The Wendy’s Company: Q1 2012 Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended April 1, 2012, compared with the 13 weeks ended April 3, 2011. The Wendy’s system had 6,581 restaurants, including 1,414 company-owned and 5,167 franchised locations. North American restaurant operations and franchising represented virtually all current operations. Arby’s was sold on July 4, 2011, with its prior-year results presented as discontinued operations; Wendy’s retained an indirect 18.5% interest.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $593.2 million | $582.5 million | 1.8% increase |
| Operating profit | $20.9 million | $28.0 million | 25.4% decrease |
| Operating margin | 3.5% | 4.8% | Down 1.3 percentage points |
| Income from continuing operations | $14.7 million | $(0.3) million | Improved |
| Net income attributable to The Wendy’s Company | $12.4 million | $(1.4) million | Improved |
| Basic and diluted EPS | $0.03 | $0.00 | Improved from loss |
| Net cash used in operating activities | $15.1 million | Cash provided of $53.5 million | Declined $68.6 million |
| Capital expenditures | $47.0 million | $28.6 million | Increased $18.4 million |
Sales increased 2.1% to $519.9 million, while franchise revenue was essentially flat at $73.3 million. Systemwide same-store sales increased 0.7% under the new reporting method. The average customer check increased, primarily from menu pricing, but customer transactions declined. The Wendy’s restaurant margin fell to 11.8% from 13.4%, driven chiefly by higher commodity costs.
Cost of sales rose 3.8%, faster than revenue, and represented 76.7% of total revenue. Food and paper costs increased 2.2 percentage points as a percentage of Wendy’s sales due to commodity inflation. The filing does not provide a consolidated adjusted EBITDA measure.
Cash and cash equivalents were $418.4 million at April 1, 2012, down from $475.2 million at January 1, 2012. Total debt, including current maturities, was approximately $1.35 billion. The Wendy’s Restaurants entity held $281.7 million of cash and had $82.9 million available for dividends to The Wendy’s Company under its credit agreement.
Material changes versus the prior comparable period
- Revenue increased modestly, but operating profit declined because cost of sales grew faster than revenue and the quarter included $5.5 million of facilities relocation and transition costs.
- General and administrative expense decreased $2.4 million at the consolidated company level, primarily because certain prior-year professional and information-technology costs did not recur.
- Impairment charges declined to $4.5 million from $7.9 million, although Q1 2012 included a $1.6 million impairment charge on a company-owned aircraft held for sale.
- The quarter included a $27.4 million net gain on the February 2012 sale of the Jurlique investment. The gain included a $2.9 million loss on a related foreign-currency derivative.
- Net income attributable to The Wendy’s Company benefited from the Jurlique gain, but $2.4 million was attributed to noncontrolling interests in connection with the investment sale. No remaining noncontrolling interest in that subsidiary was expected after the transaction.
- Operating cash flow deteriorated primarily because deferred vendor incentive receipts were $29.4 million lower than in the prior-year quarter, the Jurlique gain reduced operating cash flow relative to reported earnings, and accounts payable changes used more cash.
- Restaurant count decreased by 13 locations from January 1, 2012, reflecting openings, closures and net purchases from franchisees.
Outlook, unusual items, risks and contingencies
- Management expected approximately $188 million of additional capital expenditures for the remainder of 2012, implying approximately $235 million for the full year. Expected uses also included potential restaurant transactions and quarterly dividends of approximately $23.4 million for the remainder of 2012.
- Management stated that operating cash flows and available cash were expected to provide sufficient liquidity for operating requirements over the next 12 months, based on current operating levels.
- On April 3, 2012, the company began marketing a proposed $1.325 billion senior secured credit facility, consisting of an expected $200 million revolver and $1.125 billion term loan. The proposed refinancing was intended to repay existing debt and fund the tender offer or redemption of Senior Notes. Completion was subject to market and other conditions, with no assurance of completion.
- The company commenced a tender offer for Senior Notes and anticipated debt extinguishment costs of approximately $10.6 million for the existing Credit Agreement and approximately $64.6 million for the Senior Notes across the second and third quarters of 2012.
- The Atlanta restaurant support center relocation was expected to be substantially complete by the end of 2012. Total expected relocation and transition costs were approximately $36.1 million, including $5.5 million recorded in Q1 2012.
- The company had approximately $8.2 million of capital expenditure commitments expected to be paid in the second quarter of 2012.
- Legal and environmental reserves for continuing operations totaled $2.3 million. The company could not estimate the possible loss range for claims involving Tim Hortons; mediation had been agreed upon but had not yet occurred.
- A multiemployer pension fund covering unionized bakery employees entered critical status. Contribution surcharges were expected to be 5% from June 1 through December 31, 2012, and 10% beginning January 1, 2013, although management did not expect a material effect.
- Key operating risks included commodity inflation, labor and other operating costs, competition and pricing pressure, consumer spending and preferences, franchisee financial condition, restaurant development and remodeling execution, food safety, legal and regulatory matters, impairment charges and refinancing execution.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the proposed refinancing and Senior Note tender offer were completed and the actual refinancing terms, leverage and debt extinguishment costs.
- Whether commodity, labor and other cost inflation continued to pressure restaurant margins after Q1 2012.
- The timing and final cost of the Atlanta support-center relocation and transition program.
- Actual full-year capital expenditures, restaurant openings and closures, and progress under the Image Activation and breakfast initiatives.
- Cash generation after capital expenditures, dividends and debt service, including the timing of deferred vendor incentive receipts.
- The ultimate outcome and financial exposure from Tim Hortons-related claims, legal proceedings and the multiemployer pension plan.
- The sustainability of reported earnings excluding the $27.4 million Jurlique gain and other unusual items.