FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
------------------
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 1-8116
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WENDY'S INTERNATIONAL, INC.
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(Exact name of Registrant as specified in its charter)
Ohio 31-0785108
-------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 256, 4288 West Dublin-Granville Road, Dublin, Ohio 43017-0256
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) 614-764-3100
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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. YES X NO ___.
---
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 4, 2001
--------------------------- -------------------------------
Common shares, $.10 stated value 104,573,000 shares
Exhibit index on page 19.
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Pages
-----
PART I: Financial Information
Item 1. Financial Statements:
Consolidated Condensed Statements of Income for the quarters 3 - 4
and year-to-date periods ended September 30, 2001 and
October 1, 2000
Consolidated Condensed Balance Sheets as of September 30, 2001
and December 31, 2000 5 - 6
Consolidated Condensed Statements of Cash Flows for the
year-to-date periods ended September 30, 2001 and
October 1, 2000 7
Notes to the Consolidated Condensed Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 16
PART II: Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Index to Exhibits 19
Exhibit 99 20 - 21
2
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
Quarter Ended Quarter Ended
September 30, 2001 October 1, 2000
------------------ ---------------
Revenues
Retail sales..................................... $489,345 $468,414
Franchise revenues............................... 121,047 109,182
-------- --------
610,392 577,596
-------- --------
Costs and expenses
Cost of sales.................................... 311,164 293,321
Company restaurant operating
costs.......................................... 102,843 99,955
Operating costs.................................. 23,679 21,002
General and administrative
expenses....................................... 54,594 52,968
Depreciation and amortization
of property and equipment...................... 29,528 27,832
Other expense.................................... 682 899
Interest, net.................................... 4,797 3,833
-------- --------
527,287 499,810
-------- --------
Income before income taxes........................... 83,105 77,786
Income taxes......................................... 30,749 29,169
-------- --------
Net income........................................... $ 52,356 $ 48,617
======== ========
Basic earnings per common share...................... $ .46 $ .43
======== ========
Diluted earnings per common share.................... $ .44 $ .41
======== ========
Dividends per common share........................... $ .06 $ .06
======== ========
Basic shares......................................... 114,205 113,392
======== ========
Diluted shares....................................... 123,169 121,316
======== ========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
3
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
Year-to-Date Ended Year-to-Date Ended
September 30, 2001 October 1, 2000
------------------ ---------------
Revenues
Retail sales..................................... $1,430,412 $1,349,047
Franchise revenues............................... 345,128 315,598
---------- ----------
1,775,540 1,664,645
---------- ----------
Costs and expenses
Cost of sales.................................... 910,729 848,955
Company restaurant operating
costs.......................................... 303,653 286,424
Operating costs.................................. 65,529 60,337
General and administrative
expenses....................................... 161,684 155,699
Depreciation and amortization
of property and equipment...................... 87,606 80,278
Other (income) expense........................... (643) 4,865
Interest, net.................................... 13,539 11,735
---------- ----------
1,542,097 1,448,293
---------- ----------
Income before income taxes........................... 233,443 216,352
Income taxes......................................... 86,374 81,132
---------- ----------
Net income........................................... $ 147,069 $ 135,220
========== =========
Basic earnings per common share...................... $ 1.29 $ 1.18
========== ==========
Diluted earnings per common share.................... $ 1.24 $ 1.14
========== ==========
Dividends per common share........................... $ .18 $ .18
========== ==========
Basic shares......................................... 114,132 114,501
========== ==========
Diluted shares....................................... 122,958 122,459
========== ==========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
4
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
September 30, 2001 December 31, 2000
------------------ -----------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents............. $ 187,477 $ 169,718
Accounts receivable, net.............. 79,499 75,960
Notes receivable, net................. 11,491 11,832
Deferred income taxes................. 14,590 21,503
Inventories and other................. 33,544 40,086
---------- -----------
326,601 319,099
---------- -----------
Property and equipment.................... 2,189,263 2,074,574
Accumulated depreciation and
amortization........................ (626,003) (577,484)
---------- -----------
1,563,260 1,497,090
---------- -----------
Notes receivable, net..................... 33,677 38,932
Goodwill, net............................. 41,700 43,719
Deferred income taxes..................... 12,524 20,572
Other assets.............................. 36,797 38,304
---------- -----------
$2,014,559 $ 1,957,716
========== ===========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
5
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
September 30, 2001 December 31, 2000
------------------ -----------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable................................. $ 70,506 $ 125,564
Accrued expenses:
Salaries and wages............................ 25,765 34,663
Taxes......................................... 78,041 50,867
Insurance..................................... 38,973 38,414
Other......................................... 40,041 42,965
Current portion of long-term
obligations................................... 4,030 3,943
---------- ----------
257,356 296,416
---------- ----------
Long-term obligations
Term debt........................................ 203,750 204,027
Capital leases................................... 44,707 44,357
---------- ----------
248,457 248,384
---------- ----------
Deferred income taxes................................ 66,160 72,750
Other long-term liabilities.......................... 15,328 14,023
Commitments and contingencies
Company-obligated mandatorily redeemable preferred
securities of subsidiary Wendy's Financing I,
holding solely Wendy's Convertible Debentures..... 200,000 200,000
Shareholders' equity
Preferred stock, Authorized: 250,000 shares
Common stock, $.10 stated value per share,
Authorized: 200,000,000 shares,
Issued and Exchangeable:
137,828,000 and 136,188,000 shares,
respectively................................. 12,238 12,074
Capital in excess of stated value................ 455,394 423,144
Retained earnings................................ 1,337,539 1,211,015
Accumulated other comprehensive expense.......... (47,648) (27,133)
---------- ----------
1,757,523 1,619,100
Treasury stock at cost: 23,568,000 and
21,978,000 shares, respectively................. (530,265) (492,957)
---------- ----------
1,227,258 1,126,143
---------- ----------
$2,014,559 $1,957,716
========== ==========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
6
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Year-to-Date Year-to-Date
Ended Ended
September 30, 2001 October 1, 2000
------------------ ---------------
Net cash provided by operating
activities....................................... $ 236,085 $ 209,451
---------- ----------
Cash flows from investing activities
Proceeds from asset dispositions................. 25,477 40,688
Capital expenditures............................. (213,451) (214,313)
Acquisition of franchises........................ (1,543) (1,555)
Payments on notes receivable..................... 11,465 4,369
Other investing activities....................... (7,782) (2,729)
---------- ----------
Net cash used in investing activities........ (185,834) (173,540)
---------- ----------
Cash flows from financing activities
Proceeds from issuance of common stock........... 28,113 4,513
Repurchase of common shares...................... (37,308) (93,435)
Principal payments on long-term
obligations.................................... (2,752) (3,481)
Dividends paid on common and
exchangeable shares............................ (20,545) (20,745)
---------- ----------
Net cash used in financing activities.......... (32,492) (113,148)
---------- ----------
Increase (decrease) in cash and cash
equivalents.................................... 17,759 (77,237)
Cash and cash equivalents at beginning of
period......................................... 169,718 210,785
---------- ----------
Cash and cash equivalents at end of period........... $ 187,477 $ 133,548
========== ==========
Supplemental disclosures of cash flow information:
Interest paid.................................... $ 18,428 $ 18,231
Capitalized lease obligations incurred........... 4,051 7,600
Income taxes paid................................ 50,739 69,431
Acquisition of franchises:
Fair value of assets acquired, net............ 1,543 1,555
Cash paid..................................... 1,543 1,555
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
7
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. MANAGEMENT'S STATEMENT
-------------------------------
In the opinion of management, the accompanying consolidated condensed
financial statements contain all adjustments (all of which are normal and
recurring in nature) necessary to present fairly the condensed financial
position of Wendy's International, Inc. and Subsidiaries (the Company) as
of September 30, 2001 and December 31, 2000 and the condensed results of
operations and comprehensive income (see Note 3) for the quarters and
year-to-date periods ended September 30, 2001 and October 1, 2000 and cash
flows for the year-to-date periods ended September 30, 2001 and October 1,
2000. All of these financial statements are unaudited with the exception of
the December 31, 2000 balance sheet. The Notes to the audited Consolidated
Financial Statements, which are contained in the Financial Statements and
Other Information furnished with the Company's 2001 Proxy Statement, should
be read in conjunction with these Consolidated Condensed Financial
Statements.
NOTE 2. NET INCOME PER SHARE
-----------------------------
Basic earnings per common share are computed by dividing net income
available to common shareholders by the weighted average number of common
shares outstanding. Diluted computations include assumed conversions of
stock options, net of shares repurchased from proceeds, and
company-obligated mandatorily redeemable preferred securities, when
dilutive, and the elimination of related expenses, net of income taxes.
Options to purchase 3.2 million shares and 5.1 million shares of common
stock in the current quarter and year-to-date, and 6.4 million shares in
the prior year quarter and year-to-date, were not included in the
computation of diluted earnings per common share. These options were
excluded from the calculation because the exercise price of these options
was greater than the average market price of the common shares in the
respective periods, and therefore, they are antidilutive.
The computations of basic and diluted earnings per common share are shown
below:
Quarter Quarter Year-to-Date Year-to-Date
Ended Ended Ended Ended
Sept. 30, 2001 Oct. 1, 2000 Sept. 30, 2001 Oct. 1, 2000
-------------- ------------ -------------- ------------
(In thousands, except per share data)
Income for computation of basic earnings
per common share............................ $ 52,356 $ 48,617 $147,069 $135,220
Interest savings (net of income taxes) on
assumed conversions......................... 1,598 1,585 4,793 4,755
-------- -------- -------- --------
Income for computation of diluted
earnings per common share................... $ 53,954 $ 50,202 $151,862 $139,975
======== ======== ======== ========
Weighted average shares for computation
of basic earnings per common share.......... 114,205 113,392 114,132 114,501
Dilutive stock options........................ 1,391 351 1,253 385
Assumed conversions........................... 7,573 7,573 7,573 7,573
-------- -------- -------- --------
Weighted average shares for computation
of diluted earnings per common share........ 123,169 121,316 122,958 122,459
======== ======== ======== ========
Basic earnings per common share............... $ 0.46 $ 0.43 $ 1.29 $ 1.18
======== ======== ======== ========
Diluted earnings per common share............. $ 0.44 $ 0.41 $ 1.24 $ 1.14
======== ======== ======== ========
8
NOTE 3. CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
------------------------------------------------------------------
The components of other comprehensive expense and total comprehensive income are
shown below:
Quarter Quarter Year-to-Date Year-to-Date
Ended Ended Ended Ended
Sept. 30, 2001 Oct. 1, 2000 Sept. 30, 2001 Oct. 1, 2000
-------------- ------------ -------------- ------------
(In thousands)
Net income........................................ $ 52,356 $48,617 $147,069 $135,220
Other comprehensive expense:
Translation adjustments........................... (17,422) (6,559) (20,515) (14,337)
-------- ------- -------- --------
Comprehensive income.............................. $ 34,934 $42,058 $126,554 $120,883
======== ======= ======== ========
The translation adjustments change of $10.9 million in the current quarter and
$6.2 million year-to-date both reflect a more significant weakening of the
Canadian dollar during 2001 versus 2000.
NOTE 4. SEGMENT REPORTING
--------------------------
The Company operates exclusively in the food-service industry and has determined
that its reportable segments are those that are based on the Company's methods
of internal reporting and management structure. The Company's reportable
segments are Wendy's and Tim Hortons. There were no material amounts of revenues
or transfers between reportable segments. The table below presents information
about reportable segments:
Wendy's Tim Hortons Total
------- ----------- -----
(In thousands)
Quarter Ended Sept. 30, 2001
----------------------------
Revenues $ 466,106 $144,286 $ 610,392
Income before income taxes 78,742 35,563 114,305
Capital expenditures 61,553 18,775 80,328
Quarter Ended Oct. 1, 2000
--------------------------
Revenues $ 444,046 $133,550 $ 577,596
Income before income taxes 76,083 29,710 105,793
Capital expenditures 59,933 17,850 77,783
Year-to-Date Ended Sept. 30, 2001
---------------------------------
Revenues $1,361,454 $414,086 $1,775,540
Income before income taxes 227,035 96,281 323,316
Capital expenditures 159,139 54,312 213,451
Year-to-Date Ended Oct. 1, 2000
-------------------------------
Revenues $1,283,879 $380,766 $1,664,645
Income before income taxes 216,747 83,309 300,056
Capital expenditures 158,919 55,394 214,313
A reconciliation of reportable segment income before income taxes to
consolidated income before income taxes follows:
Quarter Quarter Year-to-Date Year-to-Date
Ended Ended Ended Ended
Sept. 30, 2001 Oct. 1, 2000 Sept. 30, 2001 Oct. 1, 2000
-------------- ------------ -------------- ------------
(In thousands)
Income before income taxes.......................... $114,305 $105,793 $323,316 $300,056
Corporate charges................................... (31,200) (28,007) (89,873) (83,704)
-------- -------- -------- --------
Consolidated income before income taxes............. $ 83,105 $ 77,786 $233,443 $216,352
======== ======== ======== ========
Corporate charges include certain overhead costs and net interest expense.
9
NOTE 5. SUBSEQUENT EVENT AND RELATED PARTY TRANSACTION
-------------------------------------------------------
On October 18, 2001, the Company agreed to purchase 9.7 million exchangeable
shares of WENTIM, LTD., a subsidiary of the Company, which shares were
exchangeable into 9.7 million common shares of the Company, from Ronald V.
Joyce, co-founder of Tim Hortons, and entities wholly owned by Mr. Joyce. The
purchase price per share was $25.75, a 3% discount to the closing price of the
Company's common shares on October 18. The transaction reduced the Company's
shares outstanding by 9.7 million. Mr. Joyce continues to own 5.7 million
exchangeable shares. The Company used approximately $50 million in available
cash to complete the transaction and borrowed the remainder through the issuance
of short-term commercial paper.
Separate from the payment of the purchase price for the shares, the Company also
paid $3.5 million, plus applicable taxes, to Mr. Joyce for ongoing consulting
services and personality rights, and to terminate the employment agreement
between Mr. Joyce and one of the subsidiaries of the Company.
In November 2001, the Company issued $200 million of 6.25% senior notes due
November 15, 2011. The net proceeds from the issuance of this debt were used to
pay off approximately $200 million in short-term debt borrowed in connection
with the 9.7 million share repurchase.
10
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
The Company's diluted earnings per common share increased 7.3% to $.44 in the
current quarter, and 8.8% to $1.24 in the year-to-date period. In the quarter,
consolidated revenues increased 5.7% to $610 million and systemwide sales
increased 7.0% to $2.2 billion. Year-to-date, consolidated revenues increased
6.7% to $1.8 billion and systemwide sales increased 7.5% to $6.2 billion.
Consolidated revenues include sales from company operated units, as well as
royalties, rents and franchise fees from franchise restaurants. Systemwide sales
include sales from both company and franchise restaurants. Average same-store
sales increased for both Wendy's and Tim Hortons Canadian and U.S. restaurants
during the quarter and year-to-date.
WENDY'S
Retail Sales
Wendy's retail sales for the third quarter 2001 increased $17.6 million, or
4.6%, to $399.8 million, and $64.9 million, or 5.9%, to $1.2 billion for
year-to-date 2001. Of this total, domestic Wendy's retail sales increased 5.7%
to $359.0 million in the quarter, and 7.0% to $1.0 billion for the year-to-date.
For domestic company operated Wendy's, average restaurant sales increased 1.2%
to $343,875 per restaurant in the quarter, and 1.6% to $1.0 million
year-to-date. Average same-store sales in Wendy's domestic company restaurants
increased 1.6% in the quarter and 1.9% for the year-to-date. The average number
of transactions in domestic company operated Wendy's decreased .4% in the
quarter and year-to-date, while the average check increased 2.0% in the quarter
and 2.4% year-to-date. In addition, domestic selling prices increased 1.2% in
the quarter and 1.7% year-to-date. In the third quarter and year-to-date, the
average number of Wendy's company operated domestic restaurants increased by 45
and 53, respectively, compared to the prior year quarter and year-to-date.
Canadian Wendy's retail sales increased $1.5 million, or 5.7% in the third
quarter, and $6.7 million, or 8.9% for the year-to-date. Canadian Wendy's
same-store sales for company operated restaurants, in local currency, increased
4.5% in the quarter and 5.5% year-to-date. With the closure of the Company's
Argentina market in fourth quarter 2000, other international retail sales
decreased $3.9 million in the quarter and $12.0 million year-to-date.
Franchise Revenues
Wendy's franchise revenues increased $4.4 million, or 7.2%, to $66.3 million in
the quarter, and increased $12.6 million, or 7.0%, to $194.6 million
year-to-date. Royalties, before reserves, increased $3.8 million, or 7.5%, to
$54.6 million in the quarter, and increased $10.6 million, or 7.3%, to $155.7
million year-to-date. This was primarily a result of an average of 168 more
Wendy's domestic franchise restaurants being open in the current quarter
compared to the prior year quarter and an average of 170 more restaurants open
year-to-date. In addition, average net sales at franchise domestic restaurants
increased 2.9% to $302,282 in the quarter and 2.7% to $872,058 year-to-date. In
local currency, Canadian Wendy's same-store franchise sales increased 3.3% in
the quarter and 3.8% year-to-date, while other international same-store
franchise sales decreased .1% in the quarter and 1.1% year-to-date. Total
Wendy's franchise restaurants open at quarter-end were 4,754 and 4,543,
respectively, in 2001 and 2000.
Cost of Sales and Restaurant Operating Costs
Wendy's cost of sales increased $16.1 million, or 7.1%, to $241.7 million in the
quarter, and $49.3 million, or 7.5%, to $705.0 million year-to-date. Of this
total, Wendy's domestic restaurant cost of sales increased 8.2% to $216.1
million in the quarter, and 8.6% to $631.5 million year-to-date. Wendy's
domestic cost of sales as a percent of Wendy's domestic retail sales, increased
1.4% in the quarter and .8% year-to-date. Domestic food costs, as a percent of
domestic retail sales, increased .9% in the quarter and .4% year-to-date,
primarily reflecting an increase in beef costs of 16.4% in the quarter and 12.8%
year-to-date, and an increase in tomato costs of 10.6% year-to-date. These costs
were partly offset by a selling price increase of 1.2% for the quarter and 1.7%
year-to-date. Domestic labor costs, as a percent of sales,
11
increased .6% in the quarter and year-to-date, reflecting an increase in the
average hourly crew rate of 3.3% in the quarter and 3.7% year-to-date, and
average sales increases insufficient to leverage labor costs.
As a percent of retail sales, Canadian Wendy's cost of sales increased 1.8% in
the quarter and .9% year-to-date, reflecting higher commodity prices. Other
international restaurants reduced cost of sales by $2.5 million in the quarter
and $7.4 million year-to-date, primarily due to the closure of the Argentina
market.
Wendy's company restaurant operating costs increased $3.6 million, or 3.8%, to
$98.7 million in the quarter, and $19.2 million, or 7.1%, to $290.7 million
year-to-date. Of this total, domestic Wendy's company restaurant operating costs
increased 6.5% to $91.3 million in the quarter, and 9.9% to $268.5 million,
year-to-date. As a percent of retail sales, domestic restaurant costs increased
.1% in the quarter and .7% for the year-to-date. The quarter reflected higher
pension costs offset by reduced insurance and performance-based bonus expense.
The year-to-date included higher pension and utility expenses.
The factors discussed above resulted in Wendy's domestic company operating
margin decreasing 1.7% to 15.1% in the quarter and 1.6% to 15.1% for the
year-to-date.
Canadian Wendy's company restaurant operating costs increased $1.4 million
year-to-date. As a percent of retail sales, Canadian Wendy's company restaurant
operating costs were 24.2% and 25.4% for third quarter and year-to-date 2001,
versus 24.9% and 25.8% for the prior year quarter and year-to-date. Other
international restaurant operating costs decreased $2.1 million in the quarter
and $6.4 million year-to-date, reflecting the closure of the Argentina market.
Operating Costs
Wendy's operating costs decreased 1.5% to $4.1 million in the quarter reflecting
a prior year rent adjustment on a surplus property lease. Year-to-date,
operating costs increased 5.8% to $11.4 million, reflecting higher percentage
rent due to higher average sales and additional rental properties.
TIM HORTONS
Retail Sales
Tim Hortons (Hortons) retail sales increased $3.3 million, or 3.8%, to $89.5
million in third quarter 2001, and $16.4 million, or 6.7%, to $263.5 million for
the year-to-date. Of this total, Canadian warehouse sales (sales of dry goods to
franchisees) increased $3.1 million, or 4.4% to $73.8 million in the quarter,
and $18.1 million, or 9.1%, to $217.1 million year-to-date. This reflected the
increase in the number of Hortons' Canadian franchised restaurants serviced and
same-store sales growth in local currency of 6.4% for the quarter and 7.7% for
the year-to-date. Retail sales in the U.S. decreased $1.2 million in the quarter
and $5.6 million year-to-date, reflecting the strategy to sell most of the
company operated restaurants to franchisees.
Franchise Revenues
Hortons franchise revenues, before reserves, increased $7.4 million, or 15.7%,
to $54.7 million in third quarter 2001, and $16.9 million, or 12.6% to $150.6
million for the year-to-date. Canadian royalties increased 10.4% to $11.0
million in the quarter, and 12.3% to $31.5 million year-to-date. Canadian rental
income from restaurants leased to franchisees increased 15.4% to $32.2 million
in the quarter, and 16.0% to $90.8 million for the year-to-date. These increases
reflected the increase in the number of Canadian franchise restaurants open and
the same-store sales growth in local currency of 6.4% for the quarter and 7.7%
for the year-to-date.
Franchise fees increased $2.1 million in the quarter, reflecting more
restaurants franchised in the current year quarter compared to the prior year.
Year-to-date, franchise fees decreased $481,000, reflecting the weakening in the
Canadian exchange rate (see Note 3). In Canadian dollars, franchise fees
increased $3.5 million in the quarter and $700,000 year-to-date.
Cost of Sales
The Hortons' Canadian warehouse cost of sales increased $1.8 million, or 3.1%,
to $58.1 million in the quarter, and increased $13.8 million, or 8.7%, to $172.0
million year-to-date. The increase in each period reflects additional sales to
12
Canadian franchisees due to the increased number of restaurants serviced and
higher average sales per restaurant. Warehouse cost of sales, as a percent of
warehouse sales, decreased to 78.6% in the third quarter 2001 from 79.6% in
2000, and decreased to 79.2% from 79.5% in the year-to-date period. The decrease
in each period reflects commodity prices and product mix. Hortons U.S. cost of
sales decreased $1.2 million in the quarter and $4.5 million year-to-date,
reflecting the strategy to franchise most of the company operated restaurants.
Operating Costs
Hortons operating costs increased $2.7 million, or 16.2%, to $19.6 million in
the quarter, and increased $4.6 million, or 9.2%, to $54.1 million year-to-date.
Canadian Hortons rent expense increased 7.2% to $7.8 million in the quarter, and
9.2% to $23.5 million year-to-date, reflecting the growth in the number of
properties being leased and then subleased to Canadian franchisees, as well as
higher percentage rent due to higher sales. Cost of equipment increased 27.6% to
$5.9 million in the quarter and .4% to $14.0 million year-to-date due to a
increase in the number of units being franchised in the current year. Costs of
operating and maintaining Canadian warehouse operations increased 13.8% to $4.6
million in the quarter, and increased 16.6% to $13.0 million for the
year-to-date.
CONSOLIDATED
General and Administrative Expenses
Company general and administrative expenses for the third quarter 2001 increased
3.1% to $54.6 million and 3.8% to $161.7 million for the year-to-date. As a
percent of revenues, costs were .3% lower in the quarter at 8.9% versus 9.2%
last year. For the year-to-date, costs were .3% lower at 9.1% versus 9.4% last
year. The dollar increase in 2001 primarily reflects an increase in salaries and
benefits, as well as legal and professional fees. In the quarter, these
increases were partly offset by reduced performance-based bonus expense.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for the quarter and year-to-date
increased over 2000 reflecting the Company's information technology initiatives
and additional restaurant development.
Other Expense
Other expense decreased $5.5 million in the year-to-date period, reflecting
higher charges incurred in the prior year for a legal reserve, executive search
charges and store closures. The year-to-date period also reflected an increase
in international reserves last year, versus a reduction in the current year.
Interest, Net
Interest income decreased $1.2 million in the quarter and $2.4 million for the
year-to-date reflecting lower overall interest income rates available in the
current economy. Interest expense was substantially the same in the current
quarter and year-to-date in comparison to the prior year.
Foreign Currency
The primary currency exposure the Company has is to the Canadian dollar. The
results of Wendy's and Tim Hortons' Canadian operations are translated into U.S.
dollars. The change in the Canadian dollar this year versus last year reduced
earnings per share by approximately $.024 for year-to-date 2001, related to
translating Canadian operations.
INTERNATIONAL CHARGES
---------------------
In the fourth quarter 2000, the Company recorded a pretax charge of $18.4
million related to the termination of operations in Argentina. This charge
included $6.8 million for asset impairment charges, $1.7 million for lease
termination costs, $3.2 million in employee-related costs, and $6.7 million in
other closure costs. At year-end 2000, $3.5 million of accrued expenses for
closure and employee costs remained, however, substantially all of these
obligations were settled by the end of the third quarter. The resolution of
these issues has not resulted in any material income impact in the year-to-date
financial statements.
13
COMPREHENSIVE INCOME
--------------------
Comprehensive income decreased $7.1 million in the quarter and increased $5.7
million year-to-date. The decrease in comprehensive income in the quarter
reflects an increase of $3.7 million in reported income offset by a decrease of
$10.9 million due to the weakening Canadian exchange rate during the current
quarter. The increase in comprehensive income year-to-date reflects an increase
of $11.9 million in reported income offset by a decrease of $6.2 million due to
the weakening in the Canadian exchange rate (see Note 3).
FINANCIAL CONDITION
-------------------
The Company's financial condition continues to be very strong at the end of the
third quarter of 2001. The long-term debt to equity and debt-to-total
capitalization ratios were 20% and 17%, respectively, at September 30, 2001.
Cash flow from operations was $236 million for the year-to-date 2001, and $209
million for the prior year. Year-to-date through September 30, 2001, cash of
$37.3 million was used to repurchase 1.6 million common shares. A total of $529
million in cash has been used to purchase 23.4 million shares since 1998.
Capital expenditures amounted to $213 million for 2001 compared with $214
million for 2000. Please refer to Note 5 for a material change in our financial
position after the third quarter. The Company borrowed $200 million, and in
addition, used $50 million of cash on hand to purchase 9.7 million shares of
common stock.
OUTLOOK
-------
The Company continues to employ its strategic initiatives as outlined in the
Financial Statements and Other Information furnished with the Company's 2001
Proxy Statement. These initiatives include leveraging the Company's core assets,
growing same-store sales, improving store-level productivity to enhance margins,
improving underperforming operations, repurchasing common shares and
implementing new technology initiatives. The Company intends to allocate
resources to improve long-term return on assets and invested capital, and to
remain focused on established operational strategies of exceeding customer
expectations, fostering a performance-driven culture, delivering a balanced
message of brand equity plus value in marketing and growing a healthy restaurant
system. New restaurant development continues to be very important. The Company
also intends to evaluate potential mergers, acquisitions, joint venture
investments, alliances, vertical integration opportunities and divestitures. The
Company's long-term goal for EPS growth continues to be in the 12% to 15% range,
excluding unusual items. The Company anticipates current year EPS will be in the
$1.64 to $1.67 range. In 2000, the Company earned $1.44, which included a $.09
charge related to the closure of the Argentina market.
The Company currently anticipates that more than 500 new Wendy's and Hortons
restaurants could be opened systemwide (both company and franchise) during 2001,
subject to the continued ability of the Company and its franchisees to complete
permitting and meet other conditions and to comply with other regulatory
requirements for the completion of stores and to obtain financing for new
restaurant development. Year-to-date 2001, there have been 309 new restaurants
opened, which is the same amount as the prior year. For the entire year 2000,
552 new restaurants opened.
Cash flow from operations, cash and investments on hand, possible asset sales,
and cash available through existing revolving credit agreements and through the
possible issuance of securities should provide for the Company's projected short
and long-term cash requirements, including cash for capital expenditures, future
acquisitions of restaurants from franchisees or other corporate purposes. As
part of its strategic initiatives, the Company took a number of actions in
October, 2001 to increase its financial flexibility to respond to potential
opportunities and cash requirements. The actions included the establishment of a
commercial paper program, increasing available lines of credit from $167 million
to $200 million and filing a shelf registration statement on Form S-3 with the
Securities and Exchange Commission to issue up to $500 million of securities.
The Company borrowed $200 million under the commercial paper program to
partially fund the purchase of 9.7 million shares described above. On November
7, 2001, the Company issued $200 million of 6.25% senior notes due November 15,
2011 and used the proceeds to repay the commercial paper. Standard & Poor's and
Moody's rate the Company's senior unsecured debt BBB+ and Baa-1, respectively.
Standard & Poor's changed its outlook from stable to negative following the 9.7
million share purchase. The Company is committed to a strong capital structure
and financial profile, and intends to maintain an investment grade rating. If
additional funds are
14
needed for mergers, acquisitions or other strategic investments, the Company
believes it could borrow additional cash and still maintain its investment grade
rating.
Long term, the Company does not have significant term debt maturities until
2005. The Company believes it will be able to pay or refinance future term debt
obligations based on its strong financial condition and sources of cash
described in the preceding paragraph.
MARKET RISK
-----------
The Company's debt is primarily denominated in U.S. dollars, at fixed interest
rates, which limits financial instruments risk. Therefore, the Company does not
currently utilize any derivatives to alter interest rate risk. Currency exposure
is predominately related to Canadian operations, since cash exposure outside
North America is primarily limited to royalties. The Canadian currency has been
reasonably stable over time, however, in recent months the Canadian dollar has
weakened which reduces the U.S. dollar benefit of Canadian operations. The
Company currently does not hedge its cash flow exposure to Canadian currency
fluctuations, however, we are monitoring the situation closely. A change of $.01
in the currency exchange rate would change U.S. dollar pretax income from
Canadian operations approximately $900,000 for the year. Also, the Company does
not hedge its exposure to currency fluctuations related to royalty collections
outside North America, because it does not believe the risk is material.
The Company purchases certain products in the normal course of business, which
are affected by commodity prices. Therefore, the Company is exposed to some
price volatility related to weather, and various other market conditions outside
the Company's control. However, the Company does employ various purchasing and
pricing contract techniques, in an effort to minimize volatility. The Company
does not generally make use of financial instruments to hedge commodity prices,
partly because of the contract pricing utilized. While volatility can occur,
which would impact profit margins, there are generally alternative suppliers
available and if the pricing problem is prolonged, the Company has some ability
to increase selling prices to offset the commodity prices.
RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
The Company adopted Financial Accounting Standard Number 133 - "Accounting for
Derivative Instruments and Hedging Activities" in the first quarter 2001. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities in the financial statements at fair
value. Currently this statement does not materially impact the Company's
financial statements.
In June 2001, Financial Accounting Standard Number 141 - "Business Combinations"
was issued. This statement requires that all business combinations initiated
after June 30, 2001 be accounted for using the purchase accounting method and
establishes specific criteria for the recognition of intangible assets
separately from goodwill. The Company will adopt the provisions of this
statement for any future business combinations.
In June 2001, Financial Accounting Standard Number 142 - "Goodwill and Other
Intangible Assets" was issued. This statement is effective for all quarters of
fiscal years beginning after December 15, 2001. This statement addresses the
accounting for goodwill and intangible assets subsequent to acquisition. The
Company is in the process of evaluating the impact of this statement on its
financial statements and will adopt the provisions of this statement in the
first quarter of fiscal year 2002.
In June 2001, Financial Accounting Standard Number 143 - "Accounting for Asset
Retirement Obligations" was issued. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. This statement
addresses accounting and reporting standards for legal obligations associated
with the retirement of tangible long-lived assets. The Company is in the process
of evaluating the impact of this statement on its financial statements and will
adopt the provisions of this statement in the first quarter of fiscal year 2003.
15
In August 2001, Financial Accounting Standard Number 144 - "Accounting for the
Impairment or Disposal of Long-Lived Assets" was issued. This statement
supersedes Financial Accounting Standard Number 121 - "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
Accounting Principles Board Opinion Number 30 - "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". FAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. This statement addresses accounting and reporting
standards for the impairment or disposal of long-lived assets. The Company is in
the process of evaluating the impact of this statement on its financial
statements and will adopt the provisions of this statement in the first quarter
of fiscal year 2002.
SAFE HARBOR STATEMENT
---------------------
Certain information contained in this Form 10-Q, particularly information
regarding future economic performance and finances, plans and objectives of
management, is forward looking. In some cases, information regarding certain
important factors that could cause actual results to differ materially from any
such forward-looking statement appears together with such statement. In
addition, the following factors, in addition to other possible factors not
listed, could affect the Company's actual results and cause such results to
differ materially from those expressed in forward-looking statements. These
factors include: competition within the quick-service restaurant industry, which
remains extremely intense, both domestically and internationally, with many
competitors pursuing heavy price discounting; changes in economic conditions;
changes in consumer perceptions of food safety; harsh weather, particularly in
the first and fourth quarters; changes in consumer tastes; labor and benefit
costs; legal claims; risks inherent to international development (including
currency fluctuations); the continued ability of the Company and its franchisees
to obtain suitable locations and financing for new restaurant development;
governmental initiatives such as minimum wage rates, taxes and possible
franchise legislation; the ability of the Company to successfully complete
transactions designed to improve its return on investment; and other factors set
forth in Exhibit 99 attached hereto.
The number of systemwide restaurants open as of September 30, 2001 and October
1, 2000 was as follows:
2001 2000
---- ----
Wendy's
-------
Company.................... 1,175 1,135
Franchise.................. 4,754 4,543
----- -----
Total Wendy's.............. 5,929 5,678
===== =====
Tim Hortons
-----------
Company.................... 97 106
Franchise.................. 1,989 1,789
----- -----
Total Hortons.............. 2,086 1,895
===== =====
Total System............... 8,015 7,573
===== =====
16
Part II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Index to Exhibits on Page 19.
(b) No report on Form 8-K was filed during the quarter ended September 30,
2001.
17
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WENDY'S INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: 11/13/01 /s/ Kerrii B. Anderson
--------- -----------------------------
Kerrii B. Anderson
Executive Vice President and
Chief Financial Officer
18
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number Description Page No.
------ ----------- --------
99 Safe Harbor Under 20 - 21
the Private Securities
Litigation Reform Act of 1995
The Company and its subsidiaries are parties to instruments with respect to
long-term debt for which securities authorized under each such instrument do not
exceed ten percent of the total assets of the Company and its subsidiaries on a
consolidated basis. Copies of these instruments will be furnished to the
Commission upon request.
19