UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| | |
(X) | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended OctoberApril 3, 20102011
OR
|
| | |
( ) | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _______________
Commission file number: 1-2207
WENDY’S/ARBY’S GROUP, INC.
(Exact name of registrantregistrants as specified in its charter)
|
| | |
Delaware | | 38-0471180 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
| | |
1155 Perimeter Center West, Atlanta, GA | | 30338 |
(Address of principal executive offices) | | (Zip Code) |
(678) 514-4100
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Commission file number: 333-161613
WENDY’S/ARBY’S RESTAURANTS, LLC
(Exact name of registrants as specified in its charter)
|
| | |
Delaware | | 38-0471180 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
1155 Perimeter Center West, Atlanta, GA | | 30338 |
(Address of principal executive offices) | | (Zip Code) |
(678) 514-4100
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Wendy’s/Arby’s Group, Inc. Yes [X][x] No [ ]
Wendy’s/Arby’s Restaurants, LLC Yes [ ] No [x]*
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Wendy’s/Arby’s Group, Inc. Yes [X[x] No [ ]
Wendy’s/Arby’s Restaurants, LLC Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Wendy’s/Arby’s Group, Inc.
Large accelerated filer [X][x] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
Wendy’s/Arby’s Restaurants, LLC
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x] Smaller reporting company [ ]
Indicate by check mark whether theeither registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X ][x]
There were 418,367,459419,022,290 shares of the registrant’s Common StockWendy’s/Arby’s Group, Inc. common stock outstanding as of NovemberMay 2, 2010.2011.
Wendy’s/Arby’s Restaurants, LLC meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with reduced disclosure format.
* Wendy’s/Arby’s Restaurants, LLC has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the period it was required to file such reports.
Explanatory Note
This Quarterly Report on Form 10-Q is a combined report being filed separately by Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s”) and Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”), a direct 100% owned subsidiary holding company of Wendy’s/Arby’s. Unless the context indicates otherwise, any reference in this report to the “Companies,” “we,” “us,” and “our” refers to Wendy’s/Arby’s together with its direct and indirect subsidiaries, including Wendy’s/Arby’s Restaurants. Each registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such registrant. Each registrant hereto is not filing any information that does not relate to such registrant, and therefore makes no representation as to any such information.
The principal subsidiaries of Wendy’s/Arby’s Restaurants are Wendy’s International, Inc. (“Wendy’s”) and Arby’s Restaurant Group, Inc. (“Arby’s”) and their subsidiaries. Substantially all of the operating results of Wendy’s/Arby’s are derived from the operating results of Wendy’s/Arby’s Restaurants, except for certain administrative expenses of Wendy’s/Arby’s. Where information or an explanation is provided that is substantially the same for each company, such information or explanation has been combined in this Quarterly Report on Form 10-Q. Where information or an explanation is not substantially the same for each company, we have provided separate information and explanation. In addition, separate financial statements for each company are included in Part I Item 1, “Financial Statements.”
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
INDEX TO FORM 10-Q
|
| |
| Page |
| |
| |
Wendy’s/Arby’s Group, Inc. and Subsidiaries | |
| |
| |
| |
Wendy’s/Arby’s Restaurants, LLC and Subsidiaries | |
| |
| |
| |
Wendy’s/Arby’s Group, Inc. and Subsidiaries and Wendy’s/Arby’s Restaurants, LLC and Subsidiaries | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.Statements.
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
| | | October 3, | | | January 3, | | | | | | | | |
| | 2010 | | | 2010 | | April 3, 2011 | | January 2, 2011 |
ASSETS | | (Unaudited) | | | | | (Unaudited) | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | | $ | 520,514 | | | $ | 591,719 | | $ | 500,061 | | | $ | 512,508 | |
Accounts and notes receivable | | | 88,521 | | | | 88,004 | | 84,623 | | | 84,258 | |
Inventories | | | 21,238 | | | | 23,024 | | 23,112 | | | 22,694 | |
Prepaid expenses and other current assets | | | 42,935 | | | | 29,212 | | 53,783 | | | 24,386 | |
Deferred income tax benefit | | | 78,764 | | | | 66,557 | | 54,996 | | | 34,389 | |
Advertising funds restricted assets | | | 102,758 | | | | 80,476 | | 85,478 | | | 76,553 | |
Total current assets | | | 854,730 | | | | 878,992 | | 802,053 | | | 754,788 | |
Notes receivable | | | 14,065 | | | | 39,295 | | |
Properties | | 1,519,962 | | | 1,551,261 | |
Other intangible assets | | 1,351,418 | | | 1,358,574 | |
Goodwill | | 888,095 | | | 883,644 | |
Investments | | | 106,865 | | | | 107,020 | | 109,941 | | | 107,223 | |
Properties | | | 1,554,740 | | | | 1,619,248 | | |
Goodwill | | | 882,611 | | | | 881,019 | | |
Other intangible assets | | | 1,367,078 | | | | 1,392,883 | | |
Deferred costs and other assets | | | 74,591 | | | | 56,959 | | 69,272 | | | 77,164 | |
Total assets | | $ | 4,854,680 | | | $ | 4,975,416 | | $ | 4,740,741 | | | $ | 4,732,654 | |
| | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | |
Current portion of long-term debt | | $ | 17,923 | | | $ | 22,127 | | $ | 17,350 | | | $ | 18,415 | |
Accounts payable | | | 88,515 | | | | 103,454 | | 68,745 | | | 81,361 | |
Accrued expenses and other current liabilities | | | 247,925 | | | | 269,090 | | 240,519 | | | 245,157 | |
Advertising funds restricted liabilities | | | 102,758 | | | | 80,476 | | 85,478 | | | 76,553 | |
Total current liabilities | | | 457,121 | | | | 475,147 | | 412,092 | | | 421,486 | |
Long-term debt | | | 1,559,634 | | | | 1,500,784 | | 1,526,674 | | | 1,553,987 | |
Deferred income | | | 21,815 | | | | 13,195 | | 39,745 | | | 11,460 | |
Deferred income taxes | | | 469,973 | | | | 475,538 | | 430,189 | | | 412,293 | |
Other liabilities | | | 171,550 | | | | 174,413 | | 164,928 | | | 170,254 | |
Commitments and contingencies | | | | | | | | | | | | | |
Stockholders’ equity: | | | | | | | | | | | | | |
Common stock | | | 47,042 | | | | 47,042 | | 47,042 | | | 47,042 | |
Additional paid-in capital | | | 2,768,404 | | | | 2,761,433 | | 2,774,276 | | | 2,771,126 | |
Accumulated deficit | | | (393,333 | ) | | | (380,480 | ) | (422,257 | ) | | (412,464 | ) |
Common stock held in treasury, at cost | | | (249,755 | ) | | | (85,971 | ) | (246,568 | ) | | (249,547 | ) |
Accumulated other comprehensive income (loss) | | | 2,229 | | | | (5,685 | ) | |
Accumulated other comprehensive income | | 14,620 | | | 7,017 | |
Total stockholders’ equity | | | 2,174,587 | | | | 2,336,339 | | 2,167,113 | | | 2,163,174 | |
Total liabilities and stockholders’ equity | | $ | 4,854,680 | | | $ | 4,975,416 | | $ | 4,740,741 | | | $ | 4,732,654 | |
See accompanying notes to condensed consolidated financial statements.
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
| | Three Months Ended | | | Nine Months Ended | |
| | October 3, | | | September 27, | | | October 3, | | | September 27, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | (Unaudited) | |
Revenues: | | | | | | | | | | | | |
Sales | | $ | 765,988 | | | $ | 806,038 | | | $ | 2,296,868 | | | $ | 2,395,476 | |
Franchise revenues | | | 95,226 | | | | 97,183 | | | | 278,814 | | | | 284,416 | |
| | | 861,214 | | | | 903,221 | | | | 2,575,682 | | | | 2,679,892 | |
Costs and expenses: | | | | | | | | | | | | | | | | |
Cost of sales | | | 667,063 | | | | 684,071 | | | | 1,967,569 | | | | 2,046,475 | |
General and administrative | | | 97,948 | | | | 97,909 | | | | 305,942 | | | | 320,533 | |
Depreciation and amortization | | | 46,178 | | | | 47,020 | | | | 137,448 | | | | 143,369 | |
Impairment of long-lived assets | | | 27,409 | | | | 15,528 | | | | 41,424 | | | | 31,108 | |
Facilities relocation and corporate restructuring | | | - | | | | 1,725 | | | | - | | | | 8,899 | |
Other operating expense, net | | | 2,271 | | | | 146 | | | | 3,958 | | | | 2,245 | |
| | | 840,869 | | | | 846,399 | | | | 2,456,341 | | | | 2,552,629 | |
Operating profit | | | 20,345 | | | | 56,822 | | | | 119,341 | | | | 127,263 | |
Interest expense | | | (33,868 | ) | | | (36,457 | ) | | | (104,535 | ) | | | (89,671 | ) |
Loss on early extinguishment of debt | | | - | | | | - | | | | (26,197 | ) | | | - | |
Investment income (expense), net | | | 77 | | | | 737 | | | | 5,256 | | | | (3,850 | ) |
Other than temporary losses on investments | | | - | | | | - | | | | - | | | | (3,916 | ) |
Other income, net | | | 268 | | | | 1,319 | | | | 2,974 | | | | 303 | |
(Loss) income from continuing operations | | | | | | | | | | | | | | | | |
before income taxes | | | (13,178 | ) | | | 22,421 | | | | (3,161 | ) | | | 30,129 | |
Benefit from (provision for) income taxes | | | 12,269 | | | | (8,155 | ) | | | 9,594 | | | | (11,895 | ) |
(Loss) income from continuing operations | | | (909 | ) | | | 14,266 | | | | 6,433 | | | | 18,234 | |
Income from discontinued operations, net of income taxes | | | - | | | | 422 | | | | - | | | | 422 | |
Net (loss) income | | $ | (909 | ) | | $ | 14,688 | | | $ | 6,433 | | | $ | 18,656 | |
| | | | | | | | | | | | | | | | |
Basic and diluted income per share: | | $ | .00 | | | $ | .03 | | | $ | .01 | | | $ | .04 | |
| | | | | | | | | | | | | | | | |
Dividends per share: | | $ | .015 | | | $ | .015 | | | $ | .045 | | | $ | .045 | |
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
| (Unaudited) |
Revenues: | | | |
Sales | $ | 756,496 | | | $ | 748,197 | |
Franchise revenues | 91,328 | | | 89,250 | |
| 847,824 | | | 837,447 | |
Costs and expenses: | | | | | |
Cost of sales | 659,788 | | | 641,422 | |
General and administrative | 103,627 | | | 110,482 | |
Depreciation and amortization | 43,125 | | | 46,326 | |
Impairment of long-lived assets | 9,612 | | | 11,601 | |
Other operating expense, net | 1,032 | | | 1,283 | |
| 817,184 | | | 811,114 | |
Operating profit | 30,640 | | | 26,333 | |
Interest expense | (34,328 | ) | | (36,278 | ) |
Other income, net | 323 | | | 1,408 | |
Loss before income taxes | (3,365 | ) | | (8,537 | ) |
Benefit from income taxes | 1,956 | | | 5,137 | |
Net loss | $ | (1,409 | ) | | $ | (3,400 | ) |
| | | |
Basic and diluted loss per share: | | $ .00 | | | $ | (.01 | ) |
| | | |
Dividends per share: | $ | .02 | | | $ | .015 | |
See accompanying notes to condensed consolidated financial statements.
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| | Nine Months Ended | |
| | October 3, | | | September 27, | |
| | 2010 | | | 2009 | |
| | (Unaudited) | |
Cash flows from continuing operating activities: | | | | | | |
Net income | | $ | 6,433 | | | $ | 18,656 | |
Adjustments to reconcile net income to net cash provided by continuing operating activities: | | | | | | | | |
Depreciation and amortization | | | 137,448 | | | | 143,369 | |
Impairment of long-lived assets | | | 41,424 | | | | 31,108 | |
Accretion of long-term debt | | | 13,013 | | | | 7,516 | |
Share-based compensation provision | | | 10,519 | | | | 11,654 | |
Write off and amortization of deferred financing costs | | | 10,391 | | | | 13,915 | |
Net receipt of deferred vendor incentive | | | 10,096 | | | | 13,016 | |
Distributions received from joint venture | | | 9,718 | | | | 7,106 | |
Non-cash rent expense | | | 7,152 | | | | 9,907 | |
Provision for doubtful accounts | | | 7,586 | | | | 4,390 | |
Deferred income tax benefit, net | | | (16,298 | ) | | | (300 | ) |
Equity in earnings of joint venture | | | (7,127 | ) | | | (6,258 | ) |
Operating investment adjustments, net (see below) | | | (5,201 | ) | | | 2,673 | |
Income from discontinued operations | | | - | | | | (422 | ) |
Other, net | | | (2,171 | ) | | | (3,892 | ) |
Changes in operating assets and liabilities, net: | | | | | | | | |
Accounts and notes receivable | | | (6,971 | ) | | | 11 | |
Inventories | | | 1,824 | | | | 2,770 | |
Prepaid expenses and other current assets | | | (6,853 | ) | | | (7,606 | ) |
Accounts payable | | | (8,973 | ) | | | (49,457 | ) |
Accrued expenses and other current liabilities | | | (34,638 | ) | | | 53,145 | |
Net cash provided by continuing operating activities | | | 167,372 | | | | 251,301 | |
Cash flows from continuing investing activities: | | | | | | | | |
Capital expenditures | | | (94,736 | ) | | | (65,280 | ) |
Investment activities, net (see below) | | | 32,237 | | | | 36,756 | |
Proceeds from dispositions | | | 4,394 | | | | 9,386 | |
Other, net | | | 407 | | | | 2,304 | |
Net cash used in continuing investing activities | | | (57,698 | ) | | | (16,834 | ) |
Cash flows from continuing financing activities: | | | | | | | | |
Proceeds from long-term debt | | | 497,661 | | | | 556,006 | |
Repayments of long-term debt | | | (470,942 | ) | | | (154,427 | ) |
Repurchase of common stock | | | (173,537 | ) | | | (25,244 | ) |
Dividends paid | | | (19,260 | ) | | | (21,088 | ) |
Deferred financing costs | | | (16,286 | ) | | | (37,976 | ) |
Other, net | | | 591 | | | | 1,685 | |
Net cash (used in) provided by continuing financing activities | | | (181,773 | ) | | | 318,956 | |
Net cash (used in) provided by continuing operations before effect of | | | | | | | | |
exchange rate changes on cash | | | (72,099 | ) | | | 553,423 | |
Effect of exchange rate changes on cash | | | 894 | | | | 1,671 | |
Net cash (used in) provided by continuing operations | | | (71,205 | ) | | | 555,094 | |
Net cash used in discontinued operations | | | - | | | | (538 | ) |
Net (decrease) increase in cash and cash equivalents | | | (71,205 | ) | | | 554,556 | |
Cash and cash equivalents at beginning of period | | | 591,719 | | | | 90,090 | |
Cash and cash equivalents at end of period | | $ | 520,514 | | | $ | 644,646 | |
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
| (Unaudited) |
Cash flows from operating activities: | | | |
Net loss | $ | (1,409 | ) | | $ | (3,400 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 43,125 | | | 46,326 | |
Net receipt of deferred vendor incentives | 29,357 | | | 31,067 | |
Impairment of long-lived assets | 9,612 | | | 11,601 | |
Share-based compensation provision | 3,241 | | | 3,519 | |
Distributions received from joint venture | 3,113 | | | 2,968 | |
Write-off and amortization of deferred financing costs | 2,151 | | | 1,701 | |
Accretion of long-term debt | 2,130 | | | 2,715 | |
Non-cash rent expense | 1,807 | | | 2,879 | |
Provision for doubtful accounts | 903 | | | 2,600 | |
Equity in earnings in joint venture | (2,363 | ) | | (1,850 | ) |
Deferred income tax benefit, net | (2,900 | ) | | (8,546 | ) |
Other, net | 273 | | | 1,236 | |
Changes in operating assets and liabilities: | | | |
Accounts and notes receivable | 2,342 | | | 1,762 | |
Inventories | (370 | ) | | 1,295 | |
Prepaid expenses and other current assets | (8,676 | ) | | (5,300 | ) |
Accounts payable | 4,234 | | | (13,025 | ) |
Accrued expenses and other current liabilities | (33,107 | ) | | (42,307 | ) |
Net cash provided by operating activities | 53,463 | | | 35,241 | |
Cash flows from investing activities: | | | | | |
Capital expenditures | (28,568 | ) | | (27,143 | ) |
Business acquisition | (2,900 | ) | | — | |
Other, net | 300 | | | 2,958 | |
Net cash used in investing activities | (31,168 | ) | | (24,185 | ) |
Cash flows from financing activities: | | | | | |
Repayments of long-term debt | (30,211 | ) | | (10,216 | ) |
Dividends paid | (8,374 | ) | | (6,653 | ) |
Proceeds from stock option exercises | 2,902 | | | 939 | |
Repurchases of common stock | — | | | (80,842 | ) |
Other, net | (18 | ) | | 23 | |
Net cash used in financing activities | (35,701 | ) | | (96,749 | ) |
Net cash used in operations before effect of exchange rate | | | |
changes on cash | (13,406 | ) | | (85,693 | ) |
Effect of exchange rate changes on cash | 959 | | | 1,258 | |
Net decrease in cash and cash equivalents | (12,447 | ) | | (84,435 | ) |
Cash and cash equivalents at beginning of period | 512,508 | | | 591,719 | |
Cash and cash equivalents at end of period | $ | 500,061 | | | $ | 507,284 | |
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In Thousands)
| | Nine Months Ended | |
| | October 3, | | | September 27, | |
| | 2010 | | | 2009 | |
| | (Unaudited) | |
Detail of cash flows related to investments: | | | | | | |
Operating investment adjustments, net: | | | | | | |
Income on collection of DFR Notes | | $ | (4,909 | ) | | $ | - | |
Other than temporary losses on investments | | | - | | | | 3,916 | |
Other, net | | | (292 | ) | | | (1,243 | ) |
| | $ | (5,201 | ) | | $ | 2,673 | |
Investment activities, net: | | | | | | | | |
Proceeds from sales of available-for-sale securities, securities sold short, and distributions from other investments | | $ | 1,810 | | | $ | 29,663 | |
Decrease in restricted cash held for investment | | | - | | | | 26,681 | |
Proceeds from repayment of DFR Notes | | | 30,752 | | | | - | |
Cost of available-for-sale securities, other investments purchased, and payments to cover short positions in securities | | | (325 | ) | | | (19,588 | ) |
| | $ | 32,237 | | | $ | 36,756 | |
Supplemental cash flow information: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | $ | 108,556 | | | $ | 53,110 | |
Income taxes, net of refunds | | $ | 11,513 | | | $ | 9,999 | |
Supplemental non-cash investing and financing activities: | | | | | | | | |
Total capital expenditures | | $ | 99,553 | | | $ | 70,990 | |
Cash capital expenditures | | | (94,736 | ) | | | (65,280 | ) |
Non-cash capitalized lease and certain sales-leaseback obligations | | $ | 4,817 | | | $ | 5,710 | |
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
| (Unaudited) |
Supplemental cash flow information: | | | | | |
Cash paid during the period for: | | | | | |
Interest | $ | 41,721 | | | $ | 43,375 | |
Income taxes, net of refunds | $ | 2,884 | | | $ | 6,062 | |
See accompanying notes to condensed consolidated financial statements.
WENDY’S/ARBY’S RESTAURANTS, LLC. AND SUBSIDIARIES
4CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
|
| | | | | | | |
| April 3, 2011 | | January 2, 2011 |
ASSETS | (Unaudited) | | |
Current assets: | | | |
Cash and cash equivalents | $ | 181,300 | | | $ | 198,686 | |
Accounts and notes receivable | 83,854 | | | 83,352 | |
Inventories | 23,112 | | | 22,694 | |
Prepaid expenses and other current assets | 52,922 | | | 24,032 | |
Deferred income tax benefit | 43,274 | | | 45,067 | |
Advertising funds restricted assets | 85,478 | | | 76,553 | |
Total current assets | 469,940 | | | 450,384 | |
Properties | 1,511,019 | | | 1,541,853 | |
Other intangible assets | 1,351,418 | | | 1,358,574 | |
Goodwill | 893,372 | | | 888,921 | |
Investments | 105,121 | | | 102,406 | |
Deferred costs and other assets | 68,339 | | | 74,559 | |
Total assets | $ | 4,399,209 | | | $ | 4,416,697 | |
| | | |
LIABILITIES AND INVESTED EQUITY | | | | | |
Current liabilities: | | | | | |
Current portion of long-term debt | $ | 16,072 | | | $ | 17,047 | |
Accounts payable | 67,912 | | | 81,148 | |
Accrued expenses and other current liabilities | 239,574 | | | 244,300 | |
Advertising funds restricted liabilities | 85,478 | | | 76,553 | |
Total current liabilities | 409,036 | | | 419,048 | |
Long-term debt | 1,515,728 | | | 1,542,684 | |
Due to Wendy’s/Arby’s | 17,486 | | | 30,808 | |
Deferred income | 39,745 | | | 11,460 | |
Deferred income taxes | 476,526 | | | 478,472 | |
Other liabilities | 152,440 | | | 157,595 | |
Commitments and contingencies | | | | | |
Invested equity: | | | |
Member interest, $0.01 par value; 1,000 shares authorized, one share issued and outstanding | — | | | — | |
Other capital | 2,426,458 | | | 2,423,459 | |
Accumulated deficit | (498,475 | ) | | (499,500 | ) |
Advances to Wendy’s/Arby’s | (155,000 | ) | | (155,000 | ) |
Accumulated other comprehensive income | 15,265 | | | 7,671 | |
Total invested equity | 1,788,248 | | | 1,776,630 | |
Total liabilities and invested equity | $ | 4,399,209 | | | $ | 4,416,697 | |
See accompanying notes to condensed consolidated financial statements.
WENDY’S/ARBY’S RESTAURANTS, LLC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
| (Unaudited) |
Revenues: | | | |
Sales | $ | 756,496 | | | $ | 748,197 | |
Franchise revenues | 91,328 | | | 89,250 | |
| 847,824 | | | 837,447 | |
Costs and expenses: | | | | | |
Cost of sales | 659,788 | | | 641,422 | |
General and administrative | 100,276 | | | 108,760 | |
Depreciation and amortization | 42,660 | | | 45,860 | |
Impairment of long-lived assets | 9,612 | | | 11,601 | |
Other operating expense, net | 977 | | | 1,550 | |
| 813,313 | | | 809,193 | |
Operating profit | 34,511 | | | 28,254 | |
Interest expense | (34,101 | ) | | (35,939 | ) |
Other income, net | 283 | | | 495 | |
Income (loss) before income taxes | 693 | | | (7,190 | ) |
Benefit from income taxes | 332 | | | 4,630 | |
Net income (loss) | $ | 1,025 | | | $ | (2,560 | ) |
See accompanying notes to condensed consolidated financial statements.
WENDY’S/ARBY’S RESTAURANTS, LLC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
| (Unaudited) |
Cash flows from operating activities: | | | |
Net income (loss) | $ | 1,025 | | | $ | (2,560 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 42,660 | | | 45,860 | |
Net receipt of deferred vendor incentives | 29,357 | | | 31,067 | |
Impairment of long-lived assets | 9,612 | | | 11,601 | |
Distributions received from joint venture | 3,113 | | | 2,968 | |
Share-based compensation provision | 2,999 | | | 3,307 | |
Write-off and amortization of deferred financing costs | 2,148 | | | 1,695 | |
Accretion of long-term debt | 2,130 | | | 2,715 | |
Non-cash rent expense | 1,807 | | | 2,879 | |
Provision for doubtful accounts | 903 | | | 2,600 | |
Deferred income tax benefit, net | (336 | ) | | (3,433 | ) |
Other operating transactions with Wendy’s/Arby’s | (662 | ) | | (3,624 | ) |
Tax sharing payable to Wendy’s/ Arby’s, net | (914 | ) | | (4,627 | ) |
Equity in earnings in joint venture | (2,363 | ) | | (1,850 | ) |
Tax sharing payment to Wendy’s/ Arby’s | (13,078 | ) | | — | |
Other, net | 429 | | | 1,596 | |
Changes in operating assets and liabilities: | | | |
Accounts and notes receivable | 2,206 | | | 2,041 | |
Inventories | (370 | ) | | 1,295 | |
Prepaid expenses and other current assets | (8,497 | ) | | (5,319 | ) |
Accounts payable | 3,614 | | | (11,959 | ) |
Accrued expenses and other current liabilities | (33,180 | ) | | (39,189 | ) |
Net cash provided by operating activities | 42,603 | | | 37,063 | |
Cash flows from investing activities: | | | |
Capital expenditures | (28,568 | ) | | (27,143 | ) |
Business acquisition | (2,900 | ) | | — | |
Other, net | 303 | | | 2,432 | |
Net cash used in investing activities | (31,165 | ) | | (24,711 | ) |
Cash flows from financing activities: | | | |
Repayments of long-term debt | (29,765 | ) | | (4,849 | ) |
Dividends paid to Wendy’s/ Arby’s | — | | | (112,000 | ) |
Other, net | (18 | ) | | 161 | |
Net cash used in financing activities | (29,783 | ) | | (116,688 | ) |
Net cash used in operations before effect of exchange rate | | | |
changes on cash | (18,345 | ) | | (104,336 | ) |
Effect of exchange rate changes on cash | 959 | | | 1,258 | |
Net decrease in cash and cash equivalents | (17,386 | ) | | (103,078 | ) |
Cash and cash equivalents at beginning of period | 198,686 | | | 538,864 | |
Cash and cash equivalents at end of period | $ | 181,300 | | | $ | 435,786 | |
WENDY’S/ARBY’S RESTAURANTS, LLC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In Thousands)
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
| (Unaudited) |
Supplemental cash flow information: | | | |
Cash paid during the period for: | | | |
Interest | $ | 41,449 | | | $ | 42,838 | |
Income taxes, net of refunds | $ | 2,273 | | | $ | 3,202 | |
See accompanying notes to condensed consolidated financial statements.
WENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s” or “Wendy’s/Arby’s Group” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”“Company”) and Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”), a 100% owned subsidiary of Wendy’s/Arby’s, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments necessary to present fairly our financial position as of OctoberApril 3, 2010,2011, and the results of our operations and cash flows for the three months ended April 3, 2011 and nine m onths ended October 3, 2010 and September 27, 2009 and our cash flows for the nine months ended October 3, 2010 and September 27, 2009.April 4, 2010. The results of operations for the three months and nine months ended OctoberApril 3, 20102011 are not necessarily indicative of the results to be expected for the full 20102011 fiscal year. These Financial Statements should be read in conjunction with the audited consolidated financial statements for Wendy’s/Arby’s and Wendy’s/Arby’s Restaurants, and combined notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 3, 20102, 2011 (the “Form 10-K”).
Except where otherwise indicated, these combined notes relate to the Financial Statements for each of Wendy’s/Arby’s and Wendy’s/Arby’s Restaurants (the “Companies”). References herein to Wendy’s/Arby’s corporate (“Corporate”) represent Wendy’s/Arby’s parent company functions only and their effect on the consolidated results of operations and financial condition.
In January 2011, Wendy’s/Arby’s announced that it is exploring strategic alternatives for Arby’s Restaurant Group, Inc. (“Arby’s”), including a sale of the brand. This process is continuing and there is no assurance as to any particular outcome. To address uncertainties for our employees created by this process, Wendy’s/Arby’s has implemented a retention program; the payment of a portion of this program is conditioned on the sale of Arby’s. During the 2011 first quarter, Wendy’s/Arby’s Restaurants and Wendy’s/Arby’s accrued costs of $1,279 and $1,307, respectively, which are included in “General and administrative” related to the portion of this retention program not conditioned on the sale of Arby’s. While the process is pending, Arby’s will continue to execute its growth initiatives. Arby’s did not meet the financial accounting requirements to be classified as held for sale or to be reported as discontinued operations as of April 3, 2011. As of April 3, 2011, the carrying value of our Arby’s business (defined as total assets less all non-intercompany liabilities) was $164,000. (See Note 9 for further segment information.)
We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. Our 2009 fiscal year consisted of 53 weeks with our fiscal fourth quarter containing 14 weeks. AllBoth three month and nine month periods presented herein contain 13 weeks and 39 weeks, respectively.weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.
(2) Acquisitions and Dispositions
During the nine months ended October 3, 2010, the Company received proceeds from dispositionsfirst quarter of $4,394 consisting of $2,332 from the sale of two Company-owned2011, Wendy’s International, Inc. (“Wendy’s”) restaurantsacquired the operating assets, net of liabilities assumed, of three Wendy’s franchised restaurants. The total consideration for this acquisition before post closing adjustments was $3,960 consisting of (1) $2,900 of cash, net of $45 cash acquired and 11 Company-owned Arby’s Restaurant Group,(2) the issuance of a note payable of $1,060.
Other restaurant acquisitions and dispositions during the periods presented were not significant.
(3) Investment in Joint Venture with Tim Hortons Inc.
Wendy’s is a partner in a Canadian restaurant real estate joint venture (“Arby’s” or “ARG”TimWen”) restaurants to franchiseeswith Tim Hortons Inc. Wendy’s 50% share of the respective brands, $227joint venture is accounted for using the equity method of accounting. Our equity in earnings from the sale of surplus properties, and $1,835 related to other dispositions. These sales resulted in a net gain of $293, which is included as an offset to “Depreciation and amortization.”
During the nine months ended September 27, 2009, the Company received proceeds from dispositions of $9,386 consisting of $4,345 from the sale of 11 Company-owned Wendy’s restaurants to a franchisee of Wendy’s, $3,821 from the sale of surplus properties, and $1,220 related to other dispositions. These sales resulted in a net gain of $1,944, which is included as an offset to “Depreciation and amortization.”
(3) DFR Notes
On June 9, 2010, pursuant to a March 2010 agreement between the Company and Deerfield Capital Corp. (“DFR”), we received cash proceeds of $31,330, including interest, in consideration for the repayment and cancellation of the series A senior notes (the “DFR Notes”) we received in December 2007 in connection with the sale of Deerfield & Company (the “Deerfield Sale”) to DFR. Additional information on the DFR Notes and the Deerfield Sale is discussed in our Form 10-K. The proceeds represented 64.1% of the $47,986 aggregate principal amount of the DFR Notes.
During the fourth quarter of 2008, we recognized an allowance for collectability of $21,227 to reduce the then carrying amount of the DFR Notes to $24,983. As a result, we recognized income of $4,909 during the nine months ended October 3, 2010 as the repayment proceeds exceeded the carrying value of the DFR Notes. This gainTimWen is included in “Investment income (expense),“Other operating expense, net.”
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(4) Long-Term Debt
Long-term debt consistedPresented below is an unaudited summary of the following:
| | October 3, | | | January 3, | |
| | 2010 | | | 2010 | |
| | | | | | |
10% Senior Notes, due in 2016 | | $ | 552,874 | | | $ | 551,779 | |
Term Loan, due in 2017 | | | 496,384 | | | | - | |
Senior secured term loan | | | - | | | | 251,488 | |
6.20% senior notes, due in 2014 | | | 220,992 | | | | 204,303 | |
6.25% senior notes | | | - | | | | 193,618 | |
Sale-leaseback obligations, due through 2029 | | | 122,624 | | | | 125,176 | |
Capitalized lease obligations, due through 2036 | | | 87,053 | | | | 89,886 | |
7% Debentures, due in 2025 | | | 80,912 | | | | 80,081 | |
6.54% Secured equipment term loan, due in 2013 | | | 12,891 | | | | 18,901 | |
5% Convertible notes | | | - | | | | 2,100 | |
Other | | | 3,827 | | | | 5,579 | |
| | | 1,577,557 | | | | 1,522,911 | |
Less amounts payable within one year | | | (17,923 | ) | | | (22,127 | ) |
| | $ | 1,559,634 | | | $ | 1,500,784 | |
activity related to our portion of TimWen included in our condensed consolidated balance sheets and condensed consolidated statements of operations:
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
Balance at beginning of period (a) | $ | 98,631 | | | $ | 97,476 | |
| | | |
Equity in earnings for the period | 2,926 | | | 2,698 | |
Amortization of purchase price adjustments | (563 | ) | | (848 | ) |
| 2,363 | | | 1,850 | |
| | | |
Distributions | (3,113 | ) | | (2,968 | ) |
Currency translation adjustment included in “Comprehensive income” | 3,465 | | | 4,350 | |
Balance at end of period (a) | $ | 101,346 | | | $ | 100,708 | |
_____________________ | | | |
(a) Included in “Investments.” | | | |
On May 24, 2010, Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”),
Presented below is a direct wholly-owned subsidiarysummary of the Company, entered into a $650,000 Credit Agreement (the “Credit Agreement”), which includes a $500,000 senior secured term loan facility (the “Term Loan”)unaudited financial information of TimWen as of and a $150,000 senior secured revolving credit facility (the “Credit Facility”). The Credit Agreement contains provisions for an uncommitted increase of up to $300,000 principal amount in the aggregate in the Credit Facility and/or Term Loan subject to the satisfaction of certain conditions. The Credit Facility includes a sub-facility for the issuance of up to $70,000 of letters of credit.three months ended April 3, 2011 and April 4, 2010, respectively, in Canadian dollars. The obligations under the Credit Agreement are secured by substantially all of the non-real est atesummary balance sheet financial information does not distinguish between current and long-term assets of Wendy’s/Arby’s Restaurants and its domestic subsidiaries (other than certain unrestricted subsidiaries), the stock of its domestic subsidiaries (other than certain unrestricted subsidiaries), 65% of the stock of certain of its foreign subsidiaries, as well as by mortgages on certain restaurant properties.
The Term Loan was issued at 99.5% of the principal amount, which represented an original issue discount of 0.5% and resulted in net proceeds paid to us of $497,500. The $2,500 discount is being accreted and the related charge included in interest expense through the maturity of the Term Loan. The Term Loan will mature on May 24, 2017 and requires quarterly principal installments which commenced on September 30, 2010 equal to 1% per annum of the initial principal amount outstanding, with the balance payable on the maturity date.
The Credit Facility expires not later than May 24, 2015. An unused commitment fee of 50 basis points per annum is payable quarterly on the average unused amount of the Credit Facility until the maturity date.
The interest rate on the Term Loan is based on (i) the Eurodollar Rate as defined in the Credit Agreement (but not less than 1.50%), plus 3.50%, or a Base Rate, as defined in the Credit Agreement (but not less than 2.50%), plus 2.50%. Since the inception of the Term Loan, we have elected to use the Eurodollar Rate which resulted in an interest rate on the Term Loan of 5.00% as of October 3, 2010.liabilities:
Wendy’s/Arby’s Restaurants incurred approximately $16,353 in costs related to the Credit Agreement, which is being amortized to interest expense over the Term Loan’s term utilizing the effective interest rate method.
Proceeds from the Term Loan were used to (1) repay approximately $253,849 of existing indebtedness, including fees and interest, under the then existing Wendy’s/Arby’s Restaurants amended senior secured term loan scheduled to be due in 2012, (2) redeem the Wendy’s 6.25% senior notes scheduled to be due in 2011, and (3) pay fees and expenses related to the Credit Agreement. The remaining Term Loan proceeds were used for working capital and other general corporate purposes.
The Company recognized a loss on early extinguishment of debt of $26,197 in the second quarter of 2010 related to the repayment of debt from the proceeds of the Term Loan. This loss consisted of (1) a $14,953 premium payment required to redeem the Wendy’s 6.25% senior notes, (2) $5,477 for the write-off of the unaccreted discount of the Wendy’s 6.25% senior notes (recorded in connection with the Wendy’s merger), and (3) $5,767 for the write-off of deferred costs associated with the repayment of the prior senior secured term loan.
|
| | | | | | | |
| April 3, 2011 | | April 4, 2010 |
Balance sheet information: | | | |
Properties | C$ | 77,714 | | | C$ | 82,005 | |
Cash and cash equivalents | 2,011 | | | — | |
Accounts receivable | 3,775 | | | 4,107 | |
Other | 2,980 | | | 3,418 | |
| C$ | 86,480 | | | C$ | 89,530 | |
| | | |
Accounts payable and accrued liabilities | C$ | 701 | | | C$ | 1,195 | |
Other liabilities | 9,222 | | | 9,006 | |
Partners’ equity | 76,557 | | | 79,329 | |
| C$ | 86,480 | | | C$ | 89,530 | |
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
Income statement information: | | | |
Revenues | C$ | 8,906 | | | C$ | 8,720 | |
Income before income taxes and net income | 6,129 | | | 5,376 | |
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The affirmative and negative covenants in the Credit Agreement include, among others, preservation of corporate existence; payment of taxes; and maintenance of insurance; and limitations on: indebtedness (including guarantee obligations of other indebtedness); liens; mergers, consolidations, liquidations and dissolutions; sales of assets; dividends and other payments in respect of capital stock; investments; payments of certain indebtedness; transactions with affiliates; changes in fiscal year; negative pledge clauses and clauses restricting subsidiary distributions; and material changes in lines of business. The financial covenants contained in the Credit Agreement are (i) a consolidated interest coverage ratio, (ii) a consolidated senior secured leverage ratio, and (iii) a consolidated senior secured lease adjusted levera ge ratio. The covenants generally do not restrict Wendy’s/Arby’s or any of its subsidiaries that are not subsidiaries of Wendy’s/Arby’s Restaurants. Wendy’s/Arby’s Restaurants was in compliance with all covenants of the Credit Agreement as of October 3, 2010.
Convertible Notes
On June 17, 2010, we repurchased the remaining 5% convertible notes (the “Convertible Notes”) for $2,109, including accrued interest. The Convertible Notes were repurchased at a price of 100% of their principal amount plus accrued interest.
(5)(4) Fair Value Measurement of Financial Assets and LiabilitiesInstruments
The carrying amounts and estimated fair values of the Company’sCompanies’ financial assets and liabilities instruments for which the disclosure of fair values is required were as follows:
| | October 3, 2010 | |
| | Carrying | | | Fair | |
| Amount | | | Value | |
Financial assets: | | | | | | |
Cash and cash equivalents (a) | | $ | 520,514 | | | $ | 520,514 | |
Restricted cash equivalents (a): | | | | | | | | |
Current - included in “Prepaid expenses and other current assets” | | | 1,898 | | | | 1,898 | |
Non-current - included in “Deferred costs and other assets” | | | 4,456 | | | | 4,456 | |
Non-current cost investments (b) | | | 8,515 | | | | 10,790 | |
Interest rate swaps (c) | | | 13,919 | | | | 13,919 | |
| | | | | | | | |
Financial liabilities: | | | | | | | | |
Long-term debt, including current portion: | | | | | | | | |
10% Senior Notes (d) | | $ | 552,874 | | | $ | 614,155 | |
Term Loan (d) | | | 496,384 | | | | 501,500 | |
6.20% senior notes (d) | | | 220,992 | | | | 247,244 | |
Sale-leaseback obligations (e) | | | 122,624 | | | | 134,908 | |
Capitalized lease obligations (e) | | | 87,053 | | | | 94,907 | |
7% Debentures (d) | | | 80,912 | | | | 87,000 | |
6.54% Secured equipment term loan (e) | | | 12,891 | | | | 13,389 | |
Other | | | 3,827 | | | | 3,957 | |
Total long-term debt, including current portion | | $ | 1,577,557 | | | $ | 1,697,060 | |
Guarantees of: | | | | | | | | |
Lease obligations for restaurants not operated by the Company (f) | | $ | 343 | | | $ | 343 | |
Wendy’s franchisee loans obligations (g) | | $ | 462 | | | $ | 462 | |
|
| | | | | | | | | | | |
| April 3, 2011 |
| Wendy’s/Arby’s Restaurants | | Corporate | | Wendy’s/Arby’s |
Financial assets | | | | | |
Carrying Amount: | | | | | |
Cash and cash equivalents | $ | 181,300 | | | $ | 318,761 | | | $ | 500,061 | |
Restricted cash equivalents: | | | | | |
Current - included in “Prepaid expenses and other current assets” | 778 | | | — | | | 778 | |
Non-current - included in “Deferred costs and other assets” | 3,536 | | | 685 | | | 4,221 | |
Non-current cost investments | 3,775 | | | 4,820 | | | 8,595 | |
Interest rate swaps | 7,610 | | | — | | | 7,610 | |
| | | | | |
Fair Value: | | | | | |
Cash and cash equivalents (a) | $ | 181,300 | | | $ | 318,761 | | | $ | 500,061 | |
Restricted cash equivalents (a): | | | | | |
Current | 778 | | | — | | | 778 | |
Non-current | 3,536 | | | 685 | | | 4,221 | |
Non-current cost investments (b) | 5,349 | | | 14,593 | | | 19,942 | |
Interest rate swaps (c) | 7,610 | | | — | | | 7,610 | |
|
| | | | | | | |
| April 3, 2011 |
| Carrying Amount | | Fair Value |
Financial liabilities | | | |
Long-term debt, including current portion: | | | |
10% senior notes (d) | $ | 553,653 | | | $ | 624,325 | |
Wendy’s/Arby’s Restaurants term loan (d) | 469,365 | | | 475,210 | |
6.20% senior notes (d) | 217,015 | | | 233,100 | |
Sale-leaseback obligations (e) | 120,607 | | | 120,751 | |
Capitalized lease obligations (e) | 85,343 | | | 85,917 | |
7% debentures (d) | 81,487 | | | 90,000 | |
Other | 4,330 | | | 4,318 | |
Total Wendy’s/Arby’s Restaurants long-term debt, including current portion | 1,531,800 | | | 1,633,621 | |
6.54% aircraft term loan (e) | 12,224 | | | 12,149 | |
Total Wendy’s/Arby’s long-term debt, including current portion | $ | 1,544,024 | | | $ | 1,645,770 | |
|
| | | | | | | |
Guarantees of: | | | |
Lease obligations for restaurants not operated by the Companies (f) | $ | 279 | | | $ | 279 | |
Wendy’s franchisee loans obligations (g) | $ | 368 | | | $ | 368 | |
WENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
_______________
| |
(a) | The carrying amounts approximated fair value due to the short-term maturities of the cash equivalents or restricted cash equivalents. |
| |
(b) | Fair value of these investments was based entirely on statements of account received from investment managers or investees which were principally based on quoted market or broker/dealer prices. To the extent that some of these investments, including the underlying investments in investment limited partnerships, do not have available quoted market or broker/dealer prices, the CompanyCompanies relied on valuations performed by the investment managers or investees in valuing those investments or third-party appraisals. |
| |
(c) | The fair values were based on information provided by the bank counterparties that is model-driven and whose inputs were observable or whose significant value drivers were observable. |
| |
(d) | The fair values were based on quoted market prices, as well as information provided by the bank counterparties that is model-driven and whose inputs were observable or whose significant value drivers were observable.prices. |
| |
(e) | The fair values were determined by discounting the future scheduled principal payments using an interest rate assuming the same original issuance spread over a current U.S. Treasury bond yield for securities with similar durations. |
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
| |
(f) | The fair value was assumed to reasonably approximate the carrying amount. We have accrued liabilities for these lease obligations based on a weighted average risk percentage. |
| |
(g) | Wendy’s provided loan guarantees to various lenders on behalf of franchisees entering into pooled debt facility arrangements for new store development and equipment financing. Wendy’s has accrued a liability for the fair value of these guarantees, the calculation for which was based upon a weighedweighted average risk percentage established at the inception of each program. |
The carrying amounts of current accounts, notes receivable and non-current notes receivable (included in “Deferred costs and other assets”) approximated fair value due to the effect of related allowances for doubtful accounts and notes receivable. The carrying amounts of accounts payable and accrued expenses approximated fair value due to the short-term maturities of those items.
Valuation techniques under the accounting guidance related to fair value measurements were based on observable and unobservable inputs. Observable inputs reflected readily obtainable data from independent sources, while unobservable inputs reflected our market assumptions. These inputs are classified into the following hierarchy:
Level 1 Inputs – - Quoted prices for identical assets or liabilities in active markets.
Level 2 Inputs – - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs – - Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation.
The following table presents ourthe Companies’ financial assets and liabilities (other than cash and cash equivalents) measured at fair value on a recurring basis as of OctoberApril 3, 20102011 by the valuation hierarchy as defined in the fair value guidance:
| | October 3, | | | Fair Value Measurements | |
| | 2010 | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | |
Interest rate swaps (included in “Deferred costs and other assets”) | | $ | 13,919 | | | $ | - | | | $ | 13,919 | | | $ | - | |
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements |
| April 3, 2011 | | Level 1 | | Level 2 | | Level 3 |
Interest rate swaps (included in “Deferred costs and other assets”) | $ | 7,610 | | | $ | — | | | $ | 7,610 | | | $ | — | |
Derivative instruments
The Company’s primary objective for entering into derivative instruments is to manage its exposure to changes in interest rates, as well as to maintain an appropriate mix of fixed and variable rate debt.
During the third quarter of 2009, we entered into eight interest rate swaps with notional amounts totaling $361,000 to swap the fixed rate interest rates on the 6.20% and 6.25% Wendy’s senior notes for floating rates. The interest rate swaps were designated as fair value hedges of the related debt and qualify to be accounted for under the short-cut method according to the applicable guidance, resulting in no ineffectiveness in the hedging relationship.
During the first quarter of 2010, we entered into an interest rate swap with a notional amount of $39,000 on Wendy’s 6.20% senior notes. The interest rate swap was designated as a fair value hedge of the related debt and did not qualify for the short-cut method. This interest rate swap is tested for effectiveness quarterly and the hedge was determined to be effective for each quarterly period in the nine months ended October 3, 2010. If any portion of the hedge was determined to be ineffective, any changes in fair value would be recognized in our results of operations.
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
In connection withThe following table presents the redemptionfair values for those assets and liabilities measured at fair value during the three months ended April 3, 2011 on a non-recurring basis. Total losses include losses recognized from all non-recurring fair value measurements during the quarter ended April 3, 2011 for both the Wendy's and Arby's restaurant segments. The carrying value of properties presented in the table below substantially represents the remaining carrying value of land for properties that were impaired related to the Wendy’s 6.25% senior notes, as discussed aboverestaurant segment. See Note 5 for more information on the impairment of our long-lived assets.
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Three Months Ended April 3, 2011 Total Losses |
| | | Fair Value Measurements | |
| April 3, 2011 | | Level 1 | | Level 2 | | Level 3 | |
Properties | $ | 575 | | | $ | — | | | $ | — | | | $ | 575 | | | $ | 7,755 | |
Other intangible assets | — | | | — | | | — | | | — | | | 1,857 | |
| $ | 575 | | | $ | — | | | $ | — | | | $ | 575 | | | $ | 9,612 | |
Derivative instruments
The Companies’ derivative instruments in “Note 4 – Long-term Debt,” we cancelled fourthe first quarter of 2011 included interest rate swaps with notional amounts totaling $175,000. Upon cancellation, we recognized a gain$225,000 that were all designated as fair value hedges on Wendy’s 6.20% senior notes. At April 3, 2011 and January 2, 2011, the fair value of $1,875 in the second quarterthese interest rate swaps of 2010, which is$7,610 and $9,623, respectively, has been included in “Interest expense”“Deferred costs and other assets” and as an adjustment to the carrying amount of the Wendy’s 6.20% senior notes.
Interest income on interest rate swaps was $1,413 and $1,812 for the ninethree months ended October,April 3, 2010. The following items, including the aforementioned gain, were recognized by the Company related to its derivative activity during each2011 and April 4, 2010, respectively.
(5) Impairment of the periods presented below:Long-Lived Assets
| | Three Months Ended | | | Nine Months Ended | |
| | October 3, 2010 | | | September 27, 2009 | | | October 3, 2010 | | | September 27, 2009 | |
Interest expense: | | | | | | | | | | | | |
Interest rate swaps | | $ | (1,320 | ) | | $ | (1,043 | ) | | $ | (6,396 | ) | | $ | (1,043 | ) |
Investment income: | | | | | | | | | | | | | | | | |
Other | | | - | | | | - | | | | - | | | | (286 | ) |
| | $ | (1,320 | ) | | $ | (1,043 | ) | | $ | (6,396 | ) | | $ | (1,329 | ) |
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
Wendy’s restaurant segment: | | | |
Impairment of company-owned restaurants: | | | |
Properties | $ | 6,084 | | | $ | — | |
Intangible assets | 1,813 | | | — | |
| 7,897 | | | — | |
Arby’s restaurant segment: | | | |
Impairment of company-owned restaurants: | | | |
Properties | 1,671 | | | 10,689 | |
Intangible assets | 44 | | | 912 | |
| 1,715 | | | 11,601 | |
Total impairment of long-lived assets | $ | 9,612 | | | $ | 11,601 | |
(6) | Impairment of Long-lived Assets |
| | Three Months Ended | | | Nine Months Ended | |
| | October 3, | | | September 27, | | | October 3, | | | September 27, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Wendy’s restaurant segment: | | | | | | | | | | | | |
Impairment of Company-owned restaurants: | | | | | | | | | | | | |
Properties | | $ | 17,373 | | | $ | 286 | | | $ | 17,448 | | | $ | 956 | |
Intangible assets | | | 3,548 | | | | - | | | | 3,955 | | | | - | |
| | | 20,921 | | | | 286 | | | | 21,403 | | | | 956 | |
Arby’s restaurant segment: | | | | | | | | | | | | | | | | |
Impairment of Company-owned restaurants: | | | | | | | | | | | | | | | | |
Properties | | | 6,333 | | | | 13,923 | | | | 18,694 | | | | 25,719 | |
Intangible assets | | | 155 | | | | 1,319 | | | | 1,327 | | | | 2,257 | |
| | | 6,488 | | | | 15,242 | | | | 20,021 | | | | 27,976 | |
| | | | | | | | | | | | | | | | |
Corporate - aircraft | | | - | | | | - | | | | - | | | | 2,176 | |
Total impairment of long-lived assets | | $ | 27,409 | | | $ | 15,528 | | | $ | 41,424 | | | $ | 31,108 | |
The Wendy’s and Arby’s Company-ownedcompany-owned restaurant segment impairment losses in each periodthe three months ended April 3, 2011 and the Arby’s company-owned restaurant impairment losses in the three months ended April 4, 2010 predominantly reflected impairment charges on all restaurant level assets resulting from the deterioration in operating performance of certain restaurants, and additional charges for capital improvements in restaurants impaired in a prior periodyear which did not subsequently recover. The Wendy’sArby’s restaurant segment impairment losses forin the three months and nine months ended October 3,April 4, 2010 and September 27, 2009 also includedreflected write-downs in the carrying value of certain surplus properties and properties held for sale. Additionally, for the nine months ended October 3, 2010 the Wendy’sThe Arby’s company-owned restaurant impairment losses included write-downs in the carrying value of options to purchase property. For the three months and nine months ended Septe mber 27, 2009, Arby’s impairment losses also included reductionsApril 3, 2011 reflected additional charges for capital improvements in the carrying valuerestaurants impaired in a prior year which did not subsequently recover.
WENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
During 2009, we disposed of one of our Company-owned aircraft and recorded an impairment charge based on the sale price.WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
All of these impairment losses represented the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets.” The fair values of impaired assets discussed above for the Wendy’s and Arby’s restaurant segments were generally estimated based on the present values of the associated cash flows and on the market value with respect to land (Level 3 inputs). There is no remaining carrying value of the properties and intangible assets which were measured at fair value as of October 3, 2010, July 4, 2010, and April 4, 2010.
(7) Facilities Relocation and Corporate Restructuring
The Company incurred corporate restructuring charges in 2009, primarily related to severance as a result of the merger with Wendy’s (the “Wendy’s Merger”). Such restructuring accrual, which is included in “Accrued expenses and other current liabilities,” was $660 at October 3, 2010 and $5,630 at January 3, 2010. The reduction in this accrual during the nine months ended October 3, 2010 reflects total payments of $5,006 partially offset by net adjustments of $36. We do not expect to incur any additional corporate restructuring charges with respect to the Wendy’s Merger.
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(6) Income Taxes
(8) | Investment in Joint Venture with Tim Hortons Inc. |
Wendy’s is a partner in a Canadian restaurant real estate joint venture (“TimWen”) with Tim Hortons Inc. Wendy’s 50% share of the joint venture is accounted for using the Equity Method. Our equity in earnings from TimWen is included in “Other operating expense, net.”
Presented below is an unaudited summary of activity related to our portion of TimWen included in our condensed consolidated balance sheets and condensed consolidated statements of operations:
| | Nine Months Ended | |
| | October 3, | | | September 27, | |
| 2010 | | | 2009 | |
Balance at beginning of period (a) | | $ | 97,476 | | | $ | 89,771 | |
| | | | | | | | |
Equity in earnings for the period | | | 9,309 | | | | 8,289 | |
Amortization of purchase price adjustments | | | (2,182 | ) | | | (2,031 | ) |
| | | 7,127 | | | | 6,258 | |
| | | | | | | | |
Distributions | | | (9,718 | ) | | | (7,106 | ) |
Currency translation adjustment included in “Comprehensive income” | | | 3,465 | | | | 10,457 | |
Balance at end of period (a) | | $ | 98,350 | | | $ | 99,380 | |
| (a) | Included in “Investments.” |
Presented below is a summary of unaudited financial information of TimWen as of and for the nine months ended October 3, 2010 and September 27, 2009, respectively, in Canadian dollars. The summary balance sheet financial information does not distinguish between current and long-term assets and liabilities:
| | October 3, | | | September 27, | |
| | 2010 | | | 2009 | |
| | (Canadian) | | | (Canadian) | |
Balance sheet information: | | | | | | |
Properties | | C$ | 80,011 | | | C$ | 84,223 | |
Cash and cash equivalents | | | 2,315 | | | | 8,465 | |
Accounts receivable | | | 3,941 | | | | 5,026 | |
Other | | | 3,011 | | | | 2,168 | |
| | C$ | 89,278 | | | C$ | 99,882 | |
| | | | | | | | |
Accounts payable and accrued liabilities | | C$ | 1,418 | | | C$ | 1,277 | |
Other liabilities | | | 8,844 | | | | 10,902 | |
Partners’ equity | | | 79,016 | | | | 87,703 | |
| | C$ | 89,278 | | | C$ | 99,882 | |
| | | | | | | | |
| | Nine Months Ended | |
| | October 3, | | | September 27, | |
| | 2010 | | | 2009 | |
| | (Canadian) | | | (Canadian) | |
Income statement information: | | | | | | |
Revenues | | C$ | 28,620 | | | C$ | 28,769 | |
Income before income taxes and net income | | | 19,064 | | | | 19,281 | |
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(9) Other Than Temporary Losses on Investments
Due to market conditions and other factors present during the nine months ended September 27, 2009, we recorded other than temporary losses of $3,916 attributable primarily to the decline in fair value of three of our investments.
TheCompany’s effective tax rate benefit for the three months ended OctoberApril 3, 2011 and April 4, 2010 was 58.1% and the effective tax rate for the three months ended September 27, 2009 was 93.1% and 36.4%60.2%, respectively. The effective rates vary from the U.S. federal statutory rate of 35% due to the effect of (1) changes in our estimated full year tax rates, (2) state income taxes, net of federal income tax benefit, (3) non-deductible expenses, (4) tax credits, (5) adjustments to our uncertain tax positions, and (6) the tax benefit of foreign tax credits, net of the tax on foreign earnings resulting from the repatriation of foreign earnings during the third quarter of 2010.
TheWendy’s/Arby’s Restaurants effective tax rate benefit for the ninethree months ended OctoberApril 3, 2011 and April 4, 2010 was 47.9% and the effective tax rate for the nine months ended September 27, 2009 was 303.5% and 39.5%64.4%, respectively. The Companies’ effective rates vary from the U.S. federal statutory rate of 35% due to the effect of (1) state income taxes, net of federal income tax benefit, (2) non-deductible expenses,tax credits, and (3) a reduction in our state valuation allowances in 2010, (4) tax credits, and (5) the tax benefit of foreign tax credits, net of the tax on foreign earnings resulting from the repatriation of foreign earnings during the third quarter of 2010.
For the nine months ended October 3, 2010 and September 27, 2009, our unrecognized tax benefits increased for prior periods by $3,345 and $1,438 and decreased for statute expirations by $874 and $697, respectively. Additionally, we increased interest on unrecognized tax benefits for these periods by $1,545 and $902, respectively. There were no other significant changes to unrecognized tax benefits andor related interest and penalties infor either the nineCompany or Wendy’s/Arby’s Restaurants.
Amounts payable for Federal and certain state income taxes are settled by Wendy’s/Arby’s Restaurants to Wendy’s/Arby’s under a tax sharing agreement. During the three months ended OctoberApril 3, 2011 and April 4, 2010, and September 27, 2009.
The Internal Revenue Service (the “IRS”) is currently conducting an examination of our 2010 and 2009 U.S. Federal income tax return years as part of the Compliance Assurance Process (“CAP”). As part of CAP, tax years are audited on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. The Company participated in CAP beginning with the tax period ended December 28, 2008 and Wendy’s has been a participant since its 2006 tax year. Any matters relating to our December 28, 2008 U.S. Federal income tax return and to Wendy’s U.S. Federal income tax returns for 2007 and prior years have been settled.
Wendy’s/Arby’s U.S. Federal incomeRestaurants made tax returns for periods ended December 30, 2007 through September 29, 2008 are not currently under examination by the IRS. Our foreign income tax returns are opensharing payments to examination primarily for periods ending on or after January 1, 2006. CertainWendy’s/Arby’s of these foreign income tax returns$13,078 and some of our state income tax returns are currently under examination. Certain of these states have issued notices of proposed tax assessments aggregating $3,745. We dispute these notices and believe their ultimate resolution will not have a material adverse impact on our consolidated financial position or results of operations.$0, respectively.
(7) Loss Per Share
(11) | (Loss) Income Per Share |
(Wendy’s/Arby’s)
Basic (loss) incomeloss per share isfor the three months ended April 3, 2011 and April 4, 2010 was computed by dividing net (loss) incomeloss by the weighted average number of common shares outstanding.
Diluted loss per share for the three months ended OctoberApril 3, 2011 and April 4, 2010 was the same as basic loss per share for each share since the Company recordedreported a net loss and, therefore, the effect of all potentially dilutive securities on the net loss per share would have been anti-dilutive. Diluted income per share forantidilutive.
As of April 3, 2011, our potential common shares consisted of the nine months ended October 3, 2010following: (1) outstanding stock options which can be exercised into 27,036 shares of our Common Stock and the three and nine months ended September 27, 2009 has been computed by dividing net income by the(2) 3,107 restricted shares of our Common Stock.
The weighted average number of shares plus the potential common share effect of dilutive stock options and non-vested restricted common shares, both computed using the treasury stock method. For the nine months ended October 3, 2010 and the three months and nine months ended September 27, 2009, we excluded 23,846, 20,290 and 20,468, respectively, of potential common shares from our diluted p er share calculation as they would have had anti-dilutive effects. Theused to calculate basic and diluted income from discontinued operationsloss per share was 418,520 and 443,326 for the three months ended April 3, 2011and nine month periods ended September 27, 2009April 4, 2010, respectively.
(8) Debt and Equity
Debt
The Wendy's/Arby’s Restaurants senior secured term loan facility (the “Term Loan”), which is part of the credit agreement entered into in May 2010 and further described in our Form 10-K, requires prepayments of principal amounts resulting from certain events and on an annual basis from Wendy’s/Arby’s Restaurants excess cash flow as defined under the Term Loan. An excess cash flow payment for fiscal 2010 of $24,874 was less than $0.01 and, therefore, is not presented.
paid in the first quarter of 2011. Should our strategic alternatives for Arby's result in a sale of the brand (as discussed in Note 1), we may be required to utilize a portion of the sales proceeds as a Term Loan prepayment.
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
As of October 3, 2010, our potential common shares consisted of (1) outstanding stock options which can be exercised into 28,395 shares of our Common Stock and (2) 3,100 unvested restricted shares of our Common Stock.Invested Equity
The weighted average number of shares used to calculate basic and diluted (loss) income per share are as follows:(Wendy’s/Arby’s Restaurants)
| | Three Months Ended | | | Nine Months Ended | |
| | October 3, | | | September 27, | | | October 3, | | | September 27, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Common Stock: | | | | | | | | | | | | |
Basic shares - weighted average | | | | | | | | | | | | |
shares outstanding | | | 417,985 | | | | 468,008 | | | | 428,968 | | | | 468,670 | |
Dilutive effect of stock options | | | | | | | | | | | | | | | | |
and restricted shares | | | - | | | | 3,385 | | | | 1,006 | | | | 2,423 | |
Diluted shares | | | 417,985 | | | | 471,393 | | | | 429,974 | | | | 471,093 | |
The following is a summary of the changes in stockholders’invested equity:
| | Nine Months Ended | |
| | October 3, | | | September 27, | |
| | 2010 | | | 2009 | |
| | | | | | |
Balance, beginning of year | | $ | 2,336,339 | | | $ | 2,383,445 | |
Comprehensive income (a) | | | 14,347 | | | | 48,999 | |
Dividends paid | | | (19,260 | ) | | | (21,088 | ) |
Share-based compensation expense | | | 10,519 | | | | 11,654 | |
Stock option exercises | | | 1,227 | | | | 1,935 | |
Repurchases of common stock for treasury | | | (167,744 | ) | | | (25,244 | ) |
Other | | | (841 | ) | | | (195 | ) |
Balance, end of period | | $ | 2,174,587 | | | $ | 2,399,506 | |
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
Balance, beginning of year | $ | 1,776,630 | | | $ | 2,197,907 | |
Comprehensive income (a) | 8,619 | | | 7,155 | |
Share-based compensation | 2,999 | | | 3,307 | |
Dividends paid to Wendy’s/Arby’s | — | | | (112,000 | ) |
Other | — | | | (75 | ) |
Balance, end of the period | $ | 1,788,248 | | | $ | 2,096,294 | |
_______________
(a) The following is a summary of the components of comprehensive income, net of income taxes:
| | Nine Months Ended | | |
| | October 3, | | | September 27, | | | | | | | | |
| | 2010 | | | 2009 | | Three Months Ended |
| | | | | | | April 3, 2011 | | April 4, 2010 |
Net income | | $ | 6,433 | | | $ | 18,656 | | |
Net income (loss) | | $ | 1,025 | | | $ | (2,560 | ) |
Net change in currency translation adjustment | | | 7,878 | | | | 30,415 | | 7,649 | | | 9,704 | |
Net unrealized losses on available-for-sale securities | | | (59 | ) | | | (72 | ) | |
Net unrecognized pension loss | | | 95 | | | | - | | |
Net unrecognized pension (loss) gain | | (55 | ) | | 11 | |
Other comprehensive income | | | 7,914 | | | | 30,343 | | 7,594 | | | 9,715 | |
Comprehensive income | | $ | 14,347 | | | $ | 48,999 | | $ | 8,619 | | | $ | 7,155 | |
(13)Stockholders’ Equity
(Wendy’s/Arby’s)
The following is a summary of the changes in stockholders’ equity:
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
Balance, beginning of year | $ | 2,163,174 | | | $ | 2,336,339 | |
Comprehensive income (a) | 6,194 | | | 6,340 | |
Share-based compensation | 3,241 | | | 3,519 | |
Exercises of stock options | 2,838 | | | 859 | |
Dividends paid | (8,374 | ) | | (6,653 | ) |
Repurchases of common stock for treasury | — | | | (78,821 | ) |
Other | 40 | | | (337 | ) |
Balance, end of the period | $ | 2,167,113 | | | $ | 2,261,246 | |
WENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
_______________
(a) The following is a summary of the components of comprehensive income, net of income taxes:
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
Net loss | $ | (1,409 | ) | | $ | (3,400 | ) |
Net change in currency translation adjustment | 7,649 | | | 9,704 | |
Net unrealized losses on available-for-sale securities | — | | | (59 | ) |
Net unrecognized pension (loss) gain | (46 | ) | | 95 | |
Other comprehensive income | 7,603 | | | 9,740 | |
Comprehensive income | $ | 6,194 | | | $ | 6,340 | |
(9) Business Segments
WeThe Companies manage and internally report ourtheir operations in two segments: (1) the operation and franchising of Wendy’s restaurants and (2) the operation and franchising of Arby’s restaurants. We evaluate segment performance and allocate resources based on each segment’s operating profit (loss).
In the first quarter of 2009, Wendy’s/Arby’s charged the restaurant segments for certain corporate support services based upon budgeted segment revenues. Commencing with the second quarter of 2009, Wendy’s/Arby’s Restaurants established a shared service center in Atlanta, Georgia and allocated all its operating costs to the restaurant segments based also on budgeted segment revenues.
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of ourthe Companies’ segment information:
| | Three Months Ended | | | Nine Months Ended | |
| | October 3, 2010 | | | September 27, 2009 | | | October 3, 2010 | | | September 27, 2009 | |
Revenues: | | | | | | | | | | | | |
Sales: | | | | | | | | | | | | |
Wendy's (1) | | $ | 525,082 | | | $ | 536,802 | | | $ | 1,570,240 | | | $ | 1,582,928 | |
Arby's | | | 240,906 | | | | 269,236 | | | | 726,628 | | | | 812,548 | |
Total | | | 765,988 | | | | 806,038 | | | | 2,296,868 | | | | 2,395,476 | |
Franchise revenues: | | | | | | | | | | | | | | | | |
Wendy's | | | 75,653 | | | | 76,713 | | | | 222,643 | | | | 224,006 | |
Arby's | | | 19,573 | | | | 20,470 | | | | 56,171 | | | | 60,410 | |
Total | | | 95,226 | | | | 97,183 | | | | 278,814 | | | | 284,416 | |
Total revenues: | | | | | | | | | | | | | | | | |
Wendy's | | | 600,735 | | | | 613,515 | | | | 1,792,883 | | | | 1,806,934 | |
Arby's | | | 260,479 | | | | 289,706 | | | | 782,799 | | | | 872,958 | |
Total | | $ | 861,214 | | | $ | 903,221 | | | $ | 2,575,682 | | | $ | 2,679,892 | |
| | | | | | | | | | | | | | | | |
Depreciation and amortization: | | | | | | | | | | | | | | | | |
Wendy's | | $ | 29,058 | | | $ | 31,444 | | | $ | 85,714 | | | $ | 96,739 | |
Arby's | | | 13,539 | | | | 14,343 | | | | 40,996 | | | | 42,481 | |
Corporate | | | 3,581 | | | | 1,233 | | | | 10,738 | | | | 4,149 | |
Total | | $ | 46,178 | | | $ | 47,020 | | | $ | 137,448 | | | $ | 143,369 | |
| | | | | | | | | | | | | | | | |
Impairment of long-lived assets: | | | | | | | | | | | | | | | | |
Wendy's | | $ | 20,921 | | | $ | 286 | | | $ | 21,403 | | | $ | 956 | |
Arby's | | | 6,488 | | | | 15,242 | | | | 20,021 | | | | 27,976 | |
Corporate | | | - | | | | - | | | | - | | | | 2,176 | |
Total | | $ | 27,409 | | | $ | 15,528 | | | $ | 41,424 | | | $ | 31,108 | |
| | | | | | | | | | | | | | | | |
Segment operating profit (loss): | | | | | | | | | | | | | | | | |
Wendy’s | | $ | 32,850 | | | $ | 69,876 | | | $ | 157,378 | | | $ | 155,400 | |
Arby’s | | | (7,296 | ) | | | (8,862 | ) | | | (22,258 | ) | | | (3,950 | ) |
Corporate | | | (5,209 | ) | | | (4,192 | ) | | | (15,779 | ) | | | (24,187 | ) |
Total | | | 20,345 | | | | 56,822 | | | | 119,341 | | | | 127,263 | |
| | | | | | | | | | | | | | | | |
Unallocated items: | | | | | | | | | | | | | | | | |
Interest expense | | | (33,868 | ) | | | (36,457 | ) | | | (104,535 | ) | | | (89,671 | ) |
Loss on early extinguishment of debt | | | - | | | | - | | | | (26,197 | ) | | | - | |
Investment income (expense), net | | | 77 | | | | 737 | | | | 5,256 | | | | (3,850 | ) |
Other than temporary losses on investments | | | - | | | | - | | | | - | | | | (3,916 | ) |
Other income, net | | | 268 | | | | 1,319 | | | | 2,974 | | | | 303 | |
(Loss) income from continuing operations before income taxes | | | (13,178 | ) | | | 22,421 | | | | (3,161 | ) | | | 30,129 | |
Benefit from (provision for) income taxes | | | 12,269 | | | | (8,155 | ) | | | 9,594 | | | | (11,895 | ) |
(Loss) income from continuing operations | | | (909 | ) | | | 14,266 | | | | 6,433 | | | | 18,234 | |
Income from discontinued operations, net of income taxes | | | - | | | | 422 | | | | - | | | | 422 | |
Net (loss) income | | $ | (909 | ) | | $ | 14,688 | | | $ | 6,433 | | | $ | 18,656 | |
13 |
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
Revenues: | | | |
Sales: | | | |
Wendy’s (1) | $ | 509,323 | | | $ | 512,747 | |
Arby’s | 247,210 | | | 235,450 | |
Corporate eliminations | (37 | ) | | — | |
Total | 756,496 | | | 748,197 | |
| | | |
Franchise revenues: | | | |
Wendy’s | 73,189 | | | 71,967 | |
Arby’s | 18,149 | | | 17,283 | |
Corporate eliminations | (10 | ) | | — | |
Total | 91,328 | | | 89,250 | |
| | | |
Total revenues: | | | |
Wendy’s | 582,512 | | | 584,714 | |
Arby’s | 265,359 | | | 252,733 | |
Corporate eliminations | (47 | ) | | — | |
Total | $ | 847,824 | | | $ | 837,447 | |
| | | |
Depreciation and amortization: | | | |
Wendy’s | $ | 27,261 | | | $ | 28,795 | |
Arby’s | 12,811 | | | 13,894 | |
Shared services center | 2,588 | | | 3,171 | |
Wendy’s/Arby’s Restaurants | 42,660 | | | 45,860 | |
Corporate | 465 | | | 466 | |
Wendy’s/Arby’s | $ | 43,125 | | | $ | 46,326 | |
| | | |
Impairment of long-lived assets: | | | |
Wendy’s | $ | 7,897 | | | $ | — | |
Arby’s | 1,715 | | | 11,601 | |
Total | $ | 9,612 | | | $ | 11,601 | |
| | | |
Segment operating profit (loss): | | | |
Wendy’s | $ | 43,687 | | | $ | 52,400 | |
Arby’s | (5,312 | ) | | (20,975 | ) |
Corporate eliminations | 3 | | | — | |
Shared services center (2) | (3,867 | ) | | (3,171 | ) |
Wendy’s/Arby’s Restaurants | 34,511 | | | 28,254 | |
Corporate | (3,871 | ) | | (1,921 | ) |
Wendy’s/Arby’s | $ | 30,640 | | | $ | 26,333 | |
| | | |
Wendy’s/Arby’s Restaurants: | | | |
Segment operating profit | $ | 34,511 | | | $ | 28,254 | |
Unallocated items: | | | |
Interest expense | (34,101 | ) | | (35,939 | ) |
Other income, net | 283 | | | 495 | |
Income (loss) before income taxes | $ | 693 | | | $ | (7,190 | ) |
| | Nine Months Ended | |
Cash capital expenditures: | | October 3, 2010 | | | September 27, 2009 | |
Wendy's | | $ | 43,904 | | | $ | 30,614 | |
Arby's | | | 37,942 | | | | 22,660 | |
Corporate (2) | | | 12,890 | | | | 12,006 | |
Total | | $ | 94,736 | | | $ | 65,280 | |
_____________
(1) Sales include sales of bakery items and kids’ meal promotion items sold to franchisees.
(2) The corporate capital expenditures are primarily related to our shared services center.
There have been no material changes in total assets by segment since January 3, 2010.
(14) Transactions with Related Parties
Wendy’s/Arby’s has entered into the following new or revised transactions with related parties since those reported in our Form 10-K:
Services Agreement
Wendy’s/Arby’s and the management company formed by certain former executives and a director, (the “Management Company”), entered into a services agreement (the “Services Agreement”) which commenced on July 1, 2009 and will continue until June 30, 2011, unless sooner terminated. Under the Services Agreement, the Management Company will assist us with strategic merger and acquisition consultation, corporate finance and investment banking services and related legal matters. During the second quarter of 2010, in addition to the regular quarterly fee to the Management Company, we paid the Management Company $2,465 in fees for corporate finance advisory services in connection with the negotiation and execution of the Credit Agreement.
Sublease of New York Office Space
In July 2007, the Company entered into an agreement under which the Management Company is subleasing the office space on one of the floors of the Company’s former New York headquarters. During the second quarter of 2010, the Company and the Management Company entered into an amendment to the sublease, effective April 1, 2010, pursuant to which the Management Company’s early termination right was cancelled in exchange for a reduction in rent. Under the terms of the amended sublease, the sublease is not cancelable prior to the expiration of the prime lease and the Management Company pays rent to the Company in an amount that covers substantially all of the Company’s rent obligations under the prime lease for such space.
Aircraft Agreement
On June 10, 2009, the Company entered into a lease of one of its corporate aircraft to TASCO LLC, an affiliate of the Management Company. On June 24, 2010, the Company and TASCO LLC entered into an agreement to renew the lease for an additional one year period (expiring June 30, 2011) on the same terms and conditions as the expiring lease.
Supply Chain Relationship Agreement
In connection with the ongoing operations of the Wendy’s purchasing co-op, Quality Supply Chain Co-op, Inc. (“QSCC”), Wendy’s paid $224 and $656 primarily for payroll-related expenses to certain QSCC purchasing employees during the three months and nine months ended October 3, 2010 for which Wendy’s expects to be reimbursed by QSCC in the fourth quarter of 2010.
Strategic Sourcing Group Agreement
On April 5, 2010, QSCC and the Arby’s independent purchasing cooperative (“ARCOP”), in consultation with Wendy’s/Arby’s Restaurants, established the Strategic Sourcing Group Co-op, LLC (the “SSG”). The SSG was formed to manage and operate purchasing programs which combine the purchasing power of both Wendy’s and Arby’s Company-owned and franchised restaurants to create buying efficiencies for certain non-perishable goods, equipment and services utilized by both brands.
In order to facilitate the orderly transition of this purchasing function for the Company’s North American operations, Wendy’s/Arby’s Restaurants transferred certain contracts, assets and certain Wendy’s/Arby’s Restaurants purchasing employees to the SSG in the second quarter of 2010. Wendy’s/Arby’s Restaurants has committed to pay approximately $4,900 of expenses of the SSG, which was expensed in the first quarter of 2010 and included in “General and administrative,” and will be paid over a 24 month period. The SSG is exploring various alternatives for its sources of funding for future operations. Effective April 5, 2010, the SSG leased 2,300 square feet of office space from Arby’s until December 31 , 2016 unless terminated earlier for an annual base rental of $51.
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
Wendy’s/Arby’s: | | | |
Segment operating profit | $ | 30,640 | | | $ | 26,333 | |
Unallocated items: | | | | |
Interest expense | (34,328 | ) | | (36,278 | ) |
Other income, net | 323 | | | 1,408 | |
Loss before income taxes | $ | (3,365 | ) | | $ | (8,537 | ) |
Revolving credit facilities
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
Cash capital expenditures: | | | |
Wendy’s | $ | 20,797 | | | $ | 15,680 | |
Arby’s | 4,478 | | | 6,470 | |
Shared services center | 3,293 | | | 4,993 | |
Wendy’s/Arby’s Restaurants | 28,568 | | | 27,143 | |
Corporate | — | | | — | |
Wendy’s/Arby’s | $ | 28,568 | | | $ | 27,143 | |
_______________
| |
(1) | Sales include sales of bakery items and kids’ meal promotion items sold to franchisees. |
| |
(2) | Includes costs associated with exploring strategic alternatives for Arby’s. |
(10) Transactions with Related Parties
The following is a summary of ongoing transactions between the Companies and their related parties and includes any updates or amendments, as well as one new transaction (see footnote (e) below) since those reported in our Form 10-K:
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
SSG agreement (a) | $ | (2,275 | ) | | $ | 4,900 | |
Subleases with related parties (b) | (105 | ) | | (80 | ) |
Interest income on revolving credit facility (c) | (19 | ) | | (106 | ) |
AFA dues subsidy (d) | 723 | | | — | |
Wendy’s advertising program (e) | 150 | | | — | |
Charitable contributions to the Foundation (f) | — | | | 500 | |
| | | | | |
| | | | | |
(Wendy’s/Arby’s) | | | | | |
Advisory fees (g) | $ | 250 | | | $ | 250 | |
Sublease income (h) | (408 | ) | | (413 | ) |
Executive use of corporate aircraft (i) | (30 | ) | | (30 | ) |
Liquidation services agreement (j) | 110 | | | 110 | |
WENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
___________________
Transactions with Purchasing Cooperatives, the Foundation, and AFA Service Corporation (“AFA”), an independently controlled advertising
| |
(a) | As agreed by its board of directors in March 2011, effective April 2011 the activities of Strategic Sourcing Group Co-op, LLC (“SSG”) were transferred to the Wendy’s independent purchasing cooperative, Quality Supply Chain Co-op (“QSCC”), and Arby’s independent purchasing cooperative (“ARCOP”). Wendy’s/Arby’s Restaurants had committed to pay approximately $5,145 of SSG expenses, of which $4,900 was expensed in the first quarter of 2010, and was to be paid over a 24 month period through March 2012. During the first quarter of 2011, the remaining accrued commitment of $2,275 was reversed and credited to “General and administrative.” |
| |
(b) | Wendy’s and QSCC entered into a sublease amendment, effective January 1, 2011, which increased the office space subleased to QSCC to 14,333 square feet for a one year period for a revised annual base rental of $176 with five one-year renewal options. |
The Companies received $18 and $0 of sublease income from SSG, $25 and $26 of sublease income from ARCOP, $23 and $26 of sublease income from the Arby’s system in which we have voting interestsFoundation, Inc. (the “Foundation”), and $39 and $28 of less than 50%, previously entered into a revolving loan agreement with ARG pursuant to which ARG provided revolving loans up to $14,500. Duringsublease income from QSCC during the thirdfirst quarter of 2011 and 2010, respectively.
| |
(c) | In December 2009, and as amended in February and August 2010 and in February 2011, AFA Service Corporation (“AFA”) entered into a revolving loan agreement with Arby’s. As of April 3, 2011 and January 2, 2011, the outstanding revolving loan balance due from AFA to Arby’s was $0 and $4,458, respectively. Arby’s recorded interest income of $19 and $106 during the first quarter of 2011 and 2010, respectively, which is included in “Other income, net.” |
| |
(d) | Arby’s and most domestic Arby’s franchisees pay member dues to AFA. Beginning in January 2011 and for the remainder of 2011, the AFA board approved a dues increase based on a tiered rate structure for the payment of advertising and marketing service fees ranging between 1.25% and 3.50% of sales. In addition and consistent with a similar arrangement in effect from April through December 2010, Arby’s agreed to partially subsidize the top two rate tiers thereby decreasing franchisees’ effective advertising and marketing service fee percentages through December 2011. Arby’s incurred $723 in the first quarter of 2011 associated with the advertising dues subsidy, which is recorded in “Cost of sales.” |
| |
(e) | Wendy’s participates in two national advertising funds for Wendy’s United States and Canadian locations established to collect and administer funds contributed for use in advertising through television, radio, newspapers, the Internet and a variety of promotional campaigns. During the first quarter of 2011, Wendy’s reimbursed the Canadian advertising fund approximately $150 for advertising expenses associated with new product testing. |
| |
(f) | During the first quarter of 2010, the Companies made a charitable contribution of $500 to the Foundation, primarily utilizing funds reimbursed to it by one of the beverage companies used by Arby’s as provided by the applicable contract. This payment is included in “General and administrative.” |
Transactions with the parties agreed in principle to terms that extend the maturity to March 2012 with revolving loans up to $14,000 bearing interest at 7.5%. AsManagement Company
| |
(g) | Wendy’s/Arby’s incurred service fees of $250 in the first quarter of 2011 and 2010, which are included in “General and administrative.” These fees were paid to a management company (the “Management Company”) which was formed by our Chairman, who was our former Chief Executive Officer, and our Vice Chairman, who was our former President and Chief Operating Officer, and a director, who was our former Vice Chairman, in connection with a services agreement, which commenced on July 1, 2009 and will continue until June 30, 2011. |
| |
(h) | Wendy’s/Arby’s recognized income of $408 and $413 from the Management Company under subleases for office space on two of the floors of the Company’s former New York headquarters for the first quarter of 2011 and 2010, respectively, which has been recorded as a reduction of “General and administrative.” |
WENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
| |
(i) | Wendy’s/Arby’s received lease income of $30 in the first quarter of 2011 and 2010 under an agreement to lease one of the Company’s aircraft, which is included as an offset to “General and administrative.” |
| |
(j) | Wendy’s/Arby’s paid the Management Company a fee of $900 in two installments in June 2009 and 2010, which was deferred and is being amortized through its expiration date of June 30, 2011 for assistance in the sale, liquidation, or other disposition of certain of our investments. $110 was amortized and recorded in “General and administrative” in the first quarter of 2011 and 2010. |
(Wendy’s/Arby’s Restaurants)
The following is a summary of continuing transactions between Wendy’s/Arby’s Restaurants and there were no amounts past due.Wendy’s/Arby’s:
|
| | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 |
Dividends paid (k) | $ | — | | | $ | 112,000 | |
Other transactions: | | | | | |
Payments for Federal and state income tax (l) | 13,078 | | | — | |
Share-based compensation (m) | 2,999 | | | 3,307 | |
Expense under management service agreements (n) | 1,261 | | | 1,254 | |
_____________________ | |
(k) | Wendy’s/Arby’s Restaurants paid cash dividends to Wendy’s/Arby’s which were charged to “Invested equity.” |
(15)
| |
(l) | Wendy’s/Arby’s Restaurants made cash payments to Wendy’s/Arby’s under a tax sharing agreement, as discussed in more detail in Note 6. |
| |
(m) | Wendy’s/Arby’s Restaurants provides share based compensation with respect to Wendy’s/Arby’s Common Stock to certain employees. Such compensation cost is allocated by Wendy’s/Arby’s to Wendy’s/Arby’s Restaurants and is correspondingly recorded as capital contributions from Wendy’s/Arby’s. |
| |
(n) | Wendy’s/Arby’s Restaurants incurred $1,261 and $1,254 for management services during the first quarter of 2011 and 2010, respectively. Such fees are included in “General and administrative” and are settled through Wendy’s/Arby’s Restaurants’ intercompany account with Wendy’s/Arby’s. |
(11) Legal and Environmental Matters
We are involved in litigation and claims incidental to our current and prior businesses. We haveprovide reserves for such litigation and claims when payment is probable and reasonably estimable. As of April 3, 2011, Wendy’s/Arby’s Restaurants had reserves for all of ourits legal and environmental matters aggregating $4,542 as of October 3, 2010. The$3,905 which are included in the total $3,934 accrued by Wendy’s/Arby’s for all legal and environmental matters. Although the outcome of these matters cannot be predicted with certainty and somewe cannot estimate the aggregate possible range of these matters may be disposed of unfavorably to us. Basedloss, based on currently available information, including legal defenses available to us, and given the aforementioned reserves and our insurance coverage, we do not believe that the outcome of these legal and environmental matters will have a material adverse effect on our consolidated financial position or results of operations.
(16) Accounting StandardsWENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
Accounting Standards Adopted DuringCOMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(12) Guarantor/Non-Guarantor
(Wendy’s/Arby’s Restaurants)
Wendy’s/Arby’s Restaurants is the issuer of, and certain of its domestic subsidiaries have guaranteed amounts outstanding under our 10% senior notes. Each of the guaranteeing subsidiaries is a direct or indirect 100% owned subsidiary of Wendy’s/Arby’s Restaurants and each has fully and unconditionally guaranteed the 10% senior notes on a joint and several basis.
The following are included in the presentation of our consolidating: (1) Condensed Consolidating Balance Sheets as of April 3, 2011 and January 2, 2011, (2) Condensed Consolidating Statements of Operations for the three months ended April 3, 2011 and April 4, 2010, and (3) Condensed Consolidating Statements of Cash Flows for the three months ended April 3, 2011 and April 4, 2010 to reflect:
In June 2009, (a)Wendy’s/Arby’s Restaurants (the “Parent”);
(b)the Financial Accounting Standards Board (the “FASB”) issued guidelines10% senior notes guarantor subsidiaries as a group;
(c)the 10% senior notes non-guarantor subsidiaries as a group;
(d)elimination entries necessary to combine the Parent with the guarantor and non-guarantor subsidiaries; and
(e)Wendy’s/Arby’s Restaurants on a consolidated basis.
Substantially all of our domestic restricted subsidiaries are guarantors of the 10% senior notes. Certain of our subsidiaries, including our foreign subsidiaries and national advertising funds, do not guarantee the 10% senior notes.
For purposes of presentation of such consolidating information, investments in subsidiaries are accounted for by the Parent on the consolidation of variable interest entities which alters how a company determines when an entity that is insufficiently capitalized or not controlled through voting should be consolidated. A company hasequity method. The elimination entries are principally necessary to determine whether it should provide consolidated reporting of an entity based upon the entity's purposeeliminate intercompany balances and design and the parent company's ability to direct the entity's actions. The guidance was effective commencing with our 2010 fiscal year. The adoption of this guidance did not have an impact on our consolidated financial statements.transactions.
In January 2010, the FASB issued amendments to the existing fair value measurements and disclosures guidance which requires new disclosures and clarifies existing disclosure requirements. The purpose of these amendments is to provide a greater level of disaggregated information, as well as more disclosure around valuation techniques and inputs to fair value measurements. The guidance was effective commencing with our 2010 fiscal year. The adoption of this guidance did not have a significant impact on our consolidated financial statements.
(17) Subsequent Event
In the fourth quarter of 2009, The New Bakery Co. of Ohio, Inc. (the “Bakery”), a wholly-owned subsidiary of Wendy’s, terminated its participation in the Bakery and Confectionery Union and Industry International Pension Fund (the “Union Pension Fund”), a union-sponsored multiemployer pension plan and formally notified the plan’s trustees of its withdrawal from that plan. Subsequent to our 2010 third quarter, the terms of a new collective bargaining agreement (the “New CBA”) were agreed to by the Bakery and Bakers Local No. 57, Bakery, Confectionery, Tobacco Workers & Grain Millers International Union of America, AFL-CIO. Included in the terms of the New CBA, the Bakery agreed to participate in the Union Pension Fund as if it had not withdrawn and the unionized employees wi ll no longer be eligible to contribute to the Company’s 401(k) plan. Accordingly, the withdrawal liability of $4,975 recorded during the fourth quarter of 2009, which remains in “Accrued expenses and other current liabilities” as of October 3, 2010, will be eliminated in the fourth quarter of 2010. The other terms of the New CBA will result in additional expense to the Company of approximately $900 in the fourth quarter of 2010, which will be included in “Cost of sales.”
WENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
CONDENSED CONSOLIDATING BALANCE SHEET
April 3, 2011
|
| | | | | | | | | | | | | | | | | | | |
| | | Guarantor | | Non-guarantor | | | | |
| Parent | | Subsidiaries | | Subsidiaries | | Eliminations | | Total |
ASSETS | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 6,664 | | | $ | 142,819 | | | $ | 31,817 | | | $ | — | | | $ | 181,300 | |
Accounts and notes receivable | 1,450 | | | 78,353 | | | 4,051 | | | — | | | 83,854 | |
Inventories | — | | | 22,050 | | | 1,062 | | | — | | | 23,112 | |
Prepaid expenses and other current assets | 5,255 | | | 45,815 | | | 1,852 | | | — | | | 52,922 | |
Deferred income tax benefit | 15,834 | | | 27,218 | | | 222 | | | — | | | 43,274 | |
Advertising funds restricted assets | — | | | — | | | 85,478 | | | — | | | 85,478 | |
Total current assets | 29,203 | | | 316,255 | | | 124,482 | | | — | | | 469,940 | |
Properties | 9,899 | | | 1,439,526 | | | 61,594 | | | — | | | 1,511,019 | |
Other intangible assets | 20,684 | | | 1,303,504 | | | 27,230 | | | — | | | 1,351,418 | |
Goodwill | — | | | 843,954 | | | 49,418 | | | — | | | 893,372 | |
Investments | — | | | — | | | 105,121 | | | — | | | 105,121 | |
Deferred costs and other assets | 30,470 | | | 37,188 | | | 681 | | | — | | | 68,339 | |
Net investment in subsidiaries | 2,612,303 | | | 255,422 | | | — | | | (2,867,725 | ) | | — | |
Deferred income tax benefit | 89,126 | | | — | | | — | | | (89,126 | ) | | — | |
Due from affiliate | 44,738 | | | — | | | 16,584 | | | (61,322 | ) | | — | |
Total assets | $ | 2,836,423 | | | $ | 4,195,849 | | | $ | 385,110 | | | $ | (3,018,173 | ) | | $ | 4,399,209 | |
| | | | | | | | | |
LIABILITIES AND INVESTED EQUITY | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Current portion of long-term debt | $ | 4,981 | | | $ | 10,852 | | | $ | 239 | | | $ | — | | | $ | 16,072 | |
Accounts payable | 2,602 | | | 60,491 | | | 4,819 | | | — | | | 67,912 | |
Accrued expenses and other current liabilities | 22,244 | | | 209,569 | | | 7,761 | | | — | | | 239,574 | |
Advertising funds restricted liabilities | — | | | — | | | 85,478 | | | — | | | 85,478 | |
Total current liabilities | 29,827 | | | 280,912 | | | 98,297 | | | — | | | 409,036 | |
Long-term debt | 1,018,348 | | | 493,462 | | | 3,918 | | | — | | | 1,515,728 | |
Due to affiliates | — | | | 78,808 | | | — | | | (61,322 | ) | | 17,486 | |
Deferred income | — | | | 39,174 | | | 571 | | | — | | | 39,745 | |
Deferred income taxes | — | | | 548,224 | | | 17,428 | | | (89,126 | ) | | 476,526 | |
Other liabilities | — | | | 142,966 | | | 9,474 | | | — | | | 152,440 | |
Invested equity: | | | | | | | | | |
Member interest, $0.01 par value; 1,000 shares authorized, one share issued and outstanding | — | | | — | | | — | | | — | | | — | |
Other capital | 2,426,458 | | | 3,276,291 | | | 199,014 | | | (3,475,305 | ) | | 2,426,458 | |
(Accumulated deficit) retained earnings | (498,475 | ) | | (524,253 | ) | | 40,789 | | | 483,464 | | | (498,475 | ) |
Advances to Wendy’s/Arby’s | (155,000 | ) | | (155,000 | ) | | — | | | 155,000 | | | (155,000 | ) |
Accumulated other comprehensive income | 15,265 | | | 15,265 | | | 15,619 | | | (30,884 | ) | | 15,265 | |
Total invested equity | 1,788,248 | | | 2,612,303 | | | 255,422 | | | (2,867,725 | ) | | 1,788,248 | |
Total liabilities and invested equity | $ | 2,836,423 | | | $ | 4,195,849 | | | $ | 385,110 | | | $ | (3,018,173 | ) | | $ | 4,399,209 | |
WENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
CONDENSED CONSOLIDATING BALANCE SHEET
January 2, 2011
|
| | | | | | | | | | | | | | | | | | | |
| | | Guarantor | | Non-guarantor | | | | |
| Parent | | Subsidiaries | | Subsidiaries | | Eliminations | | Total |
ASSETS | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 79,355 | | | $ | 88,936 | | | $ | 30,395 | | | $ | — | | | $ | 198,686 | |
Accounts and notes receivable | 320 | | | 79,404 | | | 3,628 | | | — | | | 83,352 | |
Inventories | — | | | 21,558 | | | 1,136 | | | — | | | 22,694 | |
Prepaid expenses and other current assets | 3,900 | | | 19,446 | | | 686 | | | — | | | 24,032 | |
Deferred income tax benefit | 17,634 | | | 27,218 | | | 215 | | | — | | | 45,067 | |
Advertising funds restricted assets | — | | | — | | | 76,553 | | | — | | | 76,553 | |
Total current assets | 101,209 | | | 236,562 | | | 112,613 | | | — | | | 450,384 | |
Properties | 13,748 | | | 1,466,769 | | | 61,336 | | | — | | | 1,541,853 | |
Other intangible assets | 21,453 | | | 1,310,092 | | | 27,029 | | | — | | | 1,358,574 | |
Goodwill | — | | | 841,156 | | | 47,765 | | | — | | | 888,921 | |
Investments | — | | | — | | | 102,406 | | | — | | | 102,406 | |
Deferred costs and other assets | 32,610 | | | 41,274 | | | 675 | | | — | | | 74,559 | |
Net investment in subsidiaries | 2,559,526 | | | 246,578 | | | — | | | (2,806,104 | ) | | — | |
Deferred income tax benefit | 86,423 | | | — | | | 97 | | | (86,520 | ) | | — | |
Due from affiliate | 59,618 | | | — | | | 17,893 | | | (77,511 | ) | | — | |
Total assets | $ | 2,874,587 | | | $ | 4,142,431 | | | $ | 369,814 | | | $ | (2,970,135 | ) | | $ | 4,416,697 | |
| | | | | | | | | |
LIABILITIES AND INVESTED EQUITY | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Current portion of long-term debt | $ | 5,228 | | | $ | 11,587 | | | $ | 232 | | | $ | — | | | $ | 17,047 | |
Accounts payable | 4,624 | | | 70,901 | | | 5,623 | | | — | | | 81,148 | |
Accrued expenses and other current liabilities | 38,871 | | | 195,282 | | | 10,147 | | | — | | | 244,300 | |
Advertising funds restricted liabilities | — | | | — | | | 76,553 | | | — | | | 76,553 | |
Total current liabilities | 48,723 | | | 277,770 | | | 92,555 | | | — | | | 419,048 | |
Long-term debt | 1,043,623 | | | 495,505 | | | 3,556 | | | — | | | 1,542,684 | |
Due to affiliates | — | | | 108,319 | | | — | | | (77,511 | ) | | 30,808 | |
Deferred income | — | | | 10,888 | | | 572 | | | — | | | 11,460 | |
Deferred income taxes | — | | | 548,088 | | | 16,904 | | | (86,520 | ) | | 478,472 | |
Other liabilities | 5,611 | | | 142,335 | | | 9,649 | | | ��� | | | 157,595 | |
Invested equity: | | | | | | | | | |
Member interest, $0.01 par value; 1,000 shares authorized, one share issued and outstanding | — | | | — | | | — | | | — | | | — | |
Other capital | 2,423,459 | | | 3,244,488 | | | 199,014 | | | (3,443,502 | ) | | 2,423,459 | |
(Accumulated deficit) retained earnings | (499,500 | ) | | (537,633 | ) | | 39,594 | | | 498,039 | | | (499,500 | ) |
Advances to Wendy’s/Arby’s | (155,000 | ) | | (155,000 | ) | | — | | | 155,000 | | | (155,000 | ) |
Accumulated other comprehensive income | 7,671 | | | 7,671 | | | 7,970 | | | (15,641 | ) | | 7,671 | |
Total invested equity | 1,776,630 | | | 2,559,526 | | | 246,578 | | | (2,806,104 | ) | | 1,776,630 | |
Total liabilities and invested equity | $ | 2,874,587 | | | $ | 4,142,431 | | | $ | 369,814 | | | $ | (2,970,135 | ) | | $ | 4,416,697 | |
WENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended April 3, 2011
|
| | | | | | | | | | | | | | | | | | | |
| | | Guarantor | | Non-guarantor | | | | |
| Parent | | Subsidiaries | | Subsidiaries | | Eliminations | | Total |
| | | | | | | | | |
Revenues: | | | | | | | | | |
Sales | $ | — | | | $ | 702,738 | | | $ | 53,758 | | | $ | — | | | $ | 756,496 | |
Franchise revenues | — | | | 86,240 | | | 5,088 | | | — | | | 91,328 | |
| — | | | 788,978 | | | 58,846 | | | — | | | 847,824 | |
| | | | | | | | | |
Costs and expenses: | | | | | | | | | |
Cost of sales | — | | | 611,144 | | | 48,644 | | | — | | | 659,788 | |
General and administrative | 1,279 | | | 95,263 | | | 3,734 | | | — | | | 100,276 | |
Depreciation and amortization | 2,588 | | | 37,405 | | | 2,667 | | | — | | | 42,660 | |
Impairment of long-lived assets | — | | | 9,258 | | | 354 | | | — | | | 9,612 | |
Other operating expense (income), net | — | | | 2,909 | | | (1,932 | ) | | — | | | 977 | |
| 3,867 | | | 755,979 | | | 53,467 | | | — | | | 813,313 | |
Operating (loss) profit | (3,867 | ) | | 32,999 | | | 5,379 | | | — | | | 34,511 | |
Interest expense | (23,336 | ) | | (10,649 | ) | | (116 | ) | | — | | | (34,101 | ) |
Other income (expense), net | — | | | 3,868 | | | (3,585 | ) | | — | | | 283 | |
Equity in income of subsidiaries | 13,386 | | | 1,195 | | | — | | | (14,581 | ) | | — | |
(Loss) income before income taxes | (13,817 | ) | | 27,413 | | | 1,678 | | | (14,581 | ) | | 693 | |
Benefit from (provision for) income taxes | 14,842 | | | (14,027 | ) | | (483 | ) | | — | | | 332 | |
Net income | $ | 1,025 | | | $ | 13,386 | | | $ | 1,195 | | | $ | (14,581 | ) | | $ | 1,025 | |
WENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended April 4, 2010
|
| | | | | | | | | | | | | | | | | | | |
| | | Guarantor | | Non-guarantor | | | | |
| Parent | | Subsidiaries | | Subsidiaries | | Eliminations | | Total |
| | | | | | | | | |
Revenues: | | | | | | | | | |
Sales | $ | — | | | $ | 694,804 | | | $ | 53,393 | | | $ | — | | | $ | 748,197 | |
Franchise revenues | — | | | 84,139 | | | 5,111 | | | — | | | 89,250 | |
| — | | | 778,943 | | | 58,504 | | | — | | | 837,447 | |
| | | | | | | | | |
Costs and expenses: | | | | | | | | | |
Cost of sales | — | | | 594,333 | | | 47,089 | | | — | | | 641,422 | |
General and administrative | — | | | 103,978 | | | 4,782 | | | — | | | 108,760 | |
Depreciation and amortization | 3,171 | | | 40,011 | | | 2,678 | | | — | | | 45,860 | |
Impairment of long-lived assets | — | | | 11,601 | | | — | | | — | | | 11,601 | |
Other operating expense (income), net | — | | | 2,923 | | | (1,373 | ) | | — | | | 1,550 | |
| 3,171 | | | 752,846 | | | 53,176 | | | — | | | 809,193 | |
Operating (loss) profit | (3,171 | ) | | 26,097 | | | 5,328 | | | — | | | 28,254 | |
Interest expense | (15,226 | ) | | (20,634 | ) | | (79 | ) | | — | | | (35,939 | ) |
Other income (expense), net | 73 | | | 4,108 | | | (3,686 | ) | | — | | | 495 | |
Equity in (loss) income of subsidiaries | (4,135 | ) | | 1,130 | | | — | | | 3,005 | | | — | |
(Loss) income before income taxes | (22,459 | ) | | 10,701 | | | 1,563 | | | 3,005 | | | (7,190 | ) |
Benefit from (provision for) income taxes | 19,899 | | | (14,836 | ) | | (433 | ) | | — | | | 4,630 | |
Net (loss) income | $ | (2,560 | ) | | $ | (4,135 | ) | | $ | 1,130 | | | $ | 3,005 | | | $ | (2,560 | ) |
WENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended April 3, 2011
|
| | | | | | | | | | | | | | | | | | | |
| | | Guarantor | | Non-guarantor | | | | |
| Parent | | Subsidiaries | | Subsidiaries | | Eliminations | | Total |
Cash flows from operating activities: | | | | | | | | | |
Net income | $ | 1,025 | | | $ | 13,386 | | | $ | 1,195 | | | $ | (14,581 | ) | | $ | 1,025 | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | | | | | |
Equity in income from operations of subsidiaries | (13,386 | ) | | (1,195 | ) | | — | | | 14,581 | | | — | |
Depreciation and amortization | 2,588 | | | 37,405 | | | 2,667 | | | — | | | 42,660 | |
Net receipt of deferred vendor incentives | — | | | 29,357 | | | — | | | — | | | 29,357 | |
Impairment of long-lived assets | — | | | 9,258 | | | 354 | | | — | | | 9,612 | |
Distributions received from joint venture | — | | | — | | | 3,113 | | | — | | | 3,113 | |
Share-based compensation provision | 1,196 | | | 1,803 | | | — | | | — | | | 2,999 | |
Write-off and amortization of deferred financing costs | 2,148 | | | — | | | — | | | — | | | 2,148 | |
Accretion of long-term debt | 595 | | | 1,535 | | | — | | | — | | | 2,130 | |
Non-cash rent expense (credit) | — | | | 1,880 | | | (73 | ) | | — | | | 1,807 | |
Provision for doubtful accounts | — | | | 1,024 | | | (121 | ) | | — | | | 903 | |
Tax sharing receipt from (payment to) affiliate, net | 14,000 | | | (14,000 | ) | | — | | | — | | | — | |
Deferred income tax benefit, net | (272 | ) | | (64 | ) | | — | | | — | | | (336 | ) |
Other operating transactions with affiliates | 28,357 | | | (30,328 | ) | | 1,309 | | | — | | | (662 | ) |
Tax sharing (receivable from) payable to affiliate, net | (14,570 | ) | | 13,656 | | | — | | | — | | | (914 | ) |
Equity in earnings in joint venture | — | | | — | | | (2,363 | ) | | — | | | (2,363 | ) |
Tax sharing payment to Wendy's/Arby's | (13,078 | ) | | — | | | — | | | — | | | (13,078 | ) |
Other, net | (1 | ) | | 723 | | | (293 | ) | | — | | | 429 | |
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts and notes receivable | 37 | | | 2,357 | | | (188 | ) | | — | | | 2,206 | |
Inventories | — | | | (481 | ) | | 111 | | | — | | | (370 | ) |
Prepaid expenses and other current assets | (633 | ) | | (6,746 | ) | | (1,118 | ) | | — | | | (8,497 | ) |
Accounts payable | (223 | ) | | 3,423 | | | 414 | | | — | | | 3,614 | |
Accrued expenses and other current liabilities | (21,046 | ) | | (9,517 | ) | | (2,617 | ) | | — | | | (33,180 | ) |
Net cash (used in) provided by operating activities | (13,263 | ) | | 53,476 | | | 2,390 | | | — | | | 42,603 | |
Cash flows from investing activities: | | | | | | | | | |
Capital expenditures | (3,293 | ) | | (23,398 | ) | | (1,877 | ) | | — | | | (28,568 | ) |
Business acquisition | — | | | (2,900 | ) | | — | | | — | | | (2,900 | ) |
Other, net | — | | | 303 | | | — | | | — | | | 303 | |
Net cash used in investing activities | (3,293 | ) | | (25,995 | ) | | (1,877 | ) | | — | | | (31,165 | ) |
Cash flows from financing activities: | | | | | | | | | |
Repayments of long-term debt | (26,117 | ) | | (3,598 | ) | | (50 | ) | | — | | | (29,765 | ) |
Capital contribution from Parent | (30,000 | ) | | 30,000 | | | — | | | — | | | — | |
Other, net | (18 | ) | | — | | | — | | | — | | | (18 | ) |
Net cash (used in) provided by financing activities | (56,135 | ) | | 26,402 | | | (50 | ) | | — | | | (29,783 | ) |
Net cash (used in) provided by operations before effect of exchange rate changes on cash | (72,691 | ) | | 53,883 | | | 463 | | | — | | | (18,345 | ) |
Effect of exchange rate changes on cash | — | | | — | | | 959 | | | — | | | 959 | |
Net (decrease) increase in cash and cash equivalents | (72,691 | ) | | 53,883 | | | 1,422 | | | — | | | (17,386 | ) |
Cash and cash equivalents at beginning of period | 79,355 | | | 88,936 | | | 30,395 | | | — | | | 198,686 | |
Cash and cash equivalents at end of period | $ | 6,664 | | | $ | 142,819 | | | $ | 31,817 | | | $ | — | | | $ | 181,300 | |
WENDY’S/ ARBY’S GROUP, INC. AND SUBSIDIARIES
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended April 4, 2010
|
| | | | | | | | | | | | | | | | | | | |
| | | Guarantor | | Non-guarantor | | | | |
| Parent | | Subsidiaries | | Subsidiaries | | Eliminations | | Total |
Cash flows from operating activities: | | | | | | | | | |
Net (loss) income | $ | (2,560 | ) | | $ | (4,135 | ) | | $ | 1,130 | | | $ | 3,005 | | | $ | (2,560 | ) |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | | | | | | | | |
Equity in loss (income) from operations of subsidiaries | 4,135 | | | (1,130 | ) | | — | | | (3,005 | ) | | — | |
Depreciation and amortization | 3,171 | | | 40,011 | | | 2,678 | | | — | | | 45,860 | |
Net receipt of deferred vendor incentives | — | | | 31,067 | | | — | | | — | | | 31,067 | |
Impairment of long-lived assets | — | | | 11,601 | | | — | | | — | | | 11,601 | |
Share-based compensation provision | 894 | | | 2,413 | | | — | | | — | | | 3,307 | |
Distributions received from joint venture | — | | | — | | | 2,968 | | | — | | | 2,968 | |
Non-cash rent expense (credit) | — | | | 2,966 | | | (87 | ) | | — | | | 2,879 | |
Accretion of long-term debt | 356 | | | 2,359 | | | — | | | — | | | 2,715 | |
Provision for doubtful accounts | — | | | 2,440 | | | 160 | | | — | | | 2,600 | |
Write-off and amortization of deferred financing costs | 738 | | | 957 | | | — | | | — | | | 1,695 | |
Tax sharing (receivable from) payable to affiliate, net | (17,728 | ) | | 13,101 | | | — | | | — | | | (4,627 | ) |
Other operating transactions with affiliates | (58,915 | ) | | 53,672 | | | 1,619 | | | — | | | (3,624 | ) |
Deferred income tax benefit, net | — | | | (3,433 | ) | | — | | | — | | | (3,433 | ) |
Equity in earnings in joint venture | — | | | — | | | (1,850 | ) | | — | | | (1,850 | ) |
Other, net | 2,351 | | | 1,127 | | | (1,882 | ) | | — | | | 1,596 | |
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts and notes receivable | 2 | | | 2,573 | | | (534 | ) | | — | | | 2,041 | |
Inventories | — | | | 1,219 | | | 76 | | | — | | | 1,295 | |
Prepaid expenses and other current assets | 12 | | | (7,131 | ) | | 1,800 | | | — | | | (5,319 | ) |
Accounts payable | (51 | ) | | (11,901 | ) | | (7 | ) | | — | | | (11,959 | ) |
Accrued expenses and other current liabilities | (23,288 | ) | | (9,571 | ) | | (6,330 | ) | | — | | | (39,189 | ) |
Net cash (used in) provided by operating activities | (90,883 | ) | | 128,205 | | | (259 | ) | | — | | | 37,063 | |
Cash flows from investing activities: | | | | | | | | | |
Capital expenditures | (4,993 | ) | | (20,285 | ) | | (1,865 | ) | | — | | | (27,143 | ) |
Other, net | — | | | 2,432 | | | — | | | — | | | 2,432 | |
Net cash used in investing activities | (4,993 | ) | | (17,853 | ) | | (1,865 | ) | | — | | | (24,711 | ) |
Cash flows from financing activities: | | | | | | | | | |
Dividends paid to Wendy’s/Arby’s | (112,000 | ) | | — | | | — | | | — | | | (112,000 | ) |
Repayments of long-term debt | (53 | ) | | (4,747 | ) | | (49 | ) | | — | | | (4,849 | ) |
Other, net | — | | | 161 | | | — | | | — | | | 161 | |
Net cash used in financing activities | (112,053 | ) | | (4,586 | ) | | (49 | ) | | — | | | (116,688 | ) |
Net cash (used in) provided by operations before effect of exchange rate changes on cash | (207,929 | ) | | 105,766 | | | (2,173 | ) | | — | | | (104,336 | ) |
Effect of exchange rate changes on cash | — | | | — | | | 1,258 | | | — | | | 1,258 | |
Net (decrease) increase in cash and cash equivalents | (207,929 | ) | | 105,766 | | | (915 | ) | | — | | | (103,078 | ) |
Cash and cash equivalents at beginning of period | 237,607 | | | 268,762 | | | 32,495 | | | — | | | 538,864 | |
Cash and cash equivalents at end of period | $ | 29,678 | | | $ | 374,528 | | | $ | 31,580 | | | $ | — | | | $ | 435,786 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s”) and together with its subsidiaries, the “Company” or “we”Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”) should be read in conjunction with ourthe accompanying unaudited condensed consolidated financial statements included elsewhere herein and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 3, 20102, 2011 (the “Form 10-K”). There have been no significantmaterial changes as of OctoberApril 3, 20102011 to the application of our critical accounting policies or guarantees and commitments as described in Item 7 of our Form 10-K. Certain statements we make unde runder this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II – Other Information” preceding “Item 1.” You should consider our forward-looking statements in light of our unaudited condensed consolidated financial statements, related combined notes, and other financial information appearing elsewhere in this report, our Form 10-K and our other filings with the Securities and Exchange Commission.
IntroductionExcept where otherwise indicated, this discussion relates to the unaudited condensed consolidated financial statements for each of Wendy’s/Arby’s and Executive OverviewWendy’s/Arby’s Restaurants (the “Companies”). References herein to Wendy’s/Arby’s corporate (“Corporate”) represent Wendy’s/Arby’s parent company functions only and their effect on the consolidated results of operations and financial condition.
Our Business
Wendy’s/Arby’s is the parent company of its wholly-owned100% owned subsidiary holding company Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”).Restaurants. Wendy’s/Arby’s Restaurants is the parent company of Wendy’s International, Inc. (“Wendy’s”) and Arby’s Restaurant Group, Inc. (“Arby’s” or “ARG”), which are the owners and franchisors of the Wendy’s® and Arby’s® restaurant systems, respectively. Wendy’s/Arby’s Restaurants has no operations other than those of Wendy’s and Arby’s and their respective subsidiaries.
Introduction and Executive Overview
Our Business
We currently manage and internally report our operations as two business segments: the operation and franchising of Wendy’s restaurants, including its wholesale bakery operations, and the operation and franchising of Arby’s restaurants. References in this Form 10-Q to restaurants that w e “own” or that are “company-owned” include owned and leased restaurants that we operate through our subsidiaries. As of OctoberApril 3, 2010,2011, the Wendy’s restaurant system was comprised of 6,5546,565 restaurants, of which 1,3911,395 were owned and operated by the Company.Companies. As of OctoberApril 3, 2010,2011, the Arby’s restaurant system was comprised of 3,6623,631 restaurants, of which 1,1461,139 were owned and operated by the Company.Companies. The 2,5372,534 Wendy’s and Arby’s Company-ownedcompany-owned restaurants are located principally in the United States and to a lesser extent in Canada (the “North America Restaurants”). In January 2011, we announced that we are exploring strategic alternatives for Arby’s, including a sale of the brand.
Wendy’s and Arby’s revenues and operating results have been impacted by a number of factors, including generally negative sales and traffic trends in the restaurant industry, high unemployment, negative general economic trends and intense price competition. As noted below in “Cost of sales,” both Wendy’s and Arby’s experienced increased commodity costs in the 2011 first quarter, which negatively affected cost of sales and restaurant margins. The Companies expect that significant increases in commodity costs as compared to 2010 for both Wendy’s and Arby’s will continue in 2011. Wendy’s expects to offset much of these increases with prudent price increases, while protecting transactions and market share. Arby’s is also planning to take selective price increases in the second half of 2011.
We remain committed to investing inWendy’s long-term growth opportunities for our brands. Our Wendy’s initiatives to improve sales and margins include (1) product innovation, (2) a continued emphasis on our breakfast program, (2)everyday value menu, (3) expanding dayparts, (4) remodeling our remodeling program,facilities, (5) new unit development, and (3) product innovation. Our(6) expanding internationally. Arby’s long-term growth initiativesopportunities include (1) our value strategy, which includes our everyday affordability proposition, (2) remodeling our remodeling program,facilities, (3) aour new brand positioning, to bewhich was introduced induring the first quarter of 2011, and (4) product innovation. In addition, we are aggressively pursuing international development opportunities for both brands.
As of OctoberApril 3, 2010,2011, there were approximately 500450 Arby’s franchised restaurants with amounts payable to our subsidiary ARGArby’s for royalties, rent and/or other fees that were at least 60 days past due. The financial condition of a number of Arby’s franchisees was one of the factors that resulted in a net decrease of 3144 and 3313 in the number of franchised restaurants for fiscal 20092010 and for the ninethree months ended OctoberApril 3, 2010,2011, respectively. During those same periods, 7496 and 7521 franchised Arby’s restaurants were closed, respectively. The trendPrior year trends of declining sales at franchised Arby’s restaurants hashad resulted in decreases in royalties and other franchise revenues.revenues and the deterioration in the financial condition of some of our franchisees. In addition, Arby’s franchisee accounts receivable and related allowance for doubtful accounts havehad increased significantly, and may continue to grow as a resultshould the
financial condition of some of our franchisees.franchisees not improve. Franchisees’ financial difficulties and the closure of franchised restaurants have also causedcause reductions in the contributions to and the extent of advertising programs. Continuation of these trends will further affect our revenues and may have a material adverse effect on our results of operations and financial condition.
Restaurant business revenues for the first ninethree months of 20102011 include: (1) $2,222.3$737.6 million of sales from Company-ownedcompany-owned restaurants, (2) $74.6$18.9 million from the sale of bakery items and kids’ meal promotion items to our franchisees, (3) $259.5$84.9 million of royalty income from franchisees, and (4) $19.3$6.4 million of other franchise-related revenue and other revenues. During the first quarter of 2011, Wendy’s purchasing cooperative, Quality Supply Chain Co-op, Inc. (“QSCC”) began managing the operations for kids’ meal promotion items sold to franchisees. Sales of kids’ meal promotion items recorded during the first quarter of 2011 were from inventory on hand prior to QSCC’s management of the process. In future quarters we do not expect to receive significant revenue from sales of kids’ meal promotion items sold to franchisees. However, we do not expect the decrease in these revenues to have a material adverse effect on our results of operations or financial condition. Most of our Wendy’s and Arby’s royalty agreements provided for royalties of 4.0% of franchise revenues for the ninethree months ended OctoberApril 3, 2010.2011.
Key Business Measures
We track our results of operations and manage our business using the following key business measures:
We report Arby’sWendy’s North America Restaurants same-store sales commencing after a store has been open for fifteenat least 15 continuous months. Wendy’smonths and as of the beginning of the previous fiscal year. Arby’s North America Restaurants same-store sales are reported after a store has been open for at least fifteen15 continuous months as of the beginning of the fiscal year.months. These methodologies are consistent with the metrics used by our management for internal reporting and analysis. Same-store sales exclude the impact of currency translation.
We define restaurant margin as sales from Company-ownedcompany-owned restaurants less cost of sales divided by sales from Company-ownedcompany-owned restaurants. Cost of sales includes food and paper, restaurant labor, and occupancy, advertising and other operating costs. Sales and cost of sales exclude amounts related to bakery items and kids’ meal promotion items sold to franchisees. Restaurant margin is influenced by factors such as restaurant openings and closures, price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, the level of our fixed and semi-variable costs, and fluctuations in food and labor costs.
DFR Notes
On June 9, 2010, pursuant to a March 2010 agreement between the Company and Deerfield Capital Corp. (“DFR”), we received cash proceeds of $31.3 million, including interest, in consideration for the repayment and cancellation of the series A senior notes (the “DFR Notes”) we received in December 2007 in connection with the sale of Deerfield & Company (the “Deerfield Sale”) to DFR. Additional information on the DFR Notes and the Deerfield Sale is discussed in our Form 10-K. The proceeds represented 64.1% of the $48.0 million aggregate principal amount of the DFR Notes.
During the fourth quarter of 2008, we recognized an allowance for collectability of $21.2 million to reduce the then carrying amount of the DFR Notes to $25.0 million. As a result, we recognized income of $4.9 million during the nine months ended October 3, 2010 as the repayment proceeds exceeded the carrying value of the DFR Notes. This gain is included in “Investment income (expense), net.”
As further described in “Liquidity and Capital Resources – Long-term Debt – Credit Agreement” below, on May 24, 2010, Wendy’s/Arby’s Restaurants, a direct wholly-owned subsidiary of the Company, entered into a $650.0 million Credit Agreement (the “Credit Agreement”), which includes a $500.0 million senior secured term loan facility (the “Term Loan”) and a $150.0 million senior secured revolving credit facility (the “Credit Facility”).
The Company recognized a loss on early extinguishment of debt of $26.2 million in the second quarter of 2010 related to the repayment of debt from the proceeds of the Term Loan. This loss consisted of (1) a $15.0 million premium payment required to redeem the Wendy’s 6.25% senior notes, (2) $5.5 million for the write-off of the unaccreted discount of the Wendy’s 6.25% senior notes (recorded in connection with the Wendy’s merger), and (3) $5.7 million for the write-off of deferred costs associated with the repayment of the prior senior secured term loan.
Related Party Transactions
Wendy’s/Arby’s hasThe Companies have entered into the following new or revised transactions with related parties since those reported in our Form 10-K:
Services AgreementSSG
Wendy’s/Arby’s and the management company formedAs agreed by certain former executives and a director, (the “Management Company”), entered into a services agreement (the “Services Agreement”) which commenced on July 1, 2009 and will continue until June 30,its board of directors in March 2011, unless sooner terminated. Under the Services Agreement, the Management Company will assist us with strategic merger and acquisition consultation, corporate finance and investment banking services and related legal matters. During the second quarter of 2010, in addition to the regular quarterly fee to the Management Company, we paid the Management Company $2.5 million in fees for corporate finance advisory services in connection with the negotiation and execution of the Credit Agreement.
Sublease of New York Office Space
In July 2007, the Company entered into an agreement under which the Management Company is subleasing the office space on one of the floors of the Company’s former New York headquarters. During the second quarter of 2010, the Company and the Management Company entered into an amendment to the sublease, effective April 1, 2010, pursuant to which2011 the Management Company’s early termination right was cancelled in exchange for a reduction in rent. Under the termsactivities of the amended sublease, the sublease is not cancelable prior to the expiration of the prime lease and the Management Company pays rent to the Company in an amount that covers substantially all of the Company’s rent obligations under the prime lease for such space.
Aircraft Agreement
On June 10, 2009, the Company entered into a lease of one of its corporate aircraft to TASCO LLC, an affiliate of the Management Company. On June 24, 2010, the Company and TASCO LLC entered into an agreement to renew the lease for an additional one year period (expiring June 30, 2011) on the same terms and conditions as the expiring lease.
Supply Chain Relationship Agreement
In connection with the ongoing operations of the Wendy’s purchasing co-op, Quality Supply Chain Co-op, Inc. (“QSCC”), Wendy’s paid $0.2 million and $0.7 million primarily for payroll-related expenses to certain QSCC purchasing employees during the three months and nine months ended October 3, 2010 for which Wendy’s expects to be reimbursed by QSCC in the fourth quarter of 2010.
Strategic Sourcing Group Agreement
On April 5, 2010,Co-op, LLC (“SSG”) were transferred to QSCC, and the Arby’s independent purchasing cooperative (“ARCOP”), in consultation with. Wendy’s/Arby’s Restaurants established the Strategic Sourcing Group Co-op, LLC (the “SSG”). The SSG was formed to manage and operate purchasing programs which combine the purchasing power of both Wendy’s and Arby’s Company-owned and franchised restaurants to create buying efficiencies for certain non-perishable goods, equipment and services utilized by both brands.
In order to facilitate the orderly transition of this purchasing function for the Company’s North American operations, Wendy’s/Arby’s Restaurants transferred certain contracts, assets and certain Wendy’s/Arby’s Restaurants purchasing employees to the SSG in the second quarter of 2010. Wendy’s/Arby’s Restaurants hashad committed to pay approximately $4.9$5.2 million of SSG expenses, of the SSG, which $4.9 million was expensed in the first quarter of 2010, and included in “General and administrative,” and willwas to be paid over a 24 month period. The SSG is exploring various alternatives for its sourcesperiod through March 2012. During the first quarter of funding for future operations. Effective April 5, 2010,2011, the SSG leased 2,300remaining accrued commitment of $2.3 million was reversed and credited to “General and administrative.”
QSCC Sublease
Wendy’s and QSCC entered into a sublease amendment, effective January 1, 2011, which increased the office space subleased to QSCC to 14,333 square feet of office space from Arby’s until December 31, 2016 unless terminated earlier for ana one year period for a revised annual base rental of less than $0.1 million.approximately $0.2 million with five one-year renewal options.
Revolving credit facilitiesWendy’s Advertising Program
AFA Service Corporation (“AFA”), an independently controlledWendy’s participates in two national advertising cooperativefunds for Wendy’s United States and Canadian locations established to collect and administer funds contributed for use in advertising through television, radio, newspapers, the Arby’s system in which we have voting interestsInternet and a variety of less than 50%, previously entered into a revolving loan agreement with ARG pursuant to which ARG provided revolving loans up to $14.5 million.promotional campaigns. During the thirdfirst quarter of 2010,2011, Wendy’s reimbursed the parties agreed in principle to terms that extend the maturity to March 2012Canadian advertising fund $0.2 million for advertising expenses associated with revolving loans up to $14.0 million bearing interest at 7.5%. Asnew product testing.
Presentation of Financial Information
WeThe Companies’ report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. Our 2009 fiscal year contained 53 weeks with the fiscal fourth quarter containing 14 weeks. AllBoth quarters presented contain 13 weeks. All references to years and quarters relate to fiscal periods rather than calendar periods. Certain percentage changes between these years are considered not measurable or not meaningful (“n/m”).
Results of Operations
Three Months Ended OctoberFor each of Wendy’s/Arby’s and Wendy’s/Arby’s Restaurants, the following tables included throughout this Item 2 set forth the consolidated results of operations for the three months ended April 3, 2011 and April 4, 2010 Compared with Three Months Ended September 27, 2009 (In Millions)
| | Three Months Ended | |
| | October 3, | | | September 27, | | | $ | | | | % | |
| | 2010 | | | 2009 | | | Change | | | Change | |
Revenues: | | | | | | | | | | | | | |
Sales | | $ | 766.0 | | | $ | 806.1 | | | $ | (40.1 | ) | | | (5.0)% | |
Franchise revenues | | | 95.2 | | | | 97.1 | | | | (1.9 | ) | | | (2.0) | |
| | | 861.2 | | | | 903.2 | | | | (42.0 | ) | | | (4.7) | |
Costs and expenses: | | | | | | | | | | | | | | | | |
Cost of sales | | | 667.1 | | | | 684.1 | | | | (17.0 | ) | | | (2.5) | |
General and administrative | | | 97.9 | | | | 97.9 | | | | - | | | | - | |
Depreciation and amortization | | | 46.2 | | | | 47.1 | | | | (0.9 | ) | | | (1.9) | |
Impairment of long-lived assets | | | 27.4 | | | | 15.5 | | | | 11.9 | | | | 76.8 | |
Facilities relocation and corporate restructuring | | | - | | | | 1.7 | | | | (1.7 | ) | | | (100.0) | |
Other operating expense, net | | | 2.3 | | | | - | | | | 2.3 | | | | 100.0 | |
| | | 840.9 | | | | 846.3 | | | | (5.4 | ) | | | (0.6) | |
Operating profit | | | 20.3 | | | | 56.9 | | | | (36.6 | ) | | | (64.3) | |
| | | | | | | | | | | | | | | | |
Interest expense | | | (33.9 | ) | | | (36.5 | ) | | | 2.6 | | | | (7.1) | |
Investment income, net | | | 0.1 | | | | 0.7 | | | | (0.6 | ) | | | (85.7) | |
Other income, net | | | 0.3 | | | | 1.3 | | | | (1.0 | ) | | | (76.9) | |
(Loss) income from continuing operations before income taxes | | | (13.2 | ) | | | 22.4 | | | | (35.6 | ) | | | n/m | |
Benefit from (provision for) income taxes | | | 12.3 | | | | (8.1 | ) | | | 20.4 | | | | n/m | |
(Loss) income from continuing operations | | | (0.9 | ) | | | 14.3 | | | | (15.2 | ) | | | n/m | |
Income from discontinued operations, net of income taxes | | | - | | | | 0.4 | | | | (0.4 | ) | | | (100.0)% | |
Net (loss) income | | $ | (0.9 | ) | | $ | 14.7 | | | $ | (15.6 | ) | | | n/m | |
Restaurant statistics: | | | | | | | | | | | | |
| | Third Quarter 2010 | | | | | | Third Quarter 2009 | | | | |
Wendy’s same-store sales: | | | | | | | | | | | | |
North America Company-owned restaurants | | | (3.1)% | | | | | | | (1.4)% | | | | |
North America franchised restaurants | | | (1.3)% | | | | | | | 0.4% | | | | |
North America system wide | | | (1.7)% | | | | | | | (0.1)% | | | | |
| | | | | | | | | | | | | | |
Arby’s same-store sales: | | | | | | | | | | | | | | |
North America Company-owned restaurants | | | (9.5)% | | | | | | | (6.5)% | | | | |
North America franchised restaurants | | | (4.1)% | | | | | | | (10.2)% | | | | |
North America system wide | | | (5.9)% | | | | | | | (9.0)% | | | | |
| | | | | | | | | | | | | | |
Sales: | | | | | | | | | | | | | | |
Wendy’s | | $ | 500.3 | | | | | | $ | 514.1 | | | | |
Arby’s | | | 240.9 | | | | | | | 269.2 | | | | |
Bakery and kids' meal promotion items sold | | | 24.8 | | | | | | | 22.8 | | | | |
Total sales | | $ | 766.0 | | | | | | $ | 806.1 | | | | |
| | | | | | | | | | | | | | |
Cost of sales: | | | | | | | | | | | | | | |
| | | | | | % of Sales | | | | | | | % of Sales | |
Wendy’s | | | | | | | | | | | | | | |
Food and paper | | $ | 166.3 | | | | 33.2% | | | $ | 162.6 | | | | 31.6% | |
Restaurant labor | | | 147.9 | | | | 29.6% | | | | 151.8 | | | | 29.5% | |
Occupancy, advertising and other operating costs | | | 119.0 | | | | 23.8% | | | | 115.1 | | | | 22.4% | |
Total Wendy’s cost of sales | | | 433.2 | | | | 86.6% | | | | 429.5 | | | | 83.5% | |
| | | | | | | | | | | | | | | | |
Arby’s | | | | | | | | | | | | | | | | |
Food and paper | | | 66.9 | | | | 27.8% | | | | 78.8 | | | | 29.3% | |
Restaurant labor | | | 80.1 | | | | 33.3% | | | | 84.4 | | | | 31.3% | |
Occupancy, advertising and other operating costs | | | 68.8 | | | | 28.5% | | | | 73.4 | | | | 27.3% | |
Total Arby’s cost of sales | | | 215.8 | | | | 89.6% | | | | 236.6 | | | | 87.9% | |
| | | | | | | | | | | | | | | | |
Bakery and kids' meal promotion items sold to franchisees | | | 18.1 | | | | n/m | | | | 18.0 | | | | n/m | |
Total cost of sales | | $ | 667.1 | | | | 87.1% | | | $ | 684.1 | | | | 84.9% | |
Margin $ | | | | | |
Wendy’s | | $ | 67.1 | | | $ | 84.6 |
Arby’s | | | 25.1 | | | | 32.6 |
Bakery and kids’ meal promotion items sold | | | | | | | |
to franchisees | | | 6.7 | | | | 4.8 |
Total margin | | $ | 98.9 | | | $ | 122.0 |
| | | | | | | |
Restaurant margin % | | | | | | | |
Wendy’s | | | 13.4% | | | | 16.5% |
Arby’s | | | 10.4% | | | | 12.1% |
Total restaurant margin % | | | 12.4% | | | | 15.0% |
| | | | | | | |
Franchise revenues: | | | | | | | |
Wendy’s | | $ | 75.6 | | | $ | 76.7 |
Arby’s | | | 19.6 | | | | 20.4 |
Total franchise revenues | | $ | 95.2 | | | $ | 97.1 |
Depreciation and amortization: | | | | | | |
Wendy’s | | $ | 29.1 | | | $ | 31.4 | |
Arby’s | | | 13.5 | | | | 14.3 | |
Corporate | | | 3.6 | | | | 1.4 | |
Total depreciation and amortization | | $ | 46.2 | | | $ | 47.1 | |
| | | | | | | | |
Impairment of long-lived assets: | | | | | | | | |
Wendy’s | | $ | 20.9 | | | $ | 0.3 | |
Arby’s | | | 6.5 | | | | 15.2 | |
Total impairment of long-lived assets | | $ | 27.4 | | | $ | 15.5 | |
Other operating expense, net: | | | | | | |
Wendy’s | | $ | 1.6 | | | $ | (0.5 | ) |
Arby’s | | | 0.7 | | | | 0.1 | |
Corporate | | | - | | | | 0.4 | |
Total other operating expense, net | | $ | 2.3 | | | $ | - | |
| | | | | | | | |
Operating profit (loss): | | | | | | | | |
Wendy’s (a) | | $ | 32.8 | | | $ | 69.9 | |
Arby’s | | | (7.3 | ) | | | (8.9 | ) |
Corporate | | | (5.2 | ) | | | (4.1 | ) |
Total operating profit: | | $ | 20.3 | | | $ | 56.9 | |
| | | | | | | | |
(a) Wendy’s “Operating profit (loss)” includes the margin dollars for the Bakery and kids’ meal promotion items sold to franchisees. | |
Restaurant count: | | Company-owned | | | Franchised | | | System Wide | |
Wendy’s restaurant count: | | | | | | | | | |
Restaurant count at July 4, 2010 | | | 1,391 | | | | 5,155 | | | | 6,546 | |
Opened | | | 1 | | | | 18 | | | | 19 | |
Closed | | | (1 | ) | | | (10 | ) | | | (11 | ) |
Sold to franchisees | | | - | | | | - | | | | - | |
Restaurant count at October 3, 2010 | | | 1,391 | | | | 5,163 | | | | 6,554 | |
| | | | | | | | | | | | |
Arby’s restaurant count: | | | | | | | | | | | | |
Restaurant count at July 4, 2010 | | | 1,152 | | | | 2,533 | | | | 3,685 | |
Opened | | | - | | | | 8 | | | | 8 | |
Closed | | | (6 | ) | | | (25 | ) | | | (31 | ) |
Restaurant count at October 3, 2010 | | | 1,146 | | | | 2,516 | | | | 3,662 | |
| | | | | | | | | | | | |
Total Wendy’s/Arby’s restaurant count at October 3, 2010 | | | 2,537 | | | | 7,679 | | | | 10,216 | |
(dollars in millions):
Sales | | | |
| | Change | |
| | (In Millions) | |
| | | |
Wendy’s | | $ | (13.8 | ) |
Arby’s | | | (28.3 | ) |
Bakery and kids’ meal promotion items sold to franchisees | | | 2.0 | |
| | $ | (40.1 | ) |
(Wendy’s/Arby’s) |
| | | | | | | | | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 | | $ Change | | % Change |
Revenues: | | | | | | | | |
Sales | $ | 756.5 | | | $ | 748.2 | | | $ | 8.3 | | | 1.1 | % |
Franchise revenues | 91.3 | | | 89.2 | | | 2.1 | | | 2.4 | |
| 847.8 | | | 837.4 | | | 10.4 | | | 1.2 | |
Costs and expenses: | | | | | | | | | | | |
Cost of sales | 659.8 | | | 641.4 | | | 18.4 | | | 2.9 | |
General and administrative | 103.6 | | | 110.5 | | | (6.9 | ) | | (6.2 | ) |
Depreciation and amortization | 43.1 | | | 46.3 | | | (3.2 | ) | | (6.9 | ) |
Impairment of long-lived assets | 9.6 | | | 11.6 | | | (2.0 | ) | | (17.2 | ) |
Other operating expense, net | 1.1 | | | 1.3 | | | (0.2 | ) | | (15.4 | ) |
| 817.2 | | | 811.1 | | | 6.1 | | | 0.8 | |
Operating profit | 30.6 | | | 26.3 | | | 4.3 | | | 16.3 | |
Interest expense | (34.3 | ) | | (36.3 | ) | | 2.0 | | | (5.5 | ) |
Other income, net | 0.3 | | | 1.5 | | | (1.2 | ) | | (80.0 | ) |
Loss before income taxes | (3.4 | ) | | (8.5 | ) | | 5.1 | | | (60.0 | ) |
Benefit from income taxes | 2.0 | | | 5.1 | | | (3.1 | ) | | (60.8 | ) |
Net loss | $ | (1.4 | ) | | $ | (3.4 | ) | | $ | 2.0 | | | (58.8 | )% |
(Wendy’s/Arby’s Restaurants)
|
| | | | | | | | | | | | | | |
| Three Months Ended |
| April 3, 2011 | | April 4, 2010 | | $ Change | | % Change |
Revenues: | | | | | | | | |
Sales | $ | 756.5 | | | $ | 748.2 | | | $ | 8.3 | | | 1.1 | % |
Franchise revenues | 91.3 | | | 89.2 | | | 2.1 | | | 2.4 | |
| 847.8 | | | 837.4 | | | 10.4 | | | 1.2 | |
Costs and expenses: | | | | | | | | | | | |
Cost of sales | 659.8 | | | 641.4 | | | 18.4 | | | 2.9 | |
General and administrative | 100.3 | | | 108.8 | | | (8.5 | ) | | (7.8 | ) |
Depreciation and amortization | 42.6 | | | 45.9 | | | (3.3 | ) | | (7.2 | ) |
Impairment of long-lived assets | 9.6 | | | 11.6 | | | (2.0 | ) | | (17.2 | ) |
Other operating expense, net | 1.0 | | | 1.5 | | | (0.5 | ) | | (33.3 | ) |
| 813.3 | | | 809.2 | | | 4.1 | | | 0.5 | |
Operating profit | 34.5 | | | 28.2 | | | 6.3 | | | 22.3 | |
Interest expense | (34.1 | ) | | (35.9 | ) | | 1.8 | | | (5.0 | ) |
Other income, net | 0.3 | | | 0.5 | | | (0.2 | ) | | (40.0 | ) |
Income (loss) before income taxes | 0.7 | | | (7.2 | ) | | 7.9 | | | n/m |
Benefit from income taxes | 0.3 | | | 4.6 | | | (4.3 | ) | | (93.5 | )% |
Net income (loss) | $ | 1.0 | | | $ | (2.6 | ) | | $ | 3.6 | | | n/m |
|
| | | | | | | | | | | | | |
| First Quarter 2011 | | | | | First Quarter 2010 | | | |
Sales: | | | | | | | | | |
Wendy’s | $ | 490.4 | | | | | | $ | 489.0 | | | | |
Arby’s | 247.2 | | | | | | 235.5 | | | | |
Bakery and kids’ meal promotion items sold to franchisees (a) | 18.9 | | | | | | 23.7 | | | | |
Total sales | $ | 756.5 | | | | | | $ | 748.2 | | | | |
| | | | | | | | | |
Cost of sales: | | | % of Sales | | | | | % of Sales | |
Wendy’s | | | | | | | | | |
Food and paper | $ | 157.3 | | | 32.1% | | | $ | 152.4 | | | 31.2% | |
Restaurant labor | 151.1 | | | 30.8% | | | 148.5 | | | 30.3% | |
Occupancy, advertising and other operating costs | 116.2 | | | 23.7% | | | 113.0 | | | 23.1% | |
Total Wendy’s cost of sales | 424.6 | | | 86.6% | | | 413.9 | | | 84.6% | |
Arby’s | | | | | | | | | |
Food and paper | 74.2 | | | 30.0% | | | 62.6 | | | 26.6% | |
Restaurant labor | 81.7 | | | 33.1% | | | 80.3 | | | 34.1% | |
Occupancy, advertising and other operating costs | 65.0 | | | 26.3% | | | 67.2 | | | 28.5% | |
Total Arby’s cost of sales | 220.9 | | | 89.4% | | | 210.1 | | | 89.2% | |
Bakery and kids’ meal promotion items sold to franchisees | 14.3 | | | n/m | | | 17.4 | | | n/m | |
Total cost of sales | $ | 659.8 | | | 87.2% | | | $ | 641.4 | | | 85.7% | |
|
| | | | | | | | |
| | First Quarter 2011 | | First Quarter 2010 |
Margin $: | | | | |
Wendy’s | | $ | 65.8 | | | $ | 75.1 | |
Arby’s | | 26.3 | | | 25.4 | |
Bakery and kids’ meal promotion items sold to franchisees | | 4.6 | | | 6.3 | |
Total margin | | $ | 96.7 | | | $ | 106.8 | |
| | | | |
Restaurant margin %: | | | | |
Wendy’s | | 13.4 | % | | 15.4 | % |
Arby’s | | 10.6 | % | | 10.8 | % |
Total restaurant margin % | | 12.5 | % | | 13.9 | % |
| | | | |
Franchise revenues: | | | | |
Wendy’s | | $ | 73.2 | | | $ | 72.0 | |
Arby’s | | 18.1 | | | 17.2 | |
Total franchise revenues | | $ | 91.3 | | | $ | 89.2 | |
| | | | |
Depreciation and amortization: | | | | |
Wendy’s | | $ | 27.3 | | | $ | 28.8 | |
Arby’s | | 12.8 | | | 13.9 | |
Shared services center | | 2.5 | | | 3.2 | |
Total depreciation and amortization Wendy’s/Arby’s Restaurants | | 42.6 | | | 45.9 | |
Corporate | | 0.5 | | | 0.4 | |
Total depreciation and amortization Wendy’s/Arby’s | | $ | 43.1 | | | $ | 46.3 | |
| | | | |
Impairment of long-lived assets: | | | | |
Wendy’s | | $ | 7.9 | | | $ | — | |
Arby’s | | 1.7 | | | 11.6 | |
Total impairment of long-lived assets | | $ | 9.6 | | | $ | 11.6 | |
| | | | |
Other operating expense, net: | | | | |
Wendy’s | | $ | 0.8 | | | $ | 1.2 | |
Arby’s | | 0.2 | | | 0.3 | |
Total other operating expense, net Wendy’s/Arby’s Restaurants | | 1.0 | | | 1.5 | |
Corporate | | 0.1 | | | (0.2 | ) |
Total other operating expense, net Wendy’s/Arby’s | | $ | 1.1 | | | $ | 1.3 | |
|
| | | | | | | | |
| | First Quarter 2011 | | First Quarter 2010 |
Operating profit (loss), net: | | | | |
Wendy’s (b) | | $ | 43.7 | | | $ | 52.4 | |
Arby’s | | (5.3 | ) | | (21.0 | ) |
Shared services center | | (3.9 | ) | | (3.2 | ) |
Total operating profit, net Wendy’s/Arby’s Restaurants | 34.5 | | | 28.2 | |
Corporate | | (3.9 | ) | | (1.9 | ) |
Total operating profit, net Wendy’s/Arby’s | | $ | 30.6 | | | $ | 26.3 | |
| | | | |
(a) During the first quarter of 2011, QSCC began managing the operations for kids’ meal promotion items sold to franchisees. Sales of kids’ meal promotion items recorded during the first quarter of 2011 were from inventory on hand prior to QSCC’s management of the process. |
(b) Wendy’s “Operating profit” includes the margin dollars for the bakery and kids’ meal promotion items sold to franchisees. |
|
| | | | | | | | |
Restaurant statistics: | | | | | |
Wendy’s same-store sales: | | | First Quarter 2011 | | First Quarter 2010 |
North America company-owned restaurants | | | (0.9 | )% | | 0.2% |
North America franchised restaurants | | | 0.3 | % | | 1.0% |
North America systemwide | | | 0.0 | % | | 0.8% |
| | | | | |
Arby’s same-store sales: | | | | | |
North America company-owned restaurants | | | 6.8 | % | | (11.6)% |
North America franchised restaurants | | | 4.8 | % | | (11.4)% |
North America systemwide | | | 5.5 | % | | (11.5)% |
| | | | | |
Restaurant count: | Company-owned | | Franchised | | Systemwide |
Wendy’s restaurant count: | | | | | |
Restaurant count at January 2, 2011 | 1,394 | | | 5,182 | | | 6,576 | |
Opened | 1 | | | 9 | | | 10 | |
Closed | (4 | ) | | (17 | ) | | (21 | ) |
Net purchased from (sold by) franchisees | 4 | | | (4 | ) | | — | |
Restaurant count at April 3, 2011 | 1,395 | | | 5,170 | | | 6,565 | |
Arby’s restaurant count: | | | | | |
Restaurant count at January 2, 2011 | 1,144 | | | 2,505 | | | 3,649 | |
Opened | — | | | 8 | | | 8 | |
Closed | (5 | ) | | (21 | ) | | (26 | ) |
Restaurant count at April 3, 2011 | 1,139 | | | 2,492 | | | 3,631 | |
Total restaurant count at April 3, 2011 | 2,534 | | | 7,662 | | | 10,196 | |
|
| | | |
Sales | |
| Change |
Wendy’s | $ | 1.4 | |
Arby’s | 11.7 | |
Bakery and kids’ meal promotion items sold to franchisees | (4.8 | ) |
| $ | 8.3 | |
The decreaseoverall increase in the 2011 first quarter sales was primarily due todriven by the declineincrease in Wendy’s and Arby’s North America Company-ownedcompany-owned same-store sales of 3.1% and 9.5%6.8%, respectively.partially offset by a decrease in Wendy’s and Arby’s North America Company-ownedcompany-owned same-store sales of 0.9%.
The Wendy’s North America company-owned same-store sales were impacted by severe winter weather in the generally negative economic trends and competitive pressures described above and in our Form 10-K.
first quarter of 2011. In addition, Wendy’s North America Company-ownedCanada company-owned same-store sales decreased 3.1%, of which 1.7% was$1.9 million primarily due to a decreasethe effect of higher sales taxes in the number of U.S. customer transactionstwo Canadian provinces beginning in the 2010 third quarter as compared to the 2009 third quarter despite the effect of a successful new product launch during the 2010 third quarter. Wendy’s Canada Company-owned same-store sales decreased $3.1 million primarily due to an increase in value added sales tax in certain Canadian provinces in the third quarter of 2010. The negative factors impacting Wendy’s sales were partially offset by (1) the effect of an approximate 1% blended price increase taken primarily in late 2009 and (2) a $3.8$2.9 million positive impactbenefit from favorable foreign currency translation. Wendy’ sWendy’s new stores opened or acquired subsequent to the first quarter of 2010 resulted in incremental sales of $5.6 million in the 2011 first quarter, which were partially offset by a reduction in sales of $2.5 million from locations sold or closed during or subsequent toafter the 2009 third quarter generated $3.5 million of sales in that 2009 period that did not recur in 2010 which was partially offset by sales of $2.3 million in the third quarter of 2010 from new stores opened subsequent to the third quarter of 2009.
first quarter.
Arby’s North America Company-ownedcompany-owned same-store sales were impacted byincrease of 6.8% in the first quarter of 2011 was primarily due to (1) a decrease of approximately 2.8% in same-store sales due to certain in-store promotional discounts offered duringsuccessful limited time only fish offering, (2) the 2009 third quarter, which did not recur during the 2010 third quarter, (2) a decrease of 7.0% in our average per customer check amount primarily as a resultintroduction of the expansionAngus roast beef premium product, (3) Arby’s new brand positioning, and (4) the introduction of a new item in 2010 of Arby’s everyday value strategy, and (3) a decrease in advertising expenditures in the 2010 third quarter as compared to the 2009 third quarter.menu. Arby’s locations sold or closed during or subsequent to the 2009 thirdfirst quarter generated $2.3of 2010 resulted in a reduction in sales of $3.7 million for the first quarter of sales in that 2009 period that did not recur in 2010,2011, which was mostlypartially offset by incremental sales of $2.1$0.5 million in the third2011 first quarter of 2010 from stores acquired from a franchisee subsequent toafter the third quarter of 2009.2010 first quarter.
Franchise Revenues | | | | |
| | Change | | |
| | (In Millions) | | | | |
Franchise Revenues | | |
| | | | Change |
Wendy’s | | $ | (1.1 | ) | $ | 1.2 | |
Arby’s | | | (0.8 | ) | 0.9 | |
| | $ | (1.9 | ) | $ | 2.1 | |
The decrease in franchise revenues was primarily due to the decline inBoth Wendy’s and Arby’s North America franchised restaurant same-store sales for the first quarter of 1.3% and 4.1%, respectively.
Wendy’s North America franchised restaurant same-store sales2011 were impacted by the same factors described above for company-owned restaurants; however, Wendy’s Company-ownedfranchised restaurants althoughcontinued to have higher same-store sales year over year than Wendy’s company-owned restaurants, which we believe certain franchised restaurants mitigated some of the declineis due to differences in same-store sales through greater price increases than those taken by Wendy’s Company-owned restaurants.pricing.
Arby’s North America franchised restaurant same-store sales were impacted by the same factors described above for Arby’s Company-owned restaurants, although Arby’s North America franchised restaurants in 2010 (1) were comparing to weaker 2009 sales levels than at Company-owned restaurants as a result of fewer in-store promotional discounts offered by franchisees during the 2009 third quarter, (2) participated in a higher level of local advertising than Company-owned restaurants, and (3) had a higher check average as a result of pricing and menu mix as compared to Company-owned restaurants.
|
| |
Cost of Sales | |
| Change |
| |
Wendy’s | 3.1 % points2.0% |
Arby’s | 1.7 % points0.2% |
Consolidated | 2.2 % points1.5% |
Wendy’s North America Company-ownedcompany-owned restaurant cost of sales increased as a percent of sales in the 2010 third2011 first quarter as compared to the 2009 third2010 first quarter primarily attributablefrom 84.6% to 86.6% due to increases in (1) food and paper costs of 0.9% points, (2) occupancy, advertising and other operating expenses of 0.6% points, and (3) restaurant labor of 0.5% points. Wendy’s food and paper costs were primarily impacted by a 0.8% point increase in commodity costs. The increase in occupancy, advertising, and other operating expenses. Wendy’s food and paper costs were impacted byexpenses was primarily due to a 1.6%1.1% point increase due to higher commodity prices and product quality improvements. The increase in food and paper costs as a percentageadvertising expenses associated with the expansion of sales wasWendy’s new breakfast program in additional markets partially offset by the approximate 1% blended price increase taken primarilya 0.4% point decrease in late 2009. As a percentage of sales, Wendy’s restaurantemployee health insurance costs. Restaurant labor costs for the 2010 quarter were relatively flat as compared to the 2009 quarter due to the offsetting effectsnegatively affected by an increase of (1) a 0.6% point increase0.3% points due to the deleverage effect of the decline in Wendy’s same-store sales without similar reductions in fixed and semi-variable costs.
Arby’s North America company-owned restaurant cost of sales increased as a percent of sales in the 2011 first quarter as compared to the 2010 first quarter from 89.2% to 89.4% primarily attributable to higher food and paper costs and (2) a 0.5% point decreaseof 3.4% points partially offset by declines in incentive compensation expense. The increaserestaurant labor costs of 1.0% points and in occupancy, advertising, and other operating expenses for the Wendy’s brandof 2.2% points. The increase in food and paper costs as a percentage of sales was primarily due to a 1.1%1.9% point increase in advertising expenses associated with the launch of the brand’s breakfast daypart in certain test markets.
Asfood costs for a percentage of sales, Arby’s North America Company-owned restaurant cost of sales increasedpremium product introduction in the 20102011 first quarter as compared to the 2009 quarter due to higher restaurant labor costs and higher occupancy, advertising, and other expenses,a 1.6% point increase in commodity costs.
These increases were partially offset by a decreasethe benefit of the increase in foodArby’s same-store sales on fixed and paper costs. Restaurantsemi-variable restaurant labor costs and occupancy, advertising and other operating expenses were mainly impacted by increases of 1.7%1.4% points and 1.5%1.1% points, respectively, due to the deleverage effect of the decline in Arby’s same-store sales without similar reductions in fixed and semi-variable costs excluding advertising. The increase in Arby’s occupancy,respectively. Occupancy, advertising and other operating costsexpenses as a percentage of sales was offset in partalso favorably impacted by a 0.5% point decrease in advertising expenditures. expenditures as a result of more efficient media purchases.
|
| | | | | | | | | | | |
General and Administrative | | | | |
| Change |
| Wendy’s/Arby’s Restaurants | | Corporate | | Wendy’s/Arby’s |
SSG co-op funding | $ | (7.2 | ) | | $ | — | | | $ | (7.2 | ) |
Wendy’s integration | (2.9 | ) | | — | | | (2.9 | ) |
Arby’s strategic alternatives cost | 1.3 | | | 1.1 | | | 2.4 | |
Professional fees | 1.0 | | | 0.5 | | | 1.5 | |
Other, net | (0.7 | ) | | — | | | (0.7 | ) |
| $ | (8.5 | ) | | $ | 1.6 | | | $ | (6.9 | ) |
The decrease in food and paper costs was comprised principally of a 2.6% point decrease related to certain in-store promotional discounts offered during the 2009 third quarter, which did not recur during the 2010 third quarter, partially offset by a 1.1% point increase in commodity costs.
General and Administrative | | | |
| | Change | |
| | (In Millions) | |
| | | |
Provision for doubtful accounts | | $ | 2.2 | |
Franchise incentives | | | 1.5 | |
Integration costs | | | (2.5 | ) |
Legal expenses | | | (2.3 | ) |
Other, net | | | 1.1 | |
| | $ | 0.0 | |
Generalgeneral and administrative expenses were unchanged compared to the same period in the prior year. This2011 was primarily related to (1) an increasethe non-recurrence in 2011 of expenses related to the formation of SSG incurred in the provision for doubtful accounts primarily associatedfirst quarter of 2010 combined with the collectabilityreversal of certain franchisee receivablesthe accrual for the remaining estimated SSG funding commitment during the first quarter of 2011 and (2) the completion of the Wendy’s integration efforts in early 2010. These decreases were partially offset by (1) amounts accrued in the 2011 first quarter for retention bonuses, legal and advisory fees and other costs related to the review of strategic alternatives for the Arby’s brand and (2) an increase in franchise incentives for the Wendy’s remodeling program, which were offsetprofessional fees associated primarily by (1) decreases in Wendy’s–related integration costs resulting from the completion of integration efforts in early 2010 and (2) a $2.5 million reduction in legal reserves for certain previously accrued legal matters.with information technology projects.
Depreciation and Amortization | | | |
| | Change | |
| | (In Millions) | |
| | | |
Wendy’s restaurants, primarily properties | | $ | (2.3 | ) |
Arby’s restaurants, primarily properties | | | (0.8 | ) |
General corporate | | | 2.2 | |
| | $ | (0.9 | ) |
|
| | | |
Depreciation and Amortization | |
| Change |
Wendy’s restaurants, primarily properties | $ | (1.5 | ) |
Arby’s restaurants, primarily properties | (1.1 | ) |
Shared services center assets | (0.7 | ) |
Total Wendy’s/Arby’s Restaurants | (3.3 | ) |
Corporate | 0.1 | |
Total Wendy’s/Arby’s | $ | (3.2 | ) |
The decrease in depreciation and amortization was primarily related to a reduction in depreciation related to Wendy’s and Arby’s previously impaired long-lived assets. The decreases were partially offset by increases in the amortization of software and related costs capitalized in connection with the establishment of the shared services center at the Company’s corporate headquarters in Atlanta, Georgia.
Impairment of Long-Lived Assets | | | |
| | Change | |
| | (In Millions) | |
| | | |
Wendy’s restaurants, primarily properties at underperforming locations | | $ | 20.6 | |
Arby’s restaurants, primarily properties at underperforming locations | | | (8.7 | ) |
| | $ | 11.9 | |
|
| | | |
Impairment of Long-Lived Assets | |
| Change |
Wendy’s restaurants, primarily properties at underperforming locations | $ | 7.9 | |
Arby’s restaurants, primarily properties at underperforming locations | (9.9 | ) |
| $ | (2.0 | ) |
As a result of a determination that there were events or changes in circumstances which indicatedindications that the carrying amount of the Wendy’s long-lived assets may not be recoverable, we performed a test for impairment during the third2011 first quarter of 2010 and recorded impairment charges primarily from certain underperforming Wendy’s restaurants. These charges were partially offset by a decrease inA similar test was not required for Arby’s Company-owned restaurants impairment due tolong-lived assets during the level of2011 first quarter. Arby’s impairment charges taken in the 2011 first quarter primarily reflect additional charges for capital improvements in restaurants impaired in a prior periods.year which did not subsequently recover.
| | Interest Expense | | | | |
| | Change | | Change |
| | (In Millions) | | |
| | | | |
Wendy’s debt | | $ | (4.4 | ) | $ | (3.8 | ) |
Wendy’s interest rate swaps | | | (0.3 | ) | |
Term Loan | | | 1.4 | | |
Tax-related interest | | | 0.5 | | |
Wendy’s/Arby’s Restaurants term loan | | 1.9 | |
Other | | | 0.2 | | 0.1 | |
| | $ | (2.6 | ) | |
Total Wendy’s/Arby’s Restaurants | | (1.8 | ) |
Other | | (0.2 | ) |
Total Wendy’s/Arby’s | | $ | (2.0 | ) |
There were decreasesThe decrease in interest expense duringin the third2011 first quarter of 2010 as compared to the third quarter of 2009was primarily due to (1) the redemption of the Wendy’s 6.25% senior notes in the 2010 second quarter of 2010 as further described in “Liquidity and Capital Resources – Long-term Debt – Credit Agreement” below and (2) a favorable impact of interest rate swaps on the Wendy’s 6.20% senior notes entered into during 2009. These decreases were partially offset by increasesquarter. This decrease in interest expense associated with other components of our indebtedness, primarily as a result of the Term Loan entered into in May 2010 and an increase in interest expense on uncertain tax positions and other tax matters.
Investment Income, Net
The decrease in investment income primarily related to net investment gains recognized in the third quarter of 2009 that did not recur in the third quarter of 2010. As of October 3, 2010, our investments include a joint venture investment and certain cost investments.
Benefit from (Provision for) Income Taxes | |
| | Change | |
| | (In Millions) | |
Federal and state provision on variance in income before income taxes | | $ | (13.7 | ) |
Foreign tax credits, net of tax on foreign earnings | | | (3.5 | ) |
Other | | | (3.2 | ) |
| | $ | (20.4 | ) |
Our income taxes were impacted by variations in (loss) income before income taxes in the third quarter of 2010 and 2009 and the tax benefit of foreign tax credits, net of the tax on foreign earnings resulting from the third quarter 2010 repatriation of foreign earnings.
Results of Operations
Nine Months Ended October 3, 2010 Compared with Nine Months Ended September 27, 2009 (In Millions)
| | Nine Months Ended | |
| | October 3, | | | September 27, | | | $ | | | | % | |
| | 2010 | | | 2009 | | | Change | | | Change | |
Revenues: | | | | | | | | | | | | | |
Sales | | $ | 2,296.9 | | | $ | 2,395.5 | | | $ | (98.6 | ) | | | (4.1)% | |
Franchise revenues | | | 278.8 | | | | 284.4 | | | | (5.6 | ) | | | (2.0) | |
| | | 2,575.7 | | | | 2,679.9 | | | | (104.2 | ) | | | (3.9) | |
Costs and expenses: | | | | | | | | | | | | | | | | |
Cost of sales | | | 1,967.6 | | | | 2,046.5 | | | | (78.9 | ) | | | (3.9) | |
General and administrative | | | 305.9 | | | | 320.5 | | | | (14.6 | ) | | | (4.6) | |
Depreciation and amortization | | | 137.5 | | | | 143.4 | | | | (5.9 | ) | | | (4.1) | |
Impairment of long-lived assets | | | 41.4 | | | | 31.1 | | | | 10.3 | | | | 33.1 | |
Facilities relocation and corporate restructuring | | | - | | | | 8.9 | | | | (8.9 | ) | | | (100.0) | |
Other operating expense, net | | | 4.0 | | | | 2.2 | | | | 1.8 | | | | 81.8 | |
| | | 2,456.4 | | | | 2,552.6 | | | | (96.2 | ) | | | (3.8) | |
Operating profit | | | 119.3 | | | | 127.3 | | | | (8.0 | ) | | | (6.3) | |
| | | | | | | | | | | | | | | | |
Interest expense | | | (104.5 | ) | | | (89.7 | ) | | | (14.8 | ) | | | 16.5 | |
Loss on early extinguishment of debt | | | (26.2 | ) | | | - | | | | (26.2 | ) | | | 100.0 | |
Investment income (expense), net | | | 5.3 | | | | (3.9 | ) | | | 9.2 | | | | n/m | |
Other than temporary losses on investments | | | - | | | | (3.9 | ) | | | 3.9 | | | | (100.0) | |
Other income, net | | | 2.9 | | | | 0.3 | | | | 2.6 | | | | n/m | |
(Loss) income from continuing | | | | | | | | | | | | | | | | |
operations before income taxes | | | (3.2 | ) | | | 30.1 | | | | (33.3 | ) | | | n/m | |
Benefit from (provision for) income taxes | | | 9.6 | | | | (11.9 | ) | | | 21.5 | | | | n/m | |
Income from continuing operations | | | 6.4 | | | | 18.2 | | | | (11.8 | ) | | | (64.8) | |
Income from discontinued operations, net of income taxes | | | - | | | | 0.4 | | | | (0.4 | ) | | | (100.0) | |
Net income | | $ | 6.4 | | | $ | 18.6 | | | $ | (12.2 | ) | | | (65.6)% | |
Restaurant statistics: | | | | | | | | | | | | |
| | First Nine Months 2010 | | | | | | First Nine Months 2009 | | | | |
Wendy’s same-store sales: | | | | | | | | | | | | |
North America Company-owned restaurants | | | (2.0)% | | | | | | | (0.8)% | | | | |
North America franchised restaurants | | | (0.6)% | | | | | | | 0.5% | | | | |
North America system wide | | | (0.9)% | | | | | | | 0.2% | | | | |
| | | | | | | | | | | | | | |
Arby’s same-store sales: | | | | | | | | | | | | | | |
North America Company-owned restaurants | | | (9.9)% | | | | | | | (6.8)% | | | | |
North America franchised restaurants | | | (7.3)% | | | | | | | (8.6)% | | | | |
North America system wide | | | (8.2)% | | | | | | | (8.0)% | | | | |
| | | | | | | | | | | | | | |
Sales: | | | | | | | | | | | | | | |
Wendy’s | | $ | 1,495.6 | | | | | | $ | 1,511.3 | | | | |
Arby’s | | | 726.7 | | | | | | | 812.6 | | | | |
Bakery and kids' meal promotion items sold | | | 74.6 | | | | | | | 71.6 | | | | |
Total sales | | $ | 2,296.9 | | | | | | $ | 2,395.5 | | | | |
| | | | | | | | | | | | | | |
Cost of sales: | | | | | | | | | | | | | | |
| | | | | | % of Sales | | | | | | | % of Sales | |
Wendy’s | | | | | | | | | | | | | | |
Food and paper | | $ | 479.4 | | | | 32.1% | | | $ | 488.5 | | | | 32.3% | |
Restaurant labor | | | 444.7 | | | | 29.7% | | | | 455.7 | | | | 30.2% | |
Occupancy, advertising and other operating costs | | | 346.0 | | | | 23.1% | | | | 346.8 | | | | 22.9% | |
Total Wendy’s cost of sales | | | 1,270.1 | | | | 84.9% | | | | 1,291.0 | | | | 85.4% | |
| | | | | | | | | | | | | | | | |
Arby’s | | | | | | | | | | | | | | | | |
Food and paper | | | 196.6 | | | | 27.0% | | | | 225.3 | | | | 27.7% | |
Restaurant labor | | | 242.5 | | | | 33.4% | | | | 254.1 | | | | 31.3% | |
Occupancy, advertising and other operating costs | | | 203.5 | | | | 28.0% | | | | 221.3 | | | | 27.2% | |
Total Arby’s cost of sales | | | 642.6 | | | | 88.4% | | | | 700.7 | | | | 86.2% | |
| | | | | | | | | | | | | | | | |
Bakery and kids' meal promotion items sold to franchisees | | | 54.9 | | | | n/m | | | | 54.8 | | | | n/m | |
Total cost of sales | | $ | 1,967.6 | | | | 85.7% | | | $ | 2,046.5 | | | | 85.4% | |
Margin $ | | | | | |
Wendy’s | | $ | 225.5 | | | $ | 220.3 |
Arby’s | | | 84.1 | | | | 111.9 |
Bakery and kids' meal promotion items sold to franchisees | | | 19.7 | | | | 16.8 |
Total margin | | $ | 329.3 | | | $ | 349.0 |
| | | | | | | |
Restaurant margin % | | | | | | | |
Wendy’s | | | 15.1% | | | | 14.6% |
Arby’s | | | 11.6% | | | | 13.8% |
Total restaurant margin % | | | 13.9% | | | | 14.3% |
| | | | | | | |
Franchise revenues: | | | | | | | |
Wendy’s | | $ | 222.6 | | | $ | 224.0 |
Arby’s | | | 56.2 | | | | 60.4 |
Total franchise revenues | | $ | 278.8 | | | $ | 284.4 |
Depreciation and amortization: | | | | | | |
Wendy’s | | $ | 85.7 | | | $ | 96.7 | |
Arby’s | | | 41.0 | | | | 42.5 | |
Corporate | | | 10.8 | | | | 4.2 | |
Total depreciation and amortization | | $ | 137.5 | | | $ | 143.4 | |
| | | | | | | | |
Impairment of long-lived assets: | | | | | | | | |
Wendy’s | | $ | 21.4 | | | $ | 1.0 | |
Arby’s | | | 20.0 | | | | 27.9 | |
Corporate | | | - | | | | 2.2 | |
Total impairment of long-lived assets | | $ | 41.4 | | | $ | 31.1 | |
| | | | | | |
Other operating expense, net: | | | | | | |
Wendy’s | | $ | 2.9 | | | $ | 1.2 | |
Arby’s | | | 1.2 | | | | - | |
Corporate | | | (0.1 | ) | | | 1.0 | |
Total other operating expense, net | | $ | 4.0 | | | $ | 2.2 | |
| | | | | | | | |
Operating profit (loss): | | | | | | | | |
Wendy’s (a) | | $ | 157.4 | | | $ | 155.4 | |
Arby’s | | | (22.3 | ) | | | (3.9 | ) |
Corporate | | | (15.8 | ) | | | (24.2 | ) |
Total operating profit: | | $ | 119.3 | | | $ | 127.3 | |
| | | | | | | | |
(a) Wendy’s “Operating profit (loss)” includes the margin dollars for the Bakery and kids’ meal promotion items sold to franchisees. | |
Restaurant count: | | Company-owned | | | Franchised | | | System Wide | |
Wendy’s restaurant count: | | | | | | | | | |
Restaurant count at January 3, 2010 | | | 1,391 | | | | 5,150 | | | | 6,541 | |
Opened | | | 4 | | | | 43 | | | | 47 | |
Closed | | | (2 | ) | | | (32 | ) | | | (34 | ) |
Sold to franchisees | | | (2 | ) | | | 2 | | | | - | |
Restaurant count at October 3, 2010 | | | 1,391 | | | | 5,163 | | | | 6,554 | |
| | | | | | | | | | | | |
Arby’s restaurant count: | | | | | | | | | | | | |
Restaurant count at January 3, 2010 | | | 1,169 | | | | 2,549 | | | | 3,718 | |
Opened | | | - | | | | 31 | | | | 31 | |
Closed | | | (12 | ) | | | (75 | ) | | | (87 | ) |
Sold to franchisees | | | (11 | ) | | | 11 | | | | - | |
Restaurant count at October 3, 2010 | | | 1,146 | | | | 2,516 | | | | 3,662 | |
| | | | | | | | | | | | |
Total Wendy’s/Arby’s restaurant count at October 3, 2010 | | | 2,537 | | | | 7,679 | | | | 10,216 | |
Sales | | | |
| | Change | |
| | (In Millions) | |
| | | |
Wendy’s | | $ | (15.7 | ) |
Arby’s | | | (85.9 | ) |
Bakery and kids’ meal promotion items sold to franchisees | | | 3.0 | |
| | $ | (98.6 | ) |
The overall decrease in sales was primarily due to the decline in Wendy’s and Arby’s North America Company-owned same-store sales of 2.0% and 9.9%, respectively. Wendy’s and Arby’s North America Company-owned same-store sales were impacted by the same generally negative economic trends and competitive pressures described above and in our Form 10-K, as well as severe winter weather in February 2010.
Wendy’s North America Company-owned same-store sales decreased 2.0%, of which 2.1% was due to a decrease in the number of U.S. customer transactions in the first nine months of 2010 as compared to the first nine months of 2009 which was partially offset by (1) an approximate 1% blended price increase taken primarily in late 2009 and (2) a $19.6 million positive impact from foreign currency translation forhigher principal amounts outstanding during the nine months ended October 3, 2010 as compared to the same period in 2009. Wendy’s locations sold or closed during or subsequent to the nine months ended September 27, 2009 generated $10.7 million of sales in that 2009 period, which was partially offset by sales of $4.8 million in the first nine months of 2010 from new stores o pened subsequent to the third quarter of 2009.
Arby’s North America Company-owned same-store sales were impacted by the effects of (1) a decline of approximately 1.0% in same-store sales due to a new product introduction in the 20092011 first quarter which did not recur in 2010, (2) a decrease of approximately 1.3% due to certain in-store promotional discounts offered during the nine months ended September 27, 2009, which did not recur in 2010, (3) a decrease of 8.9% in our average per customer check amount primarily as a result of the expansion in 2010 of Arby’s everyday value strategy, and (4) a reduction in advertising expenditures. Arby’s locations sold or closed during or subsequent to the nine months ended September 27, 2009 generated $7.1 million of sales in that 2009 period, which was partially offset by sales of $6.0 million in the first nine months of 2010 from stores acquired from a franchisee subsequent to the third quarter of 2009.
Franchise Revenues | | | |
| | Change | |
| | (In Millions) | |
| | | |
Wendy’s | | $ | (1.4 | ) |
Arby’s | | | (4.2 | ) |
| | $ | (5.6 | ) |
The overall decrease in franchise revenues for Wendy’s and Arby’s North America franchised restaurants was primarily due to the same factors discussed above for the third quarter 2010.
Cost of Sales | |
| Change |
| |
Wendy’s | (0.5) % points |
Arby’s | 2.2 % points |
Consolidated | 0.3 % points |
The decrease in Wendy’s North America Company-owned restaurant cost of sales as a percentage of sales in the first nine months of 2010 as compared to the first nine months of 2009 was primarily attributable to decreases in food and paper costs of 0.3% points and in restaurant labor costs of 0.4% points. The decrease in food and paper costs as a percentage of sales was primarily due to a 0.4% point decline in food costs from the approximate 1% blended price increase taken primarily in late 2009. The overall decrease in food and paper costs as a percentage of sales was partially offset by an increase of 0.5% points in commodity costs. Wendy’s restaurant labor costs decreased as compared to the first nine months of 2009 due to a 0.6% point decrease in incentive compensation expense, mostly offset b y a 0.4% point increase due to the deleverage effect of the decline in Wendy’s same-store sales without similar reductions in fixed and semi-variable costs. There are no other individually significant factors comprising the remaining declines in Wendy’s food and paper and restaurant labor costs.
As a percentage of sales, Arby’s North America Company-owned restaurant cost of sales increased in the first nine months of 2010 as compared to the first nine months of 2009 due to higher restaurant labor costs and higher occupancy, advertising, and other expenses, partially offset by a decrease in food and paper costs. Restaurant labor costs and occupancy, advertising, and other operating expenses were mainly impacted by increases of 1.8% points and 1.5% points, respectively, due to the deleverage effect of the decline in Arby’s same-store sales without similar reductions in fixed and semi-variable costs excluding advertising. The increase in Arby’s occupancy, advertising, and other operating costs was offset in part by a 1.0% point decrease in advertising expenditures. The decrease in food and paper costs was comprised principally of a 1.1% point decrease related to certain in-store promotional discounts offered during the first nine months of 2009, which did not recur during the first nine months of 2010, partially offset by a 0.5% point increase in commodity costs.
General and Administrative | | | |
| | Change | |
| | (In Millions) | |
| | | |
Compensation | | $ | (6.5 | ) |
Integration costs | | | (6.2 | ) |
Incentive compensation | | | (4.8 | ) |
Legal fees | | | (3.7 | ) |
Services agreement | | | (2.8 | ) |
SSG co-op agreement | | | 4.9 | |
Severance | | | 3.2 | |
Provision for doubtful accounts | | | 3.2 | |
Other, net | | | (1.9 | ) |
| | $ | (14.6 | ) |
The decrease in general and administrative expenses was primarily related to (1) reductions in staffing at our shared services center in Atlanta, Georgia, (2) decreases in Wendy’s–related integration costs resulting from the completion of integration efforts in early 2010, (3) decreases in incentive compensation accruals due to lower operating performance as compared to plan in 2010 versus 2009, (4) a $2.8 million reduction in legal reserves for certain previously accrued legal matters, and (5) decreases in fees under our related party services agreement that was renegotiated in June 2009. The decreases were partially offset by (1) an increase related to the formation of the SSG in 2010 as discussed above in “Introduction and Executive Overview – Related Party Transactions,” (2) severance costs related to the termination of certain senior Arby’s executives, and (3) an increase in the provision for doubtful accounts primarily associated with the collectability of certain franchisee receivables.
Depreciation and Amortization | | | |
| | Change | |
| | (In Millions) | |
| | | |
Wendy’s restaurants, primarily properties | | $ | (11.0 | ) |
Arby’s restaurants, primarily properties | | | (1.5 | ) |
General corporate | | | 6.6 | |
| | $ | (5.9 | ) |
The decrease in depreciation and amortization was primarily related to (1) an adjustment in the prior year of $6.5 million related to a one-time increase in depreciation as a result of refinements to the Wendy’s purchase price allocation (including long-lived assets) and (2) a reduction in depreciation related to Wendy’s and Arby’s previously impaired long-lived assets. These decreases were partially offset by increases in the amortization of software and related costs capitalized in connection with the establishment of the shared services center.
Impairment of Long-Lived Assets | | | |
| | Change | |
| | (In Millions) | |
| | | |
Wendy’s restaurants, primarily properties at underperforming locations | | $ | 20.4 | |
Arby’s restaurants, primarily properties at underperforming locations | | | (7.9 | ) |
Corporate – aircraft | | | (2.2 | ) |
| | $ | 10.3 | |
As a result of a determination that there were events or changes in circumstances which indicated that the carrying amount of the Wendy’s long-lived assets may not be recoverable, we performed a test for impairment during the third quarter of 2010 and recorded impairment charges primarily from certain underperforming Wendy’s restaurants. These charges were offset by (1) a decline in Arby’s Company-owned restaurants impairment due to the level of impairment charges taken in prior periods and (2) the impairment of one of our corporate aircraft classified as held for sale in the 2009 second quarter which was subsequently sold in July 2009.
Interest Expense | | | |
| | Change | |
| | (In Millions) | |
| | | |
10% senior notes | | $ | 29.8 | |
Term Loan | | | 1.0 | |
Amortization of deferred financing costs | | | (6.1 | ) |
Wendy’s debt | | | (5.7 | ) |
Wendy’s interest rate swaps | | | (5.4 | ) |
Other | | | 1.2 | |
| | $ | 14.8 | |
The increase in interest expense was principally affected by (1) interest on the Wendy’s/Arby’s Restaurants 10% senior notes issued in June 2009 and (2) the difference in interest expense between the comparableterm loan than were outstanding principal during the nine months in 2010 and 2009first quarter under the Term Loan issued in May 2010 and theprior Arby’s credit agreement as partially offset by the lower effective interest rate of the Term LoanWendy’s/Arby’s Restaurants term loan as compared to the Arby’s credit agreement. The increase in interest expense was partially offset by (1) the effect of the 2009 first half write-off of deferred debt costs relating to prepayments on the term loan under the prior Arby’s credit agreement, (2) the redemption of the Wendy’s 6.25% senior notes in the second quarter of 2010 as further described in “Liquidity and Capital Resources – Long-term Debt – Credit Agreement” below, and (3) a favorable impact of interest rate swaps on the Wendy’s 6.20% and 6.25% senior notes entered into during 2009 and 2010. This favorable impact included a $1.9 million gain on the cancellation of the swaps related to the Wendy’s 6.25% senior notes in connection with their redemption in the second quarter of 2010.
Loss on Early Extinguishment of Debt
The loss on early extinguishment of debt of $26.2 million consisted of (1) a $15.0 million premium payment required to redeem the Wendy’s 6.25% senior notes as discussed below in “Liquidity and Capital Resources – Long-term Debt – Credit Agreement,” (2) $5.5 million for the write-off of the unaccreted discount of the Wendy’s 6.25% senior notes (recorded in connection with the Wendy’s merger), and (3) $5.7 million for the write-off of deferred costs associated with the repayment of the Wendy’s/Arby’s Restaurants prior senior secured term loan as discussed below in “Liquidity and Capital Resources – Long-term Debt – Credit Agreement.”
Investment Income, Net | | | |
| | Change | |
| | (In Millions) | |
| | | |
DFR Notes | | $ | 4.2 | |
Early withdrawal fee | | | 5.5 | |
Recognized net gains | | | (1.0 | ) |
Other | | | 0.5 | |
| | $ | 9.2 | |
The increase in investment income primarily related to (1) the recognition of income on the DFR Notes as discussed above in “Introduction and Executive Overview – DFR Notes,” and (2) an early withdrawal fee incurred in the first nine months of 2009 that did not recur in the first nine months of 2010. These increases were partially offset by net investment gains recognized in the prior year that did not recur in the first nine months of 2010. As of October 3, 2010, our remaining investments include a joint venture investment and certain cost investments.
Other Than Temporary Losses on Investments
Due to market conditions and other factors present during the 2009 first nine months, we recorded other than temporary losses of $3.9 million attributable primarily to the decline in fair value of certain of our available for sale securities and three of our cost investments. We did not recognize any other than temporary losses on our remaining investments during the 2010 first nine months.agreement.
30 |
| | | | | | | |
Benefit from Income Taxes | |
| Change |
| Wendy’s/Arby’s Restaurants | | Wendy’s/Arby’s |
Federal and state benefit on variance in income (loss) before income taxes | $ | (2.9 | ) | | $ | (1.7 | ) |
Valuation allowance reduction | (2.5 | ) | | (2.5 | ) |
Other | 1.1 | | | 1.1 | |
| $ | (4.3 | ) | | $ | (3.1 | ) |
Benefit from (Provision for) Income Taxes | |
| | Change | |
| | (In Millions) | |
Federal and state provision on variance in income before income taxes | | $ | (11.9 | ) |
Foreign tax credits, net of tax on foreign earnings | | | (3.5 | ) |
Valuation allowance reduction | | | (2.5 | ) |
Other | | | (3.6 | ) |
| | $ | (21.5 | ) |
Our income taxes were impacted by variations in income (loss) income before income taxes in the first nine months of 2010from operations and 2009, the tax benefit of foreign tax credits, net of tax on foreign earnings resulting from the third quarter 2010 repatriation of foreign earnings, and by a reduction in valuation allowances related to state tax matters.
Outlook for the Remainder of 2010
There are no material changes to the outlook for 2010 as discussed in our Form 10-K except that restaurant margins for both of our brands will be somewhat negatively impacted by the continuing effect of increases in the cost of commodities experienced during the third quarter of 2010 as described above in “Cost of sales.”
In addition, we anticipate that the decline in average per customer check amount at Arby’s Company-owned restaurants as described above in “Sales” will be in part offset in the fourth quarter by an increase in customer transactions.
Liquidity and Capital Resources
Net Cash Provided by Operating Activities
(Wendy’s/Arby’s)
Net cashCash provided by operating activities was $167.4increased $18.2 million for the nine months ended October 3, 2010 as compared to $251.3 million for the same period in 2009. The significant components, which accounted for the overall decrease in net cash provided by operating activities of $83.9 million for the first nine monthsquarter of 20102011 as compared to the first nine months of 2009 were as follows:
| | Change | |
| | (In Millions) | |
| | | |
Accrued expenses and other current liabilities: | | | |
Interest | | $ | (37.9 | ) |
Incentive compensation | | | (33.3 | ) |
Funding of QSCC start-up costs | | | (11.8 | ) |
Income taxes | | | (2.9 | ) |
Accounts payable | | | 40.5 | |
Net income, net of non-cash adjustments | | | (32.1 | ) |
Other, net | | | (6.4 | ) |
| | $ | (83.9 | ) |
The net decrease in the comparative operating cash flow principally resulted from an increase in (1) interest payments in the first nine monthsquarter of 2010 primarily due to the interest payments in January and July 2010 on the Wendy’s/Arby’s Restaurants 10% senior notes, partially offset by anfollowing:
a $17.2 million increase in interest expense accruals, (2) amounts paid under the Company’s incentive compensation plans in 2010 versus 2009 for fiscal 2009 and fiscal 2008, respectively, combined with a decrease in amounts accrued in 2010 due to lower operating performance ascash provided by accounts payable resulting from first quarter 2011 cash inflows of $4.2 million compared to plan$13.0 million in 2010 versus 2009, (3) funding for start-up costs and other operating expenses paid to QSCC, and (4) income tax payments combined with a decreasecash outflows which reduced accounts payable in income tax accruals the same period last year. This change was primarily due to variations in (loss) income before income taxes in the first nine months of 2010 and 2009. These changes were partially offset by the net impact of the following, which affected accounts payable:following: (1) a reductionan increase in the amounts payable to the Wendy’s national advertising cooperativefor marketing costs in the first nine monthsquarter of 2011 versus the first quarter of 2010 primarily related to the timing of receipt and payment of vendor invoices, (2) an increase in food purchases at both Wendy’s and Arby’s in the first quarter of 2011 primarily due to an increase in commodity costs combined with an increase in Arby’s sales in the first quarter of 2011 as compared to the first quarter of 2010, and (3) a decrease in amounts payable for Wendy’s kids’ meal promotion items as the management of the operations for kids’ meal promotion items sold to franchisees was transferred to QSCC in the first quarter of 2011;
a $9.2 million reduction in payments for accrued expenses and other current liabilities. This decrease was primarily due to decreases in (1) payments to QSCC which were accrued for in 2009 and (2) amounts paid under incentive compensation plans,
partially offset by:
a $5.1 million increase in payments for other current assets including a $3.4 million increase in prepaid expenses and other current assets and a $1.7 million increase in inventories. These increases in cash outflows were primarily due to (1) the timing of certain prepaid expenses in the first quarter of 2011 as compared to the first quarter of 2010, (2) an increase in prepaid maintenance contracts and property taxes in the first quarter of 2011 as compared to the same period in 2009 due to changes in the timing and nature of amounts due, (2) a decrease in the number and amount of non-recurring items more typically included in accounts payable rather than accrued expenses,2010, and (3) a decrease in the volume of transactions processed as received from third parties, dueArby’s food inventory in part to the decrease in sales, for the first nine monthsquarter of 2010 without a similar reduction in the first quarter of 2011.
(Wendy’s/Arby’s Restaurants)
Cash provided by operating activities increased $5.5 million in the first quarter of 2011 as compared to the first nine monthsquarter of 2009.2010 primarily due to the following:
a $15.6 million increase in cash provided by accounts payable resulting from first quarter 2011 cash inflows of $3.6 million compared to $12.0 million in cash outflows which reduced accounts payable in the same period last year. This change was primarily due to the net impact of the following: (1) an increase in amounts payable for marketing costs in the first quarter of 2011 versus the first quarter of 2010 primarily related to the timing of receipt and payment of vendor invoices, (2) an increase in food purchases at both Wendy’s and Arby’s in the first quarter of 2011 primarily due to an increase in commodity costs combined with an increase in Arby’s sales in the first quarter of 2011 as compared to the first quarter of 2010, and (3) a decrease in amounts payable for Wendy’s kids’ meal promotion items as the management of the operations for kids’ meal promotion items sold to franchisees was transferred to QSCC in the first quarter of 2011;
We
a $6.0 million reduction in payments for accrued expenses and other current liabilities. This decrease was primarily due to decreases in (1) payments to QSCC which were accrued for in 2009 and (2) amounts paid under incentive compensation plans,
partially offset by:
$13.1 million in cash outflows related to tax payments made under a tax sharing agreement with Wendy’s/Arby’s net of amounts accrued under this tax sharing agreement. No similar payments or accruals were made under this tax sharing agreement in the first quarter of 2010;
a $4.9 million increase in payments for other current assets including a $3.2 million increase in prepaid expenses and other current assets and a $1.7 million increase in inventories. These increases in cash outflows were primarily due to (1) the timing of certain prepaid expenses in the first quarter of 2011 as compared to the first quarter of 2010, (2) an increase in prepaid maintenance contracts and property taxes in the first quarter of 2011 as compared to the same period of 2010, and (3) a decrease in Arby’s food inventory in the first quarter of 2010 without a similar reduction in the first quarter of 2011.
The Companies expect continued positive cash flows from operating activities during the remainder of 2010.2011.
Additionally, for the ninethree months ended OctoberApril 3, 2010, we2011, the Companies had the following significant sources and uses of cash other than from operating activities:
| · | Proceeds from the Term Loan of $497.5 million; |
Repayments of long-term debt of $29.8 million, including an excess cash flow prepayment of $24.9 million as defined in the Wendy’s/Arby’s Restaurants term loan;
| · | Repayment of $250.8 million of Wendy’s/Arby’s Restaurants amended senior secured term loan; |
Cash capital expenditures totaling $28.6 million, which included $6.9 million for the remodeling of restaurants, $3.6 million for the construction of new restaurants, and $18.1 million for various capital projects; and
| · | Payment of $215.0 million, including a premium of $15.0 million, to redeem the Wendy’s 6.25% senior notes; |
| · | Repurchases of common stock of $173.5 million, including commissions of $0.7 million, and $5.8 million of 2009 repurchases that were not settled until 2010; |
(Wendy’s/Arby’s) | · | Cash capital expenditures totaling $94.7 million, which included $30.7 million for the remodeling of restaurants, $6.1 million for the construction of new restaurants, and $8.0 million for software purchases. The remaining capital expenditures were primarily related to various technology projects and store maintenance capital expenditures; |
| · | Proceeds of $30.8 million, excluding interest, from the repayment and cancellation of the DFR Notes; |
Dividend payments of $8.4 million.
| · | Deferred financing costs of $16.3 million; and |
| · | Dividend payments of $19.3 million. |
The net cash used in our operations before the effect of exchange rate changes on cash was approximately $72.1 million.
$13.4 million and $18.3 million for Wendy’s/Arby’s and Wendy’s/Arby’s Restaurants, respectively.
Sources and Uses of Cash for the Remainder of 20102011
Our anticipated consolidated cash requirements for the remainder of 2010,2011, exclusive of operating cash flow requirements, consist principally of:
| · | Cash capital expenditures of approximately $50.3 million, which would result in total cash capital expenditures for the year of approximately $145 million, which would result in total cash capital expenditures for the year of approximately $174 million; |
| · | Quarterly cash dividends aggregating up to approximately $8.4 million as discussed below in “Dividends”; |
Scheduled debt principal repayments aggregating $8.4 million; | · | Scheduled debt principal repayments aggregating $4.4 million; |
Any potential business acquisitions or dispositions; | · | Potential repurchases of common stock of up to $250.0 million under the currently authorized stock buyback program;
|
The costs of any potential financing activities; | · | Scheduled payments of $2.9 million pursuant to the QSCC and SSG co-op agreements; and |
| · | The costs of any potential business acquisitions or financing activities. |
(Wendy’s/Arby’s)
Quarterly cash dividends aggregating up to approximately $25.1 million as discussed below in “Dividends”;
Potential repurchases of common stock of up to approximately $250 million under the currently authorized stock buyback program; and
(Wendy’s/Arby’s Restaurants)
Potential intercompany dividends and fees.
Based upon current levels of operations, wethe Companies expect that cash flows from operations and available cash will provide sufficient liquidity to meet operating cash requirements for the next twelve12 months.
Long-term Debt
The following is an explanation of changes in certain debt obligations since January 3, 2010, as discussed in our Form 10-K:
On May 24, 2010, Wendy’s/Arby’s Restaurants, a direct wholly-owned subsidiary of the Company, entered into a $650.0 million Credit Agreement, which includes a $500.0 million Term Loan and a $150.0 million Credit Facility. The Credit Agreement contains provisions for an uncommitted increase of up to $300.0 million principal amount in the aggregate in the Credit Facility and/or Term Loan subject to the satisfaction of certain conditions. The Credit Facility includes a sub-facility for the issuance of up to $70.0 million of letters of credit. The obligations under the Credit Agreement are secured by substantially all of the non-real estate assets of Wendy’s/Arby’s Restaurants and its domestic subsidiaries (other than certain unrestricted subsidiaries), the stock of its domestic subsidiaries (other than certain unr estricted subsidiaries), 65% of the stock of certain of its foreign subsidiaries, as well as by mortgages on certain restaurant properties.
The Term Loan was issued at 99.5% of the principal amount, which represented an original issue discount of 0.5% and resulted in net proceeds paid to us of $497.5 million. The $2.5 million discount is being accreted and the related charge included in interest expense through the maturity of the Term Loan. The Term Loan will mature on May 24, 2017 and requires quarterly principal installments which commenced on September 30, 2010 equal to 1% per annum of the initial principal amount outstanding, with the balance payable on the maturity date.
The Credit Facility expires not later than May 24, 2015. An unused commitment fee of 50 basis points per annum is payable quarterly on the average unused amount of the Credit Facility until the maturity date.
The interest rate on the Term Loan is based on (i) the Eurodollar Rate as defined in the Credit Agreement (but not less than 1.50%), plus 3.50%, or a Base Rate, as defined in the Credit Agreement (but not less than 2.50%), plus 2.50%. Since the inception of the Term Loan we have elected to use the Eurodollar Rate which resulted in an interest rate on the Term Loan of 5.0% as of October 3, 2010.
Wendy’s/Arby’s Restaurants incurred approximately $16.4 million in costs related to the Credit Agreement, which is being amortized to interest expense over the Term Loan’s term utilizing the effective interest rate method.
Proceeds from the Term Loan were used to (1) repay approximately $253.8 million of existing indebtedness, including fees and interest, under the then existing Wendy’s/Arby’s Restaurants amended senior secured term loan scheduled to be due in 2012, (2) redeem the Wendy’s 6.25% senior notes scheduled to be due in 2011, and (3) pay fees and expenses related to the Credit Agreement. The remaining Term Loan proceeds are expected to be used for working capital and other general corporate purposes.
The Company recognized a loss on early extinguishment of debt of $26.2 million in the second quarter of 2010, related to the repayment of debt from the proceeds from the Term Loan. This loss consisted of (1) a $15.0 million premium payment required to redeem the Wendy’s 6.25% senior notes, (2) $5.5 million for the write-off of the unaccreted discount of the Wendy’s 6.25% senior notes (recorded in connection with the Wendy’s merger), and (3) $5.7 million for the write-off of deferred costs associated with the repayment of the prior senior secured term loan.
The affirmative and negative covenants in the Credit Agreement include, among others, preservation of corporate existence; payment of taxes; and maintenance of insurance; and limitations on: indebtedness (including guarantee obligations of other indebtedness); liens; mergers, consolidations, liquidations and dissolutions; sales of assets; dividends and other payments in respect of capital stock; investments; payments of certain indebtedness; transactions with affiliates; changes in fiscal year; negative pledge clauses and clauses restricting subsidiary distributions; and material changes in lines of business. The financial covenants contained in the Credit Agreement are (i) a consolidated interest coverage ratio, (ii) a consolidated senior secured leverage ratio, and (iii) a consolidated senior secured lease adjusted levera ge ratio. The covenants generally do not restrict Wendy’s/Arby’s or any of its subsidiaries that are not subsidiaries of Wendy’s/Arby’s Restaurants. Wendy’s/Arby’s Restaurants was in compliance with all covenants of the Credit Agreement as of October 3, 2010.
The indentures that govern Wendy’s 6.20% Senior Notes and 7% Debentures (the “Wendy’s Notes”) contain covenants that specify limits on the incurrence of indebtedness. We were in compliance with these covenants as of October 3, 2010 and project that we will be in compliance with these covenants for the next twelve months.
A significant number of the underlying leases in the Arby’s restaurants segment for sale-leaseback obligations and capitalized lease obligations, as well as the operating leases, require or required periodic financial reporting of certain subsidiary entities within ARG or of individual restaurants, which in many cases have not been prepared or reported. The Company has negotiated waivers and alternative covenants with its most significant lessors which substitute consolidated financial reporting of ARG for that of individual subsidiary entities and which modify restaurant level reporting requirements for more than half of the affected leases. Nevertheless, as of October 3, 2010, the Company was not in compliance, and remains not in compliance, with the reporting requirements under those leases for which waivers a nd alternative financial reporting covenants have not been negotiated. However, none of the lessors has asserted that the Company is in default of any of those lease agreements. The Company does not believe that such non-compliance will have a material adverse effect on its condensed consolidated financial position or results of operations.
On June 17, 2010, we repurchased the remaining 5% convertible notes (the “Convertible Notes”) for $2.1 million, including accrued interest. The Convertible Notes were repurchased at a price of 100% of their principal amount plus accrued interest.
Interest Rate Swaps
In connection with the redemption of the Wendy’s 6.25% senior notes discussed above under “Credit Agreement,” we cancelled four interest rate swaps with notional amounts totaling $175.0 million that had swapped the fixed rate interest rates on these senior notes for floating rates. We recognized a gain on the cancellation of $1.9 million in the second quarter of 2010, which is included in “Interest expense.”
Contractual Obligations
The following is an explanation of changes to the Company’s contractual obligations since January 3, 2010, as discussed in our Form 10-K:
| · | The completion of a new $500.0 million Term Loan, due May 24, 2015, which resulted in the following early principal reductions of our long-term debt obligations: |
| - | $251.5 million for the Wendy’s/Arby’s Restaurants amended senior secured term loan; and |
| - | $200.0 million for the Wendy’s 6.25% senior notes. |
| · | The repurchase of $2.1 million of 5% Convertible Notes.
|
| · | The formation of the SSG requiring payments of approximately $4.9 million for its initial operations as discussed in “Introduction and Executive Overview – Related Party Transactions.” |
Dividends
(Wendy’s/Arby’s)
On March 15, 2010, June 15, 2010 and September 15, 2010, we2011, Wendy’s/Arby’s paid quarterly cash dividends of $0.015$0.02 per share on our Common Stock,its common stock, aggregating $19.3 million.$8.4 million. On November 11, 2010, weMay 5, 2011, Wendy’s/Arby’s declared dividends of $0.02 per share to be paid on DecemberJune 15, 20102011 to shareholders of record as of DecemberJune 1, 2010. As a result2011. If Wendy’s/Arby’s pays regular quarterly cash dividends for the remainder of this dividend declaration,2011 at the same rate declared in our 2011 first quarter, Wendy’s/Arby’s total cash requirement for dividends for the fourth quarterremainder of 2010 will2011 would be approximately $8.4 million. We$25.1 million based on the number of shares of its common stock outstanding at May 2, 2011. Wendy’s/Arby’s currently intendintends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any quarterly dividends will be declared or paid in the future or of the amount or timing of such dividends, if any.
(Wendy’s/Arby’s Restaurants)
As of April 3, 2011, under the terms of the Wendy’s/Arby’s Restaurants’ credit agreement, there was $32.9 million available for the payment of dividends directly to Wendy’s/Arby’s.
Stock Repurchases
(Wendy’s/Arby’s)
As of January 3, 2010, our Board of Directors2, 2011, we had approximately $250 million authorized the repurchase of up to a total of $125.0 millionfor repurchases of our Common Stockcommon stock through January 2, 2011,1, 2012, when and if market conditions warrant and to the extent legally permissible. On January 27, 2010, March 22, 2010 and May 27, 2010, our Board of Directors authorizedNo shares were repurchased during the repurchase of up to an additional $75.0 million, $50.0 million and $75.0 million, respectively, of our Common Stock through January 2,three months ended April 3, 2011 when and if market conditions warrant and to the extent legally permissible. As of October 3, 2010, we had repurchased 52.3 million shares for an aggregate purchase price of $245.5 million, excluding commissions of $1.0 million.
On November 11, 2010, our Board of Directors authorized the extension of the current stock repurchase program through January 1, 2012 and authorized the repurchase of up to an additional $170.0 million of our Common Stock, bringing the total amount currently authorized to approximately $250.0 million. The stock repurchase program will allow the Company to make repurchases as market conditions warrant and to the extent legally permissible..
Seasonality
Our restaurant operations are moderately impacted by seasonality becauseseasonality. Wendy’s restaurant revenues are normally higher during the summer months than during the winter months.months, and Arby’s restaurant revenues are somewhat lower in our first quarter. Because of this seasonality,our businesses are moderately seasonal, results for any particularfuture quarter arewill not necessarily be indicative of the results that may be achieved for any other quarter or for the full fiscal year.
Critical Accounting Policies and Estimates
Our critical accounting policies are set forth in our Form 10-K. As further described therein, the Company operates in two business segments consisting of its two restaurant brands; Wendy’s and Arby’s. Each segment includes Company-owned restaurants and franchise operations which have been considered to be separate reporting units for purposes of assessing goodwill impairment. Substantially all Wendy’s goodwill ($865.0 million at October 3, 2010) relates to Wendy’s franchise operations. Arby’s goodwill of $17.6 million relates entirely to Arby’s franchise operations.
We test goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired, using a two-step process. The fair value of the reporting unit is determined by management and is based on the results of (1) estimates we make regarding the present value of the anticipated cash flows associated with each reporting unit (the “income approach”) and (2) the indicated value of the reporting units based on a comparison and correlation of the Company and other similar companies (the “market approach”).
During the third quarter of 2010, we performed an interim goodwill impairment assessment as a result of a sustained decline in the market value of our stock. Our analysis evaluated the estimated fair value of each reporting unit relative to its carrying value based on a combination of the income and the market approach. As a result of our interim test, we concluded that the fair value of each of Wendy’s and Arby’s reporting units exceeded their carrying amounts and no impairment of goodwill was therefore indicated.
The estimated fair value of our reporting units are subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions and the competitive environment. Should actual cash flows and our future estimates vary adversely from those estimates we use, we may be required to recognize goodwill impairment charges in future periods.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This “Quantitative and Qualitative Disclosures about Market Risk” has been presentedThere were no material changes from the information contained in accordance with Item 305 of Regulation S-K promulgated by the Securities and Exchange Commission (the “SEC”) and should be read in conjunction with “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our annual reportCompanies’ Annual Report on Form 10-K for the fiscal year ended January 3, 2010 (the “Form 10-K”). Certain statements we make under this Item 3 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II – Other Information” preceding “Item 1.”
We are exposed to the impact of interest rate changes, changes in commodity prices, changes in the fair value of our investments and foreign currency fluctuations primarily related to the Canadian dollar. In the normal course of business, we employ established policies and procedures to manage our exposure to these changes using financial instruments we deem appropriate.
Wendy’s/Arby’s has not experienced any material changes since January 3, 2010, as discussed in our Form 10-K, to its commodity price, equity market and foreign currency risks.
Interest Rate Risk
Our objective in managing our exposure to interest rate changes is to limit the impact on our earnings and cash flows. Our policy is to maintain a target, over time and subject to market conditions, of between 50% and 75% of “Long-term debt” as fixed rate debt. As of October 3, 2010 our long-term debt, including current portion, aggregated $1,577.6 million and consisted of $871.5 million of fixed-rate debt, $496.4 million of variable interest rate debt, and $209.7 million of capitalized lease and sale-leaseback obligations. Our variable interest rate debt consists of $496.4 million of term loan borrowings under a variable-rate senior secured term loan facility due through 2017 (the “Term Loan”). The interest rate on the Term Loan is based on the Eurodollar rate, which has a floor of 1.50%, plus 3.50%, or a base rate, which has a floor of 2.50%, plus 2.50%. Since the inception of the Term Loan and as of October 1, 2010, we have elected to use the Eurodollar Rate which resulted in an interest rate on the Term Loan of 5.0% as of OctoberApril 3, 2010.2011.
Consistent with our policy, we entered into several outstanding interest rate swap agreements (the “Interest Rate Swaps”) during the third quarter of 2009 and the first quarter of 2010 with notional amounts totaling $186.0 million and $39.0 million, respectively, that swap the fixed rate interest rates on the Wendy’s 6.20% senior notes for floating rates. The Interest Rate Swaps are accounted for as fair value hedges. At October 3, 2010, the fair value of our Interest Rate Swaps was $13.9 million and was included in “Deferred costs and other assets” and as an adjustment to the carrying amount of the Wendy’s 6.20% senior notes. Our policies prohibit the use of derivative instruments for trading purposes, and we have procedures in place to monitor and control their use. If any portion of th e hedge is determined to be ineffective, any changes in fair value would be recognized in our results of operations.
Credit Risk
Our credit risk as of January 3, 2010 included the Deerfield Capital Corp. (“DFR”) Notes (“DFR Notes”), which we received in late fiscal 2007 in connection with the sale of our majority capital interest in Deerfield & Company (the “Deerfield Sale”).
On June 9, 2010, pursuant to a March 2010 agreement between the Company and DFR, we received cash proceeds of $30.8 million in consideration for the repayment and cancellation of the DFR Notes we received in December 2007 in connection with the Deerfield Sale to DFR. Additional information on the DFR Notes and the Deerfield Sale is discussed in our Form 10-K. The proceeds represented 64.1% of the $48.0 million aggregate principal amount of the DFR Notes.
During the fourth quarter of 2008, we recognized an allowance for collectability of $21.2 million to reduce the then carrying amount of the DFR Notes to $25.0. As a result, we recognized income of $4.9 million during the nine months ended October 3, 2010, as the repayment proceeds exceeded the carrying value of the DFR Notes. This gain is included in “Investment income (expense), net.”
Overall Market Risk
Our overall market risk as of October 3, 2010 with the exception of our equity investment in a Canadian restaurant real estate joint venture (“TimWen”) with Tim Hortons Inc. is not material. As of October 3, 2010, our $98.3 million investment in TimWen was classified in our unaudited condensed consolidated balance sheet as as follows (in millions):
Type | At Cost | | At Fair Value (a) | | Carrying Value | |
| | | |
Non-current equity investment (b) | $ 82.7 | | $ 98.3 | | $ 98.3 | |
(a) | There can be no assurance that we would be able to realize this amount. |
(b) | The company believes that the fair value of our equity interest in TimWen is at least equal to its carrying value as there have been no indications of its impairment. |
Our investment in TimWen is accounted for in accordance with the equity method of accounting since we have significant influence over the investees and our results of operations include our share of the income or loss of the investees.
Sensitivity Analysis
Our estimate of market risk exposure is presented for each class of financial instruments held by us at October 3, 2010 for which an immediate adverse market movement would cause a potential material impact on our financial position or results of operations. We believe that the adverse market movements described below represent the hypothetical loss to our financial position or our results of operations and do not represent the maximum possible loss nor any expected actual loss, even under adverse conditions, because actual adverse fluctuations would likely differ. As of October 3, 2010, we did not hold any market-risk sensitive instruments which were entered into for trading purposes. As such, the table below reflects the risk for those financial instruments entered into as of October 3, 2010 based upon assumed immediate adverse effe cts as noted below (in millions):
| | Carrying Value | | | Interest Rate Risk | | | Equity Price Risk | | | Foreign Currency Risk | |
Non-current equity investment | | $ | 98.3 | | | $ | - | | | $ | (9.8 | ) | | $ | (9.8 | ) |
Interest Rate Swaps | | | 13.9 | | | | (8.2 | ) | | | - | | | | - | |
Long-term debt, excluding capitalized lease and sale-leaseback obligations-variable rate | | | (496.4 | ) | | | (31.8 | ) | | | - | | | | - | |
Long-term debt, excluding capitalized lease and sale-leaseback obligations-fixed rate | | | (871.5 | ) | | | (119.8 | ) | | | - | | | | - | |
The sensitivity analysis of financial instruments held at October 3, 2010 assumes an instantaneous one percentage point adverse change in market interest rates, and an instantaneous 10% adverse change in the foreign currency exchange rates versus the United States dollar, each from their levels at October 3, 2010 and with all other variables held constant. The equity price risk reflects the impact of a 10% decrease in the carrying value of our non-current equity investment in the table above. The sensitivity analysis also assumes that the decreases in the equity markets and foreign exchange rates are other than temporary.
As of October 3, 2010, we had amounts of both fixed-rate debt and variable interest rate debt. On the fixed-rate debt, the interest rate risk presented with respect to our long-term debt, excluding capitalized lease and sale-leaseback obligations, primarily relates to the potential impact a decrease in interest rates of one percentage point has on the fair value of our $871.5 million of fixed-rate debt and not on our financial position or our results of operations. However, as discussed above under “Interest Rate Risk,” we have interest rate swap agreements on a portion of our fixed-rate debt. The interest rate risk of our fixed-rate debt presented in the tables above exclude the effect of the $225.0 million for which we designated interest rate swap agreements as fair value hedges for the terms of the swap agreements. As interest rates decrease, the fair market values of the interest rate swap agreements increase. The interest rate risks presented with respect to the interest rate swap agreements represent the potential impact the indicated change has on our results of operations. On the variable interest rate debt, the interest rate risk presented with respect to our long-term debt, excluding capitalized lease and sale-leaseback obligations, represents the potential impact an increase in interest rates of one percentage point has on our results of operations related to our $496.4 million of variable interest rate long-term debt outstanding as of October 3, 2010. Our variable interest rate long-term debt outstanding as of October 3, 2010 had a weighted average remaining maturity of approximately six years.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
OurThe management of Wendy’s/Arby’s and Wendy’s/Arby’s Restaurants, under the supervision and with the participation of ourtheir Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of ourtheir disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of OctoberApril 3, 2010.2011. Based on such evaluation, ourevaluations, the Chief Executive Officer and Chief Financial Officer concluded that as of OctoberApril 3, 2010, our2011, the disclosure controls and procedures of Wendy’s/Arby’s and Wendy’s/Arby’s Restaurants were effective in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by useach company in the reports that we fileit files or submitsubmits under the Exchange Act and (2) ensuring that information required to be di scloseddisclosed by useach company in such reports is accumulated and communicated to our management, including ourthe Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in ourthe internal control over financial reporting madeof Wendy’s/Arby’s and Wendy’s/Arby’s Restaurants during the first quarter of 2011 that materially affected, or are reasonably likely to materially affect, ourtheir internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
There are inherent limitations in the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of the controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, ourthe management of Wendy’s/Arby’s and Wendy’s/Arby’s Restaurants, including ourtheir Chief Executive Officer and Chief Financial Officer, does not expect that ourthe control system can prevent or detect all error or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subjec tsubject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with policies or procedures.
Part II. OTHER INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This Quarterly Report on Form 10-Q and oral statements made from time to time by representatives of the Company may contain or incorporate by reference certain statements that are not historical facts, including, most importantly, information concerning possible or assumed future results of operations of the Company.Companies. Those statements, as well as statements preceded by, followed by, or that include the words “may,” “believes,” “plans,” “expects,” “anticipates,” or the negation thereof, or similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). All statements that address future operating, financial or business performance; strategies or expectations; future synergies, efficiencies or overhead savings; anticipated costs or charges; future capitalization; compliance with covenants contained in agreements governing our indebtedness, adequacy of capital resources and anticipated financial impacts of recent or pending transactions are forward-looking statements within the meaning of the Reform Act. The forward-looking statements are based on our expectations at the time such statements are made, speak only as of the dates they are made and are susceptible to a number of risks, uncertainties and other factors. Our actual results, performance and achievements may differ materially from any future results, performance or achievements expressed or implied by our forward-looking statements. For all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act. ; Many important factors could affect our future results and could cause those results to differ materially from those expressed in or implied by the forward-looking statements contained herein. Such factors, all of which are difficult or impossible to predict accurately, and many of which are beyond our control, include, but are not limited to, the following:
| · | competition, including pricing pressures, aggressive marketing and the potential impact of competitors’ new unit openings on sales of Wendy’s and Arby’s restaurants; |
uncertainty regarding the outcome of the Companies’ exploration of strategic alternatives for the Arby’s brand and its impact on the Companies’ businesses;
| · | consumers’ perceptions of the relative quality, variety, affordability and value of the food products we offer; |
| · | food safety events, including instances of food-borne illness (such as salmonella or E. coli) involving Wendy’s or Arby’s or their respective supply chains; |
| · | success of operating initiatives, including advertising and promotional efforts and new product and concept development by us and our competitors; |
| · | the impact of general economic conditions and high unemployment rates on consumer spending, particularly in geographic regions that contain a high concentration of Wendy’s or Arby’s restaurants, and the effects of war or terrorist activities; |
| · | changes in consumer tastes and preferences, such as concerns regarding the nutritional aspects of beef, poultry, french fries or other products we sell or concerns regarding the effects of disease outbreaks such as “mad cow disease” and avian influenza or “bird flu;” |
| · | changes in spending patterns and demographic trends, such as the extent to which consumers eat meals away from home; |
competition, including pricing pressures, aggressive marketing and the potential impact of competitors’ new unit openings on sales of Wendy’s and Arby’s restaurants;
| · | certain factors affecting our franchisees, including the business and financial viability of franchisees, with a significant number of Arby’s franchisees and a minimal number of Wendy’s franchisees having experienced declining sales and profitability, the timely payment of franchisees’ obligations due to us or to national or local advertising organizations, and the ability of our franchisees to open new restaurants in accordance with their development commitments, including their ability to finance restaurant development and remodels; |
| · | availability, location and terms of sites for restaurant development by us and our franchisees; |
| · | development costs, including real estate and construction costs; |
| · | delays in opening new restaurants or completing remodels of existing restaurants; |
| · | the timing and impact of acquisitions and dispositions of restaurants; |
consumers’ perceptions of the relative quality, variety, affordability and value of the food products we offer;
| · | our ability to successfully integrate acquired restaurant operations; |
| · | anticipated or unanticipated restaurant closures by us and our franchisees; |
| · | our ability to identify, attract and retain potential franchisees with sufficient experience and financial resources to develop and operate Wendy’s and Arby’s restaurants successfully; |
food safety events, including instances of food-borne illness (such as salmonella or E. coli) involving Wendy’s or Arby’s or their respective supply chains;
consumer concerns over nutritional aspects of beef, poultry, French fries or other products we sell, or concerns regarding the effects of disease outbreaks such as “mad cow disease” and avian influenza or “bird flu”;
| · | availability of qualified restaurant personnel to us and to our franchisees, and the ability to retain such personnel; |
success of operating and marketing initiatives, including advertising and promotional efforts and new product and concept development by us and our competitors;
the impact of general economic conditions and high unemployment rates on consumer spending, particularly in geographic regions that contain a high concentration of Wendy’s or Arby’s restaurants;
| · | our ability, if necessary, to secure alternative distribution of supplies of food, equipment and other products to Wendy’s and Arby’s restaurants at competitive rates and in adequate amounts, and the potential financial impact of any interruptions in such distribution; |
changes in consumer tastes and preferences, and in discretionary consumer spending;
| · | changes in commodity (including beef and chicken), labor, supply, fuel, utilities, distribution and other operating costs; |
changes in spending patterns and demographic trends, such as the extent to which consumers eat meals away from home;
| · | availability and cost of insurance; |
certain factors affecting our franchisees, including the business and financial viability of franchisees, with a significant number of Arby’s franchisees having experienced a prolonged period of declining sales and profitability, the timely payment of such franchisees' obligations due to us or to national or local advertising organizations, and the ability of our franchisees to open new restaurants in accordance with their development commitments, including their ability to finance restaurant development and remodels;
| · | adverse weather conditions; |
changes in commodity costs (including beef and chicken), labor, supply, fuel, utilities, distribution and other operating costs;
| · | availability, terms (including changes in interest rates) and deployment of capital; |
availability, location and terms of sites for restaurant development by us and our franchisees;
| · | changes in legal or regulatory requirements, including franchising laws, accounting standards, payment card industry rules, overtime rules, minimum wage rates, government-mandated health benefits, tax legislation and menu-board labeling requirements; |
development costs, including real estate and construction costs;
| · | the costs, uncertainties and other effects of legal, environmental and administrative proceedings; |
delays in opening new restaurants or completing remodels of existing restaurants;
| · | the effects of charges for impairment of goodwill or for the impairment of long-lived assets due to deteriorating operating results; and |
the timing and impact of acquisitions and dispositions of restaurants;
| · | other risks and uncertainties affecting us and our subsidiaries referred to in our Form 10-K for the fiscal year ended January 3, 2010 (the “Form 10-K”) (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the Securities and Exchange Commission. |
our ability to successfully integrate acquired restaurant operations;
anticipated or unanticipated restaurant closures by us and our franchisees;
our ability to identify, attract and retain potential franchisees with sufficient experience and financial resources to develop and operate Wendy’s and Arby’s restaurants successfully;
availability of qualified restaurant personnel to us and to our franchisees, and the ability to retain such personnel;
our ability, if necessary, to secure alternative distribution of supplies of food, equipment and other products to Wendy’s and Arby’s restaurants at competitive rates and in adequate amounts, and the potential financial impact of any interruptions in such distribution;
availability and cost of insurance;
adverse weather conditions;
availability, terms (including changes in interest rates) and deployment of capital;
changes in, and our ability to comply with, legal, regulatory or similar requirements, including franchising laws, accounting standards, payment card industry rules, overtime rules, minimum wage rates, wage and hour laws, government-mandated health care benefits, tax legislation and menu-board labeling requirements;
the costs, uncertainties and other effects of legal, environmental and administrative proceedings;
the effects of charges for impairment of goodwill or for the impairment of other long-lived assets due to deteriorating operating results;
the effects of war or terrorist activities; and
other risks and uncertainties affecting us and our subsidiaries referred to in our Annual Report on Form 10-K for the fiscal year ended January 2, 2011 (see especially “Item 1A. Risk Factors” and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the Securities and Exchange Commission.
All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We assume no obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q as a result of new information, future events or developments, except as required by Federal securities laws. In addition, it is our policy generally not to make any specific projections as to future earnings, and we do not endorse any projections regarding future performance that may be made by third parties.
parties.
Item 1. Legal Proceedings.
We are involved in litigation and claims incidental to our current and prior businesses. We haveprovide reserves for such litigation and claims when payment is probable and reasonably estimable. As of April 3, 2011, Wendy’s/Arby’s and Wendy’s/Arby’s Restaurants had reserves for all of ourtheir legal and environmental matters aggregating $4.5 million as of October 3, 2010. The$3.9 million. Although the outcome of these matters cannot be predicted with certainty and somewe cannot estimate the aggregate possible range of these matters may be disposed of unfavorably to us. Basedloss, based on our currently available information, including legal defenses available to us, and given the aforementioned reserves and our insurance coverage, we do not believe that the outcome of these legal and environmental matters will have a material adverse effect on our consolidated financial position or results of operations.
Item 1A. Risk Factors.
In addition to the information contained in this report, you should carefully consider the risk factors disclosed in our Form 10-K, which could materially affect our business, financial condition or future results. Except as described elsewhere in this report, including the risk factor set forth below, there have been no material changes from the risk factors previously disclosed in our Form 10-K and our Forms 10-Q for the quarters ended April 4, 2010 and July 4, 2010.
Our financial results are affected by the operating results of franchisees.
As of October 3, 2010, approximately 79% of the Wendy’s system and 69% of the Arby’s system were franchise restaurants. We receive revenue in the form of royalties, which are generally based on a percentage of sales at franchised restaurants, rent and fees from franchisees. Accordingly, a substantial portion of our financial results is to a large extent dependent upon the operational and financial success of our franchisees. If sales trends or economic conditions worsen for our franchisees, their financial results may worsen and our royalty, rent and other fee revenues may decline. In addition, accounts receivable and related allowance for doubtful accounts may increase. When company-owned restaurants are sold, one of our subsidiaries is often required to remain r esponsible for lease payments for these restaurants to the extent that the purchasing franchisees default on their leases. During periods of declining sales and profitability of franchisees, such as are currently being experienced by a significant number of Arby’s franchisees and a minimal number of Wendy’s franchisees, the incidence of franchisee defaults for these lease payments increases and we are then required to make those payments and seek recourse against the franchisee or agree to repayment terms. Additionally, if franchisees fail to renew their franchise agreements, or if we decide to restructure franchise agreements in order to induce franchisees to renew these agreements, then our royalty revenues may decrease. Further, we may decide from time to time to acquire restaurants from franchisees that experience significant financial hardship, which may reduce our cash and equivalents.10-K.
As of October 3, 2010, there were approximately 500 Arby’s franchised restaurants with amounts payable to our subsidiary Arby’s Restaurant Group, Inc. (“ARG”) for royalties, rent and/or other fees that were at least 60 days past due. The financial condition of a number of Arby’s franchisees was one of the factors that resulted in a net decrease of 31 and 33 in the number of franchised restaurants for fiscal 2009 and for the nine months ended October 3, 2010, respectively. During those periods 74 and 75 franchised Arby’s restaurants were closed, respectively. The trend of declining sales at franchised restaurants has resulted in decreases in royalties and other franchise revenues. In addition, Arby’s franchisee accounts receivable and related allowance for doubtful accounts have increased significantly, and may continue to grow as a result of the deteriorating financial condition of some of our franchisees. Franchisee financial difficulties and the closure of franchised restaurants have also caused reductions in the contributions to and extent of national and local advertising programs. Continuation of these trends will further affect our revenues and may have a material adverse effect on our results of operations and financial condition.
AFA Service Corporation (“AFA”), an independently controlled advertising cooperative for the Arby’s system in which we have voting interests of less than 50%, previously entered into a revolving loan agreement with ARG pursuant to which ARG provided revolving loans up to $14.5 million. During the third quarter of 2010, the parties agreed in principle to terms that extend the maturity to March 2012 with revolving loans up to $14.0 million bearing interest at 7.5%. As of October 3, 2010, the outstanding balance under this agreement was $5.8 million and there were no amounts past due. Due to declining sales and profitability of Arby’s franchisees, it is possible that our ability in the future to collect principal and interest payments from AFA could be adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to repurchases of shares of our common stock by us and our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended)Act) during the thirdfirst fiscal quarter of 2010:2011:
Issuer Repurchases of Equity Securities
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan (2) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (2) |
July 5, 2010 through August 8, 2010 | 95,503 | $4.11 | - | $79,517,373 |
August 9, 2010 through September 5, 2010 | - | - | - | $79,517,373 |
September 6, 2010 through October 3, 2010 | 1,700 | 4.57 | - | $79,517,373 |
Total | 97,203 | $4.12 | - | $79,517,373 |
|
| (1) | | | |
Period | Total Number of Shares Purchased | Includes 97,203 shares reacquired by Average
Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Company from holders of restricted stock awards to satisfy tax withholding requirements. The shares were valued at the average of the high and low trading prices of our Common Stock on the vesting date of such awards. Plan (1) |
January 3, 2011 throughFebruary 6, 2011 — | — | — | $249,517,373 | February 7, 2011 through March 6, 2011 | (2)— | On January 27, 2010, — | — | $249,517,373 | March 22, 2010 and May 27, 2010, our Board of Directors authorized our management, when and if market conditions warrant and to the extent legally permissible, to repurchase 7, 2011 through January 2, April 3, 2011 up to an additional $75.0 million, $50.0 million and $75.0 million, respectively, of our Common Stock. | — | — | — | $249,517,373 | Total | — | — | — | $249,517,373 | (1) On November 11, 2010, our Board of Directors authorized the extension of the current stock repurchase program through January 1, 2012 and authorized the repurchase of up to an additional $170.0 million of our Common Stock, bringing the total amount currently authorized to approximately $250.0 million. The stock repurchase program will allow the Company to make repurchases as market conditions warrant and to the extent legally possible. permissible.
Item 4. (Removed and Reserved).
Item 6. Exhibits.
| | | EXHIBIT NO. | DESCRIPTION | | | 2.1 | Agreement and Plan of Merger, dated as of April 23, 2008, by and among Triarc Companies, Inc., Green Merger Sub Inc. and Wendy’s International, Inc., incorporated herein by reference to Exhibit 2.1 to Triarc’s Current Report on Form 8-K dated April 29, 2008 (SEC file no. 001-02207). | 2.2 | Side Letter Agreement, dated August 14, 2008, by and among Triarc Companies, Inc., Green Merger Sub, Inc. and Wendy’s International, Inc., incorporated herein by reference to Exhibit 2.3 to Triarc’s Registration Statement on Form S-4, Amendment No.3, filed on August 15, 2008 (Reg. no. 333-151336). | 2.3 | Agreement and Plan of Merger, dated as of December 17, 2007, by and among Deerfield Triarc Capital Corp., DFR Merger Company, LLC, Deerfield & Company LLC and, solely for the purposes set forth therein, Triarc Companies, Inc. (in such capacity, the Sellers’ Representative,Representative), incorporated herein by reference to Exhibit 2.1 to Triarc’s Current Report on Form 8-K dated December 21, 2007 (SEC file No. 001-02207). | 3.1 | Amended and Restated Certificate of Incorporation of Wendy’s/Arby’s Group, Inc., as filed with the Secretary of State of the State of Delaware on May 28, 2009, incorporated herein by reference to Exhibit 3.1 to Wendy’s/Arby’s Group’s Current Report on Form 8-K dated June 1, 2009 (SEC file no. 001-02207). | 3.2 | Amended and Restated By-Laws of Wendy’s/Arby’s Group, Inc., as amended and restated as of May 28, 2009, incorporated herein by reference to Exhibit 3.2 to Wendy’s/Arby’s Group’s Current Report on Form 8-K dated June 1, 2009 (SEC file no. 001-02207). | 3.3 | Certificate of Formation of Wendy’s/Arby’s Restaurants, LLC, as amended to date, incorporated by reference to Exhibit 3.1 to Wendy’s/Arby’s Restaurants’ Registration Statement on Form S-4 filed on August 28, 2009 (Reg. No. 333-161613). (Wendy’s/Arby’s Restaurants only.) | 3.4 | Third Amended and Restated Limited Liability Company Operating Agreement of Wendy’s/Arby’s Restaurants, LLC, incorporated by reference to Exhibit 3.2 to Wendy’s/Arby’s Restaurants’ Registration Statement on Form S-4 filed on August 28, 2009 (Reg. no. 333-161613). (Wendy’s/Arby’s Restaurants only.) | 10.1 | | 10.2 | | 10.3 | | 10.4 | | 10.5 | | 31.1 | | 31.2 | | 31.3 | | 31.4 | | 32.1 | | 101.INS | XBRL Instance Document** | 101.SCH | XBRL Taxonomy Extension Schema Document** | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document** | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document** | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document** | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document** | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document** |
____________________ | | | * | Filed herewith | ** | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.” |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, theeach registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | WENDY’S/ARBY’S GROUP, INC. (Registrant) | Date: November 12, 2010May 10, 2011 | By: /s/Stephen E. Hare | | Stephen E. Hare | | Senior Vice President and | | Chief Financial Officer | | (On behalf of the Company) | | | Date: November 12, 2010 May 10, 2011 | By: /s/Steven B. Graham | | Steven B. Graham | | Senior Vice President and | | Chief Accounting Officer | | (Principal Accounting Officer) |
| | | | WENDY’S/ARBY’S RESTAURANTS, LLC (Registrant) | Date: May 10, 2011 | By: /s/Stephen E. Hare | | Stephen E. Hare | | Senior Vice President and | | Chief Financial Officer | | (On behalf of the Company) | | | Date: May 10, 2011 | By: /s/Steven B. Graham | | Steven B. Graham | | Senior Vice President and | | Chief Accounting Officer | | (Principal Accounting Officer) |
Exhibit Index EXHIBIT NO. | DESCRIPTION | | | 2.1 | Agreement and Plan of Merger, dated as of April 23, 2008, by and among Triarc Companies, Inc., Green Merger Sub Inc. and Wendy’s International, Inc., incorporated herein by reference to Exhibit 2.1 to Triarc’s Current Report on Form 8-K dated April 29, 2008 (SEC file no. 001-02207). | 2.2 | Side Letter Agreement, dated August 14, 2008, by and among Triarc Companies, Inc., Green Merger Sub, Inc. and Wendy’s International, Inc., incorporated herein by reference to Exhibit 2.3 to Triarc’s Registration Statement on Form S-4, Amendment No.3, filed on August 15, 2008 (Reg. no. 333-151336). | 2.3 | Agreement and Plan of Merger, dated as of December 17, 2007, by and among Deerfield Triarc Capital Corp., DFR Merger Company, LLC, Deerfield & Company LLC and, solely for the purposes set forth therein, Triarc Companies, Inc. (in such capacity, the Sellers’ Representative,Representative), incorporated herein by reference to Exhibit 2.1 to Triarc’s Current Report on Form 8-K dated December 21, 2007 (SEC file No. 001-02207). | 3.1 | Amended and Restated Certificate of Incorporation of Wendy’s/Arby’s Group, Inc., as filed with the Secretary of State of the State of Delaware on May 28, 2009, incorporated herein by reference to Exhibit 3.1 to Wendy’s/Arby’s Group’s Current Report on Form 8-K dated June 1, 2009 (SEC file no. 001-02207). | 3.2 | Amended and Restated By-Laws of Wendy’s/Arby’s Group, Inc., as amended and restated as of May 28, 2009, incorporated herein by reference to Exhibit 3.2 to Wendy’s/Arby’s Group’s Current Report on Form 8-K dated June 1, 2009 (SEC file no. 001-02207). | 3.3 | Certificate of Formation of Wendy’s/Arby’s Restaurants, LLC, as amended to date, incorporated by reference to Exhibit 3.1 to Wendy’s/Arby’s Restaurants’ Registration Statement on Form S-4 filed on August 28, 2009 (Reg. No. 333-161613). (Wendy’s/Arby’s Restaurants only.) | 3.4 | Third Amended and Restated Limited Liability Company Operating Agreement of Wendy’s/Arby’s Restaurants, LLC, incorporated by reference to Exhibit 3.2 to Wendy’s/Arby’s Restaurants’ Registration Statement on Form S-4 filed on August 28, 2009 (Reg. no. 333-161613). (Wendy’s/Arby’s Restaurants only.) | 10.1 | | 10.2 | | 10.3 | | 10.4 | | 10.5 | | 31.1 | | 31.2 | | 31.3 | | 31.4 | | 32.1 | | 101.INS | XBRL Instance Document** | 101.SCH | XBRL Taxonomy Extension Schema Document** | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document** | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document** | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document** | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document** | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document** |
_______________________ | | | * | Filed herewith | ** | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.” |
|