Business Context and Reporting Period
The Wendy’s Company filed this Form 10-K for the 52-week fiscal year ended December 30, 2012. The company operates and franchises Wendy’s quick-service restaurants, principally in North America, and reports one operating segment. The system comprised 6,560 restaurants at year-end, including 1,427 company-operated and 5,133 franchised locations. Arby’s was sold in July 2011; its results are presented as discontinued operations.
Although the request references 2012 Q4, this filing is an annual report. The fourth quarter ended December 30, 2012, contained 13 weeks and generated revenue of $629.9 million, operating profit of $32.3 million, and net income attributable to The Wendy’s Company of $26.4 million.
Key Financial Metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $2,505.2 million | $2,431.4 million | +$73.8 million |
| Sales | $2,198.3 million | $2,126.6 million | +$71.7 million |
| Franchise revenue | $306.9 million | $304.8 million | +$2.1 million |
| Operating profit | $122.7 million | $137.1 million | -$14.4 million |
| Income from continuing operations | $8.0 million | $17.9 million | -$9.9 million |
| Net income attributable to The Wendy’s Company | $7.1 million | $9.9 million | -$2.8 million |
| Diluted EPS | $0.02 | $0.02 | Flat |
| Cash flow from operating activities | $190.4 million | $246.7 million | -$56.3 million |
- Company-owned restaurant sales were $2,129.3 million; bakery and other sales were $69.0 million. Royalty income was $282.5 million.
- North America systemwide same-store sales increased 1.6% under the company’s new methodology. Company-owned and franchised same-store sales each increased 1.6%.
- Wendy’s restaurant margin was 14.0%, unchanged from 2011; food and paper costs increased to 33.2% of Wendy’s sales from 33.1%.
- Cash and cash equivalents were $453.4 million at year-end, compared with $475.2 million at January 1, 2012.
- Capital expenditures were $197.6 million, including $71.9 million for new and reimaged Image Activation restaurants.
- Total debt, including the current portion, was $1,457.6 million, compared with $1,357.0 million at the prior year-end. Stockholders’ equity was $1,985.9 million.
- The company reported working capital of $423.0 million and total assets of $4,303.2 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3.0%, supported by 1.6% systemwide same-store sales growth, strategic menu price increases, premium product mix, and incremental sales from acquired and newly opened restaurants. Customer transactions declined through most of the year.
- Operating profit declined despite higher revenue, primarily because of increased depreciation and amortization, higher commodity and labor costs, $41.0 million of facilities relocation and other transaction costs, and $21.1 million of long-lived asset impairment charges.
- The company incurred a $75.1 million loss on early extinguishment of debt in connection with its 2012 refinancing. This included redemption premiums and write-offs of discounts and deferred financing costs.
- Investment income increased to $36.2 million, principally from a $27.4 million gain on the sale of the Jurlique investment and a $4.6 million dividend from the company’s Arby’s investment.
- The company completed acquisitions of 56 franchised restaurants and sold 30 company-owned restaurants to franchisees. Systemwide restaurant count decreased by 34 locations, from 6,594 to 6,560.
- Cash flow from operations fell 22.8%, while capital expenditures increased from $146.8 million to $197.6 million. The company used approximately $23.1 million of cash before foreign exchange effects.
- The company replaced its prior term loan and senior notes with a $1.125 billion senior secured term loan and a $200 million revolving facility. The term loan had a 4.75% effective interest rate at year-end and matures in 2019.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected 2013 sales growth to be driven by menu improvements, product innovation, operational execution, brand positioning, approximately 100 company-owned restaurant reimages, and approximately 25 new company-owned restaurants. Net restaurant openings and closings were not expected to materially affect sales.
- Management expected cost of sales as a percentage of sales to benefit from discontinuing breakfast at certain restaurants, but to face pressure from higher commodity costs.
- Depreciation and amortization was expected to increase in 2013 because of higher Image Activation-related capital spending. Interest expense was expected to decline because of the full-year effect of the 2012 refinancing.
- Planned 2013 cash capital expenditures were approximately $245.0 million. Potential additional uses included dividends of up to approximately $62.9 million and stock repurchases of up to $100.0 million. Management expected operating cash flow and available cash to fund requirements for the next 12 months.
- The Image Activation franchisee incentive program totals $10.0 million for 2013. Franchisee financing constraints could limit participation and reduce the expected sales benefits.
- Credit facilities are secured by substantially all non-real-estate assets of Wendy’s and certain subsidiaries and include interest coverage and senior secured leverage covenants. The company reported compliance with all covenants at year-end.
- Contractual obligations totaled $3.071 billion, including $1.897 billion of long-term debt obligations, $921.9 million of operating lease obligations, and $176.4 million of purchase obligations.
- Guarantees and contingencies totaled $91.4 million, including lease guarantees, franchisee loan recourse, letters of credit, and Japan joint venture guarantees. Potential Japan joint venture obligations could reach approximately $8.0 million if partners fail to reimburse or fund their share.
- Key risks include intense restaurant competition and discounting, commodity and labor inflation, food safety and reputational events, franchisee financial stress, execution of Image Activation, lease obligations, impairment charges, interest-rate exposure, legal and tax matters, and potential liabilities related to the underfunded multiemployer pension plan.
- Unusual 2012 items included $10.6 million of costs associated with discontinuing breakfast at certain restaurants, $21.1 million of impairment charges, $41.0 million of relocation and transaction costs, the $75.1 million debt extinguishment loss, and the Jurlique investment gain.
Important Facts for Investors to Verify
- Reconcile reported earnings with and without the $75.1 million debt refinancing charge, $41.0 million of relocation and transaction costs, $21.1 million of impairments, and the $27.4 million Jurlique gain.
- Assess whether same-store sales growth and restaurant margin can offset commodity, labor, lease, and remodeling costs.
- Review the refinancing terms, variable-rate exposure on the $1.115 billion term loan, covenant thresholds, and debt maturities.
- Verify that planned 2013 capital expenditures, dividends, potential repurchases, and Image Activation incentives are consistent with operating cash flow and liquidity.
- Monitor franchisee health, lease guarantees, franchisee loan guarantees, and the concentration of revenues in franchised restaurants.
- Evaluate the potential impact of the Japan joint venture funding plan, the Tim Hortons real estate joint venture, and the 18.5% indirect Arby’s investment.
- Review unresolved tax and legal matters, including the disputed Tim Hortons tax claims, $28.8 million of unrecognized tax benefits, and potential multiemployer pension withdrawal liability.
- Confirm the timing and financial effect of the discontinuation of breakfast and the company’s execution of its 2013 restaurant reimaging and development plans.