The Wendy’s Company — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 and 26 weeks ended June 29, 2014, compared with June 30, 2013. Wendy’s operated and franchised restaurants primarily in North America and reported one material operating segment. At quarter-end, the system had 6,545 restaurants, including 1,005 company-owned and 5,540 franchised locations.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $523.4 million | $650.5 million | $1,046.6 million | $1,254.2 million |
| Operating profit | $63.9 million | $57.0 million | $152.9 million | $79.5 million |
| Net income attributable to Wendy’s | $29.0 million | $12.2 million | $75.3 million | $14.4 million |
| Diluted EPS | $0.08 | $0.03 | $0.20 | $0.04 |
| Operating margin | 12.2% | 8.8% | 14.6% | 6.3% |
| Net margin | 5.5% | 1.9% | 7.2% | 1.1% |
| Operating cash flow | Not separately provided | Not separately provided | $81.0 million | $143.4 million |
Q2 Wendy’s restaurant margin increased to 17.8% from 16.7%; six-month restaurant margin increased to 15.4% from 14.8%. Systemwide same-restaurant sales increased 3.3% in the quarter and 2.1% for the first six months, compared with 0.3% and 0.6%, respectively, in the prior-year periods.
Cash and cash equivalents were $371.7 million at June 29, 2014, down from $580.2 million at December 29, 2013. Total debt, including current maturities, was approximately $1.454 billion, consisting principally of Term A Loans, Term B Loans, 7% debentures and capital lease obligations. The company stated that operating cash flow and available cash were expected to meet operating requirements for the next 12 months.
Material changes versus the prior comparable period
- Revenue declined 19.5% in the quarter and 16.5% year to date, primarily because company-owned restaurants were sold to franchisees. The company estimated that these dispositions reduced sales by $152.5 million in Q2 and $248.8 million for the first six months.
- Franchise revenue increased $19.3 million in Q2 and $36.9 million year to date, reflecting more franchised restaurants, higher rental income and franchise same-restaurant sales growth.
- Operating profit increased $6.9 million in Q2 and $73.4 million year to date. The six-month improvement included a $43.2 million net benefit from facilities action charges, principally a $61.4 million gain on restaurant sales under the system optimization initiative.
- Interest expense declined $5.9 million in Q2 and $13.8 million year to date following redemption of the 6.20% senior notes and lower effective term-loan rates. The prior-year periods included a $21.0 million loss on early extinguishment of debt.
- Operating cash flow decreased $62.4 million year to date, while capital expenditures increased to $114.5 million from $81.8 million, primarily for the Image Activation program.
- Financing activities used $291.9 million, including $277.3 million of share repurchases and $36.6 million of dividends. The company repurchased 29.7 million shares for $275.0 million in February 2014.
Guidance, outlook, risks and unusual items
- Management expected approximately $170.5 million of additional capital expenditures during the remainder of 2014, resulting in approximately $285.0 million for the full year.
- The company expected up to approximately $36.7 million of additional 2014 dividend payments and identified potential stock repurchases of up to $100.0 million.
- In August 2014, the company announced plans to sell all company-owned Canadian restaurants to franchisees by the end of the first quarter of 2015. Future remeasurement losses, severance costs and gains or losses on sales could be material, but the company could not estimate them.
- Management cited risks from competition, consumer demand and preferences, food safety, commodity and labor costs, adverse weather, franchisee financial condition, restaurant development and remodeling execution, legal and regulatory matters, interest rates, taxes and impairment charges.
- Legal and environmental matters had accrued liabilities of $3.4 million. The company stated that it could not estimate the aggregate possible loss range, but did not expect these matters to materially affect its financial position or results.
- The bakery’s estimated multiemployer pension withdrawal liability was $13.5 million based on the applicable requirements. A July 2014 settlement required negotiations to recommence, and final liability remained subject to further discussions.
- The effective tax rate increased to 43.8% from 29.6% in Q2 and to 41.2% from 13.2% for the first six months, including a $3.1 million provision related to New York tax law changes and other period-specific items.
Important facts for investors to verify
- Whether gains from restaurant dispositions, rather than recurring operating improvement, explain a substantial portion of the year-to-date profit increase.
- The effect of continued refranchising on future sales, restaurant margins, franchise revenue, rental income and cash flow.
- The timing and ultimate cost of the Canadian refranchising program, including remeasurement, severance and transaction gains or losses.
- Cash requirements for Image Activation capital expenditures, dividends and the new $100.0 million share-repurchase authorization relative to operating cash flow and cash balances.
- Debt maturity, interest-rate exposure and the effect of the forward-starting interest-rate swaps covering anticipated borrowings of $450.0 million.
- Exposure to beef and other commodity inflation, adverse weather, customer traffic trends and franchisee execution.