0.8 —
Other comprehensive income (loss) (311.2) 164.9 3.0
Comprehensive income (loss) (588.6) 398.6 120.7
Comprehensive income (loss) attributable to noncontrolling interests (466.8) — —
Comprehensive income (loss) attributable to Restaurant Brands International, Inc. $(121.8) $398.6 $120.7
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(In millions of U.S. dollars, except per share data)
Issued Common Shares
Additional Paid-
In Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Noncontrolling
Interest
Total
Shares
Amount
Balances at December 31,
2011 348.2 $ 3.5 $ 1,186.6 $ (27.6) $ (113.3) $ — $ — $1,049.2
Stock option exercises 0.5 — 1.5 — — — — 1.5
Share-based
compensation — — 12.2 — — — — 12.2
Issuance of shares 1.5 — 5.4 — — — — 5.4
Dividend paid on
common shares ($0.04
per share) — — — (14.0) — — — (14.0)
Net income — — — 117.7 — — — 117.7
Other comprehensive
income (loss) — — — — 3.0 — — 3.0
Balances at December 31,
2012 350.2 $ 3.5 $ 1,205.7 $ 76.1 $ (110.3) $ — $ — $1,175.0
Stock option exercises 1.7 — 6.0 — — — — 6.0
Stock option tax benefits — — 10.1 — — — — 10.1
Share-based
compensation — — 14.6 — — — — 14.6
Issuance of shares 0.3 — 3.5 — — — — 3.5
Treasury stock purchases — — — — — (7.3) — (7.3)
Dividend paid on
common shares ($0.24
per share) — — — (84.3) — — — (84.3)
Net income — — — 233.7 — — — 233.7
Other comprehensive
income (loss) — — — — 164.9 — — 164.9
Balances at December 31,
2013 352.2 $ 3.5 $ 1,239.9 $ 225.5 $ 54.6 $ (7.3) $ — $1,516.2
Stock option exercises 0.1 — 0.4 — — — — 0.4
Share-based
compensation — — 25.8 — — — — 25.8
Issuance of shares 0.1 — 3.3 — — — — 3.3
Dividend paid on
common shares ($0.30
per share) — — — (105.6) — — — (105.6)
Retirement of treasury
stock (0.3) — (7.3) — — 7.3 — —
Transfer of Additional
Paid-In Capital
balance to common
shares — 1,262.1 (1,262.1) — — — — —
Transfers to
noncontrolling
interests (265.0) (3,003.0) — (28.5) 113.5 — 2,918.0 —
Issuance of warrant — 247.6 — — — — — 247.6
Accretion of preferred
shares to redemption
value — (538.4) — (8.0) — — — (546.4)
Preferred share
dividends — — — (13.8) — — — (13.8)
Issuance of 106,565,335
shares from
acquisition of Tim
See accompanying notes to consolidated financial statements.
66
Hortons 106.6 3,783.1 — — — — — 3,783.1
Noncontrolling interest
from acquisition of
Tim Hortons — — — — — — 1.1 1.1
Exercise of warrant 8.4 0.1 — — — — — 0.1
Net income (loss) — — — 158.0 — — (435.4) (277.4)
Other comprehensive
income (loss) — — — — (279.8) — (31.4) (311.2)
Balances at December 31,
2014 202.1 $ 1,755.0 $ — $ 227.6 $ (111.7) $ — $ 2,452.3 $4,323.2
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
See accompanying notes to consolidated financial statements.
67
2014
2013
2012
Cash flows from operating activities:
Net income (loss) $ (277.4) $ 233.7 $ 117.7
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 72.9 65.8 114.2
Loss on early extinguishment of debt 127.3 — 34.2
Amortization of deferred financing costs and debt issuance discount 60.2 56.3 57.0
(Income) loss from equity method investments 9.2 12.7 4.1
Loss (gain) on remeasurement of foreign denominated transactions (6.2) 0.3 (8.2)
Amortization of defined benefit pension and postretirement items (3.9) (2.1) (2.5)
Net losses (gains) on derivatives 297.5 6.1 11.8
Net losses (gains) on refranchisings and dispositions of assets 17.6 (3.9) 27.0
Bad debt expense (recoveries), net 1.9 2.0 (0.8)
Share-based compensation expense 43.1 14.8 12.2
Amortization of inventory step-up 7.4 — —
Deferred income taxes (52.9) 32.1 8.9
Changes in current assets and liabilities, excluding acquisitions and dispositions:
Restricted cash and cash equivalents (36.4) — —
Trade and notes receivable (24.0) (7.6) (22.2)
Inventories and other current assets (24.1) (7.8) (7.0)
Accounts and drafts payable (17.9) (30.6) (23.9)
Accrued advertising (35.9) (10.6) (32.3)
Other accrued liabilities 122.9 (5.4) (40.3)
Other long-term assets and liabilities (22.0) (30.6) (25.5)
Net cash provided by operating activities 259.3 325.2 224.4
Cash flows from investing activities:
Payments for property and equipment (30.9) (25.5) (70.2)
(Payments) proceeds from refranchisings, disposition of assets and restaurant closures (7.8) 64.8 104.9
Net payments for acquired and disposed franchisee operations, net of cash acquired (3.9) (11.9) (15.3)
Net payment for purchase of Tim Hortons, net of cash acquired (7,374.7) — —
Return of investment on direct financing leases 15.5 15.4 14.2
Settlement/sale of derivatives (388.9) — —
Other investing activities, net (0.1) 0.2 —
Net cash provided by (used for) investing activities (7,790.8) 43.0 33.6
Cash flows from financing activities:
Proceeds from term debt 6,682.5 — 1,733.5
Proceeds from Senior Notes 2,250.0 — —
Proceeds from issuance of preferred shares, net 2,998.2 — —
Repayments of term debt, Senior Notes, Discount Notes and capital leases (3,102.0) (57.2) (1,879.6)
Payment of financing costs (158.0) — (16.0)
Dividends paid on common stock (105.6) (84.3) (14.0)
Proceeds from stock option/warrant exercises 0.5 6.0 1.5
Excess tax benefits from share-based compensation — 10.1 —
Repurchases of common stock — (7.3) —
Net cash provided by (used for) financing activities 8,565.6 (132.7) (174.6)
Effect of exchange rates on cash and cash equivalents (17.8) 4.7 4.3
Increase in cash and cash equivalents 1,016.3 240.2 87.7
Cash and cash equivalents at beginning of period 786.9 546.7 459.0
Cash and cash equivalents at end of period $ 1,803.2 $ 786.9 $ 546.7
Supplemental cashflow disclosures:
Interest paid $ 199.9 $ 139.1 $ 170.3
Income taxes paid $ 35.2 $ 35.6 $ 40.1
Non-cash investing and financing activities:
Investments in unconsolidated affiliates $ — $ 17.8 $ 98.6
Acquisition of property with capital lease obligations $ — $ 1.0 $ 36.1
Net investment in direct financing leases $ — $ — $ 0.7
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Description of Business and Organization
Description of Business
Restaurant Brands International Inc. (the “Company,” “we,” “us” and “our”) was originally formed on August 25, 2014 and
continued under the laws of Canada. Pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), the Company is a successor issuer to Burger King Worldwide, Inc. (“Burger King Worldwide”). The Company
serves as the sole general partner of Restaurant Brands International Limited Partnership (the “Partnership”), the indirect parent of
Burger King Worldwide, a Delaware corporation that franchises and operates fast food hamburger restaurants principally under the
Burger King
®
brand, and Tim Hortons ULC (f/k/a Tim Hortons Inc.) (“Tim Hortons”), an unlimited liability company existing under
the laws of British Columbia that franchises and operates quick service restaurants that serve premium coffee and other beverage and
food products under the Tim Hortons
®
brand. We are one of the world’s largest quick service restaurant, or QSR, chains as measured
by the total number of restaurants. As of December 31, 2014, we franchised or owned a total of 19,043 restaurants in approximately
100 countries and U.S. territories worldwide. Of these restaurants, 18,978 were owned by our franchisees and 65 were Company
restaurants.
The following table outlines our restaurant count, by brand and consolidated, and Burger King restaurant activity for the periods
indicated.
Excluded from the above table are 258 primarily licensed Tim Hortons locations in the Republic of Ireland and the United
Kingdom as of December 28, 2014.
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.
The Transactions
On December 12, 2014 (the “Closing Date”), pursuant to the Arrangement Agreement and Plan of Merger (the “Arrangement
Agreement”), dated as of August 26, 2014, by and among Tim Hortons, Burger King Worldwide, the Company, Partnership, Blue
Merger Sub, Inc., a wholly owned subsidiary of Partnership (“Merger Sub”), and 8997900 Canada Inc., a wholly owned subsidiary of
Partnership (“Amalgamation Sub”), Amalgamation Sub acquired all of the outstanding shares of Tim Hortons pursuant to a plan of
arrangement under Canadian law, which resulted in Tim Hortons becoming an indirect subsidiary of both us and Partnership (the
“Arrangement”) and Merger Sub merged with and into Burger King Worldwide, with Burger King Worldwide surviving the merger
68
Burger King Restaurants
2014
2013
2012
Franchised restaurants – beginning of period
13,615 12,579 11,217
Franchise - Openings 999 882 691
Franchise - Closures (294) (206) (200)
Net refranchisings — 360 871
Franchised restaurants – end of period 14,320 13,615 12,579
Company restaurants – end of period 52 52 418
Total systemwide restaurants – end of period 14,372 13,667 12,997
Tim Hortons Restaurants
2014
Franchised restaurants – end of period
4,658
Company restaurants – end of period 13
Total systemwide restaurants – end of period 4,671
System Wide Restaurants
2014
Franchised restaurants – end of period
18,978
Company restaurants – end of period 65
Total systemwide restaurants – end of period 19,043
as an indirect subsidiary of both us and Partnership (the “Merger” and, together with the Arrangement, the “Transactions”). The
Arrangement was accounted for as a business combination using the acquisition method of accounting and Burger King Worldwide
was determined to be the accounting acquirer. The primary reason for the acquisition was to create one of the world’s largest quick
service restaurant companies.
In connection with the Transactions, the former holders of Burger King Worldwide common stock received 87.0 million newly
issued common shares of the Company and 265.0 million newly issued Class B exchangeable limited partnership units of Partnership
(the “Partnership exchangeable units”), which are intended to provide economic rights that are substantially equivalent, and voting
rights with respect to the Company that are equivalent, to the corresponding rights afforded to the holders of the Company’s common
shares (resulting in a 65.7% voting interest in the Company) in exchange for their holdings of Burger King Worldwide common
stock. Former holders of Tim Hortons common shares received 106.6 million newly issued common shares of the Company
(representing a 19.9% voting interest in the Company) as a component of consideration in the acquisition of Tim Hortons.
Additionally, we issued a warrant to purchase 8,438,225 common shares of the Company (the “Warrant”) to a subsidiary of Berkshire
Hathaway, Inc. in connection with the issuance of 9.0% cumulative compounding perpetual voting preferred shares (the “Preferred
Shares”), which was exercised on December 15, 2014 (together with voting rights of Preferred Shares, representing a 14.4% voting
interest in the Company). The Company’s common shares trade on the New York Stock Exchange and Toronto Stock Exchange
under the ticker symbol “QSR”. The Partnership exchangeable units trade on the Toronto Stock Exchange under the ticker symbol
“QSP”.
In 2014, fees and expenses related to the Transactions and related financings totaled $238.4 million, including (1) $70.0 million
consisting principally of investment banking fees and legal fees (which are classified as selling, general and administrative expenses),
(2) compensation related expenses of $55.0 million (which are classified as selling, general and administrative expenses)
(3) commitment fees of $28.1 million associated with the bridge loan available at the closing of the Transactions (which are classified
as loss on early extinguishment of debt) and (4) the payment of premiums of $85.3 million to redeem the Burger King Worldwide
notes (which are classified as loss on early extinguishment of debt). Debt issuance costs capitalized in connection with the issuance of
debt to fund the Transactions and refinancing of Burger King Worldwide indebtedness (see Note 10, Long-term debt) totaled $160.2
million and are classified as Other Assets.
The total consideration paid in connection with the acquisition of Tim Hortons was approximately $11.3 billion. This
consideration paid, along with repayment of Burger King Worldwide indebtedness (see Note 10, Long-term debt) and the payment of
transaction expenses was funded through (i) our issuance of 106.6 million of common shares of the Company to Tim Hortons
shareholders, (ii) $6,750.0 million of proceeds from borrowings by a subsidiary of Partnership under a new term loan credit facility
(the “Term Loan Facility”), (iii) $2,250.0 million of proceeds from the issuance of second lien secured senior notes by a subsidiary of
Partnership, and (iv) $3,000.0 million of proceeds from our issuance of the Preferred Shares and the Warrant.
As discussed in Note18, Share-based Compensation, at the time of the Transactions, we assumed the obligation for all
outstanding Burger King Worldwide stock options and RSUs. Additionally, pursuant to the Arrangement Agreement, we assumed the
obligation for each vested and unvested Tim Hortons stock option with tandem SARs that was not surrendered in connection with the
Arrangement on the same terms and conditions of the original awards, adjusted by an exchange ratio of 2.41.
The computation of consideration paid and the preliminary allocation of consideration to the net tangible and intangible assets
acquired are presented in the tables that follow (in millions).
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Cash consideration (a) $ 7,516.7
Share consideration (b) 3,778.2
Total consideration paid $11,294.9
(a) Includes $13.9 million for the settlement of share-based compensation.
(b) Calculated as 106,565,335 shares issued to former holders of Tim Hortons common shares, multiplied by $35.50, which was the
closing price of a share of Burger King Worldwide common stock on the Closing Date, reduced by post-combination expense of
approximately $4.9 million associated with accelerated vesting and recognition of certain Tim Hortons share-based
compensation.
The purchase price allocation reflects preliminary fair value estimates based on management analysis, including preliminary
work performed by third-party valuation specialists. We will continue to obtain information to assist in determining the fair value of
net assets acquired at the Closing Date during the measurement period. Measurement period adjustments will be applied
retrospectively to the Closing Date.
Intangible assets include $6,236.9 million related to the Tim Hortons brand, $322.1 million related to franchise agreements and
$258.6 million related to favorable leases. The Tim Hortons brand has been assigned an indefinite life and, therefore, will not be
amortized, but tested annually for impairment. Franchise agreements have a weighted average amortization period of 27 years.
Favorable leases have a weighted average amortization period of 6 years.
The goodwill attributable to the Transactions will not be amortizable or deductible for tax purposes. Goodwill is considered to
represent the value associated with the workforce and synergies the two companies anticipate realizing as a combined company. We
have not yet allocated goodwill related to the Transactions to reporting units for goodwill impairment testing purposes. Goodwill will
be allocated to reporting units when the purchase price allocation is finalized during the measurement period.
The following unaudited consolidated pro forma summary has been prepared by adjusting our historical data to give effect to the
Transactions as if they had occurred on January 1, 2013 (in millions, except per share amounts):
The unaudited consolidated pro forma financial information was prepared in accordance with the acquisition method of
accounting under existing standards and is not necessarily indicative of the results of operations that would have occurred if the
Transactions had been completed on the date indicated, nor is it indicative of our future operating results. The unaudited consolidated
pro forma information for 2013 includes certain non-recurring costs incurred as a result of the Transactions, consisting primarily of
transaction costs of approximately $223.0 million, loss on early extinguishment of debt of approximately $155.0 million and
transaction related derivative losses of approximately $148.0 million. These costs were recorded net of tax utilizing a tax rate of
26.5%.
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December 12, 2014
Total current assets
$ 640.7
Property and equipment 1,778.0
Intangible assets 6,817.6
Other assets, net 92.5
Accounts payable (228.2)
Advertising fund liabilities (49.7)
Other accrued liabilities (222.3)
Total debt and capital lease obligations (1,233.8)
Other liabilities, net (310.3)
Deferred income taxes, net (1,251.7)
Total identifiable net assets 6,032.8
Noncontrolling interest (1.1)
Goodwill 5,263.2
Total $ 11,294.9
Pro Forma - Unaudited
2014
2013
Total Revenues
$4,213.0 $4,307.6
Net income 278.1 8.8
Net income (loss) attributable to non-controlling interests 7.3 (465.0)
Net income attributable to Restaurant Brands International Inc. 270.8 473.8
Preferred shares dividends 270.0 270.0
Accretion of preferred shares to redemption value — 546.4
Net income (loss) attributable to common shareholders $ 0.8 $ (342.6)
Earnings (loss) per common share:
Basic $ 0.00 $ (1.77)
Diluted $ 0.00 $ (1.77)
The unaudited pro forma results do not reflect future events that either have occurred or may occur after the Transactions,
including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods. They also
do not give effect to certain charges that we expect to incur related to a strategic realignment of our global structure to better
accommodate the needs of the combined business and support successful global growth. As a result, we expect to incur certain non-
recurring general and administrative expenses, including one-time compensation costs, training expenses, and other professional fees,
in connection with these initiatives.
Note 2. Summary of Significant Accounting Policies
Fiscal year
We operate on a monthly calendar, with a fiscal year that ends on December 31. Our Burger King Worldwide subsidiaries
operate on the same fiscal calendar. The fiscal year of our Tim Hortons subsidiaries end on the Sunday nearest to December 31 which
was December 28 in 2014.
Basis of Presentation and Consolidation
The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).
All material intercompany balances and transactions have been eliminated in consolidation.
We are the sole general partner of Partnership and, as such we have 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, subject
to the terms of the partnership agreement and applicable laws. As a result, we consolidate the results of Partnership and record a
noncontrolling interest in our consolidated balance sheets and statements of operations with respect the remaining economic interest
in Partnership we do not hold.
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 most significant variable interests are in entities that operate restaurants
under our subsidiaries’ franchise arrangements and certain equity method investees that operate as master franchisees. Our maximum
exposure to loss resulting from involvement with potential VIEs is attributable to trade and notes receivable balances, outstanding
loan guarantees and future lease payments, where applicable.
We not have any ownership interests in our franchisees’ businesses, except for investments in various entities that are accounted
for under the equity method. As Burger King franchise and master franchise arrangements provide the franchise and master franchise
entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the
primary beneficiary of any such entity that might be a VIE. Tim Hortons has historically entered into certain arrangements in which
an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. In these arrangements, Tim
Hortons has the ability to determine which operators manage the restaurants and for what duration. Tim Hortons previously also
entered into interest-free financing in connection with a Franchise Incentive Program (“FIP Note”) with certain U.S. restaurant
owners whereby restaurant owners finance the initial franchise fee and purchase of restaurant assets. In both operator and FIP
arrangements, 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 (“VIE Restaurants”). Additionally, Tim Hortons
participates in advertising funds which, on behalf of Tim Hortons Company and franchise restaurants, collect contributions and
administer funds for advertising and promotional programs. Tim Hortons is the sole shareholder (Canada) and sole member (U.S.) in
these funds, and is the primary beneficiary of these funds (the “Advertising VIEs”).
Investments in other affiliates owned 50% or less where we have significant influence are accounted for by the equity method.
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Concentrations of Risk
Our operations include franchise and Company restaurants located in approximately 100 countries and territories worldwide. Of
the 19,043 restaurants in operation as of December 31, 2014, 18,978 were franchise restaurants and 65 were Company restaurants.
Four distributors currently service approximately 89% of our U.S. Burger King system restaurants and the loss of any one of
these distributors would likely adversely affect our business. In many of our international markets, a single distributor services all the
Burger King restaurants in the market. The loss of any of one of these distributors would likely have an adverse effect on the market
impacted, and depending on the market, could have an adverse impact on our financial results. In addition, we have moved to a
business model in which we enter into exclusive agreements with master franchisees to develop and operate restaurants, and
subfranchise to third parties the right to develop and operate restaurants in defined geographic areas. The termination of an
arrangement with a master franchisee or a lack of expansion by certain master franchisees could result in the delay or discontinuation
of the development of franchise restaurants, or an interruption in the operation of our brand in a particular market or markets.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
(“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. Management adjusts such estimates and assumptions when facts and circumstances dictate.
Volatile credit, equity, foreign currency and energy markets and declines in consumer spending may continue to affect the uncertainty
inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results
could differ significantly from these estimates.
Foreign Currency Translation
Our functional currency is the U.S. dollar, as our redeemable preferred shares and related preferred dividends, our Term Loan
Facility and second lien secured notes are denominated in U.S. dollars and the principal market for our common shares is the U.S.
The functional currency of each of our operating subsidiaries is generally the local currency. Foreign currency balance sheets are
translated using the end of period exchange rates, and statements of operations and statements of cash flows are translated at the
average exchange rates for each period. The translation adjustments resulting from the translation of foreign currency financial
statements are recorded in other comprehensive income (loss) in the consolidated statements of comprehensive income (loss).
Foreign Currency Transaction Gains or Losses
Foreign currency transaction gains or losses resulting from the re-measurement of our foreign-denominated assets and liabilities
or our subsidiaries are reflected in earnings in the period when the exchange rates change and are included within other operating
(income) expenses, net in the consolidated statements of operations.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid investments with original maturities of three months or less and
credit card receivables.
Restricted Cash and Cash Equivalents
Proceeds from the initial sale or reloading of the Tim Hortons Tim Card
®
quick-pay cash card program (“Tim Card”) are
recognized as Restricted cash and cash equivalents in the consolidated balance sheet along with a corresponding obligation. This
amount represents the amount of cash loaded onto Tim Cards by guests, less redemptions and loans to the Tim Hortons Advertising
and Promotion Fund (Canada) Inc. (the “Tim Hortons Ad Fund”). A Tim Card entitles the holder to use the value for purchasing
products and the amounts generally are not redeemable for cash. When a guest uses a Tim Card to purchase products at a Company
restaurant (including consolidated VIEs), we recognize the revenue from the sale of the product and relieve the obligation. When a
customer uses a Tim Card at a franchise restaurant, we remit the cash to the restaurant owner from Restricted cash and cash
equivalents and relieve the obligation. Changes in Restricted cash and cash equivalents and obligations under the Tim Card program
are reflected as operating activities in the consolidated statement of cash flows. Purchases of, and proceeds upon, the maturity of
restricted investments are included in investing activities in the consolidated statement of cash flows.
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Notes Receivable
Notes receivable represent loans made to franchisees arising from refranchisings of Company restaurants, sales of property and
FIP Notes. In certain cases past due trade receivables from franchisees are restructured into an interest-bearing note, which are
generally already fully reserved, and as a result, are transferred to notes receivable at a net carrying value of zero. Notes receivable
with a carrying value greater than zero are written down to net realizable value when it is probable or likely that we are unable to
collect all amounts due under the contractual terms of the loan agreement.
Allowance for Doubtful Accounts
We evaluate the collectability of our trade accounts receivable from franchisees based on a combination of factors, including the
length of time the receivables are past due and the probability of collection from litigation or default proceedings, where applicable.
We record a specific allowance for doubtful accounts in an amount required to adjust the carrying values of such balances to the
amount that we estimate to be net realizable value. We write off a specific account when (a) we enter into an agreement with a
franchisee that releases the franchisee from outstanding obligations, (b) franchise agreements are terminated and the projected cost of
collections exceeds the benefits expected to be received from pursuing the balance owed through legal action, or (c) franchisees do
not have the financial wherewithal or unprotected assets from which collection is reasonably assured.
Inventories
Inventories are carried at the lower of cost or net realizable value and consist primarily of raw materials such as green coffee
beans and finished goods such as new equipment, parts, paper supplies and restaurant food items. The moving average method is used
to determine the cost of raw material inventories and finished goods inventories held for sale to Tim Hortons franchisees.
Property and Equipment, net
We record property and equipment at historical cost less accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over the following estimated useful lives of the assets.
Leasehold improvements to properties where we are the lessee are amortized over the lesser of the remaining term of the lease or
the estimated useful life of the improvement.
We are considered to be the owner of certain restaurants leased from an unrelated lessor because Tim Hortons constructed some
of the structural elements of those restaurants. Accordingly, we have included these restaurant properties in Property and equipment,
net in the consolidated balance sheet and recognized the lessor’s contributions to the construction costs for these restaurants as other
debt.
Major improvements are capitalized, while maintenance and repairs are expensed when incurred.
Assets Held For Sale
We classify assets as held for sale when we commit to a plan to dispose of the assets in their current condition at a price that is
reasonable, and we believe completing the plan of sale within one year is probable without significant changes. Assets held for sale
are recorded at the lower of their carrying value or fair value, less costs to sell and we cease depreciation on assets at the time they are
classified as held for sale. We classify impairment losses associated with restaurants held for sale as losses on refranchisings.
If we subsequently decide to retain assets previously classified as held for sale, the assets would be reclassified from assets held
for sale at the lower of (a) their then-current fair value or (b) the carrying value at the date the assets were classified as held for sale,
less the depreciation that would have been recorded since that date.
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Depreciation Periods
Land
Buildings and improvements (up to 40 years)
Restaurant equipment (up to 18 years)
Furniture, fixtures, and other (up to 10 years)
Manufacturing equipment (up to 30 years)
Capital Leases (up to 40 years or lease term)
Leases
We define a lease term as the initial term of the lease plus any renewals covered by bargain renewal options or that are
reasonably assured of exercise because non-renewal would create an economic penalty plus any periods that the Company has use of
the property but is not charged rent by a landlord (“rent holiday”).
Assets we acquire as lessee under capital leases are stated at the lower of the present value of future minimum lease payments or
fair market value at the date of inception of the lease. Capital lease assets are depreciated using the straight-line method over the
shorter of the useful life of the asset or the underlying lease term.
We also have net investments in properties leased to franchisees, which meet the criteria of direct financing leases. Investments
in direct financing leases are recorded on a net basis, consisting of the gross investment and residual value in the lease less the
unearned income. Unearned income is recognized over the lease term yielding a constant periodic rate of return on the net investment
in the lease. Direct financing leases are reviewed for impairment whenever events or circumstances indicate that the carrying amount
of an asset may not be recoverable based on the payment history under the lease.
We record rent expense and income from operating leases that contain rent holidays or scheduled rent increases on a straight-
line basis over the lease term. Contingent rentals are generally based on a percentage of restaurant sales or as a percentage of
restaurant sales in excess of stipulated amounts, and thus are not considered minimum lease payments at lease inception.
Favorable and unfavorable operating leases are recorded in connection with the acquisition method of accounting. We amortize
favorable and unfavorable leases on a straight-line basis over the remaining term of the leases, as determined at the acquisition date.
Upon early termination of a lease, the write-off of the favorable or unfavorable lease carrying value associated with the lease is
recognized as a loss or gain within other operating (income) expense, net in the consolidated statements of operations. Amortization
of favorable and unfavorable leases on Company restaurants is included in occupancy and other operating costs in the consolidated
statement of operations. Amortization of favorable and unfavorable income leases is included in franchise and property revenues in
the consolidated statement of operations. Amortization of favorable and unfavorable commitment leases for franchise restaurants is
included in franchise and property expenses in the consolidated statement of operations.
Lease incentives we provide to our lessees are recorded as a lease incentive asset and amortized as a reduction of rental income
on a straight-line basis over the lease term. Lease incentives we receive from a landlord are recognized as a liability and amortized as
a reduction of rent expense over the lease term.
We recognize a loss on leases and subleases and a related lease liability when expenses to be recorded under the lease exceed
future minimum rents to us under the lease or sublease. The lease liability is amortized on a straight-line basis over the lease term as a
reduction of property expense.
Goodwill and Intangible Assets Not Subject to Amortization
Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment on an annual basis and more
often if an event occurs or circumstances change that indicates impairment might exist. Our indefinite-lived intangible assets consist
of the Tim Hortons brand and the Burger King brand (the “Brands”). Our annual goodwill impairment testing date is October 1 of
each year. Our impairment review for goodwill consists of a qualitative assessment of whether it is more-likely-than-not that a
reporting unit’s fair value is less than its carrying amount, and if required, followed by a two-step process of determining the fair
value of the reporting unit and comparing it to the carrying value of the net assets allocated to the reporting unit. If the qualitative
assessment demonstrates that it is more-likely-than-not that the estimated fair value of the reporting unit exceeds its carrying value, it
is not necessary to perform the two-step goodwill impairment test. We may elect to bypass the qualitative assessment and proceed
directly to the two-step process, for any reporting unit, in any period. We can resume the qualitative assessment for any reporting unit
in any subsequent period. When performing the two-step process, if the fair value of the reporting unit exceeds its carrying value, no
further analysis or write-down of goodwill is required. If the fair value of the reporting unit is less than the carrying value of its net
assets, the implied fair value of the reporting unit is allocated to all its underlying assets and liabilities, including both recognized and
unrecognized tangible and intangible assets, based on their fair value. If necessary, goodwill is then written down to its implied fair
value. Our impairment review for the Brands consists of a qualitative assessment similar to goodwill and if necessary, a comparison
of the fair value of the Brands with carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in
an amount equal to that excess. If the fair value exceeds its carrying amount, the asset is not considered impaired.
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We completed our goodwill and Brand impairment tests as of October 1, 2014, 2013 and 2012 and no impairment resulted.
When we dispose of a restaurant business within six months of acquisition, the goodwill recorded in connection with the
acquisition is written off. Otherwise, goodwill is written off based on the relative fair value of the business sold to the reporting unit
when disposals occur more than six months after acquisition. The sale of Company restaurants to franchisees is referred to as a
“refranchising.”
Long-Lived Assets
Long-lived assets, such as property and equipment and intangible assets subject to amortization, are tested for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Some of the
events or changes in circumstances that would trigger an impairment review include, but are not limited to, bankruptcy proceedings or
other significant financial distress of a lessee; significant negative industry or economic trends; knowledge of transactions involving
the sale of similar property at amounts below the carrying value; or our expectation to dispose of long-lived assets before the end of
their estimated useful lives. The impairment test for long-lived assets requires us to assess the recoverability of long-lived assets by
comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from
use and eventual disposition of the assets. Long-lived assets are grouped for recognition and measurement of impairment at the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets. If the net carrying value of a group of
long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we must record an impairment charge equal to
the excess, if any, of net carrying value over fair value.
Equity Method Investments
Equity investments in which we have significant influence but not control are accounted for using the equity method and are
included in other assets, net in our consolidated balance sheets. Our share of investee net income or loss is classified as (income) loss
from equity method investments in our consolidated statements of operations. The difference between the carrying value of our equity
investment and the underlying equity in the historical net assets of the investee is accounted for as if the investee were a consolidated
subsidiary. Accordingly, the carrying value difference is amortized over the estimated lives of the assets of the investee to which such
difference would have been allocated if the equity investment were a consolidated subsidiary. To the extent the carrying value
difference represents goodwill or indefinite lived assets, it is not amortized. We did not record basis difference amortization related to
equity method investments for 2014, 2013 and 2012. We evaluate our investments in equity method investments for impairment
whenever events occur or circumstances change in a manner that indicates our investment may not be recoverable. We did not record
impairment charges related to equity method investments for 2014, 2013 and 2012.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are included in comprehensive income
(loss), but are excluded from net income (loss) as these amounts are recorded directly as an adjustment to shareholders’ equity, net of
tax. Our other comprehensive income (loss) is comprised of unrealized gains and losses on foreign currency translation adjustments,
unrealized gains and losses on hedging activity, net of tax, and minimum pension liability adjustments, net of tax.
Derivative Financial Instruments
We recognize and measure all derivative instruments as either assets or liabilities at fair value in the Consolidated Balance
Sheets. We may enter into derivatives that are not initially designated as hedging instruments for accounting purposes, but which
largely offset the economic impact of certain transactions.
Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other
comprehensive income (loss) and recognized in the consolidated statements of operations when the hedged item affects earnings,
depending on the purpose of the derivatives and whether they qualify for, and we have applied, hedge accounting treatment. The
ineffective portion of gains or losses on derivatives is reported in current earnings.
When applying hedge accounting, our policy is to designate, at a derivative’s inception, the specific assets, liabilities or future
commitments being hedged, and to assess the hedge’s effectiveness at inception and on an ongoing basis. We discontinue hedge
accounting when: (i) we determine that the cash flow derivative is no longer effective in offsetting changes in the cash flows of a
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hedged item; (ii) the derivative expires or is sold, terminated or exercised; (iii) it is no longer probable that the forecasted transaction will occur;
or (iv) management determines that designation of the derivatives as a hedge instrument is no longer appropriate. We may elect not to designate
the derivative as a hedging instrument where the same financial impact is achieved in the financial statements. We do not enter into or hold
derivatives for speculative purposes.
Disclosures About Fair Value
Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustment in certain
circumstances. These items primarily include (i) assets acquired and liabilities assumed initially measured at fair value in connection with the
application of acquisition accounting, (ii) long-lived assets, reporting units with goodwill and intangible assets for which fair value is determined
as part of the related impairment tests and (iii) asset retirement obligations initially measured at fair value. At December 31, 2014 and December
31, 2013, there were no significant adjustments to fair value or fair value measurements required for non-financial assets or liabilities.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants in the principal market, or if none exists, the most advantageous market, for the specific asset or liability at the measurement
date (the exit price). The fair value should be based on assumptions that market participants would use when pricing the asset or liability. The fair
values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the calculation, as follows:
Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.
Level 3 Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
Certain of our derivatives are valued using various pricing models or discounted cash flow analyses that incorporate observable market
parameters, such as interest rate yield curves and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations
incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or us.
The carrying amounts for cash and equivalents, trade accounts and notes receivable and accounts and drafts payable approximate fair value
based on the short-term nature of these accounts.
Restricted investments, consisting of investment securities held in a rabbi trust to invest compensation deferred under our Executive
Retirement Plan and fund future deferred compensation obligations, are carried at fair value, with net unrealized gains and losses recorded in our
consolidated statements of operations. The fair value of these investment securities are determined using quoted market prices in active markets
classified as Level 1 within the fair value hierarchy.
Fair value of variable rate term debt was estimated using inputs based on bid and offer prices and are Level 2 inputs within the fair value
hierarchy.
The determinations of fair values of certain tangible and intangible assets for purposes of the application of the acquisition method of
accounting to the acquisition of Tim Hortons were based upon level 3 inputs. The determination of fair values of our reporting units and the
determination of the fair value of the Burger King brand for our 2014 annual impairment evaluations of goodwill and brand intangible asset,
respectively, were based upon level 3 inputs.
Revenue Recognition
Revenues include franchise revenues, property income, retail sales at Company restaurants, including VIE restaurants, and distribution
sales. Franchise revenues consist primarily of royalties, based on a percentage of sales reported by the franchise restaurants, and initial and
renewal franchise fees paid by franchisees. Property income consists of operating lease rentals and earned income on direct financing leases on
property leased or subleased to franchisees. Retail sales at Company restaurants (including VIE Restaurants) are recognized at the point of sale.
We present Company restaurant sales net of sales tax and other sales-related taxes. Revenues from distribution sales are recognized upon
delivery.
Royalties are based on a percentage of gross sales at franchise restaurants and are recognized when earned and collectability is reasonably
assured. Initial franchise fees are recognized as revenue when the related restaurant begins operations and completion of all material services and
conditions by the Company. Fees collected in advance are deferred until earned. A franchisee may pay a renewal franchise fee and renew its
franchise for an additional term. Renewal franchise fees are recognized as revenue upon receipt of the non-refundable fee and execution of a new
franchise agreement. Upfront fees paid by franchisees in connection with development agreements are deferred when the development agreement
includes a
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minimum number of restaurants to be opened by the franchisee. The deferred amounts are recognized as franchise fee revenue on a
pro rata basis as the franchisee opens each respective restaurant. The cost recovery accounting method is used to recognize revenues
for franchisees for which collectability is not reasonably assured. Rental income for base rentals is recorded on a straight-line basis
over the term of the lease and earned income on direct financing leases are recognized when earned and collectability is reasonably
assured. Contingent rent is recognized on an accrual basis as earned, and any amounts received from lessees in advance of achieving
stipulated thresholds are deferred until such threshold is actually achieved.
Our businesses are moderately seasonal. Our restaurant sales are typically higher in the spring and summer months when
weather is warmer than in the fall and winter months. Because our businesses are moderately seasonal, results for any one quarter are
not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
Advertising and Promotional Costs
Historically Company restaurants and franchise restaurants have contributed to advertising funds that our subsidiaries manage in
the United States and Canada and certain other international markets. Under our franchise agreements, advertising contributions
received from franchisees must be spent on advertising, product development, marketing and related activities. Since we act as an
agent for these specifically designated contributions, the revenues and expenses of the advertising funds are generally netted in our
consolidated statements of operations and cash flows.
The advertising funds expense the production costs of advertising when the advertisements are first aired or displayed. All other
advertising and promotional costs are expensed in the period incurred.
Advertising expense, which primarily consists of advertising contributions by Company restaurants (including VIE Restaurants)
based on a percentage of gross sales, totaled $2.4 million for 2014, $6.2 million for 2013 and $48.3 million for 2012 and is included
in selling, general and administrative expenses in the accompanying consolidated statements of operations.
As of the balance sheet date, contributions received may not equal advertising and promotional expenditures for the period due
to the timing of advertising promotions. To the extent that contributions received exceed advertising and promotional expenditures,
the excess contributions are accounted for as a deferred liability and are recorded in accrued advertising in the accompanying
consolidated balance sheets. To the extent that advertising and promotional expenditures temporarily exceed contributions received,
the excess expenditures are accounted for as a receivable from the fund and are recorded in prepaids and other current assets, net in
the accompanying consolidated balance sheets.
In Canada and most of our international markets, franchisees contribute to advertising funds that are not managed by us. Such
contributions and related fund expenditures are not reflected in our results of operations or financial position.
Insurance Reserves
We carry insurance to cover claims such as workers’ compensation, general liability, automotive liability, executive risk and
property, and we are self-insured for healthcare claims for eligible participating employees. Through the use of insurance program
deductibles (up to $5.0 million) and self insurance, we retain a significant portion of the expected losses under these programs.
Insurance reserves have been recorded based on our estimates of the anticipated ultimate costs to settle all claims, on an undiscounted
basis, both reported and incurred-but-not-reported (IBNR).
Litigation accruals
From time to time, we are subject to proceedings, lawsuits and other claims related to competitors, customers, employees,
franchisees, government agencies and suppliers. We are required to assess the likelihood of any adverse judgments or outcomes to
these matters as well as potential ranges of probable losses. A determination of the amount of accrual required, if any, for these
contingencies is made after careful analysis of each matter. The required accrual may change in the future due to new developments
in settlement strategy in dealing with these matters.
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Guarantees
We record a liability to reflect the estimated fair value of guarantee obligations at the inception of the guarantee. Expenses
associated with the guarantee liability, including the effects of any subsequent changes in the estimated fair value of the liability, are
classified as other operating income (expenses), net in our consolidated statements of operations.
Income Taxes
Amounts in the financial statements related to income taxes are calculated using the principles of FASB ASC Topic 740,
“Income Taxes.” Under these principles, deferred tax assets and liabilities reflect the impact of temporary differences between the
amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes, as well as
tax credit carryforwards and loss carryforwards. These deferred taxes are measured by applying currently enacted tax rates. A
deferred tax asset is recognized when it is considered more likely than not to be realized. The effects of changes in tax rates on
deferred tax assets and liabilities are recognized in income in the year in which the law is enacted. A valuation allowance reduces
deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be recognized.
Income tax benefits credited to shareholders’ equity relate to tax benefits associated with amounts that are deductible for income
tax purposes but do not affect earnings. These benefits are principally generated from employee exercises of nonqualified stock
options and settlement of restricted stock awards.
We recognize positions taken or expected to be taken in a tax return, in the financial statements when it is more likely than not
(i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized
tax position is then measured at the largest amount of benefit with greater than fifty percent likelihood of being realized upon ultimate
settlement.
Transaction gains and losses resulting from the remeasurement of foreign deferred tax assets or liabilities are classified as other
operating (income) expense, net in the consolidated statements of operations.
Share-based Compensation
We use the Black-Scholes option pricing model to value stock options, which requires the use of subjective assumptions. These
assumptions include the estimated length of time employees will retain their stock options before exercising them (the “expected
term”), the expected volatility of our common share price over the expected term, the risk-free interest rate, the dividend yield and the
forfeiture rate. With the exception of stock options issued with tandem SARs (see below), we recognize share-based compensation
cost based on the grant date estimated fair value of each award, net of estimated forfeitures.
In connection with the Transactions, the Company issued stock options with tandem stock appreciation rights (SARs) in
exchange for historical vested and unvested Tim Hortons stock options issued with tandem SARs not surrendered as part of the
Transactions. These stock options with tandem SARs are accounted for as cash settled awards, as these tandem awards allow the
employee to exercise the stock option to receive common shares or to exercise the SAR and receive a cash payment in an amount
equal to the difference between the market price of the common share on the exercise date and the exercise price of the stock option.
The accounting for stock options with tandem SARs results in a revaluation of the liability to fair value at the end of each reporting
period, which is generally classified as selling, general and administrative expenses in the consolidated statement of operations.
Share-based compensation cost is recognized over the employee’s requisite service period, which is generally the vesting period
of the equity grant. For awards that have a cliff-vesting schedule, share-based compensation cost is recognized ratably over the
requisite service period.
Restructuring
The determination of when we accrue for employee involuntary termination benefits depends on whether the termination
benefits are provided under an on-going benefit arrangement or under a one-time benefit arrangement. We record charges for on-
going benefit arrangements in accordance with ASC 712 Nonretirement Postemployment Benefits. We record charges for one-time
benefit arrangements in accordance with ASC 420 Exit or Disposal Cost Obligations.
During 2014, we accrued $16.3 million of restructuring costs associated with the implementation of a restructuring plan that
resulted in work force reductions throughout our Tim Hortons business in January 2015. Restructuring costs deemed probable and
reasonably estimable at December 31, 2014 were accrued, including severance benefits and other compensation costs and training
expenses that were provided under an on-going benefit arrangement. We expect to incur a total of $24.8 million in connection with
this restructurin
g plan.
Retirement Plans
The funded status of our defined benefit pension plans and postretirement benefit plans are recognized in the consolidated
balance sheets. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at
December 31, the measurement date. The fair value of plan assets represents the current market value of contributions made to
irrevocable trust funds, held for the sole benefit of participants, which are invested by the trust funds. For defined benefit pension
plans, the benefit obligation represents the actuarial present value of benefits expected to be paid upon retirement. For postretirement
benefit plans, the benefit obligation represents the actuarial present value of postretirement benefits attributed to employee services
already rendered. Gains or losses and prior service costs or credits related to our pension plans are being recognized as they arise as a
component of other comprehensive income (loss) to the extent they have not been recognized as a component of net periodic benefit
cost.
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We sponsor a pension plan for employees of Tim Hortons (the “Canadian Plan”), a defined contribution pension plan under the
provisions of the Income Tax Act (Canada) and the Ontario Pension Benefits Act. All of our Tim Hortons Canadian employees
meeting the eligibility requirements, including executives, are required to participate. A participant contributes 2% of their base
salary, while we contribute an amount equal to 5% of their base salary. Participants can make voluntary additional contributions,
which we match up to an additional 1% of base salary, subject to legislative maximum limits.
We also sponsor two defined contribution benefit plans for U.S. employees of Tim Hortons (the “U.S. Plans”), under the
provisions of Section 401(k) of the U.S. Internal Revenue Code. The U.S. Plans are voluntary and provided to all our Tim Hortons
U.S. employees who meet the eligibility requirements. The participant can contribute up to 75% of their base salary, subject to IRS
limits, and we contribute a specified percentage and match a specified percentage of employees contributions, based on their
eligibility under the specific plan.
We also sponsor the Burger King Savings Plan (the “Savings Plan”), a defined contribution plan under the provisions of
Section 401(k) of the U.S. Internal Revenue Code. The Savings Plan is voluntary and is provided to all employees who meet the
eligibility requirements. A participant can elect to contribute up to 50% of their compensation, subject to IRS limits, and we match
100% of the first 4% of employee compensation.
Aggregate amounts recorded in the consolidated statements of operations representing our contributions to the Canadian Plan,
U.S. Plans and Savings Plan on behalf of restaurant and corporate employees was $1.3 million for 2014, $1.0 million for 2013 and
$1.8 million for 2012. Our contributions made on behalf of restaurant employees are classified as cost of sales in our consolidated
statements of operations, while our contributions made on behalf of corporate employees are classified as selling, general and
administrative expenses in our consolidated statements of operations.
New Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that amends
accounting guidance on reporting discontinued operations and disclosures of disposals of components of an entity. Under this
guidance, only disposals of a component of an entity that represent a major strategic shift on an entity’s operations and financial
results shall be reported in discontinued operations. The guidance also requires the presentation as discontinued operation for an
entity that, on acquisition, meets the criteria to be classified as held for sale. In addition, the update expands disclosures for
discontinued operations, requires new disclosures regarding disposals of an individually significant component of an entity that does
not qualify for discontinued operations presentation and expands disclosures about an entity’s significant continuing involvement
with a discontinued operation. The accounting standards update is effective prospectively for all disposals (except disposals classified
as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after
December 15, 2014, with early adoption permitted. We early adopted the provisions of this accounting standards update and it did not
have a significant impact on our consolidated financial statements.
In May 2014, the FASB issued an accounting standards update that amends accounting guidance on revenue recognition. Under
this guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should disclose
sufficient information to enable users of financial statements to understand the nature, timing, and uncertainty of revenue and cash
flows arising from contracts with customers. This guidance is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016. Early adoption is not permitted. The accounting standards update permits the use of either the
retrospective or cumulative effect transition method. We are evaluating the impact of this accounting standards update on our
consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the
effect of the accounting standards update on our ongoing financial reporting.
In August 2014, the FASB issued an accounting standards update that amends accounting guidance on going concern. Under
this guidance, an entity’s management is responsible for evaluating whether there is substantial doubt about an organization’s ability
to continue as a going concern and to provide related footnote disclosures in certain circumstances. This guidance is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2016, with early application permitted. The
adoption of this accounting standards update is not expected to have an impact on our consolidated financial statements and related
disclosures.
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In November 2014, the FASB issued an accounting standards update to eliminate the use of different methods in practice and
thereby reduce existing diversity under U.S. GAAP in the accounting for hybrid financial instruments issued in the form of a share.
The amendments in this accounting standards update do not change the current criteria under U.S. GAAP for determining when
separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current
U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial
instrument that is issued in the form of a share. Additionally, this accounting standards update clarifies that, in evaluating the nature
of a host contract, an entity should assess the substance of the relevant terms and features when considering how to weight those
terms and features. The amendments in this accounting standards update are effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015, with early adoption permitted. We early adopted the provisions of this
accounting standards update and it did not have a significant impact on our consolidated financial statements.
In January 2015, the FASB issued an accounting standards update that eliminates from U.S. GAAP the concept of extraordinary
items. Under this guidance, an entity is no longer permitted to separately classify, present, and disclose extraordinary events and
transactions in the statement of operations. This guidance is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2015, with early application permitted. The adoption of this accounting standards update is not
expected to have an impact on our consolidated financial statements and related disclosures.
Note 3. Trade and Notes Receivable, net
Trade and notes receivable, net, consists of the following (in millions):
The change in allowances for doubtful accounts is as follows (in millions):
Note 4. Inventories and Other Current Assets, net
Inventories and other current assets, net consist of the following (in millions):
80
As of December 31,
2014
2013
Trade accounts receivable
$446.8 $190.6
Notes receivable, current portion 13.2 4.9
460.0 195.5
Allowance for doubtful accounts (20.1) (15.8)
Total, net $439.9 $179.7
As of December 31,
2014
2013
Beginning balance
$ 15.8 $ 19.7
Bad debt expense, net 1.9 2.0
Write-offs and other, net 2.4 (5.9)
Ending balance $ 20.1 $ 15.8
As of December 31,
2014
2013
Raw materials
$ 25.4 $ —
Finished goods 74.7 1.2
Total Inventory 100.1 1.2
Deferred financing costs - current 20.5 9.1
Refundable and prepaid income taxes 18.3 25.3
Prepaid rent 13.5 12.5
Prepaids and other current assets 42.5 21.7
Inventories and other current assets, net $ 194.9 $ 69.8
Note 5. Property and Equipment, net
Property and equipment, net, consist of the following (in millions):
Construction in progress represents new restaurant and equipment construction, reimaging of restaurants and software.
Depreciation and amortization expense on property and equipment totaled $53.3 million for 2014, $49.7 million for 2013 and
$102.2 million for 2012.
Assets leased under capital leases and included in property and equipment, net consist of the following (in million):
81
As of December 31,
2014
2013
Land
$ 906.2 $ 444.3
Buildings and improvements 1,300.8 383.7
Restaurant equipment 178.3 24.1
Furniture, fixtures, and other 92.2 68.3
Manufacturing equipment 32.8 —
Capital Leases 211.9 50.0
Construction in progress 44.1 19.0
2,766.3 989.4
Accumulated depreciation and amortization (226.7) (187.9)
Property and equipment, net $2,539.6 $ 801.5
As of December 31,
2014
2013
Buildings and improvements
$202.0 $ 47.9
Other 9.9 2.1
211.9 50.0
Accumulated Depreciation (15.7) (13.6)
Assets leased under capital leases, net $196.2 $ 36.4
Note 6. Intangible Assets, net and Goodwill
Intangible assets, net and goodwill consist of the following (in millions):
We recorded amortization expense on intangible assets of $35.9 million for 2014, $36.3 million for 2013 and $38.2 million for
2012.
As of December 31, 2014, the estimated future amortization expense on identifiable assets subject to amortization is as follows
(in millions):
The changes in the carrying amount of goodwill during 2014 and 2013 by operating segment (Burger King, “BK” and Tim
Hortons, “TH”) are as follows (in millions):
82
As of December 31,
Weighted
Average Life as
of December 31,
2014
2014
2013
Gross
Accumulated
Amortization Net
Gross
Accumulated
Amortization
Net
Identifiable assets subject to amortization:
Franchise agreements $ 790.4 $ (83.4) $ 707.0 $ 491.3 $ (66.0) $ 425.3 22.6 Years
Favorable leases 412.7 (62.6) 350.1 158.4 (48.5) 109.9 7.5 Years
Subtotal 1,203.1 (146.0) 1,057.1 649.7 (114.5) 535.2 17.4 Years
Indefinite lived intangible assets:
Burger King brand $2,167.0 $ — $2,167.0 $2,260.8 $ — $2,260.8
Tim Hortons brand 6,217.0 — 6,217.0 — — —
Subtotal 8,384.0 — 8,384.0 2,260.8 — 2,260.8
Intangible assets, net $9,441.1 $2,796.0
Goodwill $5,851.3 $ 630.0
Twelve-months ended December 31,
Amount
2015
$ 87.0
2016 86.6
2017 86.3
2018 85.4
2019 84.0
Thereafter 627.8
Total $1,057.1
BK - U.S. &
Canada BK - EMEA BK - LAC
BK - APAC
TH
Total
Balances at December 31, 2012
$ 231.0 $ 201.6 $ 124.1 $ 62.5 $ — $ 619.2
Impact from refranchisings (0.1) (2.2) — — — (2.3)
Effects of foreign currency adjustments — 8.5 — — — 8.5
Transfer from (to) assets held for sale — — 4.6 — — 4.6
Balances at December 31, 2013 230.9 207.9 128.7 62.5 — 630.0
Purchase of Tim Hortons — — — — 5,263.2 5,263.2
Effects of foreign currency adjustments — (25.1) — — (16.8) (41.9)
Balances at December 31, 2014 $ 230.9 $ 182.8 $ 128.7 $ 62.5 $5,246.4 $5,851.3
Note 7. Other Assets, net
Other assets, net consist of the following (in millions):
Note 8. Equity Method Investments
The aggregate carrying amount of our equity method investments was $124.9 million as of December 31, 2014 and $102.0
million as of December 31, 2013 and is included as a component of other assets, net in our consolidated balance sheets. Below are the
name of the entities, country of operation and our equity interest in our significant equity method investments based on the carrying
value as of December 31, 2014.
The aggregate market value of our equity interest in Carrols Restaurant Group, Inc. (“Carrols”), based on the quoted market
price on December 31, 2014, is approximately $71.8 million. No quoted market prices are available for our remaining equity method
investments.
With respect to our BK operations, most of the entities in which we have an equity interest own or franchise Burger King
restaurants. Franchise and property revenue we recognized from franchisees that are owned or franchised by entities in which we have
an equity interest consist of the following (in millions):
With respect to our TH business, the most significant equity investment is our 50% joint-venture interest with the Wendy’s
Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. During 2014,
Tim Hortons received $3.9 million in distributions and recognized $1.0 million of contingent rent expense associated with this joint
venture from the period of the Transactions to fiscal year end.
At December 31, 2014 and December 31, 2013, we had $22.6 million and $18.1 million, respectively, of accounts receivable
from our equity method investments which were recorded in trade and notes receivable, net in our consolidated balance sheets.
(Income) loss from equity method investments reflects our share of investee net income or loss. During 2014, we recorded a
$5.8 million noncash dilution gain included in equity in net (income) loss from unconsolidated affiliates on the issuance of stock by
Carrols, one of our equity method investees. This issuance of common stock reduced our ownership interest in Carrols from
approximately 29 percent to approximately 21 percent. The dilution gain reflects an adjustment to the difference between the carrying
value of our investment in Carrols and the amount of our underlying equity in the net assets of Carrols.
83
As of December 31,
2014
2013
Deferred financing costs - noncurrent
$138.5 $ 35.5
Equity method investments 124.9 102.0
Derivative assets - noncurrent 164.8 174.1
Other assets 102.2 51.9
Other assets, net $530.4 $363.5
Entity
Country
Equity
Interest
Carrols Restaurant Group, Inc.
United States 21.35%
Operadora de Franquicias Alsea S.A.P.I. de C.V. Mexico 20.00%
Pangaea Foods (China) Holdings, Ltd. China 27.50%
TIMWEN Partnership Canada 50.00%
2014
2013
2012
Revenues from affiliates:
Franchise royalties $ 88.5 $57.2 $28.5
Property revenues 29.2 26.3 15.3
Franchise fees and other revenue 11.3 6.6 4.6
Total $129.0 $90.1 $48.4
Note 9. Other Accrued Liabilities and Other Liabilities
Other accrued liabilities (current) and other liabilities, net (non-current) consist of the following (in millions):
Note 10. Long-Term Debt
Long-term debt is comprised of the following (in millions):
84
As of December 31,
2014
2013
Current:
Taxes payable - current $ 79.2 $ 5.2
Accrued compensation and benefits 39.4 30.9
Interest payable 37.8 16.9
Restructuring and other provisions 29.5 15.3
Deferred income - current 27.8 15.7
Closed property reserve 15.2 11.5
Preferred shares dividend payable 13.8 —
Other 76.1 59.5
Other accrued liabilities $318.8 $155.0
Non-current:
Unfavorable leases $355.2 $116.6
Accrued pension 62.9 37.4
Taxes payable - noncurrent 50.3 31.6
Lease liability - noncurrent 35.2 38.6
Share-based compensation liability 34.8 —
Deferred income - noncurrent 28.1 13.2
Derivatives liabilities - noncurrent 25.6 25.9
Other 52.0 54.6
Other liabilities, net $644.1 $317.9
Maturity dates
As of December 31,
Interest rates (a)
2014
2013
2014
2013
2014 Term Loan Facility (b)
December 12, 2021 $ 6,682.8 $ — 4.6% —
2014 Senior Notes April 1, 2022 2,250.0 — 6.0% —
Series 1 Notes June 1, 2017 262.0 — 4.2% —
Series 2 Notes December 1, 2023 390.7 — 4.5% —
Series 3 Notes April 1, 2019 392.1 — 2.9% —
Tranche A Term Loans N/A — 991.4 3.3% 3.2%
Tranche B Term Loans (c) N/A — 689.4 4.4% 4.5%
2010 Senior Notes N/A — 794.5 10.2% 10.2%
2011 Discount Notes (d) N/A — 453.1 11.5% 11.5%
Other N/A 65.3 22.7
Total debt 10,042.9 2,951.1
Less: current maturities of debt (61.4) (70.9)
Less: Tim Hortons Notes (1,044.8) —
Total long-term debt $ 8,936.7 $2,880.2
(a) Represents the effective interest rate for the instrument computed on a quarterly basis, including the amortization of deferred
debt issuance costs and original issue discount, as applicable, and in the case of our term loans, the effect of interest rate caps.
(b) Principal face amount herein is presented net of a discount of $67.2 million at December 31, 2014.
(c) Principal face amount herein is presented net of a discount of $6.7 million at December 31, 2013.
(d) Principal face amount herein is presented net of a discount of $126.0 million at December 31, 2013.
2014 Credit Agreement
Two subsidiaries of the Company (the “Borrowers”) are party to a Credit Agreement dated as of October 27, 2014 (the “2014 Credit
Agreement”) which provides for (i) Term B Loans in the aggregate principal amount of $6,750.0 million under a senior secured term loan
facility (the “2014 Term Loan Facility”), and (ii) a senior secured revolving credit facility for up to $500.0 million of revolving extensions
of credit outstanding at any time (including revolving loans, swingline loans and letters of credit) (the “2014 Revolving Credit Facility”
and, together with the Term Loan Facility, the “2014 Credit Facilities”).
The obligations under the Credit Facilities are guaranteed on a senior secured basis, jointly and severally, by the direct parent
company of one of the Borrowers and substantially all of its Canadian and U.S. subsidiaries, including Burger King Worldwide, Tim
Hortons and substantially all of their respective Canadian and U.S. subsidiaries (the “Credit Guarantors”). Amounts borrowed under the
Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future property
(subject to certain exceptions) of each Borrower and Credit Guarantor.
The 2014 Term Loan Facility matures on December 12, 2021 and the 2014 Revolving Credit Facility matures on December 12,
2019. The principal amount of the 2014 Term Loan Facility amortizes in quarterly installments equal to 0.25% of the original principal
amount of the 2014 Term Loan Facility, with the balance payable at maturity.
We may prepay the 2014 Term Loan Facility in whole or in part at any time, provided that certain voluntary prepayments prior to
the twelve month anniversary of the closing date of the Transactions will be subject to a call premium of 1.0%. Additionally, subject to
certain exceptions, the 2014 Term Loan Facility is subject to mandatory prepayments in amounts equal to (1) a percentage, as defined in
the Credit Agreement, of the net cash proceeds from any non-ordinary course sale or other disposition of assets (including as a result of
casualty or condemnation); (2) 100% of the net cash proceeds from issuances or incurrences of debt by the Company or any of its
restricted subsidiaries (other than indebtedness permitted by the 2014 Credit Facilities); and (3) 50% (with stepdowns to 25% and 0%
based upon achievement of specified first lien senior secured leverage ratios) of annual excess cash flow of the Company and its
subsidiaries.
As of December 31, 2014, we had no amounts outstanding under the 2014 Revolving Credit Facility. Funds available under the
2014 Revolving Credit Facility for future borrowings may be used to repay other debt, finance debt or share repurchases, acquisitions,
capital expenditures and other general corporate purposes. We have a $125.0 million letter of credit sublimit as part of the 2014
Revolving Credit Facility, which reduces our borrowing capacity under this facility by the cumulative amount of outstanding letters of
credit. As of December 31, 2014, we had $4.6 million of letters of credit issued against the 2014 Revolving Credit Facility and our
borrowing capacity was $495.4 million.
At the Borrowers’ option, the interest rate per annum applicable to the 2014 Credit Facilities is based on a fluctuating rate of interest
determined by reference to either (i) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank,
N.A., (b) the federal funds effective rate plus 0.50%, (c) the Eurocurrency rate applicable for an interest period of one month plus 1.00%
and (d) in respect of the 2014 Term Loan Facility, 2.00% per annum (“Base Rate Loans”), plus an applicable margin equal to 2.50% for
any 2014 Term Loan Facility and 2.00% for loans under the 2014 Revolving Credit Facility, or (ii) a Eurocurrency rate determined by
reference to LIBOR, adjusted for statutory reserve requirements (“Eurocurrency Rate Loans”), plus an applicable margin equal to 3.50%
for any 2014 Term Loan Facility and 3.00% for loans under the 2014 Revolving Credit Facility; provided that the foregoing margins
applicable to the 2014 Revolving Credit Facility are subject to reduction after financial statements have been delivered for the first full
fiscal quarter after the Closing Date based upon achievement of specified leverage ratios. Borrowings of the 2014 Credit Facility will be
subject to a floor of 1.00% in the case of Eurocurrency Rate Loans and 2.00% in the case of Base Rate Loans. We have elected our
applicable rate per annum as Eurocurrency rate determined by reference to LIBOR. As of December 31, 2014, the interest rate was 4.50%
on our outstanding 2014 Credit Facility.
We are required to pay certain recurring fees with respect to the 2014 Credit Facilities, including (i) fees on the unused
commitments of the lenders under the revolving facility, (ii) letters of credit fees on the aggregate face amounts of outstanding letters of
credit plus a fronting fee to the issuing bank and (iii) administration fees. Amounts outstanding under the 2014 Revolving Credit Facility
bear interest at a rate of LIBOR plus an applicable margin equal to 2.5% to 3.0%, depending on our leverage ratio, on the amount drawn
under each letter of credit that is issued and outstanding under the 2014 Revolving Credit Facility. The interest rate on the unused portion
of the 2014 Revolving Credit Facility ranges from 0.375% to 0.50%, depending on our leverage ratio, and our current rate is 0.50%.
2014 Senior Notes
The Borrowers are party to an indenture, dated as of October 8, 2014 (the “Indenture”) in connection with the issuance of $2,250.0
million of 6.00% second lien senior secured notes due April 1, 2022 (the “2014 Senior Notes”) by the Borrowers. The 2014 Senior Notes
bear interest at a rate of 6.0% per annum, payable semi-annually on April 1 and October 1 of each year. No principal payments are due
until maturity.
85
The 2014 Senior Notes are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of
their Canadian and U.S. subsidiaries, including Burger King Worldwide, Tim Hortons and substantially all of their respective Canadian
and U.S. subsidiaries (the “Note Guarantors”). The 2014 Senior Notes are secured by a second-priority lien, subject to certain exceptions
and permitted liens, on all of the Borrowers’ and the Note Guarantors’ present and future property that secures the Credit Facilities and
any outstanding Tim Hortons Notes, to the extent of the value of the collateral securing such first-priority senior secured debt.
The Borrowers may redeem some or all of the 2014 Senior Notes at any time prior to October 1, 2017 at a price equal to 100% of
the principal amount of the Notes redeemed plus a “make whole” premium and, at any time on or after October 1, 2017, at the
redemption prices set forth in the Indenture. In addition, at any time prior to October 1, 2017, up to 40% of the aggregate principal
amount of the 2014 Senior Notes may be redeemed with the net proceeds of certain equity offerings, at the redemption price specified in
the Indenture. In connection with any tender offer for the 2014 Senior Notes, including a change of control offer or an asset sale offer,
the Borrowers will have the right to redeem the 2014 Senior Notes at a redemption price equal to the amount offered in that tender offer
if not less than 90% in aggregate principal amount of the outstanding 2014 Senior Notes validly tender and do not withdraw such 2014
Senior Notes in such tender offer. If the Borrowers experience a change of control, the holders of the 2014 Senior Notes will have the
right to require the Borrowers to repurchase the 2014 Senior Notes at a purchase price equal to 101% of their aggregate principal amount
plus accrued and unpaid interest and Additional Amounts (as defined in the Indenture), if any, to the date of such repurchase.
2012 Credit Agreement
On September 28, 2012, Burger King Corporation (“BKC”) and Burger King Holdings, Inc. (“Holdings”) Holdings entered into a
Credit Agreement (the “2012 Credit Agreement”) to refinance amounts borrowed under the 2011 Amended Credit Agreement (as
defined below). The 2012 Credit Agreement provided for (i) tranche A term loans in the aggregate principal amount of $1,030.0 million
(the “Tranche A Term Loans”), (ii) tranche B term loans in the aggregate principal amount of $705.0 million (the “Tranche B Term
Loans”), in each case under the senior secured term loan facility (the “2012 Term Loan Facility”), and (iii) a senior secured revolving
credit facility for up to $130.0 million of revolving extensions of credit outstanding at any time (including revolving loans, swingline
loans and letters of credit) (the “2012 Revolving Credit Facility” and, together with the 2012 Term Loan Facility, the “2012 Credit
Facilities”). The Tranche A Term Loans had a maturity date of September 28, 2017, the Tranche B Term Loans had a maturity date of
September 28, 2019 and the 2012 Revolving Credit Facility had a maturity date of October 19, 2015. Borrowings under the 2012 Credit
Agreement were refinanced by the 2014 Credit Agreement, as described above.
Under the 2012 Credit Agreement, BKC was required to comply with customary financial ratios and the 2012 Credit Agreement
also contained a number of customary affirmative and negative covenants. The Company was in compliance with all 2012 Credit
Agreement financial ratios and covenants at the time of the refinancing in December 2014.
2011 Amended Credit Agreement
In connection with the acquisition of Holdings by 3G Special Situations Fund II, L.P., BKC and Holdings entered into a credit
agreement dated as of October 19, 2010, as amended and restated as of February 15, 2011 (the “2011 Amended Credit Agreement”).
The 2011 Amended Credit Agreement provided for (i) two tranches of term loans in aggregate principal amounts of $1,600.0 million
and €€ 200.0 million (the “Term Loans”), each under a term loan facility (the “Term Loan Facility”) and (ii) a senior secured revolving
credit facility for up to $150.0 million of revolving extensions of credit outstanding at any time (including revolving loans, swingline
loans and letters of credit) (the “Revolving Credit Facility,” and together with the Term Loan Facility, the “Credit Facilities”). The
maturity date for the Term Loan Facility was October 19, 2016 and the maturity date for the Revolving Credit Facility was October 19,
2015. As described above, borrowings under the 2011 Amended Credit Agreement were refinanced by the 2012 Credit Agreement.
Under the 2011 Amended Credit Agreement, BKC was required to comply with customary financial ratios and the 2011 Amended
Credit Agreement also contained a number of customary affirmative and negative covenants. The Company was in compliance with all
2011 Amended Credit Agreement financial ratios and covenants at the time of the refinancing in September 2012.
Tim Hortons Notes
At the time of the Transactions, Tim Hortons had the following Canadian dollar denominated senior unsecured notes
outstanding: (i) C$300.0 million aggregate principal amount of 4.20% Senior Unsecured Notes, Series 1, due June 1, 2017 (“Series 1
Notes”), (ii) C$450.0 million aggregate principal amount of 4.52% Senior Unsecured Notes, Series 2, due December 1, 2023 (“Series 2
Notes”) and (iii) C$450.0 million aggregate principal amount of 2.85% Senior Unsecured Notes, Series 3, due April 1, 2019 (“Series 3
Notes”) (collectively, the “Tim
86
Hortons Notes”). Due to the transactions, and the resulting rating downgrade of Tim Hortons to below investment grade, Tim Hortons
offered to repurchase for cash any and all of the outstanding Tim Hortons Notes on December 12, 2014. The consideration offered for
Tim Hortons Notes properly tendered was an amount in cash equal to 101% of the principal amount of such tendered Tim Hortons
Notes together with accrued and unpaid interest thereon. This initial offer expired on January 12, 2015, and on January 13, 2015
Tim Hortons accepted for purchase, and settled for cash, the following: (i) C$249.8 million Series 1 Notes; (ii) C$440.0 million
Series 2 Notes and (iii) C$442.0 million Series 3 Notes.
On January 26, 2015, Tim Hortons commenced a second tender offer for the outstanding balance of the Tim Hortons Notes,
expiring on February 23, 2015. The consideration offered for the Tim Hortons Notes properly tendered was an amount in cash equal
to 100% of the principal amount of such tendered Tim Hortons Notes, together with accrued and unpaid interest thereon. Tim Hortons
Notes properly tendered at 5:00 p.m., Toronto time, on February 6, 2015 (the “Early Tender Deadline”) received additional cash
consideration of 1% of the principal amount of such tendered Tim Hortons Notes. On February 9, 2015 Tim Hortons accepted for
purchase, and settled for cash, the following Tim Hortons Notes properly tendered at the Early Tender Deadline: (i) C$2.7 million
Series 1 Notes; (ii) C$7.3 million Series 2 Notes and (iii) C$3.9 million Series 3 Notes. On February 24, 2015 Tim Hortons accepted
for purchase, and settled for cash, the following: (i) C$132,000 Series 1 Notes; (ii) C$95,000 Series 2 Notes and (iii) C$215,000
Series 3 Notes. Subsequent to these tender offers, the following Tim Hortons Notes remain outstanding: (i) C$47.4 million Series 1
Notes; (ii) C$2.6 million Series 2 Notes and (iii) C$3.9 million Series 3 Notes.
Restrictions and Covenants
The 2014 Credit Facilities contain a number of customary affirmative and negative covenants that, among other things, will limit
or restrict the ability of the Borrowers and certain of their 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; engage in certain transactions with affiliates.
In addition, the Borrowers are required to not exceed a specified first lien senior secured leverage ratio in the event the sum of the
amount of letters of credit in excess of $50,000,000 (other than those that are cash collateralized), any loans under the 2014 Revolving
Credit Facility and any swingline loans outstanding as of the end of any fiscal quarter exceed 30% of the commitments under the
2014 Revolving Credit Facility.
The terms of the Indenture, among other things, limit the ability of the Borrowers and their restricted subsidiaries to: incur
additional indebtedness; create liens or use assets as security in other transactions; declare or pay dividends, redeem stock or make
other distributions to stockholders; make investments; merge or consolidate, or sell, transfer, lease or dispose of substantially of the
Borrowers’ assets; enter into transactions with affiliates; sell or transfer certain assets; and agree to certain restrictions of the ability of
restricted subsidiaries to make payments to us. These covenants are subject to a number of important qualifications, limitations and
exceptions that are described in the Indenture.
As of December 31, 2014, we were in compliance with all covenants of the 2014 Credit Agreement and Indenture, and there
were no limitations on our ability to draw on the remaining availability under our 2014 Revolving Credit Facility.
2010 Senior Notes
In 2010, BKC issued $800.0 million principal amount of senior notes that had an original maturity of October 15, 2018 and bore
interest at a rate of 9.875% per annum, which was payable semi-annually on October 15 and April 15 of each year (the “2010 Senior
Notes”). In December 2014, we completed the full redemption of our 2010 Senior Notes, using cash proceeds from our 2014 Credit
Facility and 2014 Senior Notes, paying $833.7 million to redeem $794.5 million in aggregate principal at a redemption price equal to
104.938% of the principal amount.
2011 Discount Notes
On April 19, 2011, Burger King Capital Holdings, LLC (“BKCH”) and Burger King Capital Finance, Inc. (“BKCF” and
together with BKCH, the “Issuers”) entered into an indenture with Wilmington Trust FSB, as trustee, pursuant to which the Issuers
sold $685.0 million in the aggregate principal amount at maturity of 11.0% senior discount notes due April 15, 2019 (the “2011
Discount Notes”). The 2011 Discount Notes generated $401.5 million in gross proceeds. During 2012, we repurchased 2011 Discount
Notes with an aggregate face value of $92.9 million and an aggregate carrying value of $61.1 million, net of unamortized original
issue discount, for a purchase price of $69.6 million. In December 2014, we redeemed all of the remaining outstanding 2011 Discount
Notes, using cash proceeds from our 2014 Credit Facility and 2014 Senior Notes as well as existing cash, paying $547.8 million to
redeem $501.7 million in aggregate principal at a redemption price equal to 109.174% of the principal amount.
87
Other debt
Included in other debt as of December 31, 2014 is debt of $59.9 million recognized in accordance with applicable lease
accounting rules. The Company is considered to be the owner of certain restaurants leased by the Company from an unrelated lessor
because the Company constructed some of the structural elements of those restaurants, and records the lessor’s contributions to the
construction costs for these restaurants as other debt.
Debt issuance costs
In connection with the 2014 Credit Agreement and the 2014 Senior Notes, we incurred an aggregate of $160.2 million of
deferred financing costs. We had total unamortized deferred financing costs of $159.0 million at December 31, 2014 and $44.6
million at December 31, 2013, which amounts are amortized over the term of the debt into interest expense using the effective interest
method. The amortization of deferred financing costs included in interest expense was $9.7 million for 2014, $8.9 million for 2013
and $10.9 million for 2012.
Loss on Early Extinguishment of Debt
In connection with the refinancing of term loans outstanding under the 2012 Credit Agreement, as well as the redemptions of our
2011 Discount Notes and 2010 Senior Notes, we recorded a $155.4 million loss on early extinguishment of debt in 2014. The loss on
early extinguishment of debt reflects the write-off of unamortized debt issuance costs, the write-off of unamortized discounts,
commitment fees associated with the bridge loan available at the closing of the Transactions, and the payment of premiums to redeem
the 2011 Discount Notes and 2010 Senior Notes.
We recorded a $34.2 million loss on early extinguishment of debt during 2012 in connection with the refinancing of term loans
outstanding under the 2011 Amended Credit Agreement, as described above, as well as prepayments of term loans prior to the
refinancing and repurchases of our 2011 Discount Notes and 2010 Senior Notes.
Maturities
The aggregate maturities of long-term debt as of December 31, 2014 are as follows (in millions):
88
Principal
Year Ended December 31,
Amount
2015 (a)
$ 1,115.0
2016 70.4
2017 70.5
2018 70.8
2019 70.8
Thereafter 8,712.6
Total $10,110.1
(a) Amount includes Tim Hortons Notes.
Interest Expense, net
Interest expense, net consists of the following (in millions):
Note 11. Leases
As of December 31, 2014, we leased or subleased 5,409 restaurant properties to franchisees and 92 non-restaurant properties to
third parties under direct financing leases and operating 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 of these leases provide for future rent escalations
and renewal options. Certain leases also include provisions for contingent rent, determined as a percentage of sales, generally when
annual sales exceed specific levels. The lessees bear the cost of maintenance, insurance and property taxes.
Assets leased to franchisees and other third parties under operating leases, where we are the lessor, that are included within our
property and equipment, net was as follows (in millions):
Our net investment in direct financing leases was as follows (in millions):
89
2014
2013
2012
Tranche A Term Loans
$ 23.9 $ 26.3 $ 7.1
Tranche B Term Loans 23.6 26.6 7.1
2014 Credit Facility 54.8 — —
Secured Term Loan - USD tranche — — 51.2
Secured Term Loan - Euro tranche — — 8.8
Interest Rate Caps 7.1 6.8 4.2
2014 Senior Notes 31.1 — —
Tim Horton Series Notes 1.8 — —
2010 Senior Notes 74.3 78.5 78.6
2011 Discount Notes 48.5 46.0 43.8
Amortization of deferred financing costs and debt issuance discount 11.7 10.3 13.2
Capital lease obligations 6.1 6.4 8.2
Other 0.9 1.7 2.7
Interest income (3.7) (2.6) (1.1)
Interest expense, net $280.1 $200.0 $223.8
As of December 31,
2014
2013
Land
$ 778.8 $ 421.7
Buildings and improvements 1,276.2 397.9
Restaurant equipment 47.0 2.7
Gross property and equipment leased 2,102.0 822.3
Accumulated depreciation (155.5) (130.3)
Net property and equipment leased $1,946.5 $ 692.0
As of December 31,
2014
2013
Future rents to be received
Future minimum lease receipts $154.4 $ 184.8
Contingent rents
(1)
78.1 92.1
Estimated unguaranteed residual value 22.2 23.8
Unearned income (97.1) (120.5)
Allowance on direct financing leases (0.3) (0.3)
157.3 179.9
Current portion included within trade receivables (16.8) (16.8)
Net investment in property leased to franchisees $140.5 $ 163.1
(1) Amounts represent estimated contingent rents recorded in connection with the acquisition method of accounting.
In addition, we lease land, building, equipment, office space and warehouse space, including 743 restaurant buildings under
capital leases. 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 and certain leases also include provisions for contingent rent, determined as a percentage of sales, generally when annual
sales exceed specific levels. Most leases also obligate us to pay the cost of maintenance, insurance and property taxes.
As of December 31, 2014, future minimum lease receipts and commitments were as follows (in millions):
Property revenues are comprised primarily of rental income from operating leases and earned income on direct financing leases
with franchisees as follows (in millions):
Rent expense associated with the lease commitments is as follows (in millions):
90
Lease Receipts
Lease Commitments (a)
Direct
Financing
Leases
Operating
Leases
Capital
Leases
Operating
Leases
2015
$ 22.8 $ 367.6 $ 35.4 $ 186.0
2016 22.5 333.2 37.4 183.9
2017 21.9 301.6 28.0 158.0
2018 20.4 269.8 27.1 151.0
2019 15.2 237.8 24.7 133.4
Thereafter 51.6 1,500.4 173.4 922.3
Total minimum payments $ 154.4 $3,010.4 $ 326.0 $ 1,734.6
Less amount representing interest (131.6)
Present value of minimum capital lease payments 194.4
Current portion of capital lease obligation (18.7)
Long-term portion of capital lease obligation $ 175.7
(a) Lease commitments under operating leases have not been reduced by minimum sublease rentals of $1,752.9 million due in the
future under noncancelable subleases.
2014
2013
2012
Rental income:
Minimum $180.5 $165.9 $108.1
Contingent 39.7 25.0 17.4
Amortization of favorable and unfavorable income lease contracts, net 5.7 5.6 6.3
Total rental income 225.9 196.5 131.8
Earned income on direct financing leases 15.3 17.2 19.5
Total property revenues $241.2 $213.7 $151.3
2014
2013
2012
Rental expense:
Minimum $109.1 $115.0 $148.8
Contingent 8.0 4.9 9.3
Amortization of favorable and unfavorable payable lease contracts,
net 3.1 0.9 (2.4)
Total rental expense (a) $120.2 $120.8 $155.7
(a) Amounts include rental expense related to properties subleased to franchisees of $103.3 million for 2014, $94.0 million for 2013
and $74.4 million for 2012.
The impact of favorable and unfavorable lease amortization on operating income is as follows (in millions):
Estimated future amortization of favorable and unfavorable lease contracts subject to amortization are as follows (in millions):
Note 12. Income Taxes
Income before income taxes, classified by source of income (loss), is as follows (in millions):
Income tax expense (benefit) attributable to income from continuing operations consists of the following (in millions):
91
2014
2013
2012
Franchise and property revenues $ 5.7 $ 5.6 $ 6.3
Cost of sales (0.3) (1.3) (3.4)
Franchise and property expenses 3.4 2.2 1.0
Cost of Sales
Franchise and Property Revenue
Franchise and Property Expenses
Favorable
Unfavorable
Favorable
Unfavorable
Favorable
Unfavorable
2015
$ 0.3 $ (0.3) $ 12.9 $ (17.6) $ 42.3 $ (37.2)
2016 0.2 (0.3) 12.7 (17.4) 42.1 (37.1)
2017 0.2 (0.3) 12.5 (17.1) 41.9 (36.7)
2018 0.2 (0.2) 12.0 (16.6) 41.6 (36.2)
2019 0.2 (0.1) 11.7 (15.5) 40.7 (35.5)
Thereafter 2.2 (0.2) 22.5 (30.7) 53.9 (56.2)
Total $ 3.3 $ (1.4) $ 84.3 $ (114.9) $ 262.5 $ (238.9)
2014
2013
2012
Canada
$(247.4) $ (18.1) $ 3.0
U.S. (263.2) 127.4 (4.7)
Other Foreign 257.5 212.9 161.4
Income before income taxes $(253.1) $322.2 $159.7
2014
2013
2012
Current:
Canada $ 25.9 $ 0.5 $ —
U.S. Federal 16.1 29.9 19.0
U.S. state, net of federal income tax benefit (0.3) 3.7 1.1
Other Foreign 35.5 22.3 13.0
$ 77.2 $56.4 $33.1
Deferred:
Canada $(20.4) $ (4.5) $ (2.5)
U.S. Federal (28.7) 27.8 (1.0)
U.S. state, net of federal income tax benefit (4.2) (1.2) 1.6
Other Foreign 0.4 10.0 10.8
$(52.9) $32.1 $ 8.9
Total $ 24.3 $88.5 $42.0
The statutory rate reconciles to the effective tax rate as follows:
Our effective tax rate was (9.6)% for 2014, primarily due to the impact of the Transactions, including non-deductible transaction
related costs, and the mix of income from multiple tax jurisdictions. Our effective tax rate was 27.5% for 2013, primarily as a result
of the mix of income from multiple tax jurisdictions and the impact of non-deductible expenses related to our refranchisings, partially
offset by a favorable impact from the sale of a foreign subsidiary and a reduction in the state effective tax rate related to our
refranchisings. Our effective tax rate was 26.3% for 2012, primarily as a result of the mix of income from multiple tax jurisdictions,
the release of valuation allowance and the impact of costs on refranchisings primarily in foreign jurisdictions.
The following table provides the amount of income tax expense (benefit) allocated to continuing operations and amounts
separately allocated to other items (in millions):
The significant components of deferred income tax expense (benefit) attributable to income from continuing operations are as
follows (in millions):
92
2014
2013
2012
Statutory rate (1)
26.5% 35.0% 35.0%
State income taxes, net of federal income tax benefit — 0.5 1.0
Costs and taxes related to foreign operations (2) (9.9) 6.2 10.7
Foreign exchange gain (loss) (2.1) — —
Foreign tax rate differential (3) 30.0 (14.6) (25.0)
Taxes provided on earnings due to Transactions (22.4) — —
Change in valuation allowance (6.6) 0.6 (1.1)
Change in accrual for tax uncertainties (0.3) 1.5 1.6
Deductible FTC 3.8 (1.9) (3.2)
Non Deductible Transaction Costs (5.0) 0.3 2.5
Impact of Transactions (14.6) — —
Capital gain (loss) rate differential (8.7) — —
Other (0.3) (0.1) 4.8
Effective income tax rate (9.6)% 27.5% 26.3%
(1) The statutory rate is the Canadian rate of 26.5% for 2014 and the U.S. rate of 35.0% for 2013 and 2012.
(2) Costs and taxes related to foreign operations for 2014 consists of non-Canadian jurisdictions. For 2013 and 2012, the costs and
taxes related to foreign operations consists of non-U.S. jurisdictions.
(3) Amounts reflect statutory rates in jurisdictions in which we operate outside of Canada for 2014 and outside of the U.S. for 2013
and 2012.
2014
2013
2012
Income tax expense from continuing operations
$ 24.3 $ 88.5 $42.0
Cash flow hedge in accumulated other comprehensive income (loss) (60.3) 68.1 (1.8)
Net investment hedge in accumulated other comprehensive income (loss) 20.9 (5.7) (4.2)
Pension liability in accumulated other comprehensive income (loss) (13.4) 9.9 (1.2)
Stock option tax benefit in additional paid-in capital — (10.1) —
Total $(28.5) $150.7 $34.8
2014
2013
2012
Deferred income tax expense (benefit)
$(71.9) $ 9.9 $17.9
Change in valuation allowance 15.7 22.6 (8.3)
Change in effective state income tax rate 3.0 (4.0) 0.8
Change in effective foreign income tax rate 0.3 3.6 (1.5)
Total $(52.9) $32.1 $ 8.9
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
are presented below (in millions):
The valuation allowance had a net increase of $17.6 million during 2014 primarily due to the acquisition of Tim Hortons,
reduced by true-up adjustments related to ordinary and capital losses.
Changes in valuation allowance are as follows (in millions):
93
As of December 31,
2014
2013
Deferred tax assets:
Trade and notes receivable, principally due to allowance for doubtful
accounts $ 11.6 $ 9.2
Accrued employee benefits 53.1 34.1
Unfavorable leases 114.1 58.8
Liabilities not currently deductible for tax 52.7 53.2
Tax loss and credit carryforwards 215.5 107.2
Other 15.5 0.5
Total gross deferred tax assets 462.5 263.0
Valuation allowance (115.3) (97.7)
Net deferred tax assets 347.2 165.3
Less deferred tax liabilities:
Property and equipment, principally due to differences in depreciation 91.5 10.3
Intangible assets 1,682.0 640.2
Leases 123.0 89.0
Statutory Impairment 8.0 9.2
Derivatives 24.8 65.9
Outside basis difference 177.1 —
Total gross deferred tax liabilities 2,106.4 814.6
Net deferred tax liability $1,759.2 $649.3
2014
2013
2012
Beginning balance
$ 97.7 $ 93.3 $99.6
Additions due to Tim Hortons acquisition 57.0 — —
Change in estimates recorded to deferred income tax expense 15.7 22.6 (8.3)
Expiration of foreign tax credits and capital losses (11.3) — —
Changes from foreign currency exchange rates (2.1) 0.1 2.0
True-ups from changes in ordinary and capital losses (41.7) — —
Sale of foreign subsidiaries — (18.3) —
Ending balance $115.3 $ 97.7 $93.3
The gross amount and expiration dates of operating loss and tax credit carryforwards as of December 31, 2014 are as follows (in
millions):
The Company has approximately $966.6 million of undistributed earnings of which approximately $5.0 million has been
previously taxed. Taxes of $59.8 million have been provided on approximately $263.7 million of undistributed earnings. During
2014, the Company provided $56.7 million of taxes on $160.4 million of earnings and prior to 2014, the Company provided
approximately $3.1 million of taxes on $103.3 million of earnings. Deferred tax liabilities have not been provided on approximately
$697.9 million of undistributed earnings that are considered to be permanently reinvested. In connection with the acquisition of Tim
Hortons, the Company provided approximately $117.2 million of taxes on $860.7 million of acquired foreign outside basis
differences in connection with acquisition accounting.
We had $41.6 million of unrecognized tax benefits at December 31, 2014, which if recognized, would favorably affect the
effective income tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in
millions):
During the twelve months beginning January 1, 2015, it is reasonably possible we will reduce unrecognized tax benefits by
approximately $10.7 million, primarily as a result of the expiration of certain statutes of limitations and the resolution of audits.
We recognize interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of accrued
interest and penalties was $12.8 million at December 31, 2014 and $4.1 million at December 31, 2013. Potential interest and penalties
associated with uncertain tax positions increased by $8.3 million due to the acquisition of Tim Hortons. Potential interest and
penalties associated with uncertain tax positions recognized was $0.5 million during the year ended December 31, 2014, $0.6 million
during the year ended December 31, 2013, and $0.3 million during the year ended December 31, 2012. To the extent interest and
penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the
overall income tax provision.
We file income tax returns with Canada and its provinces. Generally we are subject to routine examinations by the Canada
Revenue Authority (“CRA”). The CRA is conducting examinations of the 2010 through 2012 taxation years. Additionally, income tax
returns filed with various provincial jurisdictions are generally open to examination for periods of three to five years subsequent to the
filing of the respective return. Tax years 2005 through 2009 are also under appeals and a Notice of Appeal to the Tax Court of Canada
was filed in 2012 with respect to tax year 2002. At this time, we believe that we have complied with all applicable Canadian tax laws
and that we have adequately provided for these matters.
94
Amount
Expiration Date
Canadian net operating loss carryforwards
$182.5 2030-2034
Canadian capital loss carryforwards 1.3 Indefinite
U.S. federal net operating loss carryforwards 203.5 2034
U.S. state net operating loss carryforwards 360.2 2016-2034
U.S. capital loss carryforwards 59.4 2018
U.S. foreign tax credits 20.2 2015-2025
Other foreign net operating loss carryforwards 88.0 Indefinite
Other foreign net operating loss carryforwards 1.8 2015-2034
Other 0.4 various
Total $917.3
2014
2013
2012
Beginning balance
$27.7 $23.3 $21.6
Additions on tax position related to the current year 2.7 2.2 1.9
Additions for tax positions of prior years 2.5 2.4 0.9
Additions due to acquisitions 13.4 — —
Reductions for tax positions of prior year (3.6) (0.1) (0.5)
Reductions for settlement (0.3) (0.1) (0.5)
Reductions due to statute expiration (0.8) — (0.1)
Ending balance $41.6 $27.7 $23.3
We also file income tax returns, including returns for our subsidiaries, with U.S. federal, U.S. state, and foreign jurisdictions.
Generally we are subject to routine examination by taxing authorities in the U.S. jurisdictions, as well as other foreign tax
jurisdictions, such as the United Kingdom, Germany, Spain, Switzerland and Singapore. None of the foreign jurisdictions should be
individually material. Our U.S. federal income tax returns for fiscal 2009, 2010, the period July 1, 2010 through October 18, 2010 and
the period October 19, 2010 through December 31, 2010 are currently under audit by the Internal Revenue Service. In addition, we
have various U.S. state and foreign income tax returns in the process of examination. From time to time, these audits result in
proposed assessments where the ultimate resolution may result in owing additional taxes. We believe that our tax positions comply
with applicable tax law and that we have adequately provided for these matters.
Note 13. Pension and Post Retirement Medical Benefits
Pension Benefits
We sponsor noncontributory defined benefit pension plans for our employees in the United States (the “U.S. Pension Plans”)
and certain employees in the United Kingdom, Germany and Switzerland (the “International Pension Plans”). Effective December 31,
2005, all benefits accrued under the U.S. Pension Plans were frozen at the benefit level attained as of that date.
Postretirement Medical Benefits
Our Burger King postretirement medical plan (the “U.S. Retiree Medical Plan”) provides medical, dental and life insurance
benefits to U.S. salaried retirees hired prior to June 30, 2001 and who were age 40 or older as of June 30, 2001, and their eligible
dependents. The amount of retirement health care coverage an employee will receive depends upon the length of credited service. In
2011, the credited service for this plan was frozen for all participants. Beginning January 1, 2012, the annual employer-provided
subsidy will be $160 (pre-age 65) and $80 (post-age 65) per year of credited service for anyone not already receiving benefits prior to
this date.
During 2012, we eliminated the option to delay enrollment for the U.S. Retiree Medical Plan and participants were required to
make a one-time election to participate in the plan. This change was accounted for as a negative plan amendment and resulted in a
reduction to the U.S. Retiree Medical Plan liability of $11.1 million. This reduction is being amortized as a reduction to net periodic
benefit costs over 6 years, the average remaining years until expected retirement. This negative plan amendment resulted in net
periodic benefit cost reductions of approximately $1.8 million in 2014, $1.8 million in 2013, and $1.5 million in 2012 and will result
in net periodic benefit costs reductions of approximately $1.8 million every year thereafter during the amortization period.
95
Obligations and Funded Status
The following table sets forth the change in benefit obligations, fair value of plan assets and amounts recognized in the balance
sheets for the U.S. Pension Plans, International Pension Plans and U.S. Retiree Medical Plan (in millions):
96
U.S. Pension Plans
U.S. Retiree Medical Plan
2014
2013
2014
2013
Change in benefit obligation
Benefit obligation at beginning of year $193.6 $212.9 $ 7.9 $ 8.5
Service cost — — — —
Interest cost 9.2 8.4 0.4 0.4
Plan amendments — — — —
Actuarial (gains) losses 38.1 (17.4) 1.5 (0.6)
Part D Rx Subsidy Received — — — —
Benefits paid (9.2) (10.3) (0.6) (0.4)
Benefit obligation at end of year $231.7 $193.6 $ 9.2 $ 7.9
Change in plan assets
Fair value of plan assets at beginning of year $159.6 $145.4 $ — $ —
Actual return on plan assets 17.3 17.0 — —
Employer contributions 5.2 7.5 0.6 0.4
Benefits paid (9.2) (10.3) (0.6) (0.4)
Fair value of plan assets at end of year $172.9 $159.6 $ — $ —
Funded status of plan $ (58.8) $ (34.0) $ (9.2) $ (7.9)
Amounts recognized in the consolidated balance sheet
Current liabilities $ (0.8) $ (0.8) $ (0.7) $ (0.5)
Noncurrent liabilities (58.0) (33.2) (8.5) (7.4)
Net pension liability, end of fiscal year $ (58.8) $ (34.0) $ (9.2) $ (7.9)
Amounts recognized in accumulated other comprehensive
income (AOCI)
Prior service cost / (credit) $ — $ — $ (9.5) $ (12.4)
Unrecognized actuarial loss (gain) 27.1 (2.9) (0.4) (2.1)
Total AOCI (before tax) $ 27.1 $ (2.9) $ (9.9) $ (14.5)
International Pension Plans
2014
2013
Benefit obligation at end of year
$ 33.4 $ 27.0
Fair value of plan assets at end of year 30.8 28.8
Funded status of plan$ (2.6) $ 1.8
Amounts recognized in the consolidated balance sheet
Current Assets $ 0.3 $ —
Noncurrent Assets 2.0 6.1
Current liabilities — (0.1)
Noncurrent liabilities (4.9) (4.2)
Net pension liability, end of fiscal year $ (2.6) $ 1.8
Amounts recognized in accumulated other comprehensive
income (AOCI)
Unrecognized actuarial loss (gain) $ (0.3) $ (5.6)
Total AOCI (before tax) $ (0.3) $ (5.6)
Additional year-end information for the U.S. Pension Plans, International Pension Plans and U.S. Retiree Medical Plan with
accumulated benefit obligations in excess of plan assets
The following sets forth the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the
U.S. Pension Plans, International Pension Plans and U.S. Retiree Medical Plan (in millions):
Components of Net Periodic Benefit Cost
The following sets forth the net periodic benefit costs (income) for the U.S. Pension Plans and U.S. Retiree Medical Plan for the
periods indicated (in millions):
The net periodic benefit costs (income) for our International Pension Plans was not significant for any comparative period.
Other Changes in Plan Assets and Projected Benefit Obligation Recognized in Other Comprehensive Income
As of December 31, 2014, for the combined U.S. and International Pension Plans, we expect to amortize during 2015 from
accumulated other comprehensive income (loss) into net periodic pension cost an estimated $2.9 million of net prior service credit
and $2.7 million of net actuarial loss.
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U.S. Pension Plans
U.S. Retiree Medical Plan
International Pension Plans
As of December 31,
As of December 31,
As of December 31,
2014
2013
2014
2013
2014
2013
Projected benefit obligation
$ 231.7 $ 193.6 $ 9.2 $ 7.9 $ 33.4 $ 27.0
Accumulated benefit obligation $ 231.7 $ 193.6 $ 9.2 $ 7.9 $ 24.0 $ 16.9
Fair value of plan assets $ 172.9 $ 159.6 $ — $ — $ 30.8 $ 28.8
U.S. Pension Plans
U.S. Retiree Medical Plan
2014 2013 2012
2014
2013 2012
Interest costs on projected benefit obligations
$ 9.2 $ 8.4 $ 8.6 $ 0.4 $ 0.3 $ 0.5
Expected return on plan assets (9.2) (8.3) (8.5) — — —
Amortization of prior service costs/(credit) — — — (2.9) (2.9) (2.6)
Amortization of actuarial losses (gains) — 1.2 — (0.2) (0.1) (0.1)
Settlement expense — — 0.2 — — —
Net periodic benefit costs (income) $— $ 1.3 $ 0.3 $ (2.7) $ (2.7) $ (2.2)
U.S. Pension Plans
U.S. Retiree Medical Plan
2014
2013 2012
2014
2013
2012
Unrecognized actuarial (gain) loss
$30.0 $(26.2) $12.0 $ 1.5 $ (0.6) $ 0.1
(Gain) loss recognized due to settlement — (0.3) (0.2) — — —
Prior service cost (credit) — — — — — (11.1)
Amortization of prior service (cost) credit — — — 2.9 2.9 2.6
Amortization of actuarial gain (loss) — (1.2) — 0.2 0.1 0.1
Total recognized in OCI $30.0 $(27.7) $11.8 $ 4.6 $ 2.4 $ (8.3)
International Pension Plans
2014
2013
2012
Unrecognized actuarial (gain) loss
$ 4.9 $ (4.4) $ (2.1)
Amortization of actuarial gain (loss) 0.4 — 2.3
Total recognized in OCI $ 5.3 $ (4.4) $ 0.2
Assumptions
The weighted-average assumptions used in computing the benefit obligations of the U.S. Pension Plans, International Pension
Plans and U.S. Retiree Medical Plan are as follows:
The discount rate used in the calculation of the benefit obligation at December 31, 2014 and December 31, 2013 for the
U.S. Plans is derived from a yield curve comprised of the yields of approximately 774 and 700 market-weighted corporate bonds,
respectively, rated AA on average by Moody’s, Standard & Poor’s, and Fitch, matched against the cash flows of the U.S. Plans. The
discount rate used in the calculation of the benefit obligation at December 31, 2014 and December 31, 2013 for the International
Pension Plans is primarily derived from the yields on Swiss government bonds with a maturity matched against the cash flows of the
International Pension Plans.
The weighted-average assumptions used in computing the net periodic benefit cost of the U.S. Pension Plans, International
Pension Plans and the U.S. Retiree Medical Plan are as follows:
The expected long-term rate of return on plan assets is determined by expected future returns on the asset categories in target
investment allocation. These expected returns are based on historical returns for each asset’s category adjusted for an assessment of
current market conditions.
The assumed healthcare cost trend rates are as follows:
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2014
2013
2012
U.S. Pension Plans:
Discount rate as of year-end 4.03% 4.84% 4.04%
U.S. Retiree Medical Plan:
Discount rate as of year-end 4.03% 4.84% 4.04%
International Pension Plans:
Discount rate as of year-end 3.57% 4.70% 4.03%
Range of compensation rate increase 3.36% 3.52% 3.14%
2014
2013
2012
U.S. Pension Plans:
Discount rate 4.84% 4.04% 4.58%
Expected long-term rate of return on plan assets 6.20% 6.05% 6.50%
U.S. Retiree Medical Plan:
Discount rate 4.84% 4.04% 4.58%
Expected long-term rate of return on plan assets N/A N/A N/A
International Pension Plans:
Discount rate 4.67% 4.18% 4.86%
Range of compensation rate increase 3.52% 3.27% 3.47%
Expected long-term rate of return on plan assets 4.58% 5.64% 5.25%
2014
2013
2012
Healthcare cost trend rate assumed for next year
8.00% 8.00% 8.00%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.00% 5.00% 5.00%
Year that the rate reaches the ultimate trend rate 2020 2020 2020
Assumed healthcare cost trend rates do not have a significant effect on the amounts reported for the postretirement healthcare
plans, since a one-percentage point increase or decrease in the assumed healthcare cost trend rate would have a minimal effect on
service and interest cost for the postretirement obligation.
Plan Assets
The fair value of the major categories of pension plan assets for U.S. and International Pension Plans at December 31, 2014 and
December 31, 2013 is presented below (in millions):
We categorize plan assets within a three level fair value hierarchy as described in Note 2. Pooled funds are primarily classified
as Level 2 and are valued using net asset values of participation units held in common collective trusts, as reported by the managers of
the trusts and as supported by the unit prices of actual purchase and sale transactions.
The investment objective for the U.S. Pension Plans and International Pension Plans is to secure the benefit obligations to
participants while minimizing our costs. The goal is to optimize the long-term return on plan assets at an average level of risk. The
Investment Committee developed a strategic allocation policy for the U.S. Pension Plan to reduce return seeking assets and increase
fixed income assets as the Plan’s funded status improves. The portfolio of equity securities, currently targeted at 50% for
U.S. Pension Plan and 70% for International Pension Plan, includes primarily large-capitalization companies with a mix of small-
capitalization U.S. and foreign companies well diversified by industry. The portfolio of fixed income asset allocation, currently
targeted at 50% for U.S. Pension Plan and 30% for International Pension Plan, is actively managed and consists of long duration fixed
income securities primarily in U.S. debt markets and non-U.S. bonds with long-term maturities that help to reduce exposure to
interest variation and to better correlate asset maturities with obligations.
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U.S.
Pension Plans
International
Pension Plan
U.S.
Pension Plan
International
Pension Plan
As of December 31,
2014
2013
Level 1
Cash and Cash equivalents $ 3.0 $ — $ — $ —
Level 2
Cash and Cash equivalents (a) 2.8 0.2 2.7 0.2
Equity Securities (b):
U.S. 47.7 3.0 44.0 5.5
Non - U.S. 36.3 18.1 38.1 14.5
Fixed Income (b):
Corporate Bonds and Notes 57.1 — 45.3 —
U.S. Government Treasuries 17.0 — 11.6 0.6
International Debt 4.6 4.5 3.9 —
Mortgage-Backed Securities 0.2 — 0.9 —
U.S. Government Agencies 3.4 — 8.2 —
Municipal Bonds — — 3.0 —
Non- U.S. Bonds — 4.7 1.1 7.4
Other (c) 0.8 0.3 0.8 0.6
Total fair value of plan assets $ 172.9 $ 30.8 $ 159.6 $ 28.8
(a) Short-term investments in money market funds and short term receivables for investments sold
(b) Securities held in common commingled trust funds
(c) Other securities held in common commingled trust funds including interest rate swaps and foreign currency contracts
Estimated Future Cash Flows
Total contributions to the U.S. Pension Plans and International Pension Plans were $6.1 million for 2014, $8.2 million for 2013 and
$10.1 million for 2012.
The U.S. and International Pension Plans’ and U.S. Retiree Medical Plan’s expected contributions to be paid in the next year, the
projected benefit payments for each of the next five years and the total aggregate amount for the subsequent five years are as follows (in
millions):
Note 14. Fair Value Measurements
Fair Value Measurements
The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and
December 31, 2013 (in millions):
Our derivatives are valued using a discounted cash flow analysis that incorporates observable market parameters, such as interest rate
yield curves and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments
that are necessary to reflect the probability of default by us or the counterparty.
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U.S. Pension
Plans
International
Pension
Plans
U.S. Retiree
Medical Plan
Estimated Net Contributions During Year Ended 2015
$ 0.8 $ 0.1 $ 0.7
Estimated Future Year Benefit Payments During Years Ended:
2015 $ 9.6 $ 0.2 $ 0.7
2016 $ 9.9 $ 0.2 $ 0.7
2017 $ 10.2 $ 0.2 $ 0.6
2018 $ 10.5 $ 0.2 $ 0.6
2019 $ 10.9 $ 0.3 $ 0.6
2020 - 2024 $ 64.8 $ 1.5 $ 2.9
Fair Value Measurements
at December 31, 2014
Fair Value Measurements
at December 31, 2013
Balance Sheet Location
(Level 1)
(Level 2)
Total
(Level 1)
(Level 2)
Total
Assets:
Derivatives designated as cash flow hedges
Interest rate Other assets, net $ — $ — $ — $ — $ 174.1 $174.1
Foreign currency Trade and notes receivable, net — 6.0 6.0 — — —
Derivatives designated as net investment hedges
Foreign currency
Inventories and other current
assets, net — 2.1 2.1 — — —
Foreign currency Other assets, net — 75.9 75.9 — — —
Derivatives not designated as hedging instruments
Interest rate Other assets, net — 88.9 88.9 — — —
Other
Investments held in a rabbi trust
Inventories and other current
assets, net 1.1 — 1.1
Investments held in a rabbi trust Other assets, net 5.2 — 5.2 8.9 — 8.9
Total assets at fair value $ 6.3 $ 172.9 $179.2 $ 8.9 $ 174.1 $183.0
Liabilities:
Derivatives designated as cash flow hedges
Interest rate Other liabilities, net $ — $ 25.6 $ 25.6 $ — $ — $ —
Derivatives designated as net investment hedges
Foreign currency Other liabilities, net — — — — 25.9 25.9
Other
ERP liabilities Other accrued liabilities — 1.1 1.1 — 2.8 2.8
ERP liabilities Other liabilities, net — 5.2 5.2 — 6.0 6.0
Total liabilities at fair value $ — $ 31.9 $ 31.9 $ — $ 34.7 $ 34.7
Investments held in a Rabbi trust consist of money market funds and mutual funds and the fair value measurements are derived
using quoted prices in active markets for the specific funds which are based on Level 1 inputs of the fair value hierarchy. The fair
value measurements of the ERP liabilities are derived principally from observable market data which are based on Level 2 inputs of
the fair value hierarchy.
At December 31, 2014, the fair value of our variable rate term debt and bonds was estimated at $10.1 billion, compared to a
carrying amount of $10.0 billion, net of original issuance discount and premium. At December 31, 2013, the fair value of our variable
rate term debt and bonds was estimated at $3.1 billion, compared to a carrying amount of $2.9 billion, net of original issuance
discount and premium. Fair value of variable rate term debt and fixed rate debt was estimated using inputs based on bid and offer
prices and are Level 2 inputs within the fair value hierarchy.
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not
measured at fair value on an ongoing basis but are subject to periodic impairment tests. These items primarily include long-lived
assets, goodwill, the Brand and other intangible assets. Refer to Note 2 for inputs and valuation techniques used to measure fair value
of these nonfinancial assets.
Note 15. 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 exposure to
fluctuations in interest rates and currency exchange rates. See Note 14 for fair value measurements of our derivative instruments.
Forward-Starting Interest Rate Swaps
During November 2014, we entered into a series of six forward-starting receive-variable, pay-fixed interest rate swaps to hedge
the variability in the interest payments associated with our 2014 Term Loan Facility beginning April 1, 2015, through the expiration
of the sixth swap on March 31, 2021. The variable component of the swap is based on the highest of the LIBOR rate at the end of the
period and 1%, which matches the applicable interest rate set forth in the 2014 Credit Agreement. The initial notional value of the
swap is $6,733.1 million, which will align with the outstanding principal balance of the 2014 Term Loan Facility as of April 1, 2015,
and will be reduced quarterly in accordance with the principal repayments of the 2014 Term Loan Facility. There are six sequential
interest rate swaps to achieve the hedged position. Each year on March 31, the existing interest rate swap will expire and will be
immediately replaced with a new interest rate swap until the expiration of the arrangement on March 31, 2021. At inception, these
interest rate swaps were designated as a cash flow hedge for hedge accounting, and as such, the effective portion of unrealized
changes in market value are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted
transaction affects earnings. Gains and losses from hedge ineffectiveness are recognized in current earnings.
During October 2014, we also entered into a series of receive-variable, pay-fixed interest rate swaps with a combined initial
notional value of $6,750.0 million that is amortized each quarter at the same rate of the 2014 Term Loan Facility. Each year in March,
the existing interest rate swap will expire and will be immediately replaced with a new interest rate swap until the expiration of the
arrangement on March 31, 2021. To offset the cash flows associated with these interest rate swaps, in November 2014 we entered into
a series of six annual mirror interest rate swaps in which we will receive-fixed, pay-variable on a total notional value of $6,750.0
million that is amortized each quarter at the same rate of the 2014 Term Loan Facility. Each year in March, the existing interest rate
swap will expire and will be immediately replaced with a new interest rate swap until the expiration of the arrangement on March 31,
2021. These interest rate swaps are not designated for hedge accounting and as such changes in fair value are recognized in current
earnings.
During 2012, we entered into three forward-starting interest rate swaps with a total notional value of $2,300.0 million to hedge
the variability of forecasted interest payments on our forecasted debt issuance attributable to changes in LIBOR. These swaps were
settled during the fourth quarter of 2014. The forward-starting interest rate swaps fixed LIBOR on $1,000.0 million of floating-rate
debt beginning 2015 and an additional $1,300.0 million of floating-rate debt starting 2016. During 2014, we discontinued hedge
accounting on our forward-starting interest rate swaps as it was probable at the time that the forecasted transactions will not occur
since we intended to repay our outstanding 2012 Term Loan Facility concurrently with the Transactions and did not anticipate issuing
new debt in 2015 or 2016. Refer to Note 1 for further information on the Transactions. Whenever hedge accounting is discontinued
and the derivative remains outstanding, we continue to carry the derivative at its fair value on the balance sheet and recognize any
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subsequent changes in fair value in earnings. When it is no longer probable that a forecasted transaction will occur, we discontinue
hedge accounting and recognize immediately in earnings any gains and losses, attributable to those forecasted transactions that are
probable not to occur, that were recorded in accumulated other comprehensive income (loss) related to the hedging relationship. Prior
to the discontinuance of hedge accounting, we accounted for these swaps as cash flow hedges, and as such, the effective portion of
unrealized changes in market value was recorded in AOCI and was to be reclassified into earnings during the period in which the
hedged forecasted transaction affects earnings. Gains and losses from hedge ineffectiveness are recognized in current earnings.
Cross-Currency Rate Swaps
To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we
may, from time to time, hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate
swaps. At December 31, 2014, we designated cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the
Euro and U.S. dollar 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 accumulated other comprehensive income (loss), net of tax. Such amounts will
remain in accumulated other comprehensive income (loss) until the complete or substantially complete liquidation of our investment
in the underlying foreign operations.
At December 31, 2014, we had outstanding cross-currency rate swaps in which we pay quarterly between 4.802%-7.002% on a
tiered payment structure per annum on the Canadian dollar notional amount of C$5,641.7 million and receive quarterly between
3.948%-6.525% on a tiered payment structure per annum on the USD notional amount of $5,000.0 million through the maturity date
of March 31, 2021. At inception, these derivative instruments were not designated for hedge accounting and as such changes in fair
value were recognized in current earnings. Beginning with the closing of the Transactions on December 12, 2014, we designated
these cross-currency rate swaps as a hedge and began accounting for these derivative instruments as net investment hedges.
At December 31, 2014, we also had outstanding cross-currency rate swaps with an aggregate notional value of $315.0 million.
At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as net investment hedges. A total
notional value of $115.0 million of these swaps are contracts to exchange quarterly fixed-rate interest payments we make in Euros for
quarterly fixed-rate interest payments we receive in U.S. dollars and mature on October 16, 2016. A total notional value of $200.0
million of these swaps are contracts to exchange quarterly floating-rate interest payments we make in Euros based on EURIBOR for
quarterly floating-rate interest payments we receive in U.S. dollars based on LIBOR and mature on September 28, 2017. These cross-
currency rate swaps also require the exchange of Euros and U.S. dollar principal payments upon maturity.
Foreign Currency Exchange Contracts
In connection with the Transactions, we were exposed to foreign currency risk as the cash consideration paid to Tim Hortons
shareholders in connection with the Transactions was denominated in Canadian dollars. As such, during 2014 we entered into foreign
currency forward and foreign currency option contracts to hedge our exposure to the volatility of the Canadian dollar. We had
outstanding foreign currency forward contracts to effectively exchange $9,000.0 million U.S. dollars for C$9,971.8 million Canadian
dollars and foreign currency option contracts to exchange $5,230.0 million U.S. dollars for C$5,635.3 million Canadian dollars that
were settled during the fourth quarter of 2014. At any point in time, the aggregate notional value of these derivative instruments never
exceeded $9,230.0 million U.S. dollars. The foreign currency option contracts had a total premium of $59.9 million that was paid at
expiration. These derivative instruments did not qualify for hedge accounting and changes in fair values were immediately recognized
in other operating expenses (income), net in current earnings.
We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases
and payments, such as coffee and certain intercompany purchases, made by our Canadian Tim Hortons operations. At December 31,
2014, 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 $138.3 million with maturities ranging between January 2015 and December 2015. We have designated these
instruments as cash flow hedges, as of the date of the acquisition, and as such, the effective portion of unrealized changes in market
value are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects
earnings. Gains and losses from hedge ineffectiveness are recognized in current earnings.
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Interest Rate Caps
During 2010, we entered into interest rate cap agreements (the “Cap Agreements”) to manage interest rate risk related to our
variable debt. During the fourth quarter of 2014, we terminated our Cap Agreements. Such agreements were used to cap the
borrowing rate on variable debt to provide a hedge against the risk of rising interest rates. At December 31, 2013, we had Cap
Agreements with a notional amount of $1.2 billion to mitigate the impact of fluctuations in the three-month LIBOR and effectively
cap the LIBOR applicable to our variable rate debt. The six year Cap Agreements were a series of individual caplets that reset and
settled quarterly with an original maturity of October 19, 2016, consistent with the payment dates of our LIBOR-based term debt.
Under the terms of the Cap Agreements, if LIBOR resets above a strike price, we received the net difference between LIBOR
and the strike price. With regards to our 2012 Credit Agreement, we had elected our applicable rate per annum as the Eurocurrency
rate determined by reference to LIBOR. In addition, on the quarterly settlement dates, we remitted the deferred premium payment
(plus interest) to the counterparty, whether LIBOR resets above or below the strike price.
During 2014 we discontinued hedge accounting for our Cap Agreements. Repayment of the 2012 Term Loans, 2010 Senior
Notes and 2011 Discount Notes occurred concurrently with the consummation of the Transactions. As such, the forecasted interest
payments were not expected to occur, resulting in the discontinuance of hedge accounting for our Cap Agreements. Refer to Note 1
for further information on the Transactions. Whenever hedge accounting is discontinued and the derivative remains outstanding, we
continue to carry the derivative at its fair value on the balance sheet and recognize any subsequent changes in fair value in earnings.
When it is no longer probable that a forecasted transaction will occur, we discontinue hedge accounting and recognize immediately in
earnings any gains and losses, attributable to those forecasted transactions that are probable not to occur, that were accumulated in
AOCI related to the hedging relationship. Prior to the discontinuance of hedge accounting, the Cap Agreements were designated as
cash flow hedges and to the extent they were effective in offsetting the variability of the variable rate interest payments, changes in
the derivatives’ fair values were not included in current earnings but were included in accumulated other comprehensive income
(AOCI) in the accompanying condensed consolidated balance sheets. At each cap maturity date, the portion of the fair value
attributable to the matured cap was reclassified from AOCI into earnings as a component of interest expense, net.
During 2012, we terminated our Euro denominated interest rate cap agreements which effectively capped the annual interest
expense applicable to our borrowings under the 2011 Amended Credit Agreement for Euro denominated borrowings. In connection
with the termination of the Euro denominated interest rate cap agreements, we recorded a charge of $8.4 million in 2012 within other
operating expense (income), net related to realized losses reclassified from AOCI.
Credit Risk
By entering into derivative instrument 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.
103
The following tables present the required quantitative disclosures for our derivative instruments (in millions):
Note 16. Redeemable Preferred Shares
In connection with the Transactions, we issued (a) 68,530,939 Class A 9.0% cumulative compounding perpetual voting
preferred shares (the “Preferred Shares”) at a purchase price of $43.775848 per share (the “Purchase Price”) and (b) a warrant to
purchase 8,438,225 of our common shares, at an exercise price of $0.01 per common share (the “Warrant”), for an aggregate purchase
price of $3,000.0 million. The proceeds, net of issuance costs, were used to finance a portion of the Transactions and were allocated
to the Preferred Shares ($2,750.6 million) and the Warrant ($247.6 million) on a relative fair value basis. On December 15, 2014,
upon exercise of the Warrant in full, we issued 8,438,225 of our common shares.
The 9.0% annual dividend will accrue whether or not declared by our Board of Directors and will be payable, quarterly in
arrears, only when declared and approved by our Board of Directors.
In addition to the preferred dividends, we are required to pay the holder of the Preferred Shares an additional amount (the
“make-whole dividend”) determined by a formula designed to ensure that on an after-tax basis, the net amount of the dividends
received by the holder of the Preferred Shares from the original issue date is the same as it would have been if we were a U.S.
corporation. The make-whole dividend can be paid, at our option, in cash, common shares or any combination thereof. The make-
whole dividends are
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Gain (Loss) Recognized in
Other Comprehensive Income (Loss)
(effective portion)
2014
2013
2012
Derivatives designated as cash flow hedges:
Interest rate caps $ (1.9) $ — $ (17.1)
Forward-starting interest rate swaps $ (155.5) $ 169.1 $ 0.7
Forward-currency contracts $ 1.1 $ — $ —
Derivatives designated as net investment hedges:
Cross-currency rate swaps $ 66.3 $ (14.8) $ (10.8)
Gain (Loss) Reclassified from AOCI
into Interest Expense, net
2014
2013
2012
Derivatives designated as cash flow hedges:
Interest rate caps $ (6.6) $ (6.1) $ (3.2)
Gain (Loss) Reclassified from AOCI
into Other operating expenses (income), net
2014
2013
2012
Derivatives discontinued as hedging instruments:
Interest rate caps $ (26.6) $ — $ (8.4)
Forward-starting interest rate swaps $ 40.0 $ — $ —
Gain (Loss) Recognized in
Other operating expenses (income), net
2014
2013
2012
Derivatives not designated as hedging instruments:
Interest rate caps $ (1.0) $ — $ —
Forward-starting interest rate swaps $ 55.4 $ — $ —
Foreign currency exchange contracts $ (358.7) $ (0.4) $ (0.5)
payable not later than 75 days after the close of each fiscal year, beginning with the fiscal year ended December 31, 2017. The right to receive the
make-whole dividends will terminate if and at the time that 100% of the outstanding Preferred Shares are no longer held by the original purchaser
or any of its subsidiaries.
The Preferred Shares may be redeemed at our option on and after the third anniversary of the original issue date. After the tenth anniversary
of the original issue date, holders of not less than a majority of the outstanding Preferred Shares may cause us to redeem their Preferred Shares. In
either case, the fixed redemption price is 109.9% of the Purchase Price per share (the “redemption price”) plus accrued and unpaid dividends and
unpaid make-whole dividends. Holders of the Preferred Shares also hold a contingently exercisable option to cause us to redeem their Preferred
Shares at the redemption price in the event of a change in control.
Holders of the Preferred Shares have voting rights equal to one vote per each Preferred Share. Except as otherwise provided holders of the
Preferred Shares and common shares vote together as a single class.
In the event of any liquidation, dissolution or winding up of our affairs, whether voluntary or involuntary, holders of the Preferred Shares
shall be entitled to receive payment in full in cash equal to 109.9% of the Purchase Price per share, plus accrued and unpaid dividends and unpaid
make-whole dividends, after satisfaction of all liabilities and obligations to our creditors and before any distributions to our common shareholders
(the “Class A Liquidation Preference”). If the Class A Liquidation Preference has been paid in full on all Preferred Shares, the holders of our other
shares shall be entitled to receive all of our remaining assets (or proceeds thereof) according to their respective rights and preferences.
Since the redemption features of the Preferred Shares are not solely within our control, we classified the Preferred Shares as temporary
equity. Additionally, during 2014, we adjusted the carrying value of the Preferred Shares to their redemption price, which is reflected as a $546.4
million reduction in income attributable to common shareholders and common shareholders’ equity.
Note 17. Common Shareholders’ Equity
For the period of January 1, 2014, through December 11, 2014 (i.e., prior to the closing date of the Transactions), our common equity
reflected 100% ownership by Burger King Worldwide common shareholders. As a result of the Transactions that closed on December 12, 2014,
our ownership interest changed and both Burger King Worldwide and Tim Hortons became indirect subsidiaries of us and Partnership, and we
became the sole general partner of Partnership. Consequently, the number of our common shares outstanding decreased from 352,042,242 Burger
King Worldwide shares on December 11, 2014 to 193,565,794 common shares of the Company on December 12, 2014. As a result, the carrying
amount of our equity was adjusted to reflect a noncontrolling interest, which represents the interests of the holders of Partnership exchangeable
units that are not held by us, as further described below. See Note 1, Description of Business and Organization.
Noncontrolling Interests
Noncontrolling interests represent equity interests in consolidated subsidiaries that are not attributable to us. As of December 31, 2014, the
holders of Partnership exchangeable units held an economic interest of approximately 56.7% in Partnership common equity through 265,041,783
Partnership exchangeable units. Since the Partnership exchangeable units were issued to former holders of Burger King Worldwide common stock,
the carrying amount of equity attributable to us was adjusted to reflect this transfer and the resulting noncontrolling interest held by the holders of
Partnership exchangeable units in Partnership.
Pursuant to the terms of the partnership agreement, Partnership exchangeable units will be entitled to distributions from Partnership in an
amount equal to any dividends or distributions that we declare and pay with respect to our common shares. Additionally, each holder of a
Partnership exchangeable unit is entitled to vote in respect of matters on which holders of our common shares are entitled to vote through a special
voting share of the Company. Any time after the one year anniversary of the Transactions’ effective date, the holder of a Partnership exchangeable
unit will have the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for our common
shares at a ratio of one common share for each Partnership exchangeable unit, subject to our right as the general partner of Partnership, in our sole
discretion, to deliver a cash payment in lieu of our common shares. If we elect to make a cash payment in lieu of issuing common shares, the
amount of the payment will be the weighted average trading price of the common shares on the New York Stock Exchange for the 20 consecutive
trading days ending on the last business day prior to the exchange date.
Partnership issued preferred units to us in connection with the Transactions and our issuance of the Preferred Shares. Under the terms of the
partnership agreement, Partnership will make a preferred unit distribution to us in amounts equal to (i) dividends we pay on the Preferred Shares
and (ii) in the event we redeem the Preferred Shares, the redemption amount of the Preferred Shares. Although the Partnership preferred units and
related distributions eliminate in consolidation, they affect the amount of net income (loss) attributable to noncontrolling interests that we report.
Net income (loss) attributable to noncontrolling interests for 2014 represents the noncontrolling interests’ portion of (a) Partnership net income
(loss) from the Closing Date through December 31, 2014, less (b) preferred unit dividends accrued and preferred unit accretion recorded by
Partnership of $317.6 million.
The noncontrolling interest recognized in connection with the VIE Restaurants of Tim Hortons Inc. was $1.1 million at December 12, 2014.
See Note 1, Description of Business and Organization.
105
We adjust the net income (loss) in our consolidated statement of operations to exclude the noncontrolling interests’
proportionate share of results. Also, we present the proportionate share of equity attributable to the noncontrolling interests as a
separate component of shareholders’ equity within our consolidated balance sheet.
Warrant
On December 12, 2014, we issued a warrant to purchase 8,438,225 shares of our common stock at an exercise price of $0.01 per
share (the “Warrant”) to the purchaser of our Preferred Shares. We determined the value of the Warrant using the Black-Scholes
method and allocated proceeds to the Preferred Shares and Warrant on a relative fair value basis, which resulted in $247.6 million of
proceeds attributed to the Warrant. On December 15, 2014, upon exercise of the Warrant in full, we issued 8,438,225 of our common
shares. See Note 16, Redeemable Preferred Shares.
Dividends Paid
Cash dividend payments to shareholders of Burger King Worldwide common stock were $105.6 million in 2014, $84.3 million
in 2013 and $14.0 million in 2012.
Although we do not currently have a dividend policy, we may declare dividends periodically if our Board of Directors
determines that it is in the best interests of the shareholders. The terms of the Preferred Shares and the 2014 Credit Agreement and
2014 Senior Notes Indenture and applicable Canadian law limit our ability to pay cash dividends in certain circumstances. In addition,
because we are a holding company, our ability to pay cash dividends on shares (including fractional shares) of our common stock may
be limited by restrictions on our ability to obtain sufficient funds through dividends from our subsidiaries, including the restrictions
under the 2014 Credit Agreement and 2014 Senior Notes Indenture. Subject to the foregoing, the payment of cash dividends on our
common shares in the future, if any, will be at the discretion of our Board of Directors and will depend upon such factors as earnings
levels, capital requirements, our overall financial condition and any other factors deemed relevant by our Board of Directors.
Annual Bonus Election
We have a bonus program under which eligible employees may elect to use a portion of their annual bonus compensation to
purchase our common shares, and prior to the Transactions, Burger King Worldwide common stock. During 2014, we issued
approximately 0.1 million shares of Burger King Worldwide common stock to participants in this program, for aggregate
consideration of $3.3 million. During 2013, we issued approximately 0.3 million shares of Burger King Worldwide common stock to
participants in this program, for aggregate consideration of $3.5 million. During 2012, we issued approximately 1.5 million shares of
Burger King Worldwide common stock to participants in this program, for aggregate consideration of $5.4 million.
106
Accumulated Other Comprehensive Income (Loss)
The following table displays the change in the components of accumulated other comprehensive income (loss) (in millions):
The following table displays the reclassifications out of accumulated other comprehensive income (loss):
Derivatives
Pensions
Foreign Currency
Translation
Accumulated
Other
Comprehensive
Income (Loss)
Balances at December 31, 2011
$ (19.6) $ (0.9) $ (92.8) $ (113.3)
Foreign currency translation adjustment — — 15.5 15.5
Net change in fair value of derivatives, net of tax (16.6) — — (16.6)
Amounts reclassified to earnings of cash flow hedges, net of
tax 7.0 — — 7.0
Pension and post-retirement benefit plans, net of tax — (1.3) — (1.3)
Amortization of prior service (credits) costs, net of tax — (1.6) — (1.6)
Balances at December 31, 2012 $ (29.2) $ (3.8) $ (77.3) $ (110.3)
Foreign currency translation adjustment — — 50.1 50.1
Reclassification of foreign currency translation adjustment
into net income — — (3.0) (3.0)
Net change in fair value of derivatives, net of tax 94.2 — — 94.2
Amounts reclassified to earnings of cash flow hedges, net of
tax 3.8 — — 3.8
Pension and post-retirement benefit plans, net of tax — 20.8 — 20.8
Amortization of prior service (credits) costs, net of tax — (1.8) — (1.8)
Amortization of actuarial (gains) losses, net of tax — 0.8 — 0.8
Balances at December 31, 2013 $ 68.8 $ 16.0 $ (30.2) $ 54.6
Foreign currency translation adjustment — — (227.2) (227.2)
Net change in fair value of derivatives, net of tax (53.3) — — (53.3)
Amounts reclassified to earnings of cash flow hedges, net of
tax (4.1) — — (4.1)
Pension and post-retirement benefit plans, net of tax — (23.8) — (23.8)
Amortization of prior service (credits) costs, net of tax — (1.8) — (1.8)
Amortization of actuarial (gains) losses, net of tax — (1.0) — (1.0)
Transfer to noncontrolling interests 3.6 6.1 103.8 113.5
OCI attributable to noncontrolling interests (10.3) — 41.7 31.4
Balances at December 31, 2014 $ 4.7 $ (4.5) $ (111.9) $ (111.7)
Affected Line Item in the
Amounts Reclassified from AOCI
Details about AOCI Components
Statements of Operations
2014
2013
2012
Gains (losses) on cash flow hedges:
Interest rate derivative contracts Interest expense, net $ (6.6) $ (6.1) $ (3.2)
Interest rate derivative contracts
Other operating expenses
(income), net 13.4 — (8.4)
Total before tax 6.8 (6.1) (11.6)
Income tax (expense)
benefit (2.7) 2.3 4.6
Net of tax $ 4.1 $ (3.8) $ (7.0)
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Defined benefit pension:
Amortization of prior service credits (costs) SG&A (1) $ 2.9 $ 3.0 $ 2.6
Amortization of actuarial gains (losses) SG&A (1) 1.0 (1.2) —
Total before tax 3.9 1.8 2.6
Income tax (expense)
benefit (1.1) (0.8) (1.0)
Net of tax $ 2.8 $ 1.0 $ 1.6
Foreign currency translation adjustment into net income:
Sale of foreign entity Other operating expenses
(income), net — (3.0) —
Total reclassifications Net of tax $ 6.9 $ (5.8) $ (5.4)
(1) Refers to selling, general and administrative expenses in the audited condensed consolidated statements of operations.
Note 18. Share-based Compensation
On February 2, 2011, the Board of Directors of Burger King Worldwide Holdings, Inc. (“Worldwide”) approved and adopted
the Burger King Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan (the “2011 Omnibus Plan”). The 2011 Omnibus Plan
generally provided for the grant of awards to employees, directors, consultants and other persons who provide services to Worldwide
and its subsidiaries.
On June 20, 2012, the Board of Directors of Burger King Worldwide adopted the Burger King Worldwide, Inc. 2012 Omnibus
Incentive Plan (the “2012 Omnibus Plan”). The 2012 Omnibus Plan generally provided for the grant of awards to employees,
directors and other persons who provide services to the Burger King Worldwide and its subsidiaries. All stock options and restricted
stock units (RSUs) under the 2011 Omnibus Plan outstanding on June 20, 2012 were assumed by Burger King Worldwide and
converted into stock options to acquire common stock and RSUs of Burger King Worldwide, and Burger King Worldwide assumed
all of the obligations of Worldwide under the 2011 Omnibus Plan. The Board also froze the 2011 Omnibus Plan. Subsequently, the
Board of Directors of Burger King Worldwide adopted the Burger King Worldwide, Inc. Amended and Restated 2012 Omnibus
Incentive Plan (“Amended and Restated 2012 Omnibus Incentive Plan”) which increased the shares available for issuance. The
Amended and Restated 2012 Omnibus Incentive Plan was approved by Burger King Worldwide stockholders at its annual meeting on
May 15, 2013.
On December 12, 2014, our Board of Directors adopted the Restaurant Brands International Inc. 2014 Omnibus Incentive Plan
(the “2014 Omnibus Plan”). The 2014 Omnibus Plan generally provides for the grant of awards to employees, directors, consultants
and other persons who provide services to us and our subsidiaries. We are currently issuing stock awards under the 2014 Omnibus
Plan and the maximum number of shares available for issuance under such Plan is 15,000,000.
On December 12, 2014, in connection with the Transactions, we assumed the obligation for all Burger King Worldwide stock
options and RSUs outstanding under the 2011 Omnibus Plan and Amended and Restated 2012 Omnibus Plan at December 12, 2014
and froze the Amended and Restated 2012 Omnibus Plan. Additionally, as provided for in the Arrangement Agreement, we assumed
the obligation for each vested and unvested Tim Hortons stock option with tandem SARs that was not surrendered in connection with
the Transactions on the same terms and conditions of the original awards, adjusted by an exchange ratio of 2.41. The assumed Tim
Hortons awards vest ratably over a three year period commencing on the grant date.
The 2014 Omnibus Plan permits the grant of several types of awards with respect to our common shares, including stock
options, restricted stock units, restricted stock and performance shares. New awards are granted with an exercise price or market value
equal to the last sales price of our common shares on the preceding trading day to the date of grant. We satisfy stock option exercises
through the issuance of authorized but previously unissued common shares. New stock option grants generally cliff vest five years
from the original grant date, provided the employee is continuously employed by us or one of our subsidiaries, and the options expire
ten years following the grant date. Additionally, if we terminate the employment of an option holder without cause prior to the vesting
date, or if the employee retires or becomes disabled, the employee will become vested in the number of options as if the options
vested 20% of each anniversary of the grant date. If the employee dies, the employee will become vested in the number of options as
if the options vested 20% on the first anniversary of the grant date, 40% on the second anniversary of the grant date and 100% on the
third anniversary of the grant date. If there is an event such as a return of capital or dividend that is determined to be dilutive, the
exercise price of the awards will adjusted accordingly.
Share-based compensation expense consisted of the following for the periods presented:
108
2014
2013
2012
Stock options and stock options with tandem SARs (a)
$43.1 $14.8 $12.2
Accelerated vesting of Tim Hortons restricted stock units and performance
stock units (b) 14.8 — —
Total share-based compensation expense (c) $57.9 $14.8 $12.2
(a) Includes (i) $9.8 million due to accelerated vesting of awards due to terminations in 2014, and (ii) $10.4 million and $4.0 million
due to modifications of awards in 2014 and 2013, respectively.
(b) Represents expense attributed to the post-combination service associated with the accelerated vesting of restricted and
performance stock units in connection with the Transactions. See Note 1, Description of Business and Organization.
(c) Generally classified as selling, general and administrative expenses in the consolidated statements of operations.
The following assumptions were used in the Black-Scholes option-pricing model to determine the fair value of awards at the
grant date and, for stock options issued with tandem SARs, at each subsequent re-measurement date:
The risk-free interest rate was based on the U.S. Treasury or Canadian Sovereign bond yield with a remaining term equal to the
expected option life assumed at the date of grant. The expected term was calculated based on the analysis of a three to five-year
vesting period coupled with the Company’s expectations of exercise activity. Expected volatility was based on a review of the equity
volatilities of publicly-traded guideline companies. The expected dividend yield is based on the annual dividend yield at the time of
grant.
The following is a summary of stock option activity under our plans for the year ended December 31, 2014:
The weighted-average grant date fair value per stock option granted was $7.17, $5.23 and $3.80 during 2014, 2013 and 2012,
respectively. The total intrinsic value of stock options exercised was $4.9 million during 2014, $25.3 million during 2013 and $5.7
million during 2012. As of December 31, 2014, there was approximately $45.8 million of total unrecognized share-based
compensation cost, which is expected to be recognized over a weighted-average period of approximately 1.7 years.
The total fair value liability for liability classified stock options with tandem SARs outstanding was $34.8 million at
December 31, 2014, and is classified as Other liabilities, net in the consolidated balance sheets. There were no cash settlements of
SARs in 2014, 2013 or 2012.
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2014
2013
2012
Risk-free interest rate
0.96% - 2.11% 1.26% 1.03%
Expected term (in years) 1.00 - 6.71 6.83 5.50
Expected volatility 20% - 25% 30.00% 35.00%
Expected dividend yield 1.00% - 1.03% 1.10% 0.00%
Total Number of
Options (in
000’s)
Weighted
Average Exercise
Price
Aggregate
Intrinsic Value
(1)
(in 000’s)
Weighted
Average
Remaining
Contractual
Term (Yrs)
Outstanding at January 1, 2014
15,980 $ 6.35
Granted 3,622 $ 27.28
Assumed - Transactions 2,426 $ 20.71
Exercised (161) $ 3.82
Forfeited (539) $ 11.90
Outstanding at December 31, 2014 21,328 $ 11.42 $ 590,066 7.1
Exercisable at December 31, 2014 971 $ 20.22 $ 18,673 5.5
Vested or expected to vest at December 31, 2014 18,492 $ 11.60 $ 508,374 7.1
(1) The intrinsic value represents the amount by which the fair value of our stock exceeds the option exercise price at December 31,
2014.
RSUs are measured at fair value based on the closing price of the Company’s common stock on the first business day preceding
the grant date. RSUs are expensed on a straight-line basis over the vesting period except for grants to non-employee members of our
Board of Directors which are expensed immediately. We grant RSUs to non-employee members of our Board of Directors in lieu of a
cash retainer and committee fees. All RSUs will settle and shares of Common Stock will be issued after the vesting period or upon
termination of service by the board member. The following is a summary of RSU activity for the year ended December 31, 2014:
The weighted average grant date fair value per RSU granted was $38.99 during 2014, $22.74 during 2013 and $6.55 during
2012. The total intrinsic value of RSUs which have vested and settled was $0.8 million during 2013. No RSUs vested and settled
during 2014 or 2012. As of December 31, 2014, total unrecognized compensation cost related to non-vested RSUs outstanding was
$2.0 million and is expected to be recognized over a weighted-average period of approximately 0.7 years.
Note 19. Earnings Per Share
Basic earnings per common share is determined by dividing net income (loss) attributable to common shareholders by the
weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by dividing net
income (loss) attributable to common shareholders and noncontrolling interests by the weighted average number of common shares
outstanding, assuming all potentially dilutive shares were issued.
For the period of January 1, 2014, through December 11, 2014, prior to the Transactions, our equity reflected 100% ownership
by Burger King Worldwide shareholders. For the period of December 12, 2014, through December 31, 2014, our equity reflected
majority ownership through RBI common shares. Basic and diluted earnings per share is computed using the weighted average
number of shares outstanding for Burger King Worldwide shareholders for the period of January 1, 2014, through December 11,
2014, and RBI shareholders for the period of December 12, 2014, through December 31, 2014. Additionally, beginning on December
12, 2014, an economic interest in Partnership common equity is held by the holders of 265,041,783 Partnership exchangeable
units. Any time after the one year anniversary of the Transactions effective date, the holders of Partnership exchangeable units will
each have the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units, subject to
our right as the general partner of Partnership, in our sole discretion, to deliver shares of our common stock or the cash equivalent
thereof. See Note 17, Common Shareholders’ Equity.
We apply the treasury stock method to determine the dilutive weighted average common shares represented by Partnership
exchangeable units and outstanding stock options, unless the effect of their inclusion is anti-dilutive. The diluted earnings per share
calculation assumes conversion of 100% of the Partnership exchangeable units under the “if converted” method. Accordingly, the
numerator is also adjusted to include the earnings allocated to the holders of noncontrolling interests.
110
Total Number of
Nonvested Shares
(in 000’s)
Weighted
Average Grant
Date Fair Value
Nonvested shares at January 1, 2014
203 $ 9.68
Granted 84 $ 38.99
Vested & Settled — —
Forfeited — —
Nonvested shares at December 31, 2014 287 $ 18.23
The following table summarizes the basic and diluted earnings per share calculations (in millions, except per share amounts):
Note 20. Franchise and Property Revenues
Franchise and property revenues consist of the following (in millions):
Refer to Note 11 for the components of property revenues.
Note 21. Sales and Cost of Sales
Sales and cost of sales consists of the following (in millions):
111
2014
2013
2012
Numerator - Basic:
Net income (loss) attributable to common shareholders $(402.2) $233.7 $117.7
Numerator - Diluted:
Net income (loss) attributable to common shareholders $(402.2) $233.7 $117.7
Add: Net income (loss) attributable to noncontrolling interests (435.4) — —
Dilutive net income (loss) available to common shareholders and noncontrolling
interests $(837.6) $233.7 $117.7
Denominator:
Weighted average common shares - basic 343.7 351.0 349.7
Exchange of noncontrolling interests for common shares (Note 17) 14.5 — —
Effect of other dilutive securities (a) — 6.8 4.4
Weighted average common shares - diluted 358.2 357.8 354.1
Basic earnings (loss) per share $ (1.17) $ 0.67 $ 0.34
Diluted earnings (loss) per share $ (2.34) $ 0.65 $ 0.33
Anti-dilutive stock options outstanding 21.3 2.9 2.7
(a) There is no effect of other dilutive securities for the year ended December 31, 2014 because a net loss was reported during this period
causing any potentially dilutive securities to be anti-dilutive. Therefore, 21.3 million shares of potentially dilutive securities were
excluded in the calculation of diluted earnings (loss) per share since their impact would have been anti-dilutive.
2014
2013
2012
Franchise royalties
$ 701.1 $657.0 $603.5
Property revenues 241.2 213.7 151.3
Franchise fees and other revenue 87.6 52.9 47.1
Franchise and property revenues $1,029.9 $923.6 $801.9
2014
2013
2012
Company restaurant sales (a)
$ 88.0 $222.7 $1,169.0
Distribution sales 79.4 — —
Sales $167.4 $222.7 $1,169.0
(a) Includes VIE Restaurants’ sales.
2014
2013
2012
Food, paper and product costs
$ 27.2 $ 70.6 $ 382.2
Payroll and employee benefits 26.2 68.1 345.1
Occupancy and other operating costs 22.5 56.6 309.9
Company restaurant expenses(b) 75.9 195.3 1,037.2
Distribution cost of sales 76.6 — —
Cost of sales $152.5 $195.3 $1,037.2
(b) Includes VIE Restaurants’ cost of sales.
Note 22. Other Operating (Income) Expenses, net
Other operating (income) expenses, net, consist of the following (in millions):
Closures and Dispositions
Net losses (gains) on disposal of assets, restaurant closures and refranchisings represent sales of Company properties and other
costs related to restaurant closures and refranchisings, and are recorded in other operating expenses (income), net in the
accompanying consolidated statements of operations. Gains and losses recognized in the current period may reflect certain costs
related to closures and refranchisings that occurred in previous periods.
During 2014, net losses (gains) on disposal of assets, restaurant closures and refranchisings consisted of net losses associated
with refranchisings of $10.5 million and net losses associated with asset disposals and restaurant closures of $14.9 million.
During 2013, net (losses) gains on disposal of assets, restaurant closures and refranchisings consisted of net gains associated
with refranchisings of $5.3 million, net losses from sale of subsidiaries of $1.0 million and net losses associated with asset disposals
and restaurant closures of $5.0 million.
During 2012, net (losses) gains on disposal of assets, restaurant closures and refranchisings consisted of net losses associated
with refranchisings of $4.9 million, impairment losses associated with long-lived assets held for sale for Company restaurants of
$13.2 million and net losses associated with asset disposals and restaurant closures of $12.7 million.
During 2014, we entered into foreign currency forward and foreign currency option contracts to hedge our exposure to the
volatility of the Canadian dollar in connection with the cash portion of the purchase price of the Tim Hortons acquisition. We
recorded a net loss on derivatives of $133.0 million related to the change in fair value on these instruments and an expense of $59.9
million related to the premium on the foreign currency option contracts. These instruments were settled in the fourth quarter of 2014.
Additionally, as a result of discontinuing hedge accounting on our interest rate caps and forward-starting interest rate swaps, we
recognized a loss of $34.5 million related to the change in fair value related to both instruments and a net gain of $13.4 million related
to the reclassification of amounts from AOCI into earnings related to both instruments. These instruments were settled in the fourth
quarter of 2014. Additionally, during the fourth quarter of 2014, we entered into a series of forward-starting interest rate swaps to
hedge the variability in the interest payments associated with our 2014 Term Loan Facility and recorded a gain of $88.9 million
related to the change in fair value related to these instruments. Lastly, during the fourth quarter of 2014 we entered into a series of
cross-currency rate swaps to protect the value of our investments in our foreign operations against adverse changes in foreign
currency exchange rates and recorded a loss of $165.8 million related to the change in fair value on these instruments. See Note 15,
Derivative Instruments for additional information about accounting for our derivative instruments.
Note 23. Commitments and Contingencies
Guarantees
We guarantee certain lease payments of franchisees arising from leases assigned in connection with sales of Company
restaurants to franchisees, by remaining secondarily liable for base and contingent rents under the assigned leases of varying terms.
The maximum contingent rent amount is not determinable as the amount is based on future revenues. In the event of default by the
franchisees, we have typically retained the right to acquire possession of the related restaurants, subject to landlord consent. The
potential amount of undiscounted payments we could be required to make in the event of non-payment by the franchisee arising from
these assigned lease guarantees, excluding contingent rents, was $22.4 million as of December 31, 2014, expiring over an average
period of seven years.
From time to time, we enter into agreements under which we guarantee loans made by third parties to qualified franchisees. As
of December 31, 2014, there were $123.9 million of loans outstanding to Burger King franchisees that we had guaranteed under five
112
2014
2013
2012
Net losses (gains) on disposal of assets, restaurant closures and
refranchisings $ 25.4 $ 0.7 $30.8
Litigation settlements and reserves, net 4.0 7.6 1.7
Net losses (gains) on derivatives 290.9 — 8.7
Foreign exchange net (gains) losses (4.3) 7.4 (4.2)
Other, net 10.9 5.6 12.2
Other operating (income) expenses, net $326.9 $21.3 $49.2
such programs, with additional franchisee borrowing capacity of approximately $198.3 million remaining. Our maximum guarantee
liability under these five programs is limited to an aggregate of $32.2 million, assuming full utilization of all borrowing capacity. We
record a liability in the period the loans are funded and the maximum term of the guarantee is approximately ten years. As of
December 31, 2014, the liability reflecting the fair value of these guarantee obligations was $5.1 million. In addition to these five
programs, as of December 31, 2014, we also had a liability of $0.2 million, with a potential maximum guarantee exposure of $3.3 million,
in connection with Tim Hortons franchisee loan guarantees. No significant payments have been made by us in connection with these
guarantees through December 31, 2014.
Other commitments arising out of normal business operations were $1.2 million as of December 31, 2014, primarily guaranteed
under bank guarantee arrangements.
Letters of Credit
As of December 31, 2014, we had $27.1 million in irrevocable standby letters of credit outstanding, which were issued primarily to
certain insurance carriers to guarantee payments of deductibles for various insurance programs, such as health and commercial liability
insurance. Of these letters of credit outstanding, $4.6 million are secured by the collateral under our 2014 Revolving Credit Facility and
the remainder are secured by cash collateral. As of December 31, 2014, no amounts had been drawn on any of these irrevocable standby
letters of credit.
Vendor Relationships
During the fiscal year ended June 30, 2000, we entered into long-term, exclusive contracts with soft drink vendors to supply
Company and franchise restaurants with their products and obligating Burger King restaurants in the United States to purchase a specified
number of gallons of soft drink syrup. These volume commitments are not subject to any time limit and as of December 31, 2014, we
estimate it will take approximately 17 years for these purchase commitments to be completed. In the event of early termination of this
arrangement, we may be required to make termination payments that could be material to our financial position, results of operations and
cash flows.
We have separate arrangements for telecommunication services with an aggregate contractual obligation of $24.4 million over the
next five years with no early termination fee.
We also enter into commitments to purchase advertising. As of December 31, 2014, commitments to purchase advertising totaled
$145.7 million and run through December 2015.
Litigation
On March 1, 2013, a putative class action lawsuit was filed against BKC in the U.S. District Court of Maryland. The complaint
alleges that BKC and/or its agents sent unsolicited advertisements by fax to thousands of consumers in Maryland and elsewhere in the
United States to promote its home delivery program in violation of the Telephone Consumers Protection Act. The plaintiff sought
monetary damages and injunctive relief. On August 19, 2014, BKC agreed to pay $8.5 million to settle the lawsuit. On December 2, 2014,
the parties finalized a settlement agreement which received preliminary court approval on December 2, 2014. We expect the final court
approval hearing to take place in April 2015.
From time to time, we are involved in other 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. The Company has an estimated liability of approximately $13.3 million as of December 31, 2014, representing the Company’s
best estimate within the range of losses which could be incurred in connection with pending litigation matters.
Insurance Programs
We carry insurance programs to cover claims such as workers’ compensation, general liability, automotive liability, executive risk
and property, and are self-insured for healthcare claims for eligible participating employees. Through the use of insurance program
deductibles (up to $5.0 million) and self insurance, we retain a significant portion of the expected losses under these programs.
Insurance reserves have been recorded based on our estimate of the anticipated ultimate costs to settle all claims, both reported and
incurred-but-not-reported (IBNR), and such reserves include judgments and independent actuarial assumptions about economic
conditions, the frequency or severity of claims and claim development patterns, and claim reserve, management and settlement practices.
We had $12.8 million in accrued liabilities as of December 31, 2014 and $19.2 million as of December 31, 2013 for these claims.
113
Note 24. Variable Interest Entities
VIEs for which we are the primary beneficiary
As discussed in Note 2, we consolidate Restaurant VIEs where Tim Hortons is the restaurant’s primary beneficiary and
Advertising VIEs. The balance sheet data associated with Restaurant VIEs and Advertising VIEs presented on a gross basis, prior to
consolidation adjustments, are as follows:
The liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on our general
assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of
consolidating these VIEs do not represent additional assets that could be used to satisfy claims by our creditors as they are not legally
included within the Company’s general assets.
VIEs for which we are not the primary beneficiary
We have investments in certain TH real estate ventures and certain BK master franchisees, which were determined to be VIEs of
which we are not the primary beneficiary. We do not consolidate these entities as control is considered to be shared by both the
Company and the other joint owners in the case of the TH real estate ventures, or control rests with other parties in the case of BK
master franchisee VIEs.
114
As of December 31, 2014
Restaurant
VIE’s
Advertising
VIE’s
Cash and cash equivalents
$ 5.9 $ —
Inventories and other current assets, net 5.2 —
Advertising fund restricted assets – current — 53.0
Property and equipment, net 10.7 53.1
Other assets, net 0.2 0.4
Total assets $ 22.0 $ 106.5
Notes payable to Tim Hortons Inc. – current (1)(2) $ 8.9 $ 11.4
Other accrued liabilities 7.8 0.1
Advertising fund liabilities – current — 45.6
Notes payable to Tim Hortons Inc. – long-term (1)(2) 0.3 45.5
Other liabilities, net 3.9 3.9
Total liabilities 20.9 106.5
Equity of VIEs 1.1 —
Total liabilities and equity $ 22.0 $ 106.5
(1) Various assets and liabilities are eliminated upon the consolidation of these VIEs.
(2) In fiscal 2014, the Ad Fund entered into an agreement with a Tim Hortons subsidiary for the Tim Card Revolving Credit Facility
and the Tim Card Loan, which are funded by the Restricted cash and cash equivalents related to our Tim Card program. These
balances are eliminated upon consolidation of the Ad Fund.
Note 25. Segment Reporting
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 Tim Hortons brand, we operate in the quick service segment of the restaurant industry. We generate
revenue from four primary 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 we derive from properties we lease or sublease to
our franchisees; (iii) retail sales at Company restaurants; and (iv) distribution sales exclusive to Tim Hortons related to our supply
chain operations, including manufacturing, procurement, warehousing and distribution. At December 31, 2014, our TH business was
managed in one segment (“TH”) and our BK business was managed in four distinct geographic segments: (1) United States (“U.S.”)
and Canada; (2) Europe, the Middle East and Africa (“EMEA”); (3) Latin America and the Caribbean (“LAC”); and (4) Asia Pacific
(“APAC”).
The unallocated amounts reflected in certain tables below include corporate support costs in areas such as facilities, finance,
human resources, information technology, legal, marketing and supply chain management, which benefit all of our geographic
segments and system-wide restaurants and are not allocated specifically to any of the geographic segments.
The following tables present revenues, segment income, depreciation and amortization, assets, long-lived assets and capital
expenditures by segment (in millions):
Total revenues in Canada were $150.5 million in 2014, $60.9 million in 2013 and $148.2 million in 2012.
The United States represented 10% or more of our total revenues in each period presented. Total revenues in the United States
were $630.9 million in 2014, $604.4 million in 2013, and $1,112.9 million in 2012. Germany also represented 10% or more of our
total revenues in 2012. Total revenues in Germany were $219.2 million in 2012.
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2014
2013
2012
Revenues:
BK - U.S. and Canada $ 639.9 $ 665.2 $1,265.7
BK - EMEA 274.2 335.8 472.9
BK - LAC 77.5 86.8 134.4
BK - APAC 63.6 58.5 97.9
TH 142.1 — —
Total revenues $1,197.3 $1,146.3 $1,970.9
Our measure of segment income is adjusted EBITDA. Adjusted EBITDA represents earnings before interest, taxes, depreciation
and amortization, adjusted to exclude specifically identified items that management believes do not directly reflect our core
operations and assists management in comparing segment performance by removing the impact of certain items that management
believes do not reflect our core operations. A reconciliation of segment income to net income consists of the following:
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2014
2013
2012
Segment Income:
BK - U.S. and Canada $ 446.3 $436.7 $447.0
BK - EMEA 219.6 189.4 166.1
BK - LAC 69.1 67.7 73.2
BK - APAC 56.4 49.3 41.1
TH 35.1 — —
Total 826.5 743.1 727.4
Unallocated Management G&A (65.4) (77.5) (75.3)
Adjusted EBITDA 761.1 665.6 652.1
Share-based compensation and non-cash incentive compensation expense 37.3 17.6 10.2
Amortization of inventory step-up 7.4 — —
Tim Hortons transaction and restructuring costs 125.0 — —
Global portfolio realignment project costs — 26.2 30.2
Business combination agreement expenses — — 27.0
(Income) loss from equity method investments 9.2 12.7 4.1
Other operating expenses (income), net 326.9 21.3 49.2
EBITDA 255.3 587.8 531.4
Depreciation and amortization 72.9 65.6 113.7
Income from operations 182.4 522.2 417.7
Interest expense, net 280.1 200.0 223.8
Loss on early extinguishment of debt 155.4 — 34.2
Income tax expense 24.3 88.5 42.0
Net income (loss) $(277.4) $233.7 $117.7
2014
2013
2012
Depreciation and Amortization:
BK - U.S. and Canada $ 39.6 $ 41.5 $ 68.8
BK - EMEA 8.4 9.7 15.9
BK - LAC 0.2 0.7 5.8
BK - APAC 2.3 2.3 5.6
TH 8.6 — —
Unallocated 13.8 11.4 17.6
Total depreciation and amortization $ 72.9 $ 65.6 $113.7
2014
2013
2012
(Income) Loss from Equity Method Investments:
BK - U.S. and Canada $ (0.4) $ 5.5 $ 2.4
BK - EMEA — 0.3 (0.3)
BK - LAC — — 0.2
BK - APAC 10.2 6.9 1.8
TH (0.6) — —
Total (income) loss from equity method investments $ 9.2 $ 12.7 $ 4.1
Long-lived assets include property and equipment, net, and net investment in property leased to franchisees. Long-lived assets in
Canada totaled $1,364.4 million as of December 31, 2014 and $46.1 million as of December 31, 2013. Long-lived assets in the United
States, including the unallocated portion, totaled $1,288.2 million as of December 31, 2014 and $885.4 million as of December 31,
2013. Only Canada and the United States represented 10% or more of our total long-lived assets as of December 31, 2014. Only the
United States represented 10% or more of our total long-lived assets as of December 31, 2013.
Note 26. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data (in millions, except per share data):
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Assets
Long-Lived Assets
As of December 31,
As of December 31,
2014
2013
2014
2013
BK - U.S. and Canada $ 3,124.8 $3,718.4 $ 825.0 $875.4
BK - EMEA 1,480.4 1,449.9 23.3 28.2
BK - LAC 158.5 152.3 4.0 4.6
BK - APAC 444.0 439.7 0.2 0.3
TH 14,485.3 — 1,770.1 —
Unallocated 1,471.0 68.2 57.5 56.1
Total $21,164.0 $5,828.5 $2,680.1 $964.6
2014
2013
2012
Capital Expenditures:
BK - U.S. and Canada $10.0 $10.3 $41.9
BK - EMEA — 2.4 6.9
BK - LAC — — 1.4
BK - APAC — — 0.8
TH 8.0 — —
Unallocated 12.9 12.8 19.2
Total capital expenditures $30.9 $25.5 $70.2
Quarters Ended
March 31,
2014
June 30,
2014
September 30,
2014
December 31,
2014
Revenues
$ 240.9 $ 261.2 $ 278.9 $ 416.3
Operating income (loss) $ 131.3 $ 151.5 $ 0.9 $ (101.3)
Net income (loss) $ 60.4 $ 75.1 $ (23.5) $ (389.4)
Basic earnings (loss) per share $ 0.17 $ 0.21 $ (0.07) $ (1.61)
Diluted earnings (loss) per share $ 0.17 $ 0.21 $ (0.07) $ (2.52)
Quarters Ended
March 31,
2013
June 30,
2013
September 30,
2013
December 31,
2013
Revenues
$ 327.7 $278.3 $ 275.1 $ 265.2
Operating income $ 102.4 $133.2 $ 145.5 $ 141.1
Net income $ 35.8 $ 62.9 $ 68.2 $ 66.8
Basic earnings per share $ 0.10 $ 0.18 $ 0.19 $ 0.19
Diluted earnings per share $ 0.10 $ 0.18 $ 0.19 $ 0.19
Note 27. Subsequent Event
Dividend
On February 17, 2015, our Board of Directors declared a cash dividend of $0.09 per common share, which will be paid on
April 2, 2015, to common shareholders of record on March 3, 2015. The Partnership will also make a distribution in respect of each
Partnership exchangeable unit in the amount of $0.09 per 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. On February 16, 2015, our Board of
Directors also declared a cash dividend of $1.20 per Preferred Share, for a total dividend of $82.5 million which will be paid to the
holder of the Preferred Shares on April 1, 2015. The dividend on the Preferred Shares included the amount due for the period of
December 12, 2014 through December 31, 2014 as well as the first calendar quarter of 2015.
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None.
Evaluation of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the participation of the Company’s management, including the
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as of December 31, 2014. Based on that evaluation, the CEO and CFO concluded that the
Company’s disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms.
Changes in Internal Controls
We are in the process of integrating Tim Hortons into our overall internal control over financial reporting processes.
Internal Control over Financial Reporting
Except as described above, the Company’s management, including the CEO and CFO, confirm that there were no changes in the
Company’s internal control over financial reporting during the fourth quarter of 2014 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting and the report of Independent Registered Public Accounting
Firm are set forth in Part II, Item 8 of this Form 10-K.
On December 12, 2014, Tim Hortons and BNY Trust Company of Canada, a trust company existing under the laws of Canada
(“BNY Trustee”), entered into the Fourth Supplemental Trust Indenture, dated as of December 12, 2014 (the “Fourth Supplemental
Trust Indenture”), which supplemented the Trust Indenture, dated June 1, 2010 (the “Original Master Trust Indenture”), between Tim
Hortons and BNY Trustee. The Fourth Supplemental Trust Indenture supplemented the Original Master Trust Indenture to reflect the
assumption by Tim Hortons of the obligations under the Original Master Trust Indenture as successor issuer following an
amalgamation.
A copy of the Fourth Supplemental Trust Indenture is attached hereto as Exhibit 4.5(i). The information in this Item 1.01 is
qualified in its entirety by reference to the full text of the Fourth Supplemental Trust Indenture contained in Exhibit 4.5(i).
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory
Arrangements of Certain Officers
On December 11, 2014, Burger King Worldwide, as the sole shareholder of the Company, adopted the Restaurant Brands
International Inc. 2014 Omnibus Incentive Plan (the “Omnibus Plan”) and reserved 15.0 million common shares for issuance under
the Omnibus Plan. On January 30, 2015, the Board of Directors of the Company ratified the adoption of the Omnibus Plan. The
approval and adoption of the Omnibus Plan is subject to ratification by shareholders of the Company at the 2015 annual meeting of
shareholders.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.Controls and Procedures
Item 9B.Other Information
Item 1.01 Entry into a Material Definitive Agreement
On December 9, 2014, the Board of Directors of Burger King Worldwide, as the sole shareholder of the Company, approved the
terms of a consulting agreement with Marc Caira, the former chief executive officer of Tim Hortons and the Vice Chairman of the
Company’s Board of Directors. On December 15, 2014, the Company entered into a consulting agreement with Mr. Caira, pursuant to
which he agreed to provide assistance in connection with the Company’s efforts to expand Tim Hortons Café and Bake Shops
globally (the “Consulting Agreement”). The term of the Consulting Agreement commenced on January 1, 2015 and will terminate on
December 31, 2017, subject to early termination by both the Company and Mr. Caira under certain circumstances. Under the
Consulting Agreement, Mr. Caira will receive $500,000 per year, payable in quarterly installments of $125,000, in arrears, within 15
days following the end of each calendar quarter. In addition, the Company has agreed to extend the ability of Mr. Caira to exercise his
outstanding options following his termination of employment with Tim Hortons until the earliest to occur of (i) December 12, 2017,
(ii) 90 days after his departure from the Board of Directors of the Company, and (iii) the expiration date of the options.
A copy of the Consulting Agreement is attached hereto as Exhibit 10.14. The information in this Item 5.02 is qualified in its
entirety by reference to the full text of the Consulting Agreement contained in Exhibit 10.14.
On December 31, 2014, the Company paid a bonus of $250,000 to José Cil, our President, Burger King, in connection with his
relocation from Switzerland to the United States.
On January 29, 2015, the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”)
approved an increase in the base salaries and target bonus percentages of certain of our named executive officers in recognition of
their expanded roles and responsibilities following the Transactions: the new base salaries of Daniel Schwartz, our CEO, Joshua
Kobza, our CFO, Jose Cil, our President, Burger King and Heitor Goncalves, our Chief Information and Performance Officer and
Chief People Officer are $800,000, $500,000, $600,000 and $500,000, respectively, and the new target bonus percentages of Messrs.,
Kobza, Cil and Goncalves are 150%, 180% and 150% of base salary, respectively. In addition, consistent with Burger King
Worldwide’s prior practices, the Compensation Committee approved a modification to the Company’s cash bonus program for 2014
(the “2014 Bonus Program”) to grant the CEO authority to adjust the overall bonus payout for an executive (other than the CEO)
under the 2014 Bonus Program by a maximum of 20% based on a qualitative evaluation of the Company’s performance and the
individual executive’s performance, subject to final approval of any such adjustment and the amount of the overall bonus payout by
the Compensation Committee.
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On December 9, 2014, the Board of Directors of Burger King Worldwide approved the minimum, target and maximum
performance measures for the Company’s cash bonus program for 2015 (the “2015 Bonus Program”) and approved organic adjusted
EBITDA growth as the financial metric which it will use for measuring the financial performance of the Company. For each participant,
the “minimum” level represents an 80% payout, the “target” level represents a 100% payout and the “maximum” level represents a
120% payout. The Board of Directors of the Company ratified these decisions on January 30, 2015.
On January 29, 2015, the Compensation Committee approved an umbrella plan which established a maximum amount the named
executive officers and other persons covered by Section 16(b) of the Securities Exchange Act of 1934, as amended, are eligible to
receive as a cash incentive payment under the 2015 Bonus Program for purposes of complying with Section 162(m) of the Internal
Revenue Code of 1986, as amended. The maximum bonus opportunity for 2015 is the lesser of $10 million or 5% of the Company’s
EBITDA for the CEO and 4% of EBITDA for the CEO’s direct reports and certain other senior executives, provided that EBITDA for
2015 is at least $500 million. The 2015 bonus targets approved by the Board of Directors of the Company on January 30, 2015 will
serve as a guideline to the Compensation Committee in exercising its negative discretion for determining the actual amount of each
executive’s payment under the 2015 Bonus Program, if any.
Burger King Worldwide provided employees at the level of director and above, including our named executive officers, the ability
to invest a portion of their net cash bonus into equity of the Company and leverage that investment through the issuance of matching
stock options. This program is called the Bonus Swap Program. On January 29, 2015, the Compensation Committee approved the
Company’s 2014 Bonus Swap Program on substantially the same terms as the Burger King Worldwide 2013 Bonus Swap Program. In
addition, on January 30, 2015, the Compensation Committee approved the 2015 Bonus Swap Program for eligible employees of the
Company and its subsidiaries. Under the 2015 Bonus Swap Program, the Company will provide participants with an opportunity to
invest a portion of their net cash bonus into equity of the Company and to receive matching restricted stock units.
Item 8.01 Other Events.
The Company 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, we are providing a summary of certain terms of the
Partnership exchangeable units. This summary is not complete and is qualified in its entirety by the complete text of the Amended and
Restated Limited Partnership Agreement, dated December 11, 2014, between the Company, 8997896 Canada Inc. and each person who
is admitted as a Limited Partner in accordance with the terms of the agreement (the “partnership agreement”) and the Voting Trust
Agreement, dated December 12, 2014, between the Company, the Partnership and Computershare Trust Company of Canada (the
“voting trust agreement”), copies of which are available on SEDAR at www.sedar.com and at www.sec.gov. For a description of the
Company’s common shares and Preferred Shares, see the Company’s Registration Statement on Form S-4 (File No. 333-198769).
The Partnership Exchangeable Units
The capital of Partnership consists of three classes of units: the common units, the preferred units and the Partnership exchangeable
units. The interest of the Company, as the sole general partner of Partnership, is represented by common units and preferred units, with
the number of issued Partnership common units and Partnership preferred units equal to the respective number of common shares and
preferred shares of the Company. The interests of the limited partners is represented by the Partnership exchangeable units.
Summary of Economic and Voting Rights
The Partnership exchangeable units are intended to provide economic rights that are substantially equivalent, and voting rights with
respect to the Company that are equivalent, to the corresponding rights afforded to holders of our common shares. Under the terms of the
partnership agreement, the rights, privileges, restrictions and conditions attaching to the Partnership exchangeable units include the
following:
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• From and after the one year anniversary of the date of the effective time of the Merger, the Partnership exchangeable
units will be exchangeable at any time, at the option of the holder (the “exchange right”), on a one-for-one basis for
common shares of the Company (the “exchanged shares”), subject to our 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 our common shares. If we elect to make a cash payment in lieu of issuing common shares, the
amount of the cash payment will be the weighted average trading price of the common shares on the NYSE for the 20
consecutive trading days ending on the last business day prior to the exchange date (the “exchangeable units cash
amount”). Partnership exchangeable units will not be exchangeable prior to the one year anniversary of the date of the
effective time of the Merger. 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.
The holders of Partnership exchangeable units are indirectly entitled to vote in respect of matters on which holders of our
common shares are entitled to vote, including in respect of the election of our directors, through a special voting share of the
Company. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of
common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast
such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. The trustee will exercise
each vote attached to the special voting share only as directed by the relevant holder of Partnership exchangeable units and, in the
absence of instructions from a holder of an exchangeable unit as to voting, will not exercise those votes. Except as otherwise required
by the partnership agreement, voting trust agreement or applicable law, the holders of the Partnership exchangeable units are not
directly entitled to receive notice of or to attend any meeting of the unitholders of Partnership or to vote at any such meeting.
Exercise of Optional Exchange Right
In order to exercise the exchange right referred to above, a holder of Partnership exchangeable units must deliver to Partnership, at its
office (or at a designated office of 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
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• If a dividend or distribution has been declared and is payable in respect of a common share of the Company,
Partnership will make a distribution in respect of each exchangeable unit in an amount equal to the dividend or
distribution in respect of a common share. The record date and payment date for distributions on the Partnership
exchangeable units will be the same as the relevant record date and payment date for the dividends or distributions
on our common shares.
• If we issue any common shares in the form of a dividend or distribution on the common shares of the Company,
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 we issue or distribute rights, options or warrants or other securities or assets of the Company to all or substantially
all of the holders of our common shares, Partnership is required to make a corresponding distribution to holders of
the Partnership exchangeable units.
• No subdivision or combination of our outstanding common shares is permitted unless a corresponding subdivision
or combination of Partnership exchangeable units is made.
• We and our board of directors are prohibited from proposing or recommending an offer for our 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 our common shares, then the distribution of the assets of Partnership between holders of our
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 our common shares
will be distributed to us. Prior to this pro rata distribution, Partnership is required to pay to us sufficient amounts to
fund our expenses or other obligations (to the extent related to our role as the general partner or our business and
affairs that are conducted through Partnership or its subsidiaries) to ensure that any property and cash distributed to
us 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 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 the Company.
• 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 an exchangeable unit relative to a common share.
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 or associates) 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) the
Company will not propose or recommend a formal bid for the Company’s common shares, and no such bid will be effected with the
consent or approval of the Company’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 the Company’s common shares, and (ii) the
Company 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 the Company’s board of directors, unless holders of the Company’s 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. A holder of
Partnership exchangeable units will not be entitled to exchange its Partnership exchangeable units into common shares of the
Company pursuant to the exchange right (described above) prior to the one year anniversary of the date of the effective time of the
Merger. As a result, if a bid with respect to common shares of the Company was made in that one year period, a holder of Partnership
exchangeable units could not participate in that bid unless it was proposed or recommended by our board of directors or was
otherwise effected with the consent or approval of our board of directors. 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 common shares of the Company, 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, the Company 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 the Company’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 Company’s 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 the Company 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 the
Company 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 the Company on a fullydiluted basis, (ii) the shareholders of the Company shall
approve a merger, consolidation, recapitalization or reorganization of the Company, other than any transaction which would result in
the holders of outstanding voting securities of the Company immediately prior to such transaction having at least a majority of the
total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction, with the
voting power of each such continuing holder relative to other continuing holders not being altered substantially in the transaction; or
(iii) the shareholders of the Company shall approve a plan of complete liquidation of the Company or an agreement for the sale or
disposition of the Company of all or substantially all of the Company’ assets, provided that, in each case, the Company, 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 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 common shares of the Company, 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
common shares of the Company.
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