Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 28, 2003, for Triarc Companies, Inc. (the parent company of Wendy's Co, though the filing text identifies the registrant as Triarc). The Company operates solely in the restaurant business through franchised and company-owned Arby's restaurants. A significant event during this period was the consolidation of Sybra, Inc., acquired in December 2002, which owns and operates approximately 237 Arby's restaurants. Consequently, the 2003 results include Sybra's operating revenues and expenses, whereas the 2002 comparative period included only royalty fees from Sybra.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 28, 2003 |
Nine Months Ended Sept 28, 2003 |
|---|---|---|
| Total Revenues | $74,635 | $219,169 |
| Net Sales (Company-owned) | $51,093 | $150,988 |
| Royalties & Franchise Fees | $23,542 | $68,181 |
| Operating Profit | $5,147 | $14,618 |
| Net Income (Loss) | $495 | $(2,903) |
| Cash & Cash Equivalents | $543,946 | $543,946 (End of Period) |
| Total Debt (Current + Long-term) | $527,407 | $527,407 (End of Period) |
| Working Capital | $611,201 | $611,201 (End of Period) |
Material Changes vs. Prior Period
- Revenue Composition: Total revenues increased significantly due to the inclusion of Sybra's net sales ($51.1M for the quarter; $151.0M for nine months). However, royalty revenues decreased by 8% ($2.2M) for the quarter and 6% ($4.7M) for nine months because royalties from Sybra are now eliminated in consolidation.
- Profitability: Operating profit improved by 31% ($1.2M) for the quarter and 62% ($5.6M) for nine months compared to the prior year periods. Net loss for the nine months improved by 74% to $(2.9M) from $(11.1M) in the prior year, driven by reduced investment impairment charges and the Sybra acquisition.
- Investment Income: Investment income turned positive ($4.0M for the quarter; $10.9M for nine months) compared to losses in the prior year, primarily due to the absence of significant "other than temporary" impairment charges recorded in 2002.
- Debt Structure: On May 19, 2003, the Company issued $175.0 million in 5% Convertible Notes due 2023. Proceeds were used to repurchase $41.7 million of Class A common stock and pay offering costs.
Guidance, Outlook, and Risks
- Outlook: Management expects positive cash flows from continuing operating activities in the fourth quarter of 2003, excluding discretionary investment purchases. Same-store sales comparisons for the fourth quarter are expected to be more favorable due to weak comparisons in the prior year's fourth quarter.
- Cost Pressures: Company-owned restaurants are experiencing increased costs for roast beef, estimated to adversely affect gross profit margins by $0.4M to $0.5M in the fourth quarter.
- Dividends: The Company paid an initial quarterly dividend of $0.065 per Class A share and $0.075 per Class B share in September 2003. Management intends to continue quarterly dividends, though future amounts are not assured.
- Legal & Contingencies:
- Snapple Dispute: The Company is in arbitration with Cadbury regarding a post-closing adjustment of up to $22.5 million plus interest related to the 2000 sale of its beverage business. Arbitration is expected to conclude by December 28, 2003.
- Encore Capital Gain: A subsequent event in October 2003 involving an offering by Encore Capital Group is expected to generate a pretax gain of approximately $6.0 million in the fourth quarter.
- Environmental: A vacant property owned by an inactive subsidiary is undergoing remediation; a liability of approximately $1.0 million has been reserved.
- Accounting Changes: The Company is evaluating the impact of FASB Interpretation No. 46 regarding the potential consolidation of a franchisee due to loan guarantees, effective in the fourth quarter.
Investor Verification Checklist
- Sybra Integration: Verify the actual performance of the 237 acquired Arby's restaurants against the pro forma assumptions made at acquisition.
- Snapple Arbitration: Monitor the outcome of the arbitration regarding the $22.5 million post-closing adjustment, which could materially impact future cash flows.
- Investment Portfolio: Review the composition of the $803 million investment portfolio, specifically the exposure to "other than temporary" losses in cost-basis investments (e.g., Scientia Health Group).
- Convertible Notes: Assess the dilution risk associated with the $175 million Convertible Notes, which are convertible into Class A and Class B common stock.
- Commodity Costs: Track the impact of rising roast beef costs on the gross margins of company-owned units in the fourth quarter.