Wendy’s Company 2015 Q3 Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended September 27, 2015, and the 39 weeks ended September 27, 2015, compared with the corresponding periods ended September 28, 2014. Wendy’s operates and franchises quick-service restaurants primarily in North America and reports one operating segment. The system had 6,487 restaurants, including 852 company-owned and 5,635 franchised units, at quarter-end. Fiscal 2015 contains 53 weeks, with a 14-week fourth quarter.
The company completed the sale of its company-owned bakery on May 31, 2015. Bakery results and the disposal gain are reported as discontinued operations.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $464.6 million | $496.7 million | $1,405.9 million | $1,511.2 million |
| Operating profit | $55.9 million | $44.2 million | $158.2 million | $192.7 million |
| Income from continuing operations | $8.3 million | $21.1 million | $51.3 million | $93.5 million |
| Net income | $7.6 million | $22.8 million | $75.3 million | $98.1 million |
| Diluted EPS | $0.03 | $0.06 | $0.22 | $0.26 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $118.6 million | $182.6 million |
Q3 operating margin was approximately 12.0%, compared with 8.9% in the prior-year quarter. Nine-month operating margin was approximately 11.2%, compared with 12.8%. Net margin was approximately 1.6% in Q3 and 5.4% for the first nine months.
- Company-owned restaurant margin increased to 18.8% in Q3 from 15.5% and to 17.2% for the first nine months from 15.4%.
- North America systemwide same-restaurant sales increased 3.1% in Q3 and 2.8% for the first nine months, versus 0.7% and 1.6%, respectively, in the comparable periods.
- Cash and cash equivalents were $175.7 million at September 27, 2015, compared with $267.1 million at December 28, 2014. Restricted cash included in prepaid and other current assets was $29.4 million.
- Total debt was approximately $2.40 billion, including $2.38 billion of long-term debt, compared with approximately $1.44 billion of total debt at December 28, 2014.
- Capital expenditures were $188.2 million in the first nine months; management expected approximately $51.8 million of additional capital expenditures in the remainder of 2015, or approximately $240 million for the full year.
- Quarterly dividends were $0.055 per share during the first three quarters. A $0.06 per-share dividend was declared for payment in December 2015.
Cash flow, debt and liquidity
For the first nine months, operating cash flow was $118.6 million, investing cash flow was negative $63.6 million and financing cash flow was negative $136.5 million. Cash decreased by $91.6 million before the effect of exchange rates and by $101.7 million after a $10.1 million unfavorable exchange-rate effect.
On June 1, 2015, Wendy’s completed a $2.275 billion securitized financing facility consisting of fixed-rate senior secured notes of $875 million at 3.371%, $900 million at 4.080% and $500 million at 4.497%, plus a $150 million variable funding facility. Proceeds refinanced the Term A and Term B loans. The refinancing increased interest expense and produced a $7.3 million loss on early extinguishment of debt. Management expected approximately $641.3 million of future interest payments on outstanding long-term debt, excluding capital leases.
Management stated that current operating cash flow and available cash were expected to be sufficient for operating requirements over the next 12 months. The debt agreements include reserve requirements, covenants and rapid-amortization provisions tied to debt-service coverage, restaurant sales, defaults and other events.
Material changes versus the prior comparable period
- Q3 revenue declined 6.5%, primarily because restaurant dispositions reduced company-owned restaurant sales by approximately $67.9 million. Franchise revenue increased $2.4 million.
- Nine-month revenue declined 7.0%; company-owned restaurant sales decreased $117.6 million, while franchise revenue increased $12.3 million.
- Q3 operating profit increased $11.7 million despite lower revenue, mainly due to improved restaurant margins and lower impairment charges. Nine-month operating profit declined $34.5 million, primarily because system optimization gains fell to $14.8 million from $74.0 million.
- Interest expense increased $14.8 million in Q3 and $18.7 million for the first nine months because of the new securitized financing structure.
- Income from continuing operations fell $12.8 million in Q3 and $42.2 million for the first nine months. The Q3 effective tax rate was 70.5%, compared with 32.8% in the prior-year quarter; the nine-month rate was 45.3%, compared with 39.8%.
- The company repurchased $1.078 billion of common stock during the first nine months, compared with $291.2 million in the prior-year period. Treasury stock increased substantially, and stockholders’ equity declined to $705.5 million from $1.718 billion at year-end 2014.
Guidance, outlook, unusual items and risks
- Management plans to reduce ongoing company-owned restaurant ownership to approximately 5% of the system by the end of 2016. Approximately 540 additional restaurants were targeted for sale to franchisees; 274 restaurants were classified as held for sale at September 27, 2015.
- The company expects approximately $10 million of additional system optimization costs during the remainder of 2015 and 2016 and approximately $3 million of additional G&A realignment costs during the same period.
- The Bakery sale generated a $14.8 million after-tax disposal gain in the first nine months. Bakery discontinued operations also benefited from a $12.5 million reversal of a multiemployer pension withdrawal liability.
- Management cited competition, pricing pressure, commodity and labor costs, franchisee financial condition, food safety, weather, technology and cybersecurity, legal and regulatory matters, restaurant disposition execution, and debt-service and covenant compliance as key risks.
- Legal and environmental accruals totaled $2.4 million. The company could not estimate an aggregate possible range of loss but did not believe the matters would materially affect consolidated results based on available information and insurance coverage.
- Management stated that disclosure controls were effective as of September 27, 2015, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improved same-restaurant sales and restaurant margins can offset the revenue loss and royalty-mix effects of continued company-owned restaurant dispositions.
- The timing and proceeds of the 274 restaurants held for sale and progress toward the approximately 5% company-owned ownership target.
- Debt-service coverage, reserve requirements, rapid-amortization triggers and refinancing requirements under the $2.275 billion securitized financing facility.
- Whether operating cash flow remains sufficient to fund capital expenditures, dividends, debt service and additional share repurchases.
- The sustainability of the unusually high Q3 effective tax rate and the tax consequences of future restaurant and asset dispositions.
- The remaining $400.1 million authorization under the June 2015 share-repurchase program and its effect on leverage, liquidity and per-share results.
- Commodity, labor, franchisee, food safety, cybersecurity and litigation exposures identified in the filing.