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Section 1: 10-Q (10-Q)

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Table of Contents

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

 
 
Form 10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-36786
 
 
 RESTAURANT BRANDS INTERNATIONAL INC.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
 
 
 
 
Canada
 
98-1202754
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
 
 
 
130 King Street West, Suite 300
 
M5X 1E1
Toronto,
Ontario
 
 
(Address of Principal Executive Offices)
 
(Zip Code)
(905) 845-6511
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
Title of each class
 
Trading Symbols
 
Name of each exchange on which registered
Common Shares, without par value
 
QSR
 
New York Stock Exchange
 
 
 
 
Toronto Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of April 24, 2020, there were 300,161,676 common shares of the Registrant outstanding.



Table of Contents

RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1A.
Item 5.
Item 6.
 


2


Table of Contents

PART I — Financial Information
Item 1. Financial Statements
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions of U.S. dollars, except share data)
(Unaudited)
 
As of
 
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,498

 
$
1,533

Accounts and notes receivable, net of allowance of $16 and $13, respectively
414

 
527

Inventories, net
85

 
84

Prepaids and other current assets
62

 
52

Total current assets
3,059

 
2,196

Property and equipment, net of accumulated depreciation and amortization of $751 and $746, respectively
1,939

 
2,007

Operating lease assets, net
1,115

 
1,176

Intangible assets, net
10,085

 
10,563

Goodwill
5,376

 
5,651

Net investment in property leased to franchisees
49

 
48

Other assets, net
1,006

 
719

Total assets
$
22,629

 
$
22,360

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts and drafts payable
$
484

 
$
644

Other accrued liabilities
779

 
790

Gift card liability
106

 
168

Current portion of long term-debt and finance leases
103

 
101

Total current liabilities
1,472

 
1,703

Long-term debt, net of current portion
12,822

 
11,759

Finance leases, net of current portion
283

 
288

Operating lease liabilities, net of current portion
1,039

 
1,089

Other liabilities, net
1,774

 
1,698

Deferred income taxes, net
1,487

 
1,564

Total liabilities
18,877

 
18,101

Shareholders’ equity:
 
 
 
Common shares, no par value; unlimited shares authorized at March 31, 2020 and December 31, 2019; 299,767,716 shares issued and outstanding at March 31, 2020; 298,281,081 shares issued and outstanding at December 31, 2019
2,537

 
2,478

Retained earnings
761

 
775

Accumulated other comprehensive income (loss)
(1,113
)
 
(763
)
Total Restaurant Brands International Inc. shareholders’ equity
2,185

 
2,490

Noncontrolling interests
1,567

 
1,769

Total shareholders’ equity
3,752

 
4,259

Total liabilities and shareholders’ equity
$
22,629

 
$
22,360


See accompanying notes to condensed consolidated financial statements.

3


Table of Contents

RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In millions of U.S. dollars, except per share data)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2020
 
2019
Revenues:
 
 
 
Sales
$
503

 
$
522

Franchise and property revenues
722

 
744

Total revenues
1,225

 
1,266

Operating costs and expenses:
 
 
 
Cost of sales
399

 
406

Franchise and property expenses
126

 
133

Selling, general and administrative expenses
325

 
312

(Income) loss from equity method investments
2

 
(2
)
Other operating expenses (income), net
(16
)
 
(17
)
Total operating costs and expenses
836

 
832

Income from operations
389

 
434

Interest expense, net
119

 
132

Income before income taxes
270

 
302

Income tax expense
46

 
56

Net income
224

 
246

Net income attributable to noncontrolling interests (Note 12)
80

 
111

Net income attributable to common shareholders
$
144

 
$
135

Earnings per common share
 
 
 
Basic
$
0.48

 
$
0.53

Diluted
$
0.48

 
$
0.53

Weighted average shares outstanding
 
 
 
Basic
299

 
252

Diluted
469

 
467

See accompanying notes to condensed consolidated financial statements.


4


Table of Contents

RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In millions of U.S. dollars)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2020
 
2019
Net income
$
224

 
$
246

 
 
 
 
Foreign currency translation adjustment
(751
)
 
159

Net change in fair value of net investment hedges, net of tax of $(106) and $26
411

 
(76
)
Net change in fair value of cash flow hedges, net of tax of $79 and $12
(214
)
 
(34
)
Amounts reclassified to earnings of cash flow hedges, net of tax of $(4) and $0
11

 
(1
)
Other comprehensive income (loss)
(543
)
 
48

Comprehensive income (loss)
(319
)
 
294

Comprehensive income (loss) attributable to noncontrolling interests
(113
)
 
133

Comprehensive income (loss) attributable to common shareholders
$
(206
)
 
$
161

See accompanying notes to condensed consolidated financial statements.


5


Table of Contents

RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(In millions of U.S. dollars, except shares and per share data)
(Unaudited)
 
Issued Common Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
 
Shares
 
Amount
 
 
 
 
Balances at December 31, 2019
298,281,081

 
$
2,478

 
$
775

 
(763
)
 
$
1,769

 
$
4,259

Stock option exercises
1,053,264

 
30

 

 

 

 
30

Share-based compensation

 
19

 

 

 

 
19

Issuance of shares
255,325

 
6

 

 

 

 
6

Dividends declared ($0.52 per share)

 

 
(156
)
 

 

 
(156
)
Dividend equivalents declared on restricted stock units

 
2

 
(2
)
 

 

 

Distributions declared by Partnership on Partnership exchangeable units ($0.52 per unit)

 

 

 

 
(86
)
 
(86
)
Exchange of Partnership exchangeable units for RBI common shares
178,046

 
2

 

 

 
(2
)
 

Restaurant VIE contributions (distributions)

 

 

 

 
(1
)
 
(1
)
Net income

 

 
144

 

 
80

 
224

Other comprehensive income (loss)

 

 

 
(350
)
 
(193
)
 
(543
)
Balances at March 31, 2020
299,767,716

 
$
2,537

 
$
761

 
$
(1,113
)
 
$
1,567

 
$
3,752


 
Issued Common Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
 
Shares
 
Amount
 
 
 
 
Balances at December 31, 2018
251,532,493

 
$
1,737

 
$
674

 
$
(800
)
 
$
2,007

 
$
3,618

Cumulative effect adjustment

 

 
12

 

 
9

 
21

Stock option exercises
2,019,620

 
42

 

 

 

 
42

Share-based compensation

 
22

 

 

 

 
22

Issuance of shares
134,809

 
7

 

 

 

 
7

Dividends declared ($0.50 per share)

 

 
(127
)
 

 

 
(127
)
Dividend equivalents declared on restricted stock units

 
2

 
(2
)
 

 

 

Distributions declared by Partnership on Partnership exchangeable units ($0.50 per unit)

 

 

 

 
(104
)
 
(104
)
Exchange of Partnership exchangeable units for RBI common shares
141,190

 
2

 

 
(1
)
 
(1
)
 

Net income

 

 
135

 

 
111

 
246

Other comprehensive income (loss)

 

 

 
26

 
22

 
48

Balances at March 31, 2019
253,828,112

 
$
1,812

 
$
692

 
$
(775
)
 
$
2,044

 
$
3,773

See accompanying notes to condensed consolidated financial statements.

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RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
(Unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
224

 
$
246

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
45

 
47

Amortization of deferred financing costs and debt issuance discount
6

 
7

(Income) loss from equity method investments
2

 
(2
)
(Gain) loss on remeasurement of foreign denominated transactions
(8
)
 
(15
)
Net (gains) losses on derivatives
(6
)
 
(20
)
Share-based compensation expense
19

 
22

Deferred income taxes
(31
)
 
38

Other
(4
)
 
3

Changes in current assets and liabilities, excluding acquisitions and dispositions:
 
 
 
Accounts and notes receivable
94

 
14

Inventories and prepaids and other current assets
(13
)
 
(13
)
Accounts and drafts payable
(136
)
 
(69
)
Other accrued liabilities and gift card liability
(67
)
 
(126
)
Tenant inducements paid to franchisees
(3
)
 

Other long-term assets and liabilities
14

 
22

Net cash provided by operating activities
136

 
154

Cash flows from investing activities:
 
 
 
Payments for property and equipment
(19
)
 
(5
)
Net proceeds from disposal of assets, restaurant closures, and refranchisings
4

 
4

Settlement/sale of derivatives, net
12

 
11

Other investing activities, net

 
1

Net cash (used for) provided by investing activities
(3
)
 
11

Cash flows from financing activities:
 
 
 
Proceeds from revolving line of credit and long-term debt
1,085

 

Repayments of long-term debt and finance leases
(25
)
 
(23
)
Payment of dividends on common shares and distributions on Partnership exchangeable units
(232
)
 
(207
)
Proceeds from stock option exercises
30

 
42

(Payments) proceeds from derivatives
(2
)
 
5

Other financing activities, net
(1
)
 
1

Net cash provided by (used for) financing activities
855

 
(182
)
Effect of exchange rates on cash and cash equivalents
(23
)
 
6

Increase (decrease) in cash and cash equivalents
965

 
(11
)
Cash and cash equivalents at beginning of period
1,533

 
913

Cash and cash equivalents at end of period
$
2,498

 
$
902

Supplemental cash flow disclosures:
 
 
 
Interest paid
$
104

 
$
140

Income taxes paid
$
48

 
$
45

See accompanying notes to condensed consolidated financial statements.

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RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Description of Business and Organization
Restaurant Brands International Inc. (the “Company”, “RBI”, “we”, “us” or “our”) was formed on August 25, 2014 and continued under the laws of Canada. The Company serves as the sole general partner of Restaurant Brands International Limited Partnership (“Partnership”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King® brand (“Burger King” or “BK”), and chicken under the Popeyes® brand (“Popeyes” or “PLK”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of March 31, 2020, we franchised or owned 4,925 Tim Hortons restaurants, 18,848 Burger King restaurants, and 3,336 Popeyes restaurants, for a total of 27,109 restaurants, and operate in more than 100 countries and U.S. territories. Approximately 100% of current system-wide restaurants are franchised.
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.
COVID-19
The global crisis resulting from the spread of coronavirus (COVID-19) has had a substantial impact on our global restaurant operations for the three months ended March 31, 2020, which is expected to continue with the timing of recovery uncertain. During the three months ended March 31, 2020, many TH, BK and PLK restaurants were temporarily closed in certain countries and many of the restaurants that remained open had limited operations, such as Drive-thru, Takeout and Delivery (where applicable). This has continued into the second quarter of 2020.
Our operating results substantially depend upon our franchisees’ sales volumes, restaurant profitability, and financial stability. The financial impact of COVID-19 has had, and is expected to continue to have, an adverse effect on our franchisees’ liquidity and we are working closely with our franchisees to monitor and assist them with access to appropriate sources of liquidity in order to sustain their businesses throughout this crisis, such as the initiation of rent relief programs for eligible franchisees who lease property from us. See Note 4, Leases, for further information about the rent relief programs. Additionally, beginning in the second quarter of 2020, we are providing cash flow support by extending loans to eligible BK franchisees in the U.S. and advancing certain cash payments to eligible TH franchisees in Canada.
We cannot currently estimate the duration or future negative financial impact of the COVID-19 pandemic on our business, however, we expect that the COVID-19 pandemic will impact our results of operations for the three months ending June 30, 2020 more significantly than during the three months ended March 31, 2020. Ongoing material adverse effects of the COVID-19 pandemic on our franchisees for an extended period could negatively affect our operating results, including reductions in revenue and cash flow and could impact our impairment assessments of accounts receivable, intangible assets, long-lived assets or goodwill.
Note 2. Basis of Presentation and Consolidation
We have prepared the accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC and Canadian securities regulatory authorities on February 21, 2020.
The Financial Statements include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All material intercompany balances and transactions have been eliminated in consolidation. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method.
We 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 amended and restated limited partnership agreement of Partnership (the “partnership

8


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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 to 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 maximum exposure to loss resulting from involvement with VIEs is attributable to accounts and notes receivable balances, outstanding loan guarantees and future lease payments, where applicable.
As our franchise and master franchise arrangements provide the franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE.
Tim Hortons has historically entered into certain arrangements in which an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. We perform an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of March 31, 2020 and December 31, 2019, we determined that we are the primary beneficiary of 31 and 35 Restaurant VIEs, respectively, and accordingly, have consolidated the results of operations, assets and liabilities, and cash flows of these Restaurant VIEs in our Financial Statements. Material intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year.
The preparation of consolidated financial statements in conformity with U.S. GAAP and related rules and regulations of the SEC requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Certain prior year amounts in the accompanying Financial Statements and notes to the Financial Statements have been reclassified in order to be comparable with the current year classifications. These reclassifications had no effect on previously reported net income.
Note 3. New Accounting Pronouncements
Credit Losses – In June 2016, the Financial Accounting Standards Board ("FASB") issued guidance that requires companies to measure and recognize lifetime expected credit losses for certain financial instruments, including trade accounts receivable and net investments in direct financing and sales-type leases. Expected credit losses are estimated using relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This amendment was effective commencing in 2020, using a modified retrospective approach. The adoption of this new guidance did not have a material impact on our Financial Statements.
Simplifying the Accounting for Income Taxes – In December 2019, the FASB issued guidance which simplifies the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance applicable to accounting for income taxes. The amendment is effective commencing in 2021 with early adoption permitted. We are currently evaluating the impact that the adoption of this new guidance will have on our Financial Statements.
Accounting Relief for the Transition Away from LIBOR and Certain other Reference Rates – In March 2020, the FASB issued guidance which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This amendment is effective as of March 12, 2020 through December 31, 2022. The expedients and exceptions provided by this new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has

9


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elected certain optional expedients for and that are retained through the end of the hedging relationships. We are currently evaluating the impact that the adoption of this new guidance will have on our Financial Statements.
Note 4. Leases
During the three months ended March 31, 2020, we initiated a rent relief program for eligible TH franchisees in Canada who lease property from us (the “TH rent relief program”) and also initiated a rent relief program effective April 1, 2020 for eligible BK franchisees in the U.S. and Canada who lease property from us (the "BK rent relief program" and together with the TH rent relief program, the “rent relief programs”). Under the rent relief programs, we temporarily converted the rent structure from a combination of fixed plus variable rent to 100% variable rent. While in effect, these programs will result in a reduction in our property revenues.
In April 2020, the FASB staff issued interpretive guidance that indicated it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Accounting Standards Codification Topic 842, Leases ("ASC 842"), as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract). Consequently, for concessions related to the effects of the COVID-19 pandemic, an entity will not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance in ASC 842 to those contracts. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee.
We have elected to apply this interpretive guidance to the rent relief programs, and have assumed that enforceable rights and obligations for those concessions exist in the lease contract. As such, starting on the effective dates indicated above, we began recognizing reductions in rents arising from the rent relief programs as reductions in variable lease payments. This election will continue while our rent relief program is in effect.
Property revenues are comprised primarily of lease income from operating leases and earned income on direct financing leases with franchisees as follows (in millions):
 
 
Three months ended March 31, 2020
 
Three months ended March 31, 2019
Lease income - operating leases
 
 
 
 
Minimum lease payments
 
$
112

 
$
111

Variable lease payments
 
63

 
84

Amortization of favorable and unfavorable income lease contracts, net
 
2

 
2

Subtotal - lease income from operating leases
 
177

 
197

Earned income on direct financing leases
 
1

 
2

Total property revenues
 
$
178

 
$
199




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Note 5. Revenue Recognition
Contract Liabilities
Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We may recognize unamortized upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract. We classify these contract liabilities as Other liabilities, net in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities between December 31, 2019 and March 31, 2020 (in millions):
Contract Liabilities
 
TH
 
BK
 
PLK
 
Consolidated
Balance at December 31, 2019
 
$
64

 
$
449

 
$
28

 
$
541

Recognized during period and included in the contract liability balance at the beginning of the year
 
(2
)
 
(30
)
 
(1
)
 
(33
)
Increase, excluding amounts recognized as revenue during the period
 
2

 
6

 
3

 
11

Impact of foreign currency translation
 
(3
)
 
(4
)
 

 
(7
)
Balance at March 31, 2020
 
$
61

 
$
421

 
$
30

 
$
512


The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2020 (in millions):
Contract liabilities expected to be recognized in
 
TH
 
BK
 
PLK
 
Consolidated
Remainder of 2020
 
$
6

 
$
26

 
$
2

 
$
34

2021
 
8

 
33

 
2

 
43

2022
 
7

 
32

 
2

 
41

2023
 
7

 
31

 
2

 
40

2024
 
6

 
30

 
2

 
38

Thereafter
 
27

 
269

 
20

 
316

Total
 
$
61

 
$
421

 
$
30

 
$
512


Disaggregation of Total Revenues
Total revenues consist of the following (in millions):
 
Three Months Ended
March 31,
 
2020
 
2019
Sales
$
503

 
$
522

Royalties
526

 
528

Property revenues
178

 
199

Franchise fees and other revenue
18

 
17

Total revenues
$
1,225

 
$
1,266




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Note 6. Earnings per Share
An economic interest in Partnership common equity is held by the holders of Class B exchangeable limited partnership units (the “Partnership exchangeable units”), which is reflected as a noncontrolling interest in our equity. See Note 12, Shareholders’ Equity.
Basic and diluted earnings per share is computed using the weighted average number of shares outstanding for the period. We apply the treasury stock method to determine the dilutive weighted average common shares represented by Partnership exchangeable units and outstanding equity awards, 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.
The following table summarizes the basic and diluted earnings per share calculations (in millions, except per share amounts):

 
Three Months Ended March 31,
 
2020
 
2019
Numerator:
 
 
 
Net income attributable to common shareholders - basic
$
144

 
$
135

Add: Net income attributable to noncontrolling interests
80

 
111

Net income available to common shareholders and noncontrolling interests - diluted
$
224

 
$
246

 
 
 
 
Denominator:
 
 
 
Weighted average common shares - basic
299

 
252

Exchange of noncontrolling interests for common shares (Note 12)
165

 
208

Effect of other dilutive securities
5

 
7

Weighted average common shares - diluted
469

 
467

 
 
 
 
Basic earnings per share (a)
$
0.48

 
$
0.53

Diluted earnings per share (a)
$
0.48

 
$
0.53

Anti-dilutive securities outstanding
8

 
5


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

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

 
As of
 
March 31, 2020
 
December 31, 2019
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Identifiable assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
   Franchise agreements
$
706

 
$
(230
)
 
$
476

 
$
720

 
$
(225
)
 
$
495

   Favorable leases
119

 
(62
)
 
57

 
127

 
(65
)
 
62

      Subtotal
825

 
(292
)
 
533

 
847

 
(290
)
 
557

Indefinite lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
   Tim Hortons brand
$
6,090

 
$

 
$
6,090

 
$
6,534

 
$

 
$
6,534

   Burger King brand
2,107

 

 
2,107

 
2,117

 

 
2,117

   Popeyes brand
1,355

 

 
1,355

 
1,355

 

 
1,355

      Subtotal
9,552

 

 
9,552

 
10,006

 

 
10,006

Intangible assets, net
 
 
 
 
$
10,085

 
 
 
 
 
$
10,563

 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
 
 
 
 
 
 
 
 
 
   Tim Hortons segment
$
3,935

 
 
 
 
 
$
4,207

 
 
 
 
   Burger King segment
595

 
 
 
 
 
598

 
 
 
 
   Popeyes segment
846

 
 
 
 
 
846

 
 
 
 
      Total
$
5,376

 
 
 
 
 
$
5,651

 
 
 
 

Amortization expense on intangible assets totaled $11 million for the three months ended March 31, 2020 and 2019. The change in the brands and goodwill balances during the three months ended March 31, 2020 was due to the impact of foreign currency translation.
Note 8. Equity Method Investments
The aggregate carrying amount of our equity method investments was $234 million and $266 million as of March 31, 2020 and December 31, 2019, respectively, and is included as a component of Other assets, net in our accompanying condensed consolidated balance sheets. TH and BK both have equity method investments. PLK does not have any equity method investments.
With respect to our TH business, the most significant equity method investment is our 50% joint venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. Distributions received from this joint venture were $2 million during the three months ended March 31, 2020 and 2019.
The aggregate market value of our 15.4% equity interest in Carrols Restaurant Group, Inc. (“Carrols”) based on the quoted market price on March 31, 2020 was approximately $17 million. The aggregate market value of our 9.8% equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on March 31, 2020 was approximately $39 million. We have evaluated recent declines in the market value of these equity method investments as a result of COVID-19 and we concluded these declines are not other than temporary and as such no impairments have been recognized at March 31, 2020. No quoted market prices are available for our other equity method investments.

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We have equity interests in entities that own or franchise Tim Hortons or Burger King restaurants. Franchise and property revenues recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions):

 
Three Months Ended March 31,
 
2020
 
2019
Revenues from affiliates:
 
 
 
Royalties
$
73

 
$
78

Property revenues
8

 
8

Franchise fees and other revenue
3

 
3

Total
$
84

 
$
89


We recognized $4 million of rent expense associated with the TIMWEN Partnership during the three months ended March 31, 2020 and 2019.
At March 31, 2020 and December 31, 2019, we had $42 million and $47 million, respectively, of accounts receivable, net from our equity method investments which were recorded in Accounts and notes receivable, net in our condensed consolidated balance sheets.
Note 9. Other Accrued Liabilities and Other Liabilities, net
Other accrued liabilities (current) and other liabilities, net (noncurrent) consist of the following (in millions):

 
As of
 
March 31,
2020
 
December 31,
2019
Current:
 
 
 
Dividend payable
$
242

 
$
232

Interest payable
93

 
71

Accrued compensation and benefits
36

 
57

Taxes payable
147

 
126

Deferred income
28

 
35

Accrued advertising expenses
47

 
40

Restructuring and other provisions
8

 
8

Current portion of operating lease liabilities
120

 
126

Other
58

 
95

Other accrued liabilities
$
779

 
$
790

Noncurrent:
 
 
 
Taxes payable
$
575

 
$
579

Contract liabilities
512

 
541

Derivatives liabilities
461

 
341

Unfavorable leases
91

 
103

Accrued pension
64

 
65

Deferred income
30

 
25

Other
41

 
44

Other liabilities, net
$
1,774

 
$
1,698




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Note 10. Long-Term Debt
Long-term debt consists of the following (in millions):
 
As of
 
March 31,
2020
 
December 31,
2019
Term Loan B (due November 19, 2026)
$
5,337

 
$
5,350

Term Loan A (due October 7, 2024)
745

 
750

Revolving Credit Facility (due October 7, 2024)
995

 

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

 
1,500

2019 3.875% Senior Notes (due January 15, 2028)
750

 
750

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

 
2,800

2019 4.375% Senior Notes (due January 15, 2028)
750

 
750

TH Facility and other
163

 
81

Less: unamortized deferred financing costs and deferred issue discount
(142
)
 
(148
)
Total debt, net
12,898

 
11,833

    Less: current maturities of debt
(76
)
 
(74
)
Total long-term debt
$
12,822

 
$
11,759


Credit Facilities
During the three months ended March 31, 2020, we drew $995 million on our senior secured revolving credit facility (the "Revolving Credit Facility") and, as of March 31, 2020, we had $995 million outstanding under our Revolving Credit Facility with an interest rate of 2.05%, $2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability under our Revolving Credit Facility was $3 million. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or share repurchases, fund acquisitions or capital expenditures and for other general corporate purposes. We have a $125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit.
On April 2, 2020, two of our subsidiaries (the "Borrowers") entered into a fifth amendment (the "Fifth Amendment") to the credit agreement (the "Credit Agreement") governing our senior secured term loan facilities (the "Term Loan Facilities") and Revolving Credit Facility. The Fifth Amendment provides the Borrowers with the option to comply with a $1,000 million minimum liquidity covenant in lieu of the 6.50:1.00 net first lien senior secured leverage ratio financial maintenance covenant for the period after June 30, 2020 and prior to September 30, 2021. There were no other material changes to the terms of the Credit Agreement.
TH Facility
One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$225 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40% or the Prime Rate plus an applicable margin equal to 0.40%, at our option. Obligations under the TH Facility are guaranteed by three of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. During the three months ended March 31, 2020, we drew down the remaining availability of C$125 million under the TH Facility and, as of March 31, 2020, we had outstanding C$225 million under the TH Facility with a weighted average interest rate of 3.06%.
2020 Senior Notes
On April 7, 2020, the Borrowers entered into an indenture (the "2020 5.75% Senior Notes Indenture") in connection with the issuance of $500 million of 5.75% first lien notes due April 15, 2025 (the "2020 5.75% Senior Notes"). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 2020 5.75% Senior Notes will be used for general corporate purposes.
Obligations under the 2020 5.75% Senior Notes are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of the Borrowers' Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Worldwide, Inc., Popeyes Louisiana Kitchen, Inc. and substantially all of their respective Canadian and U.S. subsidiaries (the "Note Guarantors"). The 2020 5.75% Senior Notes are first lien senior secured obligations and rank equal in right of

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payment with all of the existing and future first lien senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities.
Our 2020 5.75% Senior Notes may be redeemed in whole or in part, on or after April 15, 2022 at the redemption prices set forth in the 2020 5.75% Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 2020 5.75% Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others.
Restrictions and Covenants
As of March 31, 2020, we were in compliance with all applicable financial debt covenants under the Credit Facilities, the TH Facility, and the indentures governing our Senior Notes.
Fair Value Measurement
The following table presents the fair value of our variable rate term debt and senior notes, estimated using inputs based on bid and offer prices that are Level 2 inputs, and principal carrying amount (in millions):
 
As of
 
March 31,
2020
 
December 31,
2019
Fair value of our variable term debt and senior notes
$
12,148

 
$
12,075

Principal carrying amount of our variable term debt and senior notes
12,877

 
11,900


Interest Expense, net
Interest expense, net consists of the following (in millions):
 
Three Months Ended March 31,
 
2020
 
2019
Debt (a)
$
113

 
$
124

Finance lease obligations
5

 
5

Amortization of deferred financing costs and debt issuance discount
6

 
7

Interest income
(5
)
 
(4
)
    Interest expense, net
$
119

 
$
132


(a)
Amount includes $21 million and $18 million benefit during the three months ended March 31, 2020 and 2019, respectively, related to the amortization of the Excluded Component as defined in Note 13, Derivatives.
Note 11. Income Taxes
Our effective tax rate was 16.8% for the three months ended March 31, 2020. The effective tax rate during this period reflects the amount and mix of income from multiple tax jurisdictions and the impact of internal financing arrangements.
Our effective tax rate was 18.7% for the three months ended March 31, 2019. The effective tax rate for this period was primarily a result of the mix of income from multiple tax jurisdictions and the impact of internal financing arrangements and stock option exercises. Benefits from stock option exercises reduced the effective tax rate by 4.1% for the three months ended March 31, 2019.


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Note 12. Shareholders’ Equity
Noncontrolling Interests
The holders of Partnership exchangeable units held an economic interest of approximately 35.6% and 35.7% in Partnership common equity through the ownership of 165,329,153 and 165,507,199 Partnership exchangeable units as of March 31, 2020 and December 31, 2019, respectively.
During the three months ended March 31, 2020, Partnership exchanged 178,046 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging these Partnership exchangeable units for the same number of newly issued RBI common shares. The exchanges represented increases in our ownership interest in Partnership and were accounted for as equity transactions, with no gain or loss recorded in the accompanying condensed consolidated statement of operations. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit was cancelled concurrently with the exchange.
Accumulated Other Comprehensive Income (Loss)
The following table displays the changes in the components of accumulated other comprehensive income (loss) (“AOCI”) (in millions):

 
Derivatives
 
Pensions
 
Foreign Currency Translation
 
Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2019
$
199

 
$
(19
)
 
$
(943
)
 
$
(763
)
Foreign currency translation adjustment

 

 
(751
)
 
(751
)
Net change in fair value of derivatives, net of tax
197

 

 

 
197

Amounts reclassified to earnings of cash flow hedges, net of tax
11

 

 

 
11

Amounts attributable to noncontrolling interests
(74
)
 

 
267

 
193

Balance at March 31, 2020
$
333

 
$
(19
)
 
$
(1,427
)
 
$
(1,113
)

Note 13. Derivative Instruments
Disclosures about Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges, derivatives designated as net investment hedges and those utilized as economic hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates.
Interest Rate Swaps
At March 31, 2020, we had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $3,500 million to hedge the variability in the interest payments on a portion of our senior secured term loan facilities (the "Term Loan Facilities") beginning October 31, 2019 through the termination date of November 19, 2026. Additionally, at March 31, 2020, we also had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities effective September 30, 2019 through the termination date of September 30, 2026. At inception, all of these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value are recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.
During 2019, we extended the term of our previous $3,500 million receive-variable, pay-fixed interest rate swaps to align the maturity date of the new interest rate swaps with the new maturity date of our Term Loan B. The extension of the term resulted in a de-designation and re-designation of the interest rate swaps and the swaps continue to be accounted for as a cash flow hedge for hedge accounting. In connection with the de-designation, we recognized a net unrealized loss of $213 million in AOCI and this amount gets reclassified into Interest expense, net as the original forecasted transaction affects earnings. The amount of pre-tax losses in AOCI as of March 31, 2020 that we expect to be reclassified into interest expense within the next 12 months is $51 million.

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During 2015, we settled certain interest rate swaps and recognized a net unrealized loss of $85 million in AOCI at the date of settlement. This amount gets reclassified into Interest expense, net as the original hedged forecasted transaction affects earnings. The amount of pre-tax losses in AOCI as of March 31, 2020 that we expect to be reclassified into interest expense within the next 12 months is $12 million.
Cross-Currency Rate Swaps
To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At March 31, 2020, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates are economically partly offset by movements in the fair value of our cross-currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in AOCI, net of tax. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations.
At March 31, 2020, we had outstanding fixed-to-fixed cross-currency rate swaps to partially hedge the net investment in our Canadian subsidiaries. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as net investment hedges. These swaps are contracts to exchange quarterly fixed-rate interest payments we make on the Canadian dollar notional amount of C$6,754 million for quarterly fixed-rate interest payments we receive on the U.S. dollar notional amount of $5,000 million through the maturity date of June 30, 2023.
At March 31, 2020, we had outstanding cross-currency rate swaps in which we pay quarterly fixed-rate interest payments on the Euro notional value of 1,108 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. During 2018, we extended the term of the swaps from March 31, 2021 to the maturity date of February 17, 2024. The extension of the term resulted in a re-designation of the hedge and the swaps continue to be accounted for as a net investment hedge. Additionally, at March 31, 2020, we also had outstanding cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $400 million, entered during 2018, and $500 million, entered during 2019, through the maturity date of February 17, 2024. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge.
The fixed to fixed cross-currency rate swaps hedging Canadian dollar and Euro net investments utilized the forward method of effectiveness assessment prior to March 15, 2018. On March 15, 2018, we de-designated and subsequently re-designated the outstanding fixed to fixed cross-currency rate swaps to prospectively use the spot method of hedge effectiveness assessment. Additionally, as a result of adopting new hedge accounting guidance during 2018, we elected to exclude the interest component (the “Excluded Component”) from the accounting hedge without affecting net investment hedge accounting and elected to amortize the Excluded Component over the life of the derivative instrument. The amortization of the Excluded Component is recognized in Interest expense, net in the condensed consolidated statement of operations. The change in fair value that is not related to the Excluded Component is recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated.
Foreign Currency Exchange Contracts
We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At March 31, 2020, 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 $83 million with maturities to April 2021. We have designated these instruments as cash flow hedges, and as such, the unrealized changes in market value of effective hedges are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.
Credit Risk
By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty.
Credit-Risk Related Contingent Features
Our derivative instruments do not contain any credit-risk related contingent features.

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Quantitative Disclosures about Derivative Instruments and Fair Value Measurements
The following tables present the required quantitative disclosures for our derivative instruments, including their estimated fair values (all estimated using Level 2 inputs) and their location on our condensed consolidated balance sheets (in millions):
 
Gain or (Loss) Recognized in Other Comprehensive Income (Loss)
 
Three Months Ended March 31,
 
2020
 
2019
Derivatives designated as cash flow hedges(1)
 
 
 
Interest rate swaps
$
(300
)
 
$
(44
)
Forward-currency contracts
$
7

 
$
(2
)
Derivatives designated as net investment hedges
 
 
 
Cross-currency rate swaps
$
517

 
$
(102
)
(1)
We did not exclude any components from the cash flow hedge relationships presented in this table.
 
 
Location of Gain or (Loss) Reclassified from AOCI into Earnings
 
Gain or (Loss) Reclassified from AOCI into Earnings
 
 
 
Three Months Ended March 31,
 
 
 
 
2020
 
2019
Derivatives designated as cash flow hedges
 
 
 
 
 
 
Interest rate swaps
 
Interest expense, net
 
$
(15
)
 
$
(1
)
Forward-currency contracts
 
Cost of sales
 
$

 
$
2

 
 
 
 
 
 
 
 
 
Location of Gain or (Loss) Recognized in Earnings
 
Gain or (Loss) Recognized in Earnings
(Amount Excluded from Effectiveness Testing)
 
 
 
Three Months Ended March 31,
 
 
 
 
2020
 
2019
Derivatives designated as net investment hedges
 
 
 
 
 
 
Cross-currency rate swaps
 
Interest expense, net
 
$
21

 
$
18


 
Fair Value as of
 
 
 
 
 
March 31, 2020
 
December 31, 2019
 
Balance Sheet Location
Assets:
 
 
 
 
 
Derivatives designated as cash flow hedges
 
 
 
 
 
Interest rate
$

 
$
7

 
Other assets, net
Foreign currency
$
5

 
$

 
Prepaids and other current assets
Derivatives designated as net investment hedges