WEN

Wendy's/Arby's Group, Inc. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 28, 2009, and the six-month period ended on that date. The Company operates two primary segments: Wendy's Restaurants and Arby's Restaurants. The reporting period includes the full results of the Wendy's International, Inc. merger, which was completed on September 29, 2008. As of June 28, 2009, the system comprised 10,353 restaurants (2,565 company-owned and 7,788 franchised).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased significantly compared to the prior year periods (Q2 2008: $313M; H1 2008: $616M) primarily due to the inclusion of Wendy's operations following the merger. Excluding the merger, Arby's same-store sales declined 5.8% in Q2 and 6.9% in H1 2009 due to economic conditions and competitive pressures.
• Profitability: The Company reported a net income of $14.9M for Q2 2009, a turnaround from a net loss of $6.9M in Q2 2008. For the six months ended June 28, 2009, net income was $4.0M, compared to a net loss of $74.4M in the prior year period. The prior year loss was heavily impacted by a $68.1M "other than temporary" loss on Deerfield Capital Corp. (DFR) investments.
• Impairment Charges: Impairment of long-lived assets increased to $8.7M in Q2 2009 (vs. $1.3M in Q2 2008) and $15.6M for the six months (vs. $1.4M). Charges were driven by underperforming Arby's locations, surplus Wendy's properties, and a corporate aircraft write-down.
• Debt Restructuring: On June 23, 2009, the Company issued $565 million in Senior Notes (10% interest) and used proceeds to prepay $132.5 million of its Senior Secured Term Loan. Total long-term debt increased to approximately $1.53 billion.

Guidance, Outlook, and Risks

• Outlook: Management expects sales and franchise revenues to increase significantly for the remainder of 2009 due to the Wendy's merger. Restaurant margins are expected to improve due to price increases and cost controls, though offset by value menu offerings and higher labor rates.
• Restructuring Costs: The Company expects to incur an additional $1.7 million in facilities relocation and corporate restructuring charges (primarily severance) for the remainder of 2009 related to the merger integration.
• Capital Allocation: Anticipated cash requirements for the remainder of 2009 include approximately $94.8 million in capital expenditures, $14.1 million in dividends, and potential stock repurchases of up to $50 million (authorized August 4, 2009).
• Risks: Significant risks include high debt levels ($1.5 billion), sensitivity to interest rate changes on variable-rate debt, and the ability to successfully integrate the Wendy's and Arby's operations to realize synergies. The Company is currently in compliance with debt covenants but faces a "Negative" outlook from S&P.
• Legal Matters: Class action lawsuits regarding the Wendy's merger (Guiseppone, Henzel, Smith, and Ravanis cases) were settled or dismissed in July 2009. The Company maintains a $2.4 million reserve for legal and environmental matters.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the Senior Notes indenture and Credit Agreement, specifically regarding leverage ratios and interest coverage, given the "Negative" credit outlook.
• Merger Integration: Monitor the realization of cost synergies and the execution of the shared service center to ensure G&A expenses do not exceed projections.
• Same-Store Sales Trends: Track Arby's same-store sales recovery, which has been declining (down 6.9% in H1 2009), and Wendy's breakfast daypart strategy execution.
• Investment Portfolio: Review the status of "Legacy Assets" (including DFR Notes) and the Liquidation Services Agreement with the Management Company to assess potential future gains or losses.
• Franchisee Health: Assess the impact of economic conditions on franchisee liquidity, as noted by increased reserves for uncollectible franchise receivables.