The Wendy’s Company — Fiscal 2018 Form 10-K Summary
Business context and reporting period
The filing covers the 52-week fiscal year ended December 30, 2018, with comparative fiscal years ended December 31, 2017 and January 1, 2017. Wendy’s operates and franchises quick-service hamburger restaurants, primarily in North America, and reports one operating segment. The system comprised 6,711 restaurants at year-end, including 353 company-operated and 6,358 franchised locations. Approximately 95% of the system was franchised.
Company-operated restaurant sales, franchise royalties and fees, rental income, and national advertising fund contributions are the principal revenue sources. The Company adopted ASC 606 revenue recognition in 2018 using the modified retrospective method; prior-year results were not restated, limiting comparability.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenues | $1,589.9 million | $1,223.4 million | +$366.5 million |
| Operating profit | $249.9 million | $214.8 million | +$35.1 million |
| Operating margin | 15.7% | 17.6% | Lower reported margin |
| Net income | $460.1 million | $194.0 million | +$266.1 million |
| Diluted EPS | $1.88 | $0.77 | +$1.11 |
| Cash flow from operations | $224.2 million | $238.8 million | -$14.6 million |
| Capital expenditures | $69.9 million | $81.7 million | -$11.9 million |
| Long-term debt, including current portion | $2,784.4 million | $2,754.4 million | +$30.0 million |
| Stockholders’ equity | $648.4 million | $573.2 million | +$75.2 million |
Reported 2018 net income and EPS benefited substantially from the $450.0 million sale of Wendy’s remaining 12.3% interest in Inspire Brands. The transaction generated approximately $447.4 million of net investment income and $97.5 million of income tax expense.
Company-operated restaurant sales were $651.6 million, franchise royalty revenue and fees were $409.0 million, franchise rental income was $203.3 million, and advertising funds revenue was $326.0 million. Advertising funds revenue and related expense were consolidated for the first time in 2018; advertising funds revenue exceeded related expense by $4.1 million.
Restaurant margin was $103.0 million, or 15.8% of company-operated sales, compared with $104.9 million, or 16.8%, in 2017. Cost of sales increased to 84.2% of company-operated sales from 83.2%, primarily because of higher labor rates, commodity costs, and insurance costs.
At December 30, 2018, cash and cash equivalents were $431.4 million and total cash, cash equivalents, and restricted cash were $486.5 million. The Company stated that available cash and operating cash flow were expected to provide sufficient liquidity for operating requirements over the following 12 months.
Material changes versus the prior comparable period
- Reported revenue increased 30.0%, primarily because 2018 included $326.0 million of consolidated advertising funds revenue. Excluding advertising funds, the filing does not provide a directly comparable adjusted revenue figure under consistent accounting.
- Company-operated sales increased $28.8 million, supported by 1.3% company-operated same-restaurant sales growth and a net increase in company-operated restaurants.
- Systemwide sales increased 2.5% on a constant-currency basis to $10.5 billion. North America systemwide same-restaurant sales increased 0.9%, while global systemwide same-restaurant sales increased 1.0%.
- North America franchised restaurants increased to 5,825 from 5,793, and international franchised restaurants increased to 533 from 504. The system opened 159 restaurants and closed 82 during 2018.
- Operating profit increased despite higher general and administrative expense, including increased legal reserves related to the cybersecurity litigation. System optimization losses improved from a $39.1 million loss in 2017 to a $0.5 million gain in 2018.
- Cash flow from operations declined 6.1%, primarily because of higher income tax payments associated with the Inspire Brands sale. Capital expenditures declined 14.5%.
- The Company refinanced $925.0 million of debt in January 2018, issuing fixed-rate notes at 3.573% and 3.884% and establishing a $150.0 million variable-funding facility. No borrowings were outstanding under the variable-funding facility at year-end.
- Share repurchases totaled approximately $270.2 million for 15.8 million shares, and dividends paid totaled $80.5 million. The quarterly dividend increased to $0.085 per share from $0.07 in 2017.
Fourth-quarter information
| Metric | Fourth quarter 2018 | Fourth quarter 2017 |
|---|---|---|
| Revenues | $397.8 million | $309.2 million |
| Operating profit | $45.8 million | $66.6 million |
| Net income | $18.8 million | $159.3 million |
| Diluted EPS | $0.08 | $0.64 |
The fourth quarter of 2017 included a $121.6 million income tax benefit associated primarily with the Tax Cuts and Jobs Act, making the year-over-year net income and EPS comparison unusually unfavorable.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2019 sales to benefit from menu innovation, product improvements, strategic pricing, operational execution, brand positioning, and increased investment in consumer-facing digital technology.
- Management expected franchise royalty revenue to benefit from improved franchise sales trends and additional franchised restaurants.
- Franchise rental income and expense were each expected to increase by approximately $40.0 million in 2019 because of lease-accounting changes, with no expected net income impact.
- 2019 cash capital expenditures were expected to be approximately $75.0 million to $80.0 million. Expected 2019 dividends were approximately $92.1 million if quarterly payments continued at $0.10 per share, and the Company authorized up to $225.0 million of share repurchases through March 1, 2020.
- The Company expected approximately $4.5 million of additional costs under its May 2017 general and administrative realignment plan, with most remaining costs expected in 2019. Total plan savings were expected to approximate $35.0 million.
- The Company recorded a $50.0 million liability for the proposed settlement of financial-institution cybersecurity litigation and a related $22.5 million insurance receivable. If approved, the Company expected to pay approximately $27.5 million after insurance, potentially in late 2019 or early 2020.
- Total debt was approximately $2.8 billion, and the securitized financing facility is secured by substantially all assets of certain subsidiaries and contains financial covenants, reserve requirements, and rapid-amortization triggers.
- Contractual obligations totaled $5.5 billion, including $2.9 billion of long-term debt obligations, $1.5 billion of operating lease obligations, and $939.2 million of capital lease obligations. The Company also disclosed $66.3 million of lease guarantees and $27.1 million of letters of credit.
- Principal operating risks include intense competition and discounting, labor and commodity cost inflation, food safety events, franchisee financial health, execution of the Image Activation program, digital-commerce and cybersecurity risks, legal and regulatory changes, lease obligations, and potential impairment of long-lived assets.
- Approximately 50% of the global system was on the Image Activation design at year-end. The Company and franchisees reimaged 401 North America restaurants and built 159 global restaurants during 2018.
Most important facts for an investor to verify
- Separate the $450.0 million Inspire Brands sale gain from recurring operating earnings and cash generation.
- Reconcile 2018 revenue and expense growth for the first-time consolidation of advertising funds and the adoption of ASC 606.
- Assess debt-service capacity, anticipated debt repayments, securitization covenants, and the effect of lease accounting adopted in 2019.
- Confirm the final approval, timing, insurance recovery, and cash payment related to the cybersecurity settlement.
- Monitor same-restaurant sales, customer counts, restaurant margin, labor and commodity costs, and franchisee financial performance.
- Evaluate whether Image Activation, new restaurant development, digital commerce investment, and franchise incentives generate sufficient returns.
- Review the sustainability of dividends and share repurchases relative to operating cash flow and total contractual commitments.