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 MARCH 31, 2002
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.
--------------------------------------------------------------------------------
(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
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) 614-764-3100
----------------
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 May 5, 2002
------------------------------- --------------------------
Common shares, $.10 stated value 107,027,000 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
ended March 31, 2002 and April 1, 2001 3
Consolidated Condensed Balance Sheets as of March 31, 2002
and December 30, 2001 4 - 5
Consolidated Condensed Statements of Cash Flows for the
quarters ended March 31, 2002 and April 1, 2001 6
Notes to the Consolidated Condensed Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of 11 - 17
Financial Condition and Results of Operations
PART II: Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Index to Exhibits 19
Exhibit 3 20 - 40
Exhibit 99 41 - 42
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
MARCH 31, 2002 APRIL 1, 2001
-------------- -------------
REVENUES
Retail sales..................................... $493,087 $449,603
Franchise revenues............................... 119,309 105,935
-------- --------
612,396 555,538
-------- --------
COSTS AND EXPENSES
Cost of sales.................................... 314,276 288,502
Company restaurant operating
costs.......................................... 106,627 98,409
Operating costs.................................. 25,156 21,029
General and administrative
expenses....................................... 56,250 53,761
Depreciation and amortization
of property and equipment...................... 32,742 28,706
Other income..................................... (602) (531)
Interest expense................................. 10,673 7,339
Interest income.................................. (1,406) (3,103)
-------- --------
543,716 494,112
-------- --------
INCOME BEFORE INCOME TAXES........................... 68,680 61,426
INCOME TAXES......................................... 25,240 22,727
-------- --------
NET INCOME........................................... $ 43,440 $ 38,699
======== ========
BASIC EARNINGS PER COMMON SHARE...................... $.41 $.34
==== ====
DILUTED EARNINGS PER COMMON SHARE.................... $.39 $.33
==== ====
DIVIDENDS PER COMMON SHARE........................... $.06 $.06
==== ====
BASIC SHARES......................................... 106,139 114,341
======= =======
DILUTED SHARES....................................... 115,410 123,116
======= =======
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
3
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
MARCH 31, 2002 DECEMBER 30, 2001
-------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents............. $ 132,281 $ 111,121
Accounts receivable, net.............. 78,146 83,603
Notes receivable, net................. 11,670 11,295
Deferred income taxes................. 12,487 15,000
Inventories and other................. 44,451 45,334
---------- ----------
279,035 266,353
---------- ----------
PROPERTY AND EQUIPMENT.................... 2,326,150 2,290,708
Accumulated depreciation and
amortization........................ (674,921) (650,730)
---------- ----------
1,651,229 1,639,978
---------- ----------
NOTES RECEIVABLE, NET..................... 28,299 32,694
GOODWILL, NET............................. 43,691 41,214
DEFERRED INCOME TAXES..................... 32,786 36,175
OTHER ASSETS.............................. 72,049 59,629
---------- ----------
$2,107,089 $2,076,043
========== ==========
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)
MARCH 31, 2002 DECEMBER 30, 2001
-------------- -----------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $ 71,875 $ 112,245
Accrued expenses:
Salaries and wages............................ 18,580 34,014
Taxes......................................... 66,404 59,113
Insurance..................................... 42,935 40,719
Other......................................... 51,212 46,386
Current portion of long-term
obligations................................... 4,279 4,210
----------- -----------
255,285 296,687
----------- -----------
LONG-TERM OBLIGATIONS
Term debt........................................ 401,466 401,511
Capital leases................................... 50,748 49,735
----------- -----------
452,214 451,246
----------- -----------
DEFERRED INCOME TAXES................................ 77,585 82,287
OTHER LONG-TERM LIABILITIES.......................... 16,614 16,044
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:
140,085,000 and 138,452,000 shares,
respectively................................. 13,434 13,271
Capital in excess of stated value................ 507,626 467,687
Retained earnings................................ 1,414,883 1,377,840
Accumulated other comprehensive expense.......... (50,287) (48,754)
----------- -----------
1,885,656 1,810,044
Treasury stock at cost: 33,277,000 and
33,277,000 shares, respectively................. (780,265) (780,265)
----------- -----------
1,105,391 1,029,779
----------- -----------
$2,107,089 $2,076,043
=========== ===========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
5
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
QUARTER QUARTER
ENDED ENDED
MARCH 31, 2002 APRIL 1, 2001
-------------- -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES....................................... $ 73,284 $ 41,244
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from property dispositions.............. 5,795 6,840
Capital expenditures............................. (72,978) (66,012)
Acquisition of franchises........................ (746)
Principal payments on notes receivable........... 5,988 1,712
Investment in joint venture and other............ (16,272)
Other investing activities....................... (647) (4,755)
---------- ----------
Net cash used in investing activities........ (78,860) (62,215)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from employee stock
options exercised............................ 34,192 9,630
Repurchase of common stock....................... (14,942)
Principal payments on long-term
obligations.................................... (1,059) (965)
Dividends paid on common and
exchangeable shares............................ (6,397) (6,867)
---------- ----------
Net cash provided by (used in) financing
activities..................................... 26,736 (13,144)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 21,160 (34,115)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 111,121 169,718
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $132,281 $135,603
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid.................................... $4,084 $3,863
Income taxes paid................................ 14,415 20,138
Capitalized lease obligations incurred........... 2,025 1,283
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
6
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 March 31, 2002 and December 30, 2001 and the condensed results of
operations and comprehensive income (see Note 3) for the quarters ended
March 31, 2002 and April 1, 2001 and cash flows for the quarters ended
March 31, 2002 and April 1, 2001. All of these financial statements are
unaudited with the exception of the December 30, 2001 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 2002 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 3.7 million shares of common stock for the quarter
ended April 1, 2001 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
ENDED ENDED
MARCH 31, 2002 APRIL 1, 2001
-------------- -------------
(In thousands, except per share data)
Income for computation of basic earnings
per common share............................ $43,440 $38,699
Interest savings (net of income taxes) on
assumed conversions......................... 1,604 1,598
--------- ---------
Income for computation of diluted
earnings per common share................... $45,044 $40,297
======= =======
Weighted average shares for computation
of basic earnings per common share.......... 106,139 114,341
Dilutive stock options........................ 1,698 1,202
Assumed conversions........................... 7,573 7,573
--------- ---------
Weighted average shares for computation
of diluted earnings per common share........ 115,410 123,116
========= =========
Basic earnings per common share............... $.41 $.34
==== ====
Diluted earnings per common share............. $.39 $.33
==== ====
7
NOTE 3. CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------------------------
The components of other comprehensive expense and total comprehensive income are
shown below:
QUARTER QUARTER
ENDED ENDED
MARCH 31, 2002 APRIL 1, 2001
-------------- -------------
(In thousands)
Net income................................... $43,440 $38,699
Other comprehensive expense:
Translation adjustments...................... (1,533) (18,861)
-------- --------
Comprehensive income......................... $41,907 $19,838
======== ========
The translation adjustments change of $17.3 million in the current quarter
reflects a relatively stable Canadian dollar in first quarter 2002 versus a
weakening Canadian dollar during first quarter 2001.
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 MARCH 31, 2002
----------------------------
Revenues $469,712 $142,684 $612,396
Income before income taxes 72,521 31,496 104,017
Capital expenditures 53,320 19,658 72,978
Goodwill * 43,074 617 43,691
QUARTER ENDED APRIL 1, 2001
---------------------------
Revenues $424,949 $130,589 $555,538
Income before income taxes 62,520 28,340 90,860
Capital expenditures 48,062 17,950 66,012
Goodwill 42,974 - 42,974
* Reflects the transfer of intangibles into goodwill as a result of the
adoption of Statement of Financial Accounting Standards No. 142.
A reconciliation of reportable segment income before income taxes to
consolidated income before income taxes follows:
QUARTER QUARTER
ENDED ENDED
MARCH 31, 2002 APRIL 1, 2001
-------------- -------------
(In thousands)
Income before income taxes....................... $104,017 $90,860
Corporate charges................................ (35,337) (29,434)
-------- -------
Consolidated income before income taxes.......... $ 68,680 $61,426
======== =======
Corporate charges include certain overhead costs and net interest expense.
NOTE 5. INTANGIBLE ASSETS
-------------------------
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (FAS 142) effective December 31, 2001.
FAS 142 provides the accounting guidelines for goodwill and other intangibles.
Under FAS 142, the amortization of goodwill and other indefinite-lived
intangibles is prohibited and these assets must be tested for impairment
annually (or in interim periods if events indicate possible impairment).
8
In accordance with FAS 142, the Company reclassified approximately $2.5 million
of net intangibles into goodwill and has ceased amortizing goodwill effective
December 31, 2001. The Company has determined that no other intangibles have an
indefinite life, and it will continue to amortize these remaining intangibles
over their current lives.
During the first quarter 2002, the Company assigned goodwill to reporting units
and performed the first step of the transitional impairment tests for goodwill.
The first step requires the Company to compare the fair value of each reporting
unit as measured by discounted future cash flows, to the carrying value, to
determine if there is an indication that a potential impairment may exist. There
is no indication of impairment and, therefore no impairment write-off is
required upon adoption of FAS 142. There were no changes to goodwill as a result
of acquisitions or disposals during the current quarter.
The table below presents amortized and unamortized intangible assets as of
March 31, 2002 and December 30, 2001 (in thousands):
MARCH 31, 2002 DECEMBER 30, 2001
-------------- -----------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
----------------------------------------------- ----------------------------------------------
Amortized intangible assets:
Patents and trademarks $10,927 ($1,535) $9,392 $10,939 ($1,329) $9,610
Purchase options 7,500 (3,457) 4,043 7,500 (3,287) 4,213
Other 1,946 (308) 1,638 6,900 (2,552) 4,348
---------- ---------
$15,073 $18,171
========== =========
Unamortized intangible assets:
Goodwill $43,691 $41,214
========== =========
Total intangibles amortization expense was $480,000 for the quarter ended
March 31, 2002, and the estimated annual intangibles amortization expense for
each year through 2006 is $1.9 million.
In accordance with FAS 142, the quarter ended April 1, 2001 has not been
restated. The table below presents a reconciliation of net income, basic
earnings per share and diluted earnings per share as if FAS 142 had been adopted
for the quarter ended April 1, 2001. Basic and diluted earnings per share for
the quarter ended April 1, 2001 are unchanged.
QUARTER QUARTER
ENDED ENDED
MARCH 31, 2002 APRIL 1, 2001
---------------- ---------------
(in thousands, except
per share amounts)
Net income $43,440 $38,699
Goodwill amortization (net of tax) - 636
---------------- ---------------
Adjusted net income $43,440 $39,335
================ ===============
Basic earnings per share $0.41 $0.34
Goodwill amortization (net of tax) - -
---------------- ---------------
Adjusted basic earnings per share $0.41 $0.34
================ ===============
Diluted earnings per share $0.39 $0.33
Goodwill amortization (net of tax) - -
---------------- ---------------
Adjusted diluted earnings per share $0.39 $0.33
================ ===============
9
NOTE 6. RECENT ACCOUNTING STANDARDS
-----------------------------------
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" was issued in June 2001. This statement address
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 2003.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" was issued in August 2001. This
statement supersedes Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
Accounting Principles Board Opinion No. 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". This
statement addresses accounting and reporting standards for the impairment or
disposal of long-lived assets. This statement was adopted in the first quarter
2002 and currently does not impact the Company's financial statements.
Statement of Financial Accounting Standards (FAS) No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" was issued in April, 2002. This statement rescinds FAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", and an amendment of
that Statement, FAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". This Statement also rescinds FAS No. 44, "Accounting
for Intangible Assets of Motor Carriers". This Statement amends FAS No. 13,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions of this statement related to the rescission of FAS No. 4 will be
applied in fiscal years beginning after May 15, 2002. 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.
NOTE 7. INVESTMENT IN JOINT VENTURE AND OTHER
---------------------------------------------
In 2001, the Company formed a joint venture between Hortons and IAWS
Group/Cuisine de France to build a par-baked goods manufacturing facility in
Canada. The Company has committed to invest $35.4 million in this joint venture,
of which $14.1 million was paid in 2001 and $7.3 million was paid in the first
quarter 2002. On February 28, 2002, the Company finalized an investment of $9
million for a 45% minority interest in Cafe Express, a fast-casual restaurant
pioneer. Cafe Express currently operates 13 restaurants in Houston, Dallas and
Phoenix. The Company is a guarantor on a revolving credit facility for Cafe
Express up to $3 million. The Company is accounting for both of these
investments using the equity method.
NOTE 8. SUBSEQUENT EVENT
------------------------
On May 1, 2002, the Company announced that its Board of Directors had authorized
the Company's management to call for redemption of its outstanding $2.50 Term
Convertible Securities, Series A ("TECONS") issued in 1996 by Wendy's Financing
I, a statutory business trust owned by the Company. As of March 31, 2002, there
were $200 million in TECONS outstanding. The Company announced the call for
redemption on May 9, 2002. The redemption date is June 10, 2002, with a
redemption price of 102.5% of the principal amount, plus accrued and unpaid
distributions. The TECONS are convertible into common shares of the Company at
any time prior to the close of business on June 7, 2002 at the conversion rate
of 1.8932 common shares for each TECONS, which is equal to a conversion price of
$26.41 per common share. The Company expects to fund the redemption of any
TECONS not converted to equity from its cash and investments on hand.
Management expects several positive effects if all of the securities are
converted to equity:
- There would be no negative impact on diluted earnings per share as the
shares are already included in the Company's diluted EPS calculation.
- There would be an increase in common shares outstanding by 7.6 million
shares.
- There would be an increase in the Company's market capitalization by
approximately $280 million to $290 million, based on recent market prices.
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 18.2% to $.39 in the
first quarter 2002. In the quarter, consolidated revenues, which do not include
sales in franchise restaurants, increased 10.2% to $612 million. Systemwide
sales, which includes sales of both franchise and company operated restaurants,
increased 11.7% to $2.1 billion. In the current quarter versus the prior year,
same-store sales increased for Wendy's and Tim Hortons restaurants, both in the
U.S. and Canada.
WENDY'S
RETAIL SALES
Wendy's retail sales for the first quarter 2002 increased $40.0 million, or
10.9%, to $405.5 million. Of this total, domestic Wendy's retail sales increased
11.2% to $366.6 million in the quarter. For domestic company operated Wendy's,
average restaurant sales increased 5.1% to $332,876 per restaurant in the
quarter. Average same-store sales in Wendy's domestic company restaurants
increased 5.6% in the quarter. The average number of transactions in domestic
company operated Wendy's increased 2.7% in the current quarter versus the prior
year quarter, while the average check increased 2.9%. In addition, domestic
selling prices increased 1.2% in the quarter. In the first quarter, the average
number of Wendy's company operated domestic restaurants open increased by 61
compared to the prior year.
Canadian Wendy's retail sales increased $1.9 million, or 7.5%, in the first
quarter. Canadian Wendy's average sales for company operated restaurants, in
local currency, increased 1.1% in the first quarter and same-store sales
increased 3.4%. The average number of company stores open increased by thirteen
compared to the prior year. Nearly all international company operated
restaurants outside of Canada were shut down with the closures in Argentina in
2000.
FRANCHISE REVENUES
Wendy's franchise revenues, before reserves for uncollectible amounts, increased
$4.8 million, or 8.1%, to $64.3 million in the quarter. Royalties increased $5.9
million, or 12.4%, to $53.7 million in the quarter. Average net sales at
franchise domestic restaurants increased 9.1% to $294,906 in the quarter and
average same-store sales at franchise domestic restaurants increased 8.1%. In
addition, an average of 155 more Wendy's domestic franchise restaurants were
open in the current quarter compared to the prior year quarter. In local
currency, Canadian Wendy's same-store franchise sales increased 5.7% in the
quarter, while other international same-store franchise sales increased .5% in
the quarter. Total Wendy's franchise restaurants open at quarter-end were 4,828
and 4,666, respectively, in 2002 and 2001.
COST OF SALES AND RESTAURANT OPERATING COSTS
Wendy's cost of sales increased $22.3 million, or 10.0%, to $245.1 million in
the quarter. Of this total, Wendy's domestic restaurant cost of sales increased
10.1% to $220.5 million. Wendy's domestic cost of sales as a percent of Wendy's
domestic retail sales, decreased .6% in the quarter. Domestic food costs, as a
percent of domestic retail sales, decreased .5% in the quarter, reflecting a
decrease in beef, chicken and tomato costs of 5.2%, 2.6% and 8.4%, respectively,
and the 1.2% selling price increase initiated in 2001. Domestic labor costs, as
a percent of sales, decreased .2% in the quarter, reflecting higher average
sales. The average crew wage rate increased 2.2% in the quarter.
Wendy's company restaurant operating costs increased $8.6 million, or 9.2%, to
$102.5 million in the quarter. Of this total, domestic Wendy's company
restaurant operating costs increased 9.7% to $95.0 million in the quarter. As a
percent of retail sales, domestic restaurant costs decreased .4% in the quarter.
The quarter reflected lower utility costs and the leverage benefit of higher
average sales, partly offset by higher performance-based bonus expense.
The factors discussed above resulted in Wendy's domestic company operating
margin increasing 1.0% to 14.8% in the quarter.
11
As a percent of retail sales, Canadian Wendy's cost of sales increased 1.1% in
the quarter, reflecting higher labor costs. Average wage rates increased 4.0% in
the quarter.
Canadian Wendy's company restaurant operating costs increased $258,000,
reflecting growth of the business. Nearly all international company operated
restaurants outside of Canada were shut down with the closures in Argentina at
year-end 2000.
OPERATING COSTS
Wendy's operating costs increased 19.8% to $4.4 million in the quarter,
reflecting higher percentage rent due to higher average sales. Operating costs
also increased reflecting the opening of a second bakery in the second half of
2001.
TIM HORTONS
RETAIL SALES
Tim Hortons (Hortons) retail sales increased $3.5 million, or 4.2%, to $87.6
million in first quarter 2002. Of this total, Canadian warehouse sales (sales of
dry goods to franchisees) increased $5.4 million, or 7.9% to $74.3 million in
the quarter. This reflected the increase in the number of Hortons' Canadian
franchised restaurants serviced and same-store sales growth in local currency of
7.9% for the quarter. Retail sales in the U.S. were $8.3 million in the quarter,
down slightly from the prior year, reflecting fewer company operated
restaurants.
FRANCHISE REVENUES
Hortons franchise revenues, before reserves for uncollectible amounts, increased
$8.6 million, or 18.5%, to $55.1 million in first quarter 2002. Canadian
royalties increased 11.2% to $10.9 million in the quarter. This reflected
same-store sales increases in local currency of 7.9%, and 161 additional
franchise stores. Canadian rental income from restaurants leased to franchisees
increased 14.8% to $32.9 million in the quarter. These increases reflected the
increase in the number of Canadian restaurants leased to franchisees and the
high average sales (rent is generally charged as a percent of sales). Franchise
fees were $8.7 million in the current year versus $6.5 million last year.
COST OF SALES
The Hortons' Canadian warehouse cost of sales increased $4.4 million, or 8.0%,
to $58.8 million in the quarter. The increase in each period reflects additional
sales to 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, increased slightly to 79.2% in the first quarter
2002 from 79.1% in 2001. Hortons U.S. cost of sales were $6.4 million in the
quarter, up slightly from the prior year.
OPERATING COSTS
Hortons operating costs increased $3.4 million, or 19.6%, to $20.8 million in
the quarter. Canadian Hortons rent expense increased 3.5% to $7.9 million in the
quarter, 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 and other franchise costs were virtually
unchanged at $5.1 million. Costs of operating and maintaining Canadian warehouse
operations increased 25.1% to $5.3 million in the quarter. Hortons U.S. had an
increase of $1.9 million in operating costs for the quarter, reflecting the
franchising of eight restaurants to franchisees.
CONSOLIDATED
GENERAL AND ADMINISTRATIVE EXPENSES
Company general and administrative expenses for the first quarter 2002 increased
4.6% to $56.3 million. As a percent of revenues, costs were .5% lower in the
quarter at 9.2% versus 9.7% last year. The dollar increase in 2002 primarily
reflects an increase in salaries and benefits, including performance-based bonus
costs.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses for the quarter increased over 2001
reflecting the Company's information technology initiatives and additional
restaurant development.
12
INTEREST EXPENSE
Interest expense increased $3.3 million in the quarter reflecting $200 million
of 6.25% senior notes issued by the Company in the fourth quarter of 2001.
INTEREST INCOME
Interest income decreased $1.7 million in the quarter reflecting the low
interest income rates available in the current interest rate environment.
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 two-thirds of one cent for first quarter,
related to translating Canadian operations.
COMPREHENSIVE INCOME
--------------------
Comprehensive income increased $22.1 million in the current quarter compared to
the prior year quarter. Comprehensive income includes net income, which
increased $4.7 million, and translation adjustments caused by changes in foreign
currency. The translation adjustments changed $17.3 million due to a relatively
stable Canadian dollar during the current quarter versus a weakening Canadian
dollar during the prior year quarter (see Note 3).
FINANCIAL CONDITION
-------------------
The Company continues to maintain a strong balance sheet to support system
growth and financial flexibility. The long-term debt-to-equity and debt-to-total
capitalization ratios were 41% and 29%, respectively, at March 31, 2002,
reflecting the $200 million in senior notes issued in fourth quarter 2001
(company-obligated mandatorily redeemable preferred securities are excluded from
debt for these calculations). Standard & Poor's and Moody's rate the Company's
senior unsecured debt BBB+ and Baa-1, respectively. Cash flow from operations
was $73 million for the current quarter, and $41 million for the prior year
quarter. Capital expenditures amounted to $73 million for 2002 compared with $66
million for 2001.
In 2001, the Company formed a joint venture between Hortons and IAWS
Group/Cuisine de France to build a par-baked goods manufacturing facility in
Canada. The Company has committed to invest $35.4 million in this joint venture,
of which $14.1 million was paid in 2001 and $7.3 million was paid in first
quarter 2002. On February 28, 2002, the Company finalized an investment of $9
million for a 45% minority interest in Cafe Express, a fast-casual restaurant
pioneer. Cafe Express currently operates 13 restaurants in Houston, Dallas and
Phoenix. The Company is a guarantor on a revolving credit facility for Cafe
Express up to $3 million. The Company is accounting for both of these
investments using the equity method.
On May 1, 2002, the Company announced that its Board of Directors had authorized
the Company's management to call for redemption of its outstanding $2.50 Term
Convertible Securities, Series A ("TECONS") issued in 1996 by Wendy's Financing
I, a statutory business trust owned by the Company. As of March 31, 2002, there
were $200 million in TECONS outstanding. The Company announced the call for
redemption on May 9, 2002. The redemption date is June 10, 2002, with a
redemption price of 102.5% of the principal amount, plus accrued and unpaid
distributions. The TECONS are convertible into common shares of the Company at
any time prior to the close of business on June 7, 2002 at the conversion rate
of 1.8932 common shares for each TECONS, which is equal to a conversion price of
$26.41 per common share. The Company expects to fund the redemption of any
TECONS not converted to equity from its cash and investments on hand.
OUTLOOK
-------
The Company continues to employ its strategic initiatives as outlined in the
Financial Statements and Other Information furnished with the Company's 2002
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, developing profitable new restaurants 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 long-term
13
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 that could add to the Company's
long-term earnings growth. 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 $1.85 to $1.90 range.
The Company currently anticipates that between 515-540 new Wendy's and Hortons
restaurants will be opened systemwide (both company and franchise) during 2002,
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. In the first quarter, 71 new restaurants opened, versus
92 new restaurant openings in the prior year quarter.
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-term and long-term cash requirements, including cash for capital
expenditures, future acquisitions of restaurants from franchisees or other
corporate purposes. The Company is committed to a strong capital structure and
financial profile, and intends to maintain an investment grade rating. If
additional funds are needed for mergers, acquisitions or other strategic
investments, the Company believes it could borrow additional cash and still
maintain its investment grade rating. In the event the Company's rating
declines, the Company may incur an increase in borrowing costs. If the decline
in the rating is significant, it is possible that the Company would not be able
to borrow on acceptable terms. Factors that could be significant to the
determination of the Company's credit ratings include sales and cost trends,
margins at Wendy's U.S. company restaurants, the Company's cash position, cash
flow, capital expenditures and capitalization, and stability of earnings.
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. As described in Note 8 to the Company's
Consolidated Financial Statements, on May 1, 2002, the Company announced that
its Board of Directors had authorized the Company's management to call for
redemption of its outstanding $2.50 Term Convertible Securities, Series A
("TECONS"). As of March 31, 2002, there were $200 million in TECONS outstanding.
The Company announced for the call for redemption on May 9, 2002. Management
expects that the majority of the TECONS will be converted to the Company's stock
and therefore does not anticipate a significant cash outlay.
Management expects several positive effects if all of the securities are
converted to equity:
- There would be no negative impact on diluted earnings per share as the
shares are already included in the Company's diluted EPS calculation.
- There would be an increase in common shares outstanding by 7.6 million
shares.
- There would be an increase in the Company's market capitalization by
approximately $280 million to $290 million, based on recent market prices.
MARKET RISK
-----------
The Company's debt is primarily denominated in U.S. dollars, at fixed interest
rates, which limits interest rate risk on financial instruments. Therefore, the
Company does not currently utilize any derivatives to alter interest rate risk.
Currency exposure is predominately related to Canadian operations, since
exposure outside North America is limited to royalties. The Company has cash
flow exposure from Tim Hortons and Wendy's operations in Canada. The Canadian
currency has been reasonably stable over time, however, in recent years the
Canadian dollar has weakened which reduces the U.S. benefit of Canadian
operations. While the Company monitors the situation, it does not currently
hedge its exposure to Canadian currency fluctuations. At the current level of
operating income generated from Canada, if the Canadian currency rate changes
one penny in the quarter, the impact on the Company for the quarter would be
less than $200,000. At current royalty levels outside of North America, if all
foreign currencies moved 10% during each royalty collection period in the same
direction, at the same time, the quarter impact would be approximately $250,000.
Therefore,
14
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.
THE APPLICATION OF CRITICAL ACCOUNTING POLICIES
-----------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
assumptions and estimates that can have a material impact on the results of
operations of the Company. Sales recognition at company operated restaurants is
straightforward as customers pay for products at the time of sale, and inventory
turns over very quickly, with key items counted daily and a complete food
inventory taken weekly. Payments to vendors for products sold in the restaurants
are generally settled within 14 days. The earnings reporting process is covered
by the Company's system of internal controls, and generally does not require
significant management estimates and judgments. However, estimates and judgments
are inherent in the calculations of royalty and other franchise related revenue
collections, legal obligations, pension and other post-retirement benefits,
income taxes, insurance liabilities, various other commitments and contingencies
and the estimation of the useful lives of fixed assets and other long-lived
assets. While management applies its judgment based on assumptions believed to
be reasonable under the circumstances, actual results could vary from these
assumptions. It is possible that materially different amounts would be reported
using different assumptions. This discussion of critical accounting policies is
substantially the same as set forth in the Financial Statements and Other
Information furnished with the Company's Proxy Statement for the 2002 Annual
Meeting of Shareholders, which was incorporated by reference into the Company's
most recent Form 10-K.
The Company collects royalties, and in some cases rent, from franchisees and
Hortons collects distribution revenues from Canadian franchisees. The Company
provides for estimated losses for revenues that are not likely to be collected.
Although the Company enjoys a good relationship with franchisees, and collection
rates are currently very high, if average sales or the financial health of
franchisees were to deteriorate, the Company might have to increase reserves
against collection of franchise revenues.
The Company is self-insured for most workers' compensation, health care claims,
general liability and automotive liability losses. The Company records its
insurance liabilities based on historical and industry trends, which are
continually monitored, and accruals are adjusted when warranted by changing
circumstances. Outside actuaries are used to assist in estimating casualty
insurance obligations. Since there are many estimates and assumptions involved
in recording insurance liabilities, differences between actual future events and
prior estimates and assumptions could result in adjustments to these
liabilities.
Pension and other retirement benefits, including all relevant assumptions
required by generally accepted accounting principles, are evaluated each year
with the oversight of the Company's retirement committee. Due to the technical
nature of retirement accounting, outside actuaries are used to provide
assistance in calculating the estimated future obligations. Since there are many
estimates and assumptions involved in retirement benefits, differences between
actual future events and prior estimates and assumptions could result in
adjustments to pension expenses and obligations.
In the normal course of business the Company must make continuing estimates of
potential future legal obligations and liabilities, which requires the use of
management's judgment on the outcome of various issues. Management may also use
outside legal advice to assist in the estimating process. However, the ultimate
outcome of various legal issues could be different than management estimates,
and adjustments to income could be required.
The Company records income tax liabilities utilizing known obligations and
estimates of potential obligations. A deferred tax asset or liability is
recognized whenever there are future tax effects from existing temporary
differences and operating loss and tax credit carryforwards. The Company records
a valuation allowance to reduce deferred tax assets to
15
the balance that is more likely than not to be realized. Management must make
estimates and judgments on future taxable income, considering feasible tax
planning strategies and taking into account existing facts and circumstances, to
determine the proper valuation allowance. When the Company determines that
deferred tax assets could be realized in greater or less amounts than recorded,
the asset balance and income statement reflects the change in the period such
determination is made. Due to changes in facts and circumstances and the
estimates and judgments that are involved in determining the proper valuation
allowance, differences between actual future events and prior estimates and
judgments could result in adjustments to this valuation allowance.
Depreciation and amortization are recognized using the straight-line method in
amounts adequate to amortize costs over the following estimated useful lives:
buildings, up to 40 years; leasehold improvements, up to 25 years; restaurant
equipment, up to 15 years; other equipment, up to 10 years; and property under
capital leases, the primary lease term. The Company estimates useful lives on
buildings and equipment based on historical data and industry trends. Long-lived
assets are grouped into operating markets and tested for impairment whenever an
event occurs that indicates that an impairment may exist. The Company tests for
impairment using the cash flows of the operating markets. A significant
deterioration in the cash flows of an operating market or other circumstances
may trigger impairment testing. The Company capitalizes certain internally
developed software costs which are amortized over a ten-year period. The Company
monitors its capitalization and amortization policies to ensure they remain
appropriate. Please refer to Note 5 to the Company's Consolidated Financial
Statements for disclosures regarding the Company's accounting policy regarding
the testing of impairment on goodwill.
RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
The Company adopted Statement of Financial Accounting Standards (FAS) No. 142 in
first quarter 2002. In accordance with FAS 142, the Company reclassified
approximately $2.5 million of net intangibles into goodwill at year-end 2001 and
the Company is no longer recording amortization on goodwill effective December
31, 2001. The Company has determined that its goodwill is not impaired. Please
refer to Note 5 to the Company's Consolidated Financial Statements for more
detailed disclosures concerning FAS 142.
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" was issued in June 2001. This statement address
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 2003.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" was issued in August 2001. This
statement supersedes Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
Accounting Principles Board Opinion No. 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". This
statement addresses accounting and reporting standards for the impairment or
disposal of long-lived assets. This statement was adopted in first quarter 2002
and currently, does not materially impact the Company's financial statements.
Statement of Financial Accounting Standards (FAS) No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" was issued in April, 2002. This statement rescinds FAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", and an amendment of
that Statement, FAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". This Statement also rescinds FAS No. 44, "Accounting
for Intangible Assets of Motor Carriers". This Statement amends FAS No. 13,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions of this statement related to the rescission of FAS No. 4 will be
applied in fiscal years beginning after May 15, 2002. 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.
16
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 March 31, 2002 and April 1, 2001
was as follows:
2002 2001
---- ----
Wendy's
-------
Company............................... 1,236 1,162
Franchise............................. 4,828 4,666
----- -----
Total Wendy's......................... 6,064 5,828
===== =====
Tim Hortons
-----------
Company............................... 84 105
Franchise............................. 2,101 1,912
----- -----
Total Tim Hortons..................... 2,185 2,017
===== =====
Total System.......................... 8,249 7,845
===== =====
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 March 31, 2002.
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: 5/14/02 /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.
------ ----------- --------
3 New Regulations, as amended 20 - 40
99 Safe Harbor Under 41 - 42
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