form10q_11-09.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(X)
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 27, 2009
OR
( )
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ______________ to _______________
Commission
file number: 1-2207
WENDY’S/ARBY’S GROUP,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
38-0471180
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
|
|
|
1155
Perimeter Center West, Atlanta, GA
|
|
30338
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
(678)
514-4100
|
|
|
(Registrant’s
telephone number, including area code)
|
|
|
|
|
|
|
|
|
(Former
name, former address and former fiscal year, if changed since
last report)
|
|
|
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer, large accelerated filer, and smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [
] Accelerated
filer [ X
]
Non-accelerated
filer [ ] Smaller
reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [ ] No [X]
There
were 463,003,194
shares of the registrant’s Common Stock outstanding as of October 30,
2009.
PART
I. FINANCIAL INFORMATION
Item 1. Financial
Statements.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
Thousands)
|
|
September
27,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
644,646 |
|
|
$ |
90,090 |
|
Restricted
cash equivalents
|
|
|
986 |
|
|
|
20,792 |
|
Accounts
and notes receivable
|
|
|
86,870 |
|
|
|
97,258 |
|
Inventories
|
|
|
21,991 |
|
|
|
24,646 |
|
Prepaid
expenses and other current assets
|
|
|
38,911 |
|
|
|
28,990 |
|
Deferred
income tax benefit
|
|
|
45,333 |
|
|
|
37,923 |
|
Advertising
fund restricted assets
|
|
|
81,622 |
|
|
|
81,139 |
|
Total
current assets
|
|
|
920,359 |
|
|
|
380,838 |
|
Restricted
cash equivalents
|
|
|
6,732 |
|
|
|
34,032 |
|
Notes
receivable
|
|
|
34,080 |
|
|
|
34,608 |
|
Investments
|
|
|
110,121 |
|
|
|
133,052 |
|
Properties
|
|
|
1,667,384 |
|
|
|
1,770,372 |
|
Goodwill
|
|
|
878,322 |
|
|
|
853,775 |
|
Other
intangible assets
|
|
|
1,398,530 |
|
|
|
1,411,473 |
|
Deferred
costs and other assets
|
|
|
52,778 |
|
|
|
27,470 |
|
Total
assets
|
|
$ |
5,068,306 |
|
|
$ |
4,645,620 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
17,489 |
|
|
$ |
30,426 |
|
Accounts
payable
|
|
|
88,038 |
|
|
|
139,340 |
|
Accrued
expenses and other current liabilities
|
|
|
267,766 |
|
|
|
247,334 |
|
Advertising
fund restricted liabilities
|
|
|
81,622 |
|
|
|
81,139 |
|
Liabilities
related to discontinued operations
|
|
|
3,539 |
|
|
|
4,250 |
|
Total
current liabilities
|
|
|
458,454 |
|
|
|
502,489 |
|
Long-term
debt
|
|
|
1,507,857 |
|
|
|
1,081,151 |
|
Deferred
income
|
|
|
29,367 |
|
|
|
16,859 |
|
Deferred
income taxes
|
|
|
496,237 |
|
|
|
475,243 |
|
Other
liabilities
|
|
|
176,885 |
|
|
|
186,433 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
47,148 |
|
|
|
47,042 |
|
Additional
paid-in capital
|
|
|
2,757,197 |
|
|
|
2,753,141 |
|
Accumulated
deficit
|
|
|
(359,983 |
) |
|
|
(357,541 |
) |
Common
stock held in treasury
|
|
|
(31,946 |
) |
|
|
(15,944 |
) |
Accumulated
other comprehensive loss
|
|
|
(12,910 |
) |
|
|
(43,253 |
) |
|
|
|
2,399,506 |
|
|
|
2,383,445 |
|
Total
liabilities and equity
|
|
$ |
5,068,306 |
|
|
$ |
4,645,620 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
Thousands Except Per Share Amounts)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
|
September
28,
|
|
|
September
27,
|
|
|
September
28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
806,038 |
|
|
$ |
287,641 |
|
|
$ |
2,395,476 |
|
|
$ |
860,560 |
|
Franchise
revenues
|
|
|
97,183 |
|
|
|
22,730 |
|
|
|
284,416 |
|
|
|
65,679 |
|
|
|
|
903,221 |
|
|
|
310,371 |
|
|
|
2,679,892 |
|
|
|
926,239 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
684,071 |
|
|
|
239,880 |
|
|
|
2,046,475 |
|
|
|
718,317 |
|
General
and administrative
|
|
|
97,909 |
|
|
|
36,075 |
|
|
|
320,533 |
|
|
|
123,108 |
|
Depreciation
and amortization
|
|
|
47,020 |
|
|
|
16,497 |
|
|
|
143,369 |
|
|
|
48,766 |
|
Impairment
of long-lived assets
|
|
|
15,528 |
|
|
|
14,204 |
|
|
|
31,108 |
|
|
|
15,621 |
|
Facilities
relocation and corporate restructuring
|
|
|
1,725 |
|
|
|
(82 |
) |
|
|
8,899 |
|
|
|
812 |
|
Other
operating expense (income), net
|
|
|
146 |
|
|
|
- |
|
|
|
2,245 |
|
|
|
(487 |
) |
|
|
|
846,399 |
|
|
|
306,574 |
|
|
|
2,552,629 |
|
|
|
906,137 |
|
Operating
profit
|
|
|
56,822 |
|
|
|
3,797 |
|
|
|
127,263 |
|
|
|
20,102 |
|
Interest
expense
|
|
|
(36,457 |
) |
|
|
(13,585 |
) |
|
|
(89,671 |
) |
|
|
(41,020 |
) |
Investment
income (expense), net
|
|
|
737 |
|
|
|
6,724 |
|
|
|
(3,850 |
) |
|
|
3,189 |
|
Other
than temporary losses on investments
|
|
|
- |
|
|
|
(8,100 |
) |
|
|
(3,916 |
) |
|
|
(79,686 |
) |
Other
income (expense), net
|
|
|
1,319 |
|
|
|
736 |
|
|
|
303 |
|
|
|
(2,619 |
) |
Income
(loss) from continuing operations before income taxes
|
|
|
22,421 |
|
|
|
(10,428 |
) |
|
|
30,129 |
|
|
|
(100,034 |
) |
(Provision
for) benefit from income taxes
|
|
|
(8,155 |
) |
|
|
(2,938 |
) |
|
|
(11,895 |
) |
|
|
12,292 |
|
Income
(loss) from continuing operations
|
|
|
14,266 |
|
|
|
(13,366 |
) |
|
|
18,234 |
|
|
|
(87,742 |
) |
Income
from discontinued operations, net of income taxes
|
|
|
422 |
|
|
|
1,219 |
|
|
|
422 |
|
|
|
1,219 |
|
Net
income (loss)
|
|
$ |
14,688 |
|
|
$ |
(12,147 |
) |
|
$ |
18,656 |
|
|
$ |
(86,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (A)
|
|
$ |
.03 |
|
|
$ |
(.14 |
) |
|
$ |
.04 |
|
|
$ |
(.95 |
) |
Class
B common stock
|
|
|
N/A |
|
|
|
(.14 |
) |
|
|
N/A |
|
|
|
(.95 |
) |
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (A)
|
|
$ |
- |
|
|
$ |
.01 |
|
|
$ |
- |
|
|
$ |
.01 |
|
Class
B common stock
|
|
|
N/A |
|
|
|
.01 |
|
|
|
N/A |
|
|
|
.01 |
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (A)
|
|
$ |
.03 |
|
|
$ |
(.13 |
) |
|
$ |
.04 |
|
|
$ |
(.94 |
) |
Class
B common stock
|
|
|
N/A |
|
|
|
(.13 |
) |
|
|
N/A |
|
|
|
(.94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (A)
|
|
$ |
.015 |
|
|
$ |
.08 |
|
|
$ |
.045 |
|
|
$ |
.24 |
|
Class
B common stock
|
|
|
N/A |
|
|
|
.08 |
|
|
|
N/A |
|
|
|
.26 |
|
______________
|
(A)
|
In connection with the May 28,
2009 amendment and restatement of our Certificate of Incorporation, our
former Class A common stock is now referred to as Common
Stock.
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
Thousands)
|
Nine
Months Ended |
|
|
September
27,
|
|
|
September
28,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
Cash
flows from continuing operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
18,656 |
|
|
$ |
(86,523 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by continuing
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
143,369 |
|
|
|
48,766 |
|
Impairment
of long-lived assets
|
|
|
31,108 |
|
|
|
15,621 |
|
Write-off
and amortization of deferred financing costs
|
|
|
13,915 |
|
|
|
7,281 |
|
Net
receipt of deferred vendor incentive
|
|
|
13,016 |
|
|
|
3,743 |
|
Share-based
compensation provision
|
|
|
11,654 |
|
|
|
3,932 |
|
Non-cash
rent expense
|
|
|
9,907 |
|
|
|
(139 |
) |
Distributions
received from joint venture
|
|
|
7,106 |
|
|
|
- |
|
Non-cash
operating investment adjustments, net (see below)
|
|
|
2,673 |
|
|
|
78,259 |
|
Deferred
income tax benefit, net
|
|
|
(300 |
) |
|
|
(13,466 |
) |
Income
from discontinued operations
|
|
|
(422 |
) |
|
|
(1,219 |
) |
Other,
net
|
|
|
1,756 |
|
|
|
2,245 |
|
Changes
in operating assets and liabilities, net
|
|
|
(1,137 |
) |
|
|
(16,044 |
) |
Net
cash provided by continuing operating activities
|
|
|
251,301 |
|
|
|
42,456 |
|
Cash
flows from continuing investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(65,280 |
) |
|
|
(58,401 |
) |
Investment
activities, net (see below)
|
|
|
36,756 |
|
|
|
34,205 |
|
Proceeds
from dispositions
|
|
|
9,386 |
|
|
|
690 |
|
Cost
of Wendy’s Merger
|
|
|
- |
|
|
|
(7,543 |
) |
Cost
of acquisitions, less cash acquired
|
|
|
(664 |
) |
|
|
(9,540 |
) |
Other,
net
|
|
|
2,968 |
|
|
|
(391 |
) |
Net
cash used in continuing investing activities
|
|
|
(16,834 |
) |
|
|
(40,980 |
) |
Cash
flows from continuing financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
556,006 |
|
|
|
53,668 |
|
Repayments
of long-term debt
|
|
|
(154,427 |
) |
|
|
(89,313 |
) |
Deferred
financing costs
|
|
|
(37,976 |
) |
|
|
- |
|
Repurchases
of common stock
|
|
|
(25,244 |
) |
|
|
- |
|
Dividends
|
|
|
(21,088 |
) |
|
|
(16,101 |
) |
Other,
net
|
|
|
1,685 |
|
|
|
(1,144 |
) |
Net
cash provided by (used in) continuing financing activities
|
|
|
318,956 |
|
|
|
(52,890 |
) |
Net
cash provided by (used in) continuing operations before effect of exchange
rate changes on cash
|
|
|
553,423 |
|
|
|
(51,414 |
) |
Effect
of exchange rate changes on cash
|
|
|
1,671 |
|
|
|
- |
|
Net
cash provided by (used in) continuing operations
|
|
|
555,094 |
|
|
|
(51,414 |
) |
Net
cash used in operating activities of discontinued
operations
|
|
|
(538 |
) |
|
|
(670 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
554,556 |
|
|
|
(52,084 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
90,090 |
|
|
|
78,116 |
|
Cash
and cash equivalents at end of period
|
|
$ |
644,646 |
|
|
$ |
26,032 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
Thousands)
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
|
September
28,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
Detail
of cash flows related to investments:
|
|
|
|
|
|
|
Operating
investment adjustments, net:
|
|
|
|
|
|
|
Other
than temporary losses on investments
|
|
$ |
3,916 |
|
|
$ |
79,686 |
|
Other
net recognized gains
|
|
|
(1,243 |
) |
|
|
(1,427 |
) |
|
|
$ |
2,673 |
|
|
$ |
78,259 |
|
Investment
activities, net:
|
|
|
|
|
|
|
|
|
Proceeds
from sales of available-for-sale securities and other
investments
|
|
$ |
29,663 |
|
|
$ |
75,373 |
|
Decrease
in restricted cash held for investment
|
|
|
26,681 |
|
|
|
40,454 |
|
Payments
to cover short positions in securities and cost of available-for-sale
securities and other investments purchased
|
|
|
(19,588 |
) |
|
|
(81,622 |
) |
|
|
$ |
36,756 |
|
|
$ |
34,205 |
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period in continuing operations for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
53,110 |
|
|
$ |
37,692 |
|
Income
taxes, net of refunds
|
|
$ |
9,999 |
|
|
$ |
2,944 |
|
Supplemental
schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Total
capital expenditures
|
|
$ |
70,990 |
|
|
$ |
66,039 |
|
Cash
capital expenditures
|
|
|
(65,280 |
) |
|
|
(58,401 |
) |
Non-cash
capitalized lease and certain sales-leaseback transactions
|
|
$ |
5,710 |
|
|
$ |
7,638 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
(1) Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements (the
“Financial Statements”) of Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s” or
“Wendy’s/Arby’s Group” and, together with its subsidiaries, the “Company”, “we”,
“us” or “our”) have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim
financial information and, therefore, do not include all information and
footnotes required by GAAP for complete financial statements. In our opinion,
however, the Financial Statements contain all adjustments necessary to present
fairly our financial position as of September 27, 2009 and results of our
operations for the three months and nine months ended September 27, 2009 and
September 28, 2008 and our cash flows for the nine months ended September 27,
2009 and September 28, 2008. The results of operations for the three months and
nine months ended September 27, 2009 are not necessarily indicative of the
results to be expected for the full 2009 fiscal year. These Financial Statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended December 28, 2008 (the “Form 10-K”). In addition, in preparing the
Financial Statements, we have reviewed and considered all significant events
occurring subsequent to September 27, 2009 and up until November 5, 2009, the
date of the issuance of the Financial Statements.
On
September 29, 2008 (the “Closing Date”), we completed the merger (the “Wendy’s
Merger”) with Wendy’s International Inc. (“Wendy’s”) and, as such, Wendy’s
results of operations have been consolidated in our financial statements since
the Closing Date.
We report
on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to
December 31. All three-month periods presented contain 13 weeks and all
nine-month periods presented contain 39 weeks. Because our 2009 fiscal year,
ending on January 3, 2010, will contain 53 weeks, our fourth quarter will
contain 14 weeks. All references to years and quarters relate to fiscal periods
rather than calendar periods.
(2) Acquisitions
and Dispositions
Merger
with Wendy’s International, Inc.
On
September 29, 2008, we completed the Wendy’s Merger. Immediately prior to the
Wendy’s Merger, each share of our Class B Common Stock was converted into Class
A Common Stock on a one for one basis (the “Conversion”). As a result of the
Wendy’s Merger, the accounts of Wendy’s® are included for the three and
nine months ended September 27, 2009, but have not been included for the three
and nine months ended September 28, 2008.
The total
merger consideration of $2,515,521 has been allocated to Wendy’s net tangible
and intangible assets acquired and liabilities assumed based on their fair
values with the excess recognized as goodwill. During the nine months
ended September 27, 2009, the preliminary allocation to goodwill of $845,631 at
December 28, 2008 was impacted primarily by changes in the fair values of assets
acquired and liabilities assumed and the finalization of the deferred income tax
liability related to the Wendy’s Merger as follows:
Goodwill
as reported at December 28, 2008
|
|
$ |
845,631 |
|
Change
in total merger consideration:
|
|
|
|
|
Decrease
in the value of Wendy’s stock options that have been converted into
Wendy’s/Arby’s options
|
|
|
(199 |
) |
Increase
in Wendy’s Merger costs
|
|
|
325 |
|
Changes
to fair values of assets and liabilities and deferred income tax liability
related to the merger:
|
|
|
|
|
Increase
in investments
|
|
|
(683 |
) |
Increase
in properties
|
|
|
(2,738 |
) |
Increase
in favorable leases
|
|
|
(5,170 |
) |
Decrease
in computer software
|
|
|
6 |
|
Decrease
in accrued expenses and other current liabilities
|
|
|
(3,585 |
) |
Increase
in other liabilities
|
|
|
15,196 |
|
Increase
in unfavorable leases
|
|
|
6,709 |
|
Increase
in deferred income tax liability
|
|
|
7,143 |
|
Goodwill
as reported at September 27, 2009
|
|
$ |
862,635 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
Other
acquisitions
We
completed the acquisitions of the operating assets, and assumed liabilities, of
45 Arby’s® franchised restaurants during the nine months ended September 28,
2008. The total then estimated consideration for the acquisitions was $15,807
consisting of (1) $8,890 of cash (before consideration of $45 of cash acquired),
(2) the assumption of $6,239 of debt and (3) $678 of related estimated expenses.
The aggregate purchase price of $16,294 also included $693 of losses from the
settlement of unfavorable franchise rights and a $1,180 gain on the termination
of subleases both included in “Other operating expense (income), net” in the
accompanying unaudited condensed consolidated statement of
operations.
Dispositions
During
the nine months ended September 27, 2009, the Company received proceeds from
dispositions of $9,386 consisting of $3,384 from the sale of ten Wendy’s units
to a franchisee and $6,002 related to other dispositions. These sales resulted
in a net loss of $556 which is included in “Depreciation and
amortization”.
Senior
Notes
On June
23, 2009, Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”), a
direct wholly-owned subsidiary of Wendy’s/Arby’s, issued $565,000 principal
amount of Senior Notes (the “Senior Notes”). The Senior Notes will mature on
July 15, 2016 and accrue interest at 10.00% per annum, payable semi-annually on
January 15 and July 15, with the first payment on January 15, 2010. The Senior
Notes were issued at 97.533% of the principal amount, representing a yield to
maturity of 10.50% and resulting in net proceeds paid to us of $551,061. The
$13,939 discount is being accreted and the related charge included in interest
expense until the Senior Notes mature. The Senior Notes are fully and
unconditionally guaranteed, jointly and severally, on an unsecured basis by
certain direct and indirect domestic subsidiaries of Wendy’s/Arby’s Restaurants
(collectively, the “Guarantors”).
Wendy’s/Arby’s
Restaurants incurred approximately $21,105 in costs related to the issuance of
the Senior Notes which are being amortized to interest expense over the Senior
Notes’ term utilizing the effective interest method.
An
Indenture dated as of June 23, 2009 (the “Indenture”) among Wendy’s/Arby’s
Restaurants, the Guarantors and U.S. Bank National Association, as trustee (the
“Trustee”), includes certain customary covenants that, subject to a number of
important exceptions and qualifications, limit the ability of Wendy’s/Arby’s
Restaurants and its restricted subsidiaries to, among other things, incur debt
or issue preferred or disqualified stock, pay dividends on equity interests,
redeem or repurchase equity interests or prepay or repurchase subordinated debt,
make some types of investments and sell assets, incur certain liens, engage in
transactions with affiliates (except on an arms-length basis), and consolidate,
merge or sell all or substantially all of their assets. The covenants generally
do not restrict Wendy’s/Arby’s Group or any of its subsidiaries that are not
subsidiaries of Wendy’s/Arby’s Restaurants.
Senior
Secured Term Loan
On June
10, 2009, Wendy’s/Arby’s Restaurants entered into an Amendment No. 1 to the
amended and restated Arby’s Credit Agreement (as so amended, the “Credit
Agreement”) which, among other things (1) permitted the issuance by
Wendy’s/Arby’s Restaurants of the Senior Notes described above and the
incurrence of debt thereunder, and permitted Wendy’s/Arby’s Restaurants to
dividend to Wendy’s/Arby’s the net cash proceeds of the Senior Notes issuance
less amounts used to prepay the senior secured term loan under the Credit
Agreement and pay accrued interest thereon and certain other payments, (2)
modified certain total leverage financial covenants, added certain financial
covenants based on senior secured leverage ratios and modified the minimum
interest coverage ratio, (3) permitted the prepayment at any time prior to
maturity of certain senior notes of Wendy’s and eliminated certain incremental
debt baskets in the covenant prohibiting the incurrence of
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
additional
indebtedness and (4) modified the interest margins to provide that the margins
will fluctuate based on Wendy’s/Arby’s Restaurants’ corporate credit rating.
Wendy’s/Arby’s Restaurants incurred approximately $3,107 in costs related to
Amendment No. 1.
As
amended, the term loan under the Credit Agreement and amounts borrowed under the
revolving credit facility under the Credit Agreement bear interest at our option
at either (i) the Eurodollar Base Rate (as defined in the Credit Agreement), as
adjusted pursuant to applicable regulations (but not less than 2.75%), plus an
interest rate margin of 4.00%, 4.50%, 5.00% or 6.00% per annum, depending on
Wendy’s/Arby’s Restaurants’ corporate credit rating, or (ii) the Base Rate (as
defined in the Credit Agreement), which is the higher of the interest rate
announced by the administrative agent for the Credit Agreement as its base rate
and the Federal funds rate plus 0.50% (but not less that 3.75%), in either case
plus an interest rate margin of 3.00%, 3.50%, 4.00% or 5.00% per annum,
depending on Wendy’s/Arby’s Restaurants’ corporate credit rating. Based on
Wendy’s/Arby’s Restaurants’ corporate credit rating at the effective date of
Amendment No. 1 and as of September 27, 2009, the applicable interest rate
margins available to us were 4.50% for Eurodollar Base Rate borrowings and 3.50%
for Base Rate borrowings. Since the effective date of Amendment No. 1 and as of
September 27, 2009, we have elected to use the Eurodollar Base Rate which
resulted in a rate of 7.25% for the 2009 third quarter.
Concurrent
with the closing of the issuance of the Senior Notes, we prepaid the term loan
under the Credit Agreement in an aggregate principal amount of $132,500 and
accrued interest thereon.
Derivatives
During
the third quarter of 2009, we entered into several interest rate swap agreements
(the “Interest Rate Swaps”) with notional amounts totaling $361,000 that swap
the fixed rate interest rates on our 6.20% and 6.25% Wendy’s Senior Notes for
floating rates. The Company’s primary objective for entering
into derivative instruments is to manage its exposure to changes in interest
rates, as well as to maintain an appropriate mix of fixed and variable rate
debt.
The
Interest Rate Swaps are accounted for as fair value hedges and qualify for the
short-cut method under the applicable guidance. At September 27, 2009, the fair
value of our Interest Rate Swaps was $2,765 and has been included in “Deferred
costs and other assets” and as an adjustment to the carrying amount of the 6.20%
and 6.25% Wendy’s Senior Notes in the accompanying balance sheet.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
(4) Fair
Value Measurement of Financial Assets and Liabilities
The
carrying amounts and estimated fair values of the Company’s financial assets and
liabilities were as follows:
|
|
September
27, 2009
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents (a)
|
|
$ |
644,646 |
|
|
$ |
644,646 |
|
Restricted
cash equivalents (a):
|
|
|
|
|
|
|
|
|
Current
|
|
|
986 |
|
|
|
986 |
|
Non-current
|
|
|
6,732 |
|
|
|
6,732 |
|
Short-term
investments (b)
|
|
|
224 |
|
|
|
224 |
|
Deerfield
Capital Corp. (“DFR”) notes receivable (c)
|
|
|
25,607 |
|
|
|
26,043 |
|
Non-current
cost investments for which it is:
|
|
|
|
|
|
|
|
|
Practicable
to estimate fair value (d)
|
|
|
10,097 |
|
|
|
11,155 |
|
Not
practicable to estimate fair value (e)
|
|
|
645 |
|
|
|
|
|
Interest
Rate Swaps (f)
|
|
|
2,765 |
|
|
|
2,765 |
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
Long-term
debt, including current portion:
|
|
|
|
|
|
|
|
|
10.00%
Senior Notes (b)
|
|
|
551,413 |
|
|
|
597,770 |
|
Senior
secured term loan, weighted average effective interest of 7.25%
(b)
|
|
|
252,805 |
|
|
|
254,067 |
|
6.20%
senior notes (b)
|
|
|
204,455 |
|
|
|
220,500 |
|
6.25%
senior notes (b)
|
|
|
192,482 |
|
|
|
198,400 |
|
Sale-leaseback
obligations (g)
|
|
|
125,720 |
|
|
|
121,258 |
|
Capitalized
lease obligations (g)
|
|
|
91,544 |
|
|
|
87,867 |
|
7%
Debentures (b)
|
|
|
79,793 |
|
|
|
72,500 |
|
6.54%
secured bank term loan (g)
|
|
|
19,126 |
|
|
|
18,735 |
|
Notes
payable, weighted average interest of 7.27% (g)
|
|
|
4,402 |
|
|
|
4,367 |
|
5%
convertible notes (h)
|
|
|
2,100 |
|
|
|
2,045 |
|
Other
|
|
|
1,506 |
|
|
|
1,482 |
|
Total
long-term debt, including current portion
|
|
$ |
1,525,346 |
|
|
$ |
1,578,991 |
|
Guarantees
of:
|
|
|
|
|
|
|
|
|
Lease
obligations for Arby’s restaurants not operated by the Company
(i)
|
|
|
398 |
|
|
|
398 |
|
Wendy’s
franchisee loans obligations (j)
|
|
|
663 |
|
|
|
663 |
|
________________________
(a)
|
The
carrying amounts approximated fair value due to the short-term maturities
of the cash equivalents or restricted cash
equivalents.
|
(b)
|
The
fair values are based on quoted market prices. (Level 1
inputs)
|
(c)
|
The
fair value of the DFR Notes received in connection with the Deerfield Sale
was based on the present value of the probability weighted average of
expected cash flows of the DFR
Notes.
|
(d)
|
These
consist of investments in certain non-current cost investments. The fair
values of these investments, other than Jurlique International Pty Ltd.,
an Australian skin and beauty products company not publicly traded
(“Jurlique”), were based entirely on statements of account received from
investment managers or investees which are principally based on quoted
market or broker/dealer prices. To the extent that some of these
investments, including the underlying investments in investment limited
partnerships, do not have available quoted market or broker/dealer prices,
the Company relies on valuations performed by the investment managers or
investees in valuing those investments or third-party
appraisals.
|
(e)
|
It
was not practicable to estimate the fair value of this cost investment
because the investment is
non-marketable.
|
(f)
|
The
fair values were based on information provided by the bank counterparties
that is model-driven and whose inputs are observable or whose significant
value drivers are observable. (Level 2
inputs)
|
(g)
|
The
fair values were determined by discounting the future scheduled principal
payments using an interest rate assuming the same original issuance spread
over a current Treasury bond yield for securities with similar
durations.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
(h)
|
The
fair values were based on broker/dealer prices since quoted ask prices
close to our fiscal quarter end date were not available for the remaining
convertible notes.
|
(i)
|
The
fair value was assumed to reasonably approximate the carrying amount since
the carrying amount represents the fair value as of the acquisition of RTM
Restaurant Group less subsequent
amortization.
|
(j)
|
Wendy’s
provided loan guarantees to various lenders on behalf of franchisees
entering into pooled debt facility arrangements for new store development
and equipment financing. Wendy’s has accrued a liability for the fair
value of these guarantees, the calculation for which was based upon a
weighed average risk percentage established at the inception of each
program.
|
The
carrying amounts of current accounts and notes receivable and non-current notes
receivable (excluding the DFR Notes described above) approximated fair value due
to the related allowance for doubtful accounts and notes receivable. The
carrying amounts of accounts payable and accrued expenses and advertising fund
restricted assets and liabilities approximated fair value due to the short-term
maturities of those items.
(5) Impairment
of Long-lived Assets
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
|
September
28,
|
|
|
September
27,
|
|
|
September
28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Arby’s
restaurant segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of Company-owned restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties
|
|
$ |
13,923 |
|
|
$ |
4,053 |
|
|
$ |
25,719 |
|
|
$ |
5,207 |
|
Intangible
assets
|
|
|
1,319 |
|
|
|
528 |
|
|
|
2,257 |
|
|
|
791 |
|
|
|
|
15,242 |
|
|
|
4,581 |
|
|
|
27,976 |
|
|
|
5,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendy’s
restaurant segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of surplus properties:
|
|
|
286 |
|
|
|
- |
|
|
|
956 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
- |
|
|
|
9,623 |
|
|
|
2,176 |
|
|
|
9,623 |
|
Total
impairment of long-lived assets
|
|
$ |
15,528 |
|
|
$ |
14,204 |
|
|
$ |
31,108 |
|
|
$ |
15,621 |
|
The
Arby’s restaurant segment impairment losses reflect (1) the deterioration in
operating performance of certain restaurants and (2) additional charges for
restaurants impaired in a prior year. The Wendy’s restaurant
segment impairment losses reflect write-downs in the carrying value of surplus
properties and properties held for sale.
The
Corporate impairment loss reflects the reduction of our carrying value of one of
our corporate aircraft to its net realizable value based on the sale of this
aircraft in July 2009.
Impairment
losses represented the excess of the carrying value over the fair value of the
affected assets and are included in “Impairment of long-lived assets.” The fair
values of impaired assets discussed above for the Arby’s restaurants segment
were estimated based upon the present values of the anticipated cash flows
associated with each asset (a Level 3 estimate). The fair values of the impaired
assets (a Level 3 estimate) discussed above for the Wendy’s restaurants segment
were estimated based upon their expected realizable value, which reflect market
declines in the areas where the properties are located.
(6) Facilities
Relocation and Corporate Restructuring
The
facilities relocation and corporate restructuring charges in our restaurant
segment for the nine months ended September 27, 2009 of $8,899 are
primarily related to severance costs associated with the Wendy’s Merger. For the
remainder of 2009, we expect to incur additional facilities relocation and
corporate restructuring charges of $1,349 related to additional severance costs
from the Wendy’s Merger.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
An
analysis of activity in the facilities relocation and corporate restructuring
accrual during the nine months ended September 27, 2009 is as
follows:
|
|
Nine
Months Ended
|
|
|
|
September
27, 2009
|
|
|
|
Balance
December
28,
|
|
|
|
|
|
|
|
|
Balance
September
27,
|
|
|
Total
Expected to be
|
|
|
Total
Incurred
|
|
|
|
2008
|
|
|
Provision
|
|
|
Payments
|
|
|
2009
|
|
|
Incurred
|
|
|
to
Date
|
|
Wendy’s
restaurant segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
costs
|
|
$ |
3,101 |
|
|
$ |
8,971 |
|
|
$ |
(6,215 |
) |
|
$ |
5,857 |
|
|
$ |
13,421 |
|
|
$ |
12,072 |
|
Total
Wendy’s restaurant segment
|
|
|
3,101 |
|
|
|
8,971 |
|
|
|
(6,215 |
) |
|
|
5,857 |
|
|
|
13,421 |
|
|
|
12,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arby’s
restaurant segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
relocation costs
|
|
|
72 |
|
|
|
(72 |
) |
|
|
- |
|
|
|
- |
|
|
|
4,579 |
|
|
|
4,579 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,471 |
|
|
|
7,471 |
|
|
|
|
72 |
|
|
|
(72 |
) |
|
|
- |
|
|
|
- |
|
|
|
12,050 |
|
|
|
12,050 |
|
Non-cash
charges
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
719 |
|
|
|
719 |
|
Total
Arby’s restaurant segment
|
|
|
72 |
|
|
|
(72 |
) |
|
|
- |
|
|
|
- |
|
|
|
12,769 |
|
|
|
12,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention incentive compensation
|
|
|
962 |
|
|
|
- |
|
|
|
(348 |
) |
|
|
614 |
|
|
|
84,622 |
|
|
|
84,622 |
|
Non-cash
charges
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
835 |
|
|
|
835 |
|
Total
corporate
|
|
|
962 |
|
|
|
- |
|
|
|
(348 |
) |
|
|
614 |
|
|
|
85,457 |
|
|
|
85,457 |
|
|
|
$ |
4,135 |
|
|
$ |
8,899 |
|
|
$ |
(6,563 |
) |
|
$ |
6,471 |
|
|
$ |
111,647 |
|
|
$ |
110,298 |
|
(7) Investment
in Joint Venture with Tim Hortons Inc.
Wendy’s
is a partner in a Canadian restaurant real estate joint venture (“TimWen”) with
Tim Hortons Inc. Wendy’s 50% share of the joint venture is accounted for using
the Equity Method. Our equity in earnings from TimWen is included in “Other
operating expense (income), net”.
Presented
below is a summary of components related to our investment in TimWen included in
our Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of
Operations as of and for the nine months ended September 27, 2009.
|
|
|
|
|
Balance
at December 28, 2008
|
|
$ |
89,771 |
|
|
|
|
|
|
|
|
Equity
in earnings for the nine months ended September 27, 2009
|
|
|
8,289 |
|
|
Amortization
of purchase price adjustments
|
|
|
(2,031 |
) |
|
|
|
|
6,258 |
|
(a)
|
|
|
|
|
|
|
Distributions
|
|
|
(7,106 |
) |
|
Currency
translation adjustment included in “Comprehensive income”
|
|
|
10,457 |
|
|
Balance
at September 27, 2009
|
|
$ |
99,380 |
|
(b)
|
____________________________________
|
(a)
|
Equity
in earnings for the nine months ended September 27, 2009 is included in
“Other operating expense (income),
net”.
|
|
(b)
|
Included
in “Investments”.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
Presented
below is a summary of unaudited financial information of TimWen as of and for
the nine months ended September 27, 2009 in Canadian dollars. The summary
balance sheet financial information does not distinguish between current and
long-term assets and liabilities:
|
|
September
27, 2009
|
|
|
|
(Canadian)
|
|
Balance
sheet information:
|
|
|
|
Properties
|
|
C$ |
84,223 |
|
Cash
and cash equivalents
|
|
|
8,465 |
|
Accounts
receivable
|
|
|
5,026 |
|
Other
|
|
|
2,168 |
|
|
|
C$ |
99,882 |
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
C$ |
1,277 |
|
Other
liabilities
|
|
|
10,902 |
|
Partners’
equity
|
|
|
87,703 |
|
|
|
C$ |
99,882 |
|
|
|
|
|
|
|
|
Nine
months ended September 27, 2009
|
|
|
|
(Canadian)
|
|
Income
statement information:
|
|
|
|
|
Revenues
|
|
C$ |
28,769 |
|
Income
before income taxes and net income
|
|
|
19,281 |
|
(8) Other
Than Temporary Losses on Investments
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
|
September
28,
|
|
|
September
27,
|
|
|
September
28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
method investments
|
|
$ |
- |
|
|
$ |
3,000 |
|
|
$ |
3,115 |
|
|
$ |
6,500 |
|
Available-for-sale
security
|
|
|
- |
|
|
|
5,100 |
|
|
|
801 |
|
|
|
5,100 |
|
DFR
common stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
68,086 |
|
|
|
$ |
- |
|
|
$ |
8,100 |
|
|
$ |
3,916 |
|
|
$ |
79,686 |
|
We
analyze our unrealized losses on a quarterly basis. Due to current market
conditions and other factors, we recorded other than temporary losses on
investments of $3,916 for the first nine months of 2009 (none in the 2009 third
quarter) attributable primarily to the decline in fair value of two
of our cost investments. Any other than temporary losses on our investments are
dependent upon the underlying economics and/or volatility in their value and may
or may not recur in future periods. We recorded other than temporary losses in
the first nine months of 2008 of $6,500 (including $3,000 in the 2008 third
quarter) attributable to a decline in the value of our investment in
Jurlique. We recorded other than temporary losses on investments in the
2009 first nine months and the 2008 first nine months of $801 and $5,100,
respectively, related to other than temporary losses on available-for-sale
securities in an equities account which was managed by a management company
formed by our Chairman, who is our former Chief Executive Officer, and our Vice
Chairman, who is our former President and Chief Operating Officer, and a
director, who is also our former Vice Chairman.
As
described in the Form 10-K, based on the decline in the market price of the
shares received in connection with the sale of our interest in Deerfield to DFR
, we concluded that the fair value and, therefore, the carrying value of the
common shares owned by us was impaired. As a result, we recorded an other than
temporary loss for the 2008 first quarter of $68,086 (without tax benefit) which
included $11,074 of pre-tax unrealized holding losses recorded prior to 2008. As
a result of the distribution of the DFR common stock, the income tax loss that
resulted from the decline in value of our investment of $68,086 is not
deductible for income tax purposes and no income tax benefit was recorded
related to this loss.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
(9) Income
Taxes
The
effective tax rate for the three months ended September 27, 2009 was 36.4%. For
the three months ended September 28, 2008 we recorded a tax provision of $2,938
despite the loss from continuing operations before income taxes and minority
interests. The effective rates vary from the U.S. Federal statutory rate of 35%
due to the 2009 and 2008 three month effect of (1) state income taxes, net of
Federal income tax benefit, (2) non-deductible expenses, (3) adjustments to our
uncertain tax positions, (4) changes in our estimated full year tax rates, and
(5) tax credits as well as the effect in the 2009 third quarter of adjustments
related to prior year tax matters.
The
effective tax rate for the nine months ended September 27, 2009 and the
effective tax rate benefit for the nine months ended September 28, 2008 were
39.5% and 12.3%, respectively. These rates vary from the U.S. Federal statutory
rate of 35% due to the 2009 adjustments related to prior year tax matters and to
the 2009 and 2008 first nine months effect of (1) state income taxes, net of
Federal income tax benefit, (2) non-deductible expenses, (3) adjustments to our
uncertain tax positions, and (4) tax credits and the effect of the
other than temporary loss in 2008 on our investment in the common stock of DFR,
which, as a result of its subsequent distribution to shareholders, is not
deductible for income tax purposes and no tax benefit was recorded related to
this loss.
For the
nine months ended September 27, 2009 we increased our unrecognized tax benefits
for prior periods by $1,438 for additions and decreased the same by $697 for
statute expirations. We increased interest on unrecognized tax
benefits by $902. In the nine months ended September 28, 2008, an examination of
one state income tax return was settled for fiscal years 1998 through 2000.
Since this tax position was settled for less than we previously anticipated, we
recorded an income tax benefit of $1,516 and a reduction of related interest
expense of $1,071 in the nine months ended September 28, 2008. There were no
other significant changes to unrecognized tax benefits in the nine months ended
September 27, 2009 and September 28, 2008.
We
include unrecognized tax benefits and the related interest and penalties for
discontinued operations in “Liabilities related to discontinued operations.” In
the three months ended September 28, 2008, examinations by three jurisdictions
were favorably settled and we recorded a benefit of $1,251 to “Income from
discontinued operations, net of income taxes.” There were no other significant
changes in unrecognized tax benefits and the related interest and penalties for
discontinued operations during the nine months ended September 27, 2009 and
September 28, 2008.
The
Internal Revenue Service (the “IRS”) is currently conducting an examination of
our U.S. Federal income tax return for the 2009 tax year as part of the
Compliance Assurance Program (“CAP”). We participated in the CAP for our tax
period ended December 28, 2008 and prior to the Wendy’s Merger, Wendy’s was a
participant in the CAP since the beginning of the 2006 tax year. CAP is a
voluntary, real-time audit arrangement whereby taxpayers and the IRS address
issues throughout the year as they emerge. Any matters relating to Wendy’s U.S.
Federal income tax returns for 2007 and prior years have been
settled.
Wendy’s/Arby’s
U.S. Federal income tax returns for periods ended December 31, 2006 to September
29, 2008 are not currently under examination by the IRS. Our foreign income tax
returns and Wendy’s foreign income tax returns for periods prior to the Wendy’s
Merger are open to examination primarily for periods ending on or after January
1, 2006. Certain of these foreign income tax returns are currently under
examination. Some of our state income tax returns and some of the Wendy’s state
income tax returns for periods prior to the Wendy’s Merger are currently under
examination. Certain of these states have issued notices of proposed tax
assessments aggregating $8,865. We dispute these notices and believe their
ultimate resolution will not have a material adverse impact on our consolidated
financial position or results of operations.
(10) Income
(loss) Per Share
Basic
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. As described in the Form
10-K, in connection with the Wendy’s Merger, Wendy’s/Arby’s stockholders
approved the Conversion whereby each of the then outstanding shares of Triarc
class B common stock (“Class B Common Stock”) were converted into one share of
Wendy’s/Arby’s Class A common stock and accordingly we now only have one class
of common stock. In connection with the May 28, 2009 amendment and restatement
of our Certificate of Incorporation, our Class A common stock is now referred to
as Common Stock. Net loss for the three and nine month periods ended September 28, 2008 of
$12,147 and $86,523, respectively, was allocated equally among each share of
Common Stock and Class B Common Stock resulting in the same loss per share for
each class.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
Diluted
income per share for the three and nine month periods ended September 27, 2009
has been computed by dividing the allocated income for the Common Stock by the
weighted average number of shares plus the potential common share effect of
dilutive stock options and nonvested restricted Common Shares (the “Nonvested
Shares”), both computed using the treasury stock method. Diluted income per
share for the three and nine month periods ended September 28, 2008 were the
same as basic loss per share for each share of the Common Stock and Class B
Common Stock since we reported a loss and, therefore, the effect of all
potentially dilutive securities on the loss per share would have been
antidilutive. The shares used to calculate diluted income per share exclude any
effect of our 5% convertible notes due 2023 (the “Convertible Notes”) which
would have been antidilutive since the after-tax interest on the Convertible
Notes per share of Common Stock obtainable on conversion exceeded the reported
basic income from continuing operations per share. For the three and nine months
ended September 27, 2009, we excluded 19,928 potential common shares from our
diluted per share calculation as they would have had anti-dilutive effects. The
basic and diluted income from discontinued operations per share for the three
and nine month periods ended September 27, 2009 was less than $0.01 and,
therefore, is not presented.
Our
securities as of September 27, 2009 that could dilute basic income per share for
periods subsequent to September 27, 2009 are (1) outstanding stock options which
can be exercised into 27,965 shares of our Common Stock, (2) 1,472 restricted
shares of Common Stock which principally vest over three years and (3) $2,100 of
Convertible Notes which are convertible into 160 shares of Common
Stock.
Income
(loss) per share has been computed by allocating the income or loss as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
|
September
28,
|
|
|
September
27,
|
|
|
September
28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Common
Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$ |
14,266 |
|
|
$ |
(4,170 |
) |
|
$ |
18,234 |
|
|
$ |
(27,380 |
) |
Discontinued
Operations
|
|
|
422 |
|
|
|
380 |
|
|
|
422 |
|
|
|
380 |
|
Net
income (loss)
|
|
$ |
14,688 |
|
|
$ |
(3,790 |
) |
|
$ |
18,656 |
|
|
$ |
(27,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
|
N/A |
|
|
$ |
(9,196 |
) |
|
|
N/A |
|
|
$ |
(60,362 |
) |
Discontinued
Operations
|
|
|
N/A |
|
|
|
839 |
|
|
|
N/A |
|
|
|
839 |
|
Net
income (loss)
|
|
|
N/A |
|
|
$ |
(8,357 |
) |
|
|
N/A |
|
|
$ |
(59,523 |
) |
The
number of shares used to calculate basic and diluted income (loss) per share are
as follows:
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
September
27,
|
|
September
28,
|
|
September
27,
|
|
September
28,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Common
Stock:
|
|
|
|
|
|
|
|
Basic
shares - weighted average shares outstanding
|
468,008
|
|
28,905
|
|
468,670
|
|
28,903
|
Dilutive
effect of stock options and restricted shares
|
3,385
|
|
-
|
|
2,423
|
|
-
|
Diluted
shares
|
471,393
|
|
28,905
|
|
471,093
|
|
28,903
|
|
|
|
|
|
|
|
|
Class
B Common Stock:
|
|
|
|
|
|
|
|
Basic
shares - weighted average shares outstanding
|
N/A
|
|
63,745
|
|
N/A
|
|
63,720
|
Dilutive
effect of stock options and restricted shares
|
N/A
|
|
-
|
|
N/A
|
|
-
|
Diluted
shares
|
N/A
|
|
63,745
|
|
N/A
|
|
63,720
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
(11) Equity
|
The
following is a summary of the changes in
equity:
|
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
|
September
28,
|
|
|
|
2009
|
|
|
2008
|
|
Balance,
beginning of year
|
|
$ |
2,383,291 |
|
|
$ |
448,874 |
|
Effect
of change in accounting for non-controlling interests
|
|
|
154 |
|
|
|
154 |
|
Beginning
balance, as adjusted
|
|
|
2,383,445 |
|
|
|
449,028 |
|
Comprehensive
income (loss) (1)
|
|
|
48,999 |
|
|
|
(80,421 |
) |
Share-based
compensation expense
|
|
|
11,654 |
|
|
|
3,932 |
|
Stock
option exercises
|
|
|
1,935 |
|
|
|
- |
|
DFR
stock dividend distribution
|
|
|
- |
|
|
|
(14,464 |
) |
Dividends
declared but not yet paid
|
|
|
- |
|
|
|
(7,404 |
) |
Dividends
paid
|
|
|
(21,088 |
) |
|
|
(16,101 |
) |
Repurchases
of common stock for treasury
|
|
|
(25,244 |
) |
|
|
- |
|
Other
|
|
|
(195 |
) |
|
|
(181 |
) |
Balance,
end of period
|
|
$ |
2,399,506 |
|
|
$ |
334,389 |
|
(1) The
following is a summary of the components of comprehensive income (loss), net of
income taxes:
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
|
September
28,
|
|
|
|
2009
|
|
|
2008
|
|
Net
income (loss)
|
|
$ |
18,656 |
|
|
$ |
(86,523 |
) |
Net
change in currency translation adjustment
|
|
|
30,415 |
|
|
|
(149 |
) |
Net
unrealized (losses) gains on available-for-sale
securities
(a)
|
|
|
(72 |
) |
|
|
6,196 |
|
Net
unrealized gains on cash flow hedges (b)
|
|
|
- |
|
|
|
55 |
|
Other
comprehensive income
|
|
|
30,343 |
|
|
|
6,102 |
|
Comprehensive
income (loss)
|
|
$ |
48,999 |
|
|
$ |
(80,421 |
) |
(a)
Net unrealized (losses) gains on available-for-sale
securities:
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
|
September
28,
|
|
|
|
2009
|
|
|
2008
|
|
Unrealized
holding gains arising during the period
|
|
$ |
62 |
|
|
$ |
1,664 |
|
Reclassifications
of prior period unrealized holding (gains) losses into net
loss
|
|
|
(168 |
) |
|
|
8,262 |
|
Change
in unrealized holding gains and losses arising during the period from
investments under the equity method of accounting
|
|
|
- |
|
|
|
(201 |
) |
|
|
|
(106 |
) |
|
|
9,725 |
|
Income
tax benefit (provision)
|
|
|
34 |
|
|
|
(3,529 |
) |
|
|
$ |
(72 |
) |
|
$ |
6,196 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
|
|
Nine
Months Ended
|
|
(b)
Net unrealized gains on cash flow hedges
|
|
September
28,
|
|
|
|
2008
|
|
Unrealized
holding losses arising during the period
|
|
$ |
(1,526 |
) |
Reclassifications
of prior period unrealized holding losses into net income or
loss
|
|
|
1,613 |
|
Change
in unrealized holding gains and losses arising during the period from
investments under the equity method of accounting
|
|
|
3 |
|
|
|
|
90 |
|
Income
tax provision
|
|
|
(35 |
) |
|
|
$ |
55 |
|
(12) Business Segments
We manage
and internally report our operations in two brand segments: (1) the operation
and franchising of Wendy’s restaurants, including its wholesale bakery
operations, and (2) the operation and franchising of Arby’s restaurants. We
evaluate segment performance and allocate resources based on each segment’s
operating profit (loss) and other financial and non-financial
factors.
In the
first quarter of 2009, Wendy’s/Arby’s began charging the restaurant segments for
support services based upon budgeted segment revenues. Prior to that date, the
restaurant segments had directly incurred such costs. Commencing with the second
quarter of 2009, Wendy’s/Arby’s Restaurants established a shared service
center in Atlanta and allocated its operating costs to the restaurant segments
based also on budgeted segment revenues.
The
following is a summary of our segment information:
|
|
Three
months ended September 27, 2009
|
|
|
|
Wendy’s
|
|
|
Arby’s
|
|
|
|
|
|
|
|
|
|
Restaurants
|
|
|
Restaurants
|
|
|
Corporate
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
536,802 |
|
|
$ |
269,236 |
|
|
$ |
- |
|
|
$ |
806,038 |
|
Franchise
revenues
|
|
|
76,713 |
|
|
|
20,470 |
|
|
|
- |
|
|
|
97,183 |
|
|
|
$ |
613,515 |
|
|
$ |
289,706 |
|
|
$ |
- |
|
|
$ |
903,221 |
|
Depreciation
and amortization
|
|
$ |
31,444 |
|
|
$ |
14,343 |
|
|
$ |
1,233 |
|
|
$ |
47,020 |
|
Operating
profit (loss)
|
|
$ |
69,876 |
|
|
$ |
(8,862 |
) |
|
$ |
(4,192 |
) |
|
$ |
56,822 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,457 |
) |
Investment
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737 |
|
Other
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,319 |
|
Income
from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,421 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
|
|
Three
months ended September 28, 2008
|
|
|
|
Arby’s
|
|
|
|
|
|
|
|
|
|
Restaurants
|
|
|
Corporate
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
287,641 |
|
|
$ |
- |
|
|
$ |
287,641 |
|
Franchise
revenues
|
|
|
22,730 |
|
|
|
- |
|
|
|
22,730 |
|
|
|
$ |
310,371 |
|
|
$ |
- |
|
|
$ |
310,371 |
|
Depreciation
and amortization
|
|
$ |
15,875 |
|
|
$ |
622 |
|
|
$ |
16,497 |
|
Operating
profit (loss)
|
|
$ |
23,731 |
|
|
$ |
(19,934 |
) |
|
$ |
3,797 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
(13,585 |
) |
Investment
income, net
|
|
|
|
|
|
|
|
|
|
|
6,724 |
|
Other
than temporary losses on investments
|
|
|
|
|
|
|
|
|
|
|
(8,100 |
) |
Other
income, net
|
|
|
|
|
|
|
|
|
|
|
736 |
|
Loss
from continuing operations before income tax benefit
|
|
|
|
|
|
|
|
|
|
$ |
(10,428 |
) |
|
|
Nine
months ended September 27, 2009
|
|
|
|
Wendy’s
|
|
|
Arby’s
|
|
|
|
|
|
|
|
|
|
Restaurants
|
|
|
Restaurants
|
|
|
Corporate
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,582,928 |
|
|
$ |
812,548 |
|
|
$ |
- |
|
|
$ |
2,395,476 |
|
Franchise
revenues
|
|
|
224,006 |
|
|
|
60,410 |
|
|
|
- |
|
|
|
284,416 |
|
|
|
$ |
1,806,934 |
|
|
$ |
872,958 |
|
|
$ |
- |
|
|
$ |
2,679,892 |
|
Depreciation
and amortization
|
|
$ |
96,739 |
|
|
$ |
42,481 |
|
|
$ |
4,149 |
|
|
$ |
143,369 |
|
Operating
profit (loss)
|
|
$ |
155,400 |
|
|
$ |
(3,950 |
) |
|
$ |
(24,187 |
) |
|
$ |
127,263 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(89,671 |
) |
Investment
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,850 |
) |
Other
than temporary losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,916 |
) |
Other
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
303 |
|
Income
from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,129 |
|
|
|
Nine
months ended September 28, 2008
|
|
|
|
Arby’s
|
|
|
|
|
|
|
|
|
|
Restaurants
|
|
|
Corporate
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
860,560 |
|
|
$ |
- |
|
|
$ |
860,560 |
|
Franchise
revenues
|
|
|
65,679 |
|
|
|
- |
|
|
|
65,679 |
|
|
|
$ |
926,239 |
|
|
$ |
- |
|
|
$ |
926,239 |
|
Depreciation
and amortization
|
|
$ |
45,978 |
|
|
$ |
2,788 |
|
|
$ |
48,766 |
|
Operating
profit (loss)
|
|
$ |
58,344 |
|
|
$ |
(38,242 |
) |
|
$ |
20,102 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
(41,020 |
) |
Investment
income, net
|
|
|
|
|
|
|
|
|
|
|
3,189 |
|
Other
than temporary losses on investments
|
|
|
|
|
|
|
|
|
|
|
(79,686 |
) |
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
(2,619 |
) |
Loss
from continuing operations before income tax benefit
|
|
|
|
|
|
|
|
|
|
$ |
(100,034 |
) |
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
|
|
Wendy’s
Restaurants
|
|
|
Arby’s
Restaurants
|
|
|
Corporate
(a)
|
|
|
Total
|
|
Three
months ended September 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
capital expenditures
|
|
$ |
14,029 |
|
|
$ |
6,799 |
|
|
$ |
4,437 |
|
|
$ |
25,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
capital expenditures
|
|
|
|
|
|
$ |
17,958 |
|
|
$ |
- |
|
|
$ |
17,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
capital expenditures
|
|
$ |
30,614 |
|
|
$ |
22,660 |
|
|
$ |
12,006 |
|
|
$ |
65,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
capital expenditures
|
|
|
|
|
|
$ |
58,401 |
|
|
$ |
- |
|
|
$ |
58,401 |
|
|
(a)
|
The
corporate capital expenditures are primarily related to the establishment
of our shared services center.
|
There
have been no material changes in total assets since the date of the last annual
report, therefore total assets by business segment is not
presented.
(13) Transactions
with Related Parties
Wendy’s/Arby’s
has not entered into any transactions with related parties since the date of our
last Form 10-Q except for the following agreement:
Supply
Chain Relationship Agreement
During
the 2009 fourth quarter, Wendy’s and its franchisees entered into a purchasing
co-op (the “Co-op”) relationship agreement (the “Co-op Agreement”). The Co-op
will manage food and related product purchases and distribution services for the
Wendy’s system in the United States and Canada. The Co-op’s supply chain
management will ensure continuity of supply and provide consolidated purchasing
efficiencies while monitoring possible obsolete inventory. The system’s current
purchasing function is being performed and paid for by Wendy’s. In
order to facilitate the orderly transition of the current purchasing function,
Wendy’s will transfer certain contracts and certain current Wendy’s purchasing
employees to the Co-op in January 2010. Pursuant to the terms of the
Co-op Agreement, Wendy’s is required to pay $15,500 to the Co-op over an 18
month period in order to provide funding for start-up costs and cash reserves,
as well as pay for services provided by the Co-op. Future operations of the
Co-op will be paid by all members of the Co-op. The Co-op, as an independent
organization, is not expected to be consolidated with the Company’s
financial statements. Wendy’s expects to expense all required payments under the
Co-op Agreement in the fourth quarter of 2009.
(14) Legal and Environmental
Matters
In the
Form 10-K for the fiscal year ended December 28, 2008, the Company disclosed an
environmental matter with Adams Packing Association, Inc., an inactive
subsidiary of the Company, whereby Adams was listed by the United States
Environmental Protection Agency on the Comprehensive Environmental Response,
Compensation and Liability Information System list of known or suspected
contaminated sites. Adams
completed additional testing at the site in August 2009 and reported the results
to the Florida Department of Environmental Protection (the “FDEP”) at that
time. Adams and the FDEP have been corresponding since then regarding
additional testing and documentation that the FDEP has asked Adams to perform
and provide. As discussed in our Form 10-K, based on amounts spent
prior to 2008 of approximately $1,667 and after taking into consideration
various legal defenses available to us, including Adams, we expect that the
final resolution of this matter will not have a material effect on our financial
position or results of operations.
The
Company disclosed putative class action complaints in the Form 10-K for the
fiscal year ended December 28, 2008 that had been filed against Wendy’s, its
directors, and in two cases also the Company, between April 25 and June 13,
2008, alleging breach of fiduciary duties arising out of the Wendy’s board of
directors’ search for a merger partner and out of its approval of the merger
agreement with the Company on April 23, 2008, and failure to disclose material
information related to the merger in Amendment No. 3 to the Form S-4 under the
Securities Act of 1933. These cases were described in the Form 10-K as the
Guiseppone, Henzel, Smith and Ravanis cases. Updates on the status of these
cases were also included in the Company’s Form 10-Q for the quarters ended March
29 and June 28, 2009.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
On July
1, 2009, the Common Pleas Court of Franklin County, Ohio entered a final order
approving settlement of all claims in the Guiseppone, Henzel and Smith cases and
certifying a class for settlement purposes only. On July 9, 2009, the Supreme
Court of the State of New York, New York County, entered a dismissal of the
Ravanis case, with prejudice. The disposition of these cases was not material to
the results of operations or financial condition of the Company.
In
addition to the matters described above, we are involved in other litigation and
claims incidental to our current and prior businesses. We have reserves for all
of our legal and environmental matters aggregating $3,221 as of September 27,
2009. Although the outcome of these matters cannot be predicted with certainty
and some of these matters may be disposed of unfavorably to us, based on
currently available information, including legal defenses available to us, and
given the aforementioned reserves and our insurance coverage, we do not believe
that the outcome of these legal and environmental matters will have a material
adverse effect on our consolidated financial position or results of
operations.
(15) Accounting
Standards
Accounting
Standards Adopted during 2009
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued guidance
on business combinations and noncontrolling interests in consolidated financial
statements. This guidance changes the way companies account for business
combinations and noncontrolling interests by, among other things, requiring (1)
more assets and liabilities to be measured at fair value as of the acquisition
date, including a valuation of the entire company being acquired where less than
100% of the company is acquired, (2) an acquirer in preacquisition periods to
expense all acquisition-related costs, (3) changes in acquisition related
deferred tax balances after the completion of the purchase price allocation be
recognized in the statement of operations as opposed to through goodwill and (4)
noncontrolling interests in subsidiaries initially to be measured at fair value
and classified as a separate component of stockholders’ equity.
In
addition, in April 2008, the FASB issued guidance on the determination of the
useful life of intangible assets. In determining the useful life of acquired
intangible assets, the new guidance removes the requirement to consider whether
an intangible asset can be renewed without substantial cost or material
modifications to the existing terms and conditions and, instead, requires an
entity to consider its own historical experience in renewing similar
arrangements. The new guidance also requires expanded disclosure related to the
determination of intangible asset useful lives.
In April
2009, the FASB issued guidance on accounting for assets acquired and liabilities
assumed in a business combination that arise from contingencies which requires
acquirers to recognize an asset acquired or liability assumed in a business
combination that arises from a contingency at fair value if the acquisition-date
fair value of that asset or liability can be determined during the measurement
period.
The
guidance on business combinations will not impact our recording of the Wendy’s
Merger except for certain potential adjustments to deferred taxes included in
the final allocation of the purchase price. The presentation and disclosure
requirements for
noncontrolling interests in consolidated financial statements have been applied
retrospectively for all periods presented. The adoption of these noncontrolling
interest requirements resulted in a reclassification of our minority interests
from a liability to “Additional paid in capital” in our condensed consolidated
balance sheets and the income statement effect for our minority interests has
been included in “Other income (expense), net”, as such amounts are
insignificant. The new guidance on business combinations and noncontrolling
interests in consolidated financial statements will impact future acquisitions,
if any, the effect of which will depend upon the nature and terms of such
agreements.
In March
2008, the FASB published additional disclosure requirements for companies with
derivative instruments and hedging activities that are designed to enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under the guidance for accounting for derivative instruments and hedging
activities and how these items affect a company's financial position, results of
operations and cash flows. The guidance affects only these disclosures and does
not change the accounting for derivatives. The guidance has been applied
prospectively beginning with the first quarter of our 2009 fiscal
year.
In April
2009, a FASB Staff Position described expanded required interim disclosures for
all publicly traded entities about the fair value of financial instruments which
included disclosure of the methods and significant assumptions used to estimate
the fair value of financial instruments. We have applied these disclosure
requirements effective with our 2009 second quarter.
In May
2009, the FASB issued guidance that defines the period after the balance sheet
date during which a reporting entity’s
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
management
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in its financial statements, and the disclosures an entity should make
about events or transactions that occurred after the balance sheet date
(collectively, “Subsequent Events”). The Subsequent Events guidance is effective
for interim and annual periods ending after June 15, 2009, and we have applied
the guidance effective with our 2009 second quarter.
In June
2009, the FASB issued the FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (the “Codification”) which
authorized the Codification as the sole source for authoritative U.S. GAAP and
any accounting literature that is not in the Codification will be considered
nonauthoritative. We have commenced utilizing the Codification as our sole
source of authoritative US GAAP for our 2009 third quarter.
In
September 2009, the FASB issued additional implementation guidance on accounting
for uncertainty in income taxes. The guidance is effective for interim and
annual periods ending after September 15, 2009. We have applied the new guidance
effective with our 2009 third quarter; such guidance had no impact on our
accounting for uncertainty in income taxes.
Accounting
Standards Not Yet Adopted
In June
2009, the FASB issued guidelines on the consolidation of variable interest
entities which alters how a company determines when an entity that is
insufficiently capitalized or not controlled through voting should be
consolidated. A company has to determine whether it should provide consolidated
reporting of an entity based upon the entity's purpose and design and the parent
company's ability to direct the entity's actions. The guidance is effective
commencing with our 2010 fiscal year. We are currently evaluating the effects,
if any, that adoption of this standard will have on our consolidated financial
statements.
In August
2009, the FASB issued a standard on the fair value measurement of liabilities
which is based on an assumed transfer of the liability to a market participant
as of the measurement date and also provides guidance for the measurement of the
fair value of liabilities. The guidance is effective commencing with our 2009
fourth quarter. We are currently evaluating the effects, if any, that adoption
of this standard will have on our consolidated financial
statements.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of Wendy’s/Arby’s Group, Inc (“Wendy’s/Arby’s” or “Wendy’s/Arby’s
Group” and, together with its subsidiaries, the “Company” or “we”) should be
read in conjunction with our accompanying unaudited condensed consolidated
financial statements included elsewhere herein and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in our
Annual Report on Form 10-K for the fiscal year ended December 28, 2008 (the
“Form 10-K”). There have been no significant changes as of September 27, 2009 to
the application of our critical accounting policies, contractual obligations
(except as described below) or guarantees and commitments as described in Item 7
of our Form 10-K. Certain statements we make under this Item 2
constitute “forward-looking statements” under the Private Securities Litigation
Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and
Projections” in “Part II – Other Information” preceding “Item 1.” You should
consider our forward-looking statements in light of our unaudited condensed
consolidated financial statements, related notes, and other financial
information appearing elsewhere in this report, our Form 10-K and our other
filings with the Securities and Exchange Commission.
Introduction
and Executive Overview
Our
Business
Wendy’s/Arby’s
is the indirect parent company of Wendy’s International, Inc. (“Wendy’s”) and
Arby’s Restaurant Group, Inc. (“ARG”), which are the owners and franchisors of
the Wendy’s® and Arby’s® restaurant systems, respectively. We currently manage
and internally report our operations as two business segments: the operation and
franchising of Wendy’s restaurants, including its wholesale bakery operations,
and the operation and franchising of Arby’s restaurants. As of September 27,
2009, the Wendy’s restaurant system was comprised of 6,608 restaurants, of which
1,395 were owned and operated by the Company. As of September 27, 2009, the
Arby’s restaurant system was comprised of 3,739 restaurants, of which 1,165 were
owned and operated by the Company. All 2,560 Wendy’s and Arby’s Company-owned
restaurants are located principally in the United States and to a lesser extent
in Canada (the “North America Restaurants”).
Restaurant business revenues for the
2009 first nine months include: (1) $2,314.2 million of revenues from
Company-owned restaurants, (2) $81.3 million from the sale of bakery items and
kid’s meal promotion items to our franchisees and others, (3) $263.1 million
from royalty income from franchisees and (4) $21.3 million of other franchise
related revenue. Our revenues increased significantly in the 2009 first nine
months due to the merger with Wendy’s (the “Wendy’s Merger”). The Wendy’s
royalty rate was 4.0% for the nine months ended September 27, 2009. While
approximately 80% of our existing Arby’s royalty agreements and substantially
all of our new domestic royalty agreements provide for royalties of 4.0% of
franchise revenues, our average Arby’s royalty rate was 3.6% for the nine months
ended September 27, 2009.
Our
restaurant businesses have recently experienced trends in the following
areas:
Revenues
|
·
|
Industry-wide
declines in same-store sales of all segments of the restaurant industry,
including quick service restaurants
(“QSR”);
|
|
·
|
Continued
lack of general consumer confidence in the economy and the effect of
decreases in many consumers’ discretionary income caused by factors such
as (1) volatility in the financial markets and recessionary economic
conditions, including high unemployment levels, (2) a significant decline
in the real estate market, although that market has shown some improvement
in recent months, (3) fluctuations in fuel costs, with some stabilization
in recent months and (4) moderate food cost inflation through the first
half of 2009 followed by decreases in most commodity
costs;
|
|
·
|
Continued
and increasingly aggressive price competition in the QSR industry, as
evidenced by (1) value menu concepts, which offer comparatively lower
prices on some menu items, (2) the use of coupons and other price
discounting, (3) product promotions focused on lower prices of certain
menu items, including signature items, and (4) combination meal concepts,
which offer a complete meal at an aggregate price lower than the price of
individual food and beverage items;
|
|
·
|
Competitive
pressures due to extended hours of operation by many QSR competitors,
including breakfast and late night
hours;
|
|
·
|
Competitive
pressures from operators outside the QSR industry, such as the deli
sections and in-store cafes of major grocery and other retail store
chains, convenience stores and casual dining outlets offering take-out
food;
|
|
·
|
Increased
availability to consumers of product choices, including (1) healthy
products driven by a greater consumer awareness of nutritional issues, (2)
products that tend to offer a variety of portion sizes and different types
of ingredients; (3) beverage programs which offer a wider selection of
premium non-carbonated beverages, including coffee and tea products; and
(4) sandwiches with perceived higher levels of freshness, quality and
customization; and
|
|
·
|
Competitive
pressures from an increasing number of franchise opportunities seeking to
attract qualified franchisees.
|
Cost of
Sales
|
·
|
Decreasing
commodity prices which have reduced our food costs in the second half of
2009;
|
|
·
|
Relatively
stabilized fuel costs, in recent months, which have contributed to
decreases in utility, distribution and freight
costs;
|
|
·
|
Federal,
state and local legislative activity, such as minimum wage increases and
mandated health and welfare benefits which is expected to continue to
increase wages and related fringe benefits, including health care and
other insurance costs; and
|
|
·
|
Legal
or regulatory activity related to nutritional content or menu labeling
which results in increased operating
costs.
|
|
·
|
A
significant portion of both our Wendy’s and Arby’s restaurants are
franchised and, as a result, we receive revenue in the form of royalties
(which are generally based on a percentage of sales at franchised
restaurants), rent and other fees from franchisees. Arby’s franchisee
related accounts receivable and estimated reserves for uncollectibility
have increased, and may continue to increase, as a result of the
deteriorating financial condition of some of our franchisees. The
deteriorating financial condition of these franchisees also affects their
ability to make required contributions to national and local advertising
programs;
|
|
·
|
Weakness
in the overall credit markets, including higher borrowing costs in the
lending markets typically used to finance new unit development and
remodels. These tightened credit conditions and economic pressures are
negatively impacting franchisees, including the ability of some
franchisees to meet their commitments under development, rental and
franchise license agreements; and
|
|
·
|
Continued
competition for development sites among QSR competitors and other
businesses.
|
We
experience these trends directly to the extent they affect the operations of our
Company-owned restaurants and indirectly to the extent they affect sales by our
franchisees and, accordingly, the royalties and franchise fees we receive from
them.
Business
Highlights
We
believe there are significant opportunities to grow our business, strengthen our
competitive position and enhance our profitability through the execution of the
following strategies:
|
·
|
Revitalizing
the Wendy’s and Arby’s brands by creating innovative new menu items,
expanding our breakfast daypart at Wendy’s, increasing Arby’s customer
traffic by targeting our “medium Arby’s customers” and improving
affordability at Arby’s by expanding everyday value menu
items;
|
|
·
|
Continued
improvement in Wendy’s Company-owned restaurant
profitability;
|
|
·
|
Realizing
cost savings related to the Wendy’s/Arby’s
integration;
|
|
·
|
Strategically
growing our franchise base by leveraging our brands to expand in North
America as well as into new international markets with dual branded
Wendy’s and Arby’s franchised restaurants;
and
|
|
·
|
Acquisitions
of other restaurant companies.
|
Key
Business Measures
We track
our results of operations and manage our business using the following key
business measures:
We report Arby’s North America Restaurants
same-store sales commencing after a store has been open for fifteen continuous
months. Wendy’s North America Restaurants same-store sales are reported after a
store has been open for at
least
fifteen continuous months as of the beginning of the fiscal year. These
methodologies are consistent with the metrics used by our management for
internal reporting and analysis. Same-store sales exclude the impact
of currency translation.
We define
restaurant margin as sales from Company-owned restaurants (excluding sales of
bakery items and kid’s meal promotion items to franchisees) less cost of sales
(excluding costs of bakery items and kid’s meal promotion items), divided by
sales from Company-owned restaurants (excluding sales of bakery items and kid’s
meal promotion items to franchisees). Restaurant margin is influenced by factors
such as restaurant openings and closures, price increases, the effectiveness of
our advertising and marketing initiatives, featured products, product mix, the
level of our fixed and semi-variable costs, and fluctuations in food and labor
costs.
Merger
with Wendy’s International, Inc.
On
September 29, 2008, we completed the Wendy’s Merger in an all-stock transaction
in which Wendy’s shareholders received 4.25 shares of Wendy’s/Arby’s Class A
Common Stock for each share of Wendy’s common stock owned. Our consolidated
results of operations commencing September 29, 2008 include Wendy’s results of
operations.
Senior
Notes
On June
23, 2009, Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”), a
direct wholly-owned subsidiary of Wendy’s/Arby’s, issued $565.0 million
principal amount of Senior Notes (the “Senior Notes”). The Senior Notes will
mature on July 15, 2016 and accrue interest at 10.00% per annum, payable
semi-annually on January 15 and July 15, with the first payment on January 15,
2010. The Senior Notes were issued at 97.533% of the principal amount,
representing a yield to maturity of 10.50% and resulting in net proceeds paid to
us of $551.1 million. The $13.9 million discount is being accreted and the
related charge included in interest expense until the Senior Notes mature. The
Senior Notes are fully and unconditionally guaranteed, jointly and severally, on
an unsecured basis by certain direct and indirect domestic subsidiaries of
Wendy’s/Arby’s Restaurants (collectively, the “Guarantors”).
Deerfield
On
December 21, 2007, we completed the sale (the “Deerfield sale”) of our majority
capital interest in Deerfield & Company LLC (“Deerfield”), our former
subsidiary, to Deerfield Capital Corp. (“DFR”) resulting in non-cash proceeds
aggregating $134.6 million, consisting of 9.6 million shares of convertible
preferred stock of DFR (“the DFR Preferred Stock”) with a then estimated fair
value of $88.4 million and $48.0 million principal amount of series A senior
secured notes of DFR due in December 2012 (the “DFR Notes”) with a then
estimated fair value of $46.2 million. As discussed in the Form 10-K, we
recorded a valuation allowance of $21.2 million during the fourth quarter of
2008 for these DFR Notes. We also owned an additional 0.2 million common shares
in DFR.
The DFR
Notes bear interest at the three-month LIBOR (0.28% at September 27, 2009) plus
a factor, initially 5% through December 31, 2009, increasing 0.5% each quarter
from January 1, 2010 through June 30, 2011 and 0.25% each quarter from July 1,
2011 through their maturity. The DFR Notes are secured by certain equity
interests of DFR and certain of its subsidiaries. As of September 27,
2009, there is no publicly available information from DFR, known economic trends
or indications from the credit markets that we anticipate will affect the
collectability of our DFR Notes.
On March
11, 2008, DFR stockholders approved the one-for-one conversion of all its
outstanding convertible preferred stock into DFR common stock which converted
the 9.6 million preferred shares we held into a like number of shares of common
stock. During the first quarter of 2008, our Board of Directors
approved the distribution of our 9.8 million shares of DFR common stock, which
also included the 0.2 million common shares of DFR discussed above, to our
stockholders. The dividend, which was valued at $14.5 million, was paid on
April 4, 2008 to holders of record of our Class A common stock and our then
outstanding Class B common stock.
In the
first quarter of 2008, in response to unanticipated credit and liquidity events
in the first quarter of 2008, DFR announced changes to its business model and
significant losses. Based on these events and their negative effect on the
market price of DFR common stock, we concluded that the fair value and,
therefore, the carrying value of our investment in the 9.8 million common shares
was impaired. As a result, we recorded an other than temporary loss which is
included in “Other than temporary losses on investments,” of $68.1 million
(without tax benefit as described below). As a result of the distribution of the
DFR common stock, the income tax loss that resulted from the decline in value of
our investment of $68.1 million is not deductible for income tax purposes and no
income tax benefit was recorded related to this loss.
Related
Party Transactions
Wendy’s/Arby’s
has not entered into any transactions with related parties since the date of our
last Form 10-Q except for the following agreement:
Supply
Chain Relationship Agreement
During
the 2009 fourth quarter, Wendy’s and its franchisees entered into a purchasing
co-op (the “Co-op”) relationship agreement (the “Co-op Agreement”). The Co-op
will manage food and related product purchases and distribution services for the
Wendy’s system in the United States and Canada. The Co-op’s supply chain
management will ensure continuity of supply and provide consolidated purchasing
efficiencies while monitoring possible obsolete inventory. The system’s current
purchasing function is being performed and paid for by Wendy’s. In order to
facilitate the orderly transition of the current purchasing function, Wendy’s
will transfer certain contracts and certain current Wendy’s purchasing employees
to the Co-op in January 2010. Pursuant to the terms of the Co-op
Agreement, Wendy’s is required to pay $15.5 million to the Co-op over an 18
month period in order to provide funding for start-up costs and cash reserves,
as well as pay for services provided by the Co-op. Future operations of the
Co-op will be paid by all members of the Co-op. The Co-op, as an independent
organization, is not expected to be consolidated with the Company’s
financial statements. Wendy’s expects to expense all required payments under the
Co-op Agreement in the fourth quarter of 2009.
Presentation
of Financial Information
We report
on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to
December 31. All quarters presented contain 13 weeks. Because our 2009 fiscal
year ending on January 3, 2010 will contain 53 weeks, our fourth quarter of 2009
will contain 14 weeks. All references to years and quarters relate to fiscal
periods rather than calendar periods.
Results
of Operations
Three
Months Ended September 27, 2009 Compared with Three Months Ended September 28,
2008
|
|
Three
Months Ended
|
|
|
|
September
27, 2009
|
|
|
September
28, 2008
|
|
|
Total
Change
|
|
|
|
(In
Millions)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
806.1 |
|
|
$ |
287.6 |
|
|
$ |
518.5 |
|
Franchise
revenues
|
|
|
97.1 |
|
|
|
22.8 |
|
|
|
74.3 |
|
|
|
|
903.2 |
|
|
|
310.4 |
|
|
|
592.8 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
684.1 |
|
|
|
239.9 |
|
|
|
444.2 |
|
General
and administrative
|
|
|
97.9 |
|
|
|
36.1 |
|
|
|
61.8 |
|
Depreciation
and amortization
|
|
|
47.1 |
|
|
|
16.5 |
|
|
|
30.6 |
|
Impairment
of long-lived assets
|
|
|
15.5 |
|
|
|
14.2 |
|
|
|
1.3 |
|
Facilities
relocation and corporate restructuring
|
|
|
1.7 |
|
|
|
(0.1 |
) |
|
|
1.8 |
|
|
|
|
846.3 |
|
|
|
306.6 |
|
|
|
539.7 |
|
Operating
profit
|
|
|
56.9 |
|
|
|
3.8 |
|
|
|
53.1 |
|
Interest
expense
|
|
|
(36.5 |
) |
|
|
(13.6 |
) |
|
|
(22.9 |
) |
Investment
income, net
|
|
|
0.7 |
|
|
|
6.7 |
|
|
|
(6.0 |
) |
Other
than temporary losses on investments
|
|
|
- |
|
|
|
(8.1 |
) |
|
|
8.1 |
|
Other
income, net
|
|
|
1.3 |
|
|
|
0.8 |
|
|
|
0.5 |
|
Income
(loss) from continuing operations before income taxes
|
|
|
22.4 |
|
|
|
(10.4 |
) |
|
|
32.8 |
|
Provision
for income taxes
|
|
|
(8.1 |
) |
|
|
(2.9 |
) |
|
|
(5.2 |
) |
Income
(loss) from continuing operations
|
|
|
14.3 |
|
|
|
(13.3 |
) |
|
|
27.6 |
|
Income
from discontinued operations, net of income taxes
|
|
|
0.4 |
|
|
|
1.2 |
|
|
|
(0.8 |
) |
Net
income (loss)
|
|
$ |
14.7 |
|
|
$ |
(12.1 |
) |
|
$ |
26.8 |
|
Restaurant
statistics:
|
|
|
|
|
|
|
|
Wendy’s
same-store sales:
|
Third
Quarter 2009
|
|
|
|
|
|
|
North
America Company-owned restaurants
|
(1.4)%
|
|
|
|
|
|
|
North
America franchised restaurants
|
0.4%
|
|
|
|
|
|
|
North
America systemwide
|
(0.1)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arby’s
same-store sales:
|
Third
Quarter 2009
|
|
|
Third
Quarter 2008
|
|
|
|
North
America Company-owned restaurants
|
(6.5)%
|
|
|
(7.2)%
|
|
|
|
North
America franchised restaurants
|
(10.2)%
|
|
|
(4.3)%
|
|
|
|
North
America systemwide
|
(9.0)%
|
|
|
(5.1)%
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
margin:
|
|
|
|
|
|
|
|
|
Third
Quarter 2009
|
|
|
|
|
|
|
Wendy’s
|
16.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter 2009
|
|
|
Third
Quarter 2008
|
|
|
|
Arby’s
|
12.1%
|
|
|
16.6%
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
count:
|
Company-owned
|
|
|
Franchised
|
|
|
Systemwide
|
Wendy’s
restaurant count:
|
|
|
|
|
|
|
|
Restaurant
count at June 28, 2009
|
1,395
|
|
|
5,213
|
|
|
6,608
|
Opened
|
1
|
|
|
13
|
|
|
14
|
Closed
|
(1)
|
|
|
(13)
|
|
|
(14)
|
Restaurant
count at September 27, 2009
|
1,395
|
|
|
5,213
|
|
|
6,608
|
|
|
|
|
|
|
|
|
Arby’s
restaurant count:
|
|
|
|
|
|
|
|
Restaurant
count at June 28, 2009
|
1,170
|
|
|
2,575
|
|
|
3,745
|
Opened
|
2
|
|
|
12
|
|
|
14
|
Closed
|
(7)
|
|
|
(13)
|
|
|
(20)
|
Restaurant
count at September 27, 2009
|
1,165
|
|
|
2,574
|
|
|
3,739
|
Total
Wendy’s/Arby’s restaurant count at September 27, 2009
|
2,560
|
|
|
7,787
|
|
|
10,347
|
Sales
Our
sales, which were generated primarily from our Company-owned restaurants,
increased $518.5 million to $806.1 million for the three months ended September
27, 2009 from $287.6 million for the three months ended September 28, 2008. The
increase in sales was due to the Wendy’s Merger which added 1,395 Company-owned
restaurants as of September 27, 2009 that generated $536.8 million in sales
during the 2009 third quarter. Wendy’s North America Company-owned same-store
sales, excluding the impact of fewer restaurants serving breakfast in the third
quarter of 2009 as compared to the third quarter of 2008, would have increased
approximately 0.1%. Excluding the effect of the Wendy’s Merger, sales decreased
$18.3 million, which is attributable to the 6.5% decrease in same-store sales of
our Arby’s North America Company-owned restaurants stemming from lower customer
traffic primarily impacted by (1) the previously described industry-wide
restaurant trends, negative economic trends and competitive pressures in
“Introduction and Executive Overview – Our Business” and (2) a decrease in the
number of national advertising campaigns. These negative factors were partially
offset by aggressive Arby’s promotions which had a positive impact on same-store
sales during the 2009 third quarter as compared to the 2008 third
quarter.
Franchise
Revenues
Total
franchise revenues, which were generated entirely from franchised restaurants,
increased $74.3 million to $97.1 million for the three months ended September
27, 2009 from $22.8 million for the three months ended September 28, 2008. The
increase in franchise revenue was due to the Wendy’s Merger which added 5,213
franchise restaurants as of September 27, 2009 to the Wendy’s/Arby’s restaurant
system that generated $76.7 million in franchise revenue during the 2009 third
quarter. Wendy’s franchise store sales were not significantly impacted by
changes in the number of restaurants serving breakfast in the third quarter of
2009. Excluding the effect of the Wendy’s Merger, franchise revenues decreased
$2.4 million, which is attributable to the 10.2% decrease in same-store sales
for Arby’s North America franchised restaurants. Same-store sales of our Arby’s
North America franchise restaurants decreased primarily due to the same factors
discussed above under “Sales.” In addition, franchise restaurants were
negatively affected by the impact of (1) less aggressive promotions in the third
quarter of 2009 than at Company-owned restaurants and (2) less national media
advertising, which had a greater negative impact than on Company-owned
restaurants as certain franchise markets do not participate in local
advertising.
Restaurant
Margin
Our
consolidated restaurant margin decreased to 15.0% for the three months ended
September 27, 2009 from the Arby’s 16.6% for the three months ended September
28, 2008. The 2009 third quarter restaurant margin reflects the mix of the
Wendy’s restaurant margin of 16.5% and the Arby’s restaurant margin of 12.1%.
Wendy’s restaurant margin for the third quarter of 2008 was 12.5%. The increase
in the Wendy’s margin is primarily attributable to improvements in commodity
costs and in certain controllable costs primarily due to operational
initiatives, combined with price increases in the latter part of the 2008 third
quarter. The decrease in the Arby’s margin was primarily attributable to (1) the
effect of the decrease in Arby’s same-store sales without comparable reductions
in fixed and semi-variable costs and (2) the targeted product discounting of
selected Arby’s menu items. These negative factors were partially offset by
improvements in the cost of commodities.
General
and Administrative
Our
general and administrative expenses increased $61.8 million to $97.9 million for
the three months ended September 27, 2009 from $36.1 million for the three
months ended September 28, 2008. The increase was primarily due to
the Wendy’s Merger which added $53.4 million of Wendy’s-related general and
administrative expenses. Excluding these Wendy’s-related expenses, our general
and administrative expenses increased $8.4 million principally due to (1) $3.3
million of integration costs related to the Wendy’s Merger, (2) a $3.2 million
increase in certain incentive compensation accruals due to stronger consolidated
performance as compared to plan in the 2009 third quarter compared to weaker
consolidated performance as compared to plan in the 2008 third quarter, (3) a
$2.3 million increase in salaries and wages due to staffing and other expenses
associated with the establishment of the shared services center in Atlanta,
Georgia and (4) a $1.5 million increase in the allowance for doubtful accounts
primarily associated with the collection of Arby’s franchise receivables. These
increases were partially offset by (1) a $1.4 million decrease in fees for
professional and strategic services provided to us under the terms of a services
agreement with a management company (the “Management Company”) formed by our
chairman, who is our former Chief Executive Officer, and our Vice Chairman, who
is our former President and Chief Operating Officer, and a director, who is our
former Vice Chairman and (2) a $1.2 million decrease in costs associated with
our corporate aircraft.
Depreciation
and Amortization
|
|
Three
Months Ended
|
|
|
|
September
27, 2009
|
|
|
September
28, 2008
|
|
|
|
(In
Millions)
|
|
|
|
|
|
|
|
|
Arby’s
restaurants, primarily properties
|
|
$ |
14.3 |
|
|
$ |
15.9 |
|
Wendy’s
restaurants, primarily properties
|
|
|
31.4 |
|
|
|
- |
|
Other
|
|
|
1.4 |
|
|
|
0.6 |
|
|
|
$ |
47.1 |
|
|
$ |
16.5 |
|
Impairment
of Long Lived Assets
|
|
Three
Months Ended
|
|
|
|
September
27, 2009
|
|
|
September
28, 2008
|
|
|
|
(In
Millions)
|
|
|
|
|
|
|
|
|
Arby’s
restaurants, primarily properties at underperforming
locations
|
|
$ |
15.2 |
|
|
$ |
4.6 |
|
Wendy’s
restaurants
|
|
|
0.3 |
|
|
|
- |
|
General
Corporate - aircraft
|
|
|
- |
|
|
|
9.6 |
|
|
|
$ |
15.5 |
|
|
$ |
14.2 |
|
Facilities
Relocation and Corporate Restructuring
The
expense for the three months ended September 27, 2009 represents Wendy’s
merger-related severance costs incurred in the 2009 third quarter.
Interest
Expense
|
|
Three
Months Ended
|
|
|
|
September
27, 2009
|
|
|
September
28, 2008
|
|
|
|
(In
Millions)
|
|
|
|
|
|
|
|
|
Senior
Notes
|
|
$ |
14.9 |
|
|
$ |
- |
|
Wendy’s
debt
|
|
|
10.1 |
|
|
|
- |
|
Senior
secured term loan
|
|
|
4.6 |
|
|
|
6.7 |
|
Arby’s
debt
|
|
|
5.0 |
|
|
|
6.1 |
|
Amortization
of financing costs on senior secured term loan
|
|
|
1.3 |
|
|
|
0.9 |
|
Corporate
debt
|
|
|
0.6 |
|
|
|
(0.1 |
) |
|
|
$ |
36.5 |
|
|
$ |
13.6 |
|
Interest
expense increased $22.9 million principally reflecting (1) $14.9 million of
interest on the Senior Notes issued in June 2009 discussed below under
“Liquidity and Capital Resources – Senior Notes” and (2) $10.1 million of net
interest on Wendy’s debt assumed as a result of the Wendy’s Merger, which
includes a $1.0 million favorable impact from our interest rate swap agreements
discussed below under “Liquidity and Capital Resources – Derivatives.” These
increases were partially offset by a net decrease in the senior secured term
loan interest expense of $2.1 million primarily due to a decrease in the
outstanding related debt resulting from the $232.5 million of prepayments since
the end of the third quarter of 2008 as offset by an increase in the related
interest rate.
Investment
Income, Net
|
|
Three
Months Ended
|
|
|
|
September
27, 2009
|
|
|
September
28, 2008
|
|
|
|
(In
Millions)
|
|
|
|
|
|
|
|
|
Recognized
net gains
|
|
$ |
0.8 |
|
|
$ |
5.7 |
|
Interest
income
|
|
|
- |
|
|
|
0.1 |
|
Other
|
|
|
(0.1 |
) |
|
|
0.9 |
|
|
|
$ |
0.7 |
|
|
$ |
6.7 |
|
Our net
gains include realized gains (losses) on available-for-sale securities and cost
method investments and unrealized and realized gains (losses) on derivative
instruments. Our recognized net gains for the 2009 third quarter primarily
related to a $0.7 million gain realized upon the sale of one of our cost
investments. Our recognized net gains in the 2008 third quarter
related to net unrealized and realized gains on our equity securities, equity
derivatives, market put options, securities sold short and certain cost
investments, the majority of which have been sold since the 2008 third
quarter.
Provision
for Income Taxes
The
effective tax rate for the third quarter of 2009 was a 36.4%
provision. Despite a loss from continuing operations before income
taxes and minority interests, there was a provision for taxes of $2.9 million
for the 2008 third quarter. The provision for taxes for the third quarters
of both 2009 and 2008 were affected by changes in the estimated full year tax
rates in addition to the effect of 2009 adjustments related to prior year tax
matters.
Nine
Months Ended September 27, 2009 Compared with Nine Months Ended September 28,
2008
|
|
Nine
Months Ended
|
|
|
September
27, 2009
|
|
|
September
28, 2008
|
|
|
|
Total
Change
|
|
|
(In
Millions)
|
Revenues:
|
|
|
|
|
|
|
|
Sales
|
|
$ |
2,395.5 |
|
|
$ |
860.5 |
|
|
|
$ |
1,535.0 |
|
Franchise
revenues
|
|
|
284.4 |
|
|
|
65.7 |
|
|
|
|
218.7 |
|
|
|
|
2,679.9 |
|
|
|
926.2 |
|
|
|
|
1,753.7 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
2,046.5 |
|
|
|
718.3 |
|
|
|
|
1,328.2 |
|
General
and administrative
|
|
|
320.5 |
|
|
|
123.1 |
|
|
|
|
197.4 |
|
Depreciation
and amortization
|
|
|
143.4 |
|
|
|
48.8 |
|
|
|
|
94.6 |
|
Impairment
of long-lived assets
|
|
|
31.1 |
|
|
|
15.6 |
|
|
|
|
15.5 |
|
Facilities
relocation and corporate restructuring
|
|
|
8.9 |
|
|
|
0.8 |
|
|
|
|
8.1 |
|
Other
operating expense (income), net
|
|
|
2.2 |
|
|
|
(0.5 |
) |
|
|
|
2.7 |
|
|
|
|
2,552.6 |
|
|
|
906.1 |
|
|
|
|
1,646.5 |
|
Operating
profit
|
|
|
127.3 |
|
|
|
20.1 |
|
|
|
|
107.2 |
|
Interest
expense
|
|
|
(89.7 |
) |
|
|
(41.0 |
) |
|
|
|
(48.7 |
) |
Investment
(expense) income, net
|
|
|
(3.9 |
) |
|
|
3.2 |
|
|
|
|
(7.1 |
) |
Other
than temporary losses on investments
|
|
|
(3.9 |
) |
|
|
(79.7 |
) |
|
|
|
75.8 |
|
Other
income (expense), net
|
|
|
0.3 |
|
|
|
(2.6 |
) |
|
|
|
2.9 |
|
Income
(loss) from continuing operations before income taxes
|
|
|
30.1 |
|
|
|
(100.0 |
) |
|
|
|
130.1 |
|
(Provision
for) benefit from
income
taxes
|
|
|
(11.9 |
) |
|
|
12.3 |
|
|
|
|
(24.2 |
) |
Income
(loss) from continuing operations
|
|
|
18.2 |
|
|
|
(87.7 |
) |
|
|
|
105.9 |
|
Income
from discontinued operations, net of income taxes
|
|
|
0.4 |
|
|
|
1.2 |
|
|
|
|
(0.8 |
) |
Net
income (loss)
|
|
$ |
18.6 |
|
|
$ |
(86.5 |
) |
|
|
$ |
105.1 |
|
Restaurant
statistics:
|
|
|
|
|
|
Wendy’s
same-store sales:
|
2009
First
Nine
Months
|
|
|
|
|
North
America Company-owned restaurants
|
(0.8)%
|
|
|
|
|
North
America franchised restaurants
|
0.5%
|
|
|
|
|
North
America systemwide
|
0.2%
|
|
|
|
|
|
|
|
|
|
|
Arby’s
same-store sales:
|
2009
First
Nine
Months
|
|
2008
First
Nine
Months
|
|
|
North
America Company-owned restaurants
|
(6.8)%
|
|
(4.2)%
|
|
|
North
America franchised restaurants
|
(8.6)%
|
|
(2.4)%
|
|
|
North
America systemwide
|
(8.0)%
|
|
(3.0)%
|
|
|
|
|
|
|
|
|
Restaurant
margin:
|
|
|
|
|
|
|
2009
First
Nine
Months
|
|
|
|
|
Wendy’s
|
14.6%
|
|
|
|
|
|
|
|
|
|
|
|
2009
First
Nine
Months
|
|
2008
First
Nine
Months
|
|
|
Arby’s
|
13.8%
|
|
16.5%
|
|
|
|
|
|
|
|
|
Restaurant
count:
|
Company-owned
|
|
Franchised
|
|
Systemwide
|
Wendy’s
restaurant count:
|
|
|
|
|
|
Restaurant
count at December 28, 2008
|
1,406
|
|
5,224
|
|
6,630
|
Opened
|
8
|
|
32
|
|
40
|
Closed
|
(8)
|
|
(54)
|
|
(62)
|
Sold
to franchisees, net
|
(11)
|
|
11
|
|
-
|
Restaurant
count at September 27, 2009
|
1,395
|
|
5,213
|
|
6,608
|
|
|
|
|
|
|
Arby’s
restaurant count:
|
|
|
|
|
|
Restaurant
count at December 28, 2008
|
1,176
|
|
2,580
|
|
3,756
|
Opened
|
5
|
|
46
|
|
51
|
Closed
|
(16)
|
|
(52)
|
|
(68)
|
Restaurant
count at September 27, 2009
|
1,165
|
|
2,574
|
|
3,739
|
Total
Wendy’s/Arby’s restaurant count at September 27, 2009
|
2,560
|
|
7,787
|
|
10,347
|
Sales
Our
sales, which were generated primarily from our Company-owned restaurants,
increased $1,535.0 million to $2,395.5 million for the nine months ended
September 27, 2009 from $860.5 million for the nine months ended September 28,
2008. The increase in sales was due to the Wendy’s Merger which added 1,395
Company-owned restaurants as of September 27, 2009 that generated $1,582.9
million of sales during the 2009 first nine months. Wendy’s North America
Company-owned same-store sales, excluding the impact of fewer restaurants
serving breakfast in the 2009 first nine months as compared to the 2008 first
nine months, would have increased approximately 0.8%. Excluding the effect of
the Wendy’s Merger, sales decreased $47.9 million,
which is attributable to the 6.8% decrease in same-store sales of our Arby’s
North America Company-owned restaurants, principally due to the same factors
discussed under “Sales” in the three month discussion above.
Franchise
Revenues
Total
franchise revenues, which were generated entirely from franchised restaurants,
increased $218.7 million to $284.4 million for the nine months ended September
27, 2009 from $65.7 million for the nine months ended September 28, 2008. The
increase in franchise revenue was due to the Wendy’s Merger which added 5,213
franchise restaurants as of September 27, 2009 to the Wendy’s/Arby’s restaurant
system that generated $224.0 million in franchise revenue during the 2009 first
nine months. Wendy’s franchise same-store sales were not significantly impacted
by changes in the number of restaurants serving breakfast in the 2009 first nine
months. Excluding the effect of the Wendy’s Merger, franchise revenues decreased
$5.3 million, which is attributable to the 8.6% decrease in same-store sales for
Arby’s North America franchised restaurants. Same-store sales of our Arby’s
North America franchised restaurants decreased principally due to the same
factors discussed under “Franchise Revenues” in the three month discussion
above.
Restaurant
Margin
Our
consolidated restaurant margin decreased to 14.3% for the nine months ended
September 27, 2009 from the Arby’s 16.5% restaurant margin for the nine months
ended September 28, 2008. The 2009 first nine months restaurant margin reflects
the mix of the Wendy’s restaurant margin of 14.6% and the Arby’s restaurant
margin of 13.8%. Wendy’s restaurant margin for the 2008 first nine months was
11.6%. The increase in the Wendy’s margin is primarily attributable to the
effect of prior year price increases in the latter part of the 2008 third
quarter and improvements in labor and certain controllable costs, partially due
to operational initiatives, as slightly offset by increases in commodity costs
during the 2009 nine months as compared to the 2008 nine months. The decrease in
the Arby’s margin was primarily attributable to the same factors discussed under
“Restaurant Margin” in the three month discussion.
General
and Administrative
Our
general and administrative expenses increased $197.4 million to $320.5 million
for the nine months ended September 27, 2009 from $123.1 million for the nine
months ended September 28, 2008. This increase was due to the Wendy’s
Merger which added $176.1 million of Wendy’s-related general and administrative
expenses. Excluding these Wendy’s-related expenses, our general and
administrative expenses increased $21.3 million principally due to (1) $11.2
million of integration costs related to the Wendy’s Merger, (2) a $7.5 million
increase in incentive compensation primarily as a result of better than planned
performance on a consolidated basis in the 2009 first nine months as compared to
performance versus plan for the same period in the prior year, (3) a $3.6
million increase in the allowance for doubtful accounts primarily associated
with the collection of Arby’s franchise receivables and (4) a $3.1 million
increase in salaries and wages due to staffing and other expenses associated
with the establishment of the shared services center in Atlanta, Georgia. These
increases were partially offset by (1) a $3.9 million decrease in fees for
professional and strategic services provided to us under the terms of a services
agreement with the Management Company and (2) a $2.3 million decrease in costs
associated with our corporate aircraft.
Depreciation
and Amortization
|
|
Nine
Months Ended
|
|
|
|
September
27, 2009
|
|
|
September
28, 2008
|
|
|
|
(In
Millions)
|
|
|
|
|
|
|
|
|
Arby’s
restaurants, primarily properties
|
|
$ |
42.5 |
|
|
$ |
46.0 |
|
Wendy’s
restaurants, primarily properties
|
|
|
96.7 |
|
|
|
- |
|
Other
|
|
|
4.2 |
|
|
|
2.8 |
|
|
|
$ |
143.4 |
|
|
$ |
48.8 |
|
Impairment
of Long Lived Assets
|
|
Nine
Months Ended
|
|
|
|
September
27, 2009
|
|
|
September
28, 2008
|
|
|
|
(In
Millions)
|
|
|
|
|
|
|
|
|
Arby’s
restaurants, primarily properties at underperforming
locations
|
|
$ |
27.9 |
|
|
$ |
6.0 |
|
Wendy’s
restaurants
|
|
|
1.0 |
|
|
|
- |
|
General
corporate, aircraft
|
|
|
2.2 |
|
|
|
9.6 |
|
|
|
$ |
31.1 |
|
|
$ |
15.6 |
|
Facilities
Relocation and Corporate Restructuring
The
expense for the nine months ended September 27, 2009 represents Wendy’s
merger-related severance costs incurred in the 2009 first nine
months.
Interest
Expense
|
|
Nine
Months Ended
|
|
|
|
September
27, 2009
|
|
|
September
28, 2008
|
|
|
|
(In
Millions)
|
|
|
|
|
|
|
|
|
Wendy’s
debt
|
|
$ |
32.9 |
|
|
$ |
- |
|
Senior
Notes
|
|
|
15.9 |
|
|
|
- |
|
Senior
secured term loan
|
|
|
15.2 |
|
|
|
22.8 |
|
Amortization
of financing costs on senior secured term loan
|
|
|
8.5 |
|
|
|
2.2 |
|
Arby’s
debt
|
|
|
15.8 |
|
|
|
16.5 |
|
Corporate
debt
|
|
|
1.4 |
|
|
|
(0.5 |
) |
|
|
$ |
89.7 |
|
|
$ |
41.0 |
|
Interest
expense increased $48.7 million principally reflecting (1) $32.9 million of net
interest on Wendy’s debt assumed as a result of the Wendy’s Merger, which
includes a $1.0 million favorable impact from our interest rate swap agreements
discussed below under “Liquidity and Capital Resources – Derivatives,” (2) $15.9
million of interest on the Senior Notes issued in June 2009 as discussed below
under “Liquidity and Capital Resources – Senior Notes” and (3) a $6.3 million
increase in 2009 from the write-off of financing costs related to prepayments on
the senior secured term loan as compared to the same period in 2008 as discussed
below under “Liquidity and Capital Resources – Senior Secured Term Loan.” These
increases were partially offset by a net decrease of approximately $7.6 million
in the senior secured term loan interest expense. The net decrease was the
result of a decrease in interest expense of approximately $15.6 million due to
lower average outstanding debt levels outstanding on the senior secured term
loan partially offset by an increase of approximately $8.0 million due to the
change in interest rate as described in “Liquidity and Capital Resources –
Senior Secured Term Loan.”
Investment
(Expense) Income, Net
|
|
Nine
Months Ended
|
|
|
|
September
27, 2009
|
|
|
September
28, 2008
|
|
|
|
(In
Millions)
|
|
|
|
|
|
|
|
|
Recognized
net gains
|
|
$ |
2.2 |
|
|
$ |
1.4 |
|
Withdrawal
fee
|
|
|
(5.5 |
) |
|
|
- |
|
Interest
income
|
|
|
0.2 |
|
|
|
0.8 |
|
Other
|
|
|
(0.8 |
) |
|
|
1.0 |
|
|
|
$ |
(3.9 |
) |
|
$ |
3.2 |
|
Our net
gains include realized gains (losses) on available-for-sale securities and cost
method investments and unrealized and realized gains (losses) on derivative
instruments. The change in our recognized gains in the 2009 first nine months as
compared to the 2008 first nine months is primarily due to: (1) $2.3 million of
net gains that were realized upon the accelerated liquidation of our investments
in an equities account in the 2009 second quarter (the “Equities Sale”) and (2)
$4.7 million of unrealized and realized losses on swap derivatives held in the
first nine months of 2008 as offset by (1) a $4.4 million decrease in
unrealized
gains on
put and call option derivatives that were sold after the 2008 first nine months
and (2) $1.2 million of realized losses on securities sold short in the 2009
first nine months.
The $5.5
million withdrawal fee recorded in the 2009 second quarter relates to the fee
paid to the Management Company for the Equities Sale in the 2009 second quarter
as discussed above.
Other
Than Temporary Losses on Investments
|
|
Nine
Months Ended
|
|
|
|
September
27, 2009
|
|
|
September
28, 2008
|
|
|
|
(In
Millions)
|
|
|
|
|
|
|
|
|
DFR
common stock
|
|
$ |
- |
|
|
$ |
68.1 |
|
Legacy Assets
|
|
|
3.1 |
|
|
|
6.5 |
|
Available-for-sale securities
|
|
|
0.8 |
|
|
|
5.1 |
|
|
|
$ |
3.9 |
|
|
$ |
79.7 |
|
Based on a review of our unrealized
investment losses in both the 2009 and 2008 nine month periods, we determined
that the decreases in the fair value of certain of our Legacy Assets,
available-for-sale securities and our former investment in the DFR common stock
were other than temporary due to the severity of the decline, the financial
condition of the investee and the prospect for future recovery in the market
value of the investment. Accordingly, we recorded other than temporary losses on
our Legacy Assets and available-for-sale securities of $3.9 million in the 2009
first nine months. In the 2008 first nine months, we recorded $68.1
million in losses for the DFR common stock discussed in “Introduction and
Executive Overview – Deerfield,” $6.5 million for our Jurlique investment, one
of our Legacy Assets, and $5.1 million for certain of our available-for-sale
securities, as described in the three month discussion above.
(Provision
for) Benefit From Income Taxes
The
effective tax rate for the 2009 first nine months was a 39.5% provision compared
to a benefit of 12.3% in the 2008 first nine months. The effective rate is lower
in 2008 principally as a result of (1) the effect of a 2008 tax loss which is
not deductible for tax purposes in connection with the decline in value of our
investment in the common stock of DFR and related declared dividend as described
above in “Introduction and Executive Overview—Deerfield,” (2) the effect of
non-deductible compensation, other non-deductible expenses and tax credits and
their relationship to the pre-tax income in both years, (3) the effect of 2009
adjustments related to prior year tax matters, and (4) the effect of adjustments
to uncertain tax positions relative to pre-tax income in both
years.
Outlook
Sales
We
anticipate that certain of the negative factors described above which affected
our 2009 Company-owned same-store sales, including current restaurant
industry-wide sales trends, the uncertain economic environment and competitive
discounting, will continue to negatively impact our customer traffic and sales
for the fourth quarter of 2009. The Wendy’s brand will be negatively impacted by
a reduction in the number of stores serving breakfast while refining this
daypart strategy. For the fourth quarter of 2009, the Arby’s marketing strategy
will begin to emphasize everyday value products. For the fourth quarter of
2009, the net impact of new store openings and closings are not expected to have
a significant impact on consolidated sales.
Franchise
Revenues
We expect
that the same-store sales trends for franchised restaurants at Arby’s and
Wendy’s will continue to be generally impacted by many of the same factors
described above under “Sales.” We anticipate that the Arby’s
franchised restaurants same-store sales may continue to be more negatively
impacted by the reduction in national advertising in the fourth quarter of 2009
as compared to 2008. We do not anticipate the reduction in the number
of stores serving breakfast to have a significant impact on same-store sales of
Wendy’s franchised restaurants in the 2009 fourth quarter.
Restaurant
Margin
We expect
that the factors described above which affected restaurant margin for
Company-owned restaurants for the Wendy’s and Arby’s brands will continue to
impact restaurant margin for the 2009 fourth quarter. The Wendy’s and
Arby’s restaurant margins are expected to be favorably impacted by improvement
in commodity costs in the fourth quarter of 2009 as compared to the fourth
quarter of 2008. We expect that the 2009 fourth quarter restaurant margin at
Company-owned restaurants for the Wendy’s brand will increase compared to the
same period in the prior year primarily as a result of the impact of currently
effective price increases, shifts in product mix and tighter controls on fixed
and semi-variable costs. We expect the Arby’s fourth quarter 2009 margins to
continue to be negatively affected by sales deleveraging.
General
and Administrative
We expect
that our general and administrative expenses for the fourth quarter of 2009 will
increase as compared to the same period in 2008 primarily as a result of (1) the
$15.5 million to be paid to the Co-op as described above in “Introduction and
Executive Overview – Related Party Transactions” and (2) continued charges
related to our allowance for doubtful accounts primarily associated with the
collection of Arby’s franchise receivables. These increases will be partially
offset by merger-related synergies and other cost saving
initiatives.
Depreciation
and Amortization
We expect
that our depreciation and amortization expense for the fourth quarter of 2009
will increase as compared to the same period in 2008 primarily as a result of
(1) an increase in the depreciation run rate of $6.5 million recorded in the
2009 first quarter related to valuation adjustments on long-lived assets from
the Wendy’s Merger completed in the 2008 fourth quarter and (2) an increase in
information technology assets. These increases are expected to be partially
offset by decreases in depreciation and amortization as a result of (1) the
retirement of long-lived assets added as a result of the Wendy’s Merger and (2)
a reduction in depreciation on Arby’s long-lived assets for which we have
recorded impairment charges since the fourth quarter of 2008.
Facilities
Relocation and Corporate Restructuring
We expect
that our facilities relocation and corporate restructuring expense for the
fourth quarter of 2009 will be lower than the same period in 2008 primarily due
to the timing of restructuring activities.
Interest
Expense
We expect
that our interest expense for the fourth quarter of 2009 will increase compared
to the same period in 2008 primarily as a result of: (1) the issuance of the
Senior Notes discussed in “Liquidity and Capital Resources-Long-term Debt” and
(2) the effect of increased interest rates under our amended senior secured term
loan. These increases are expected to be partially offset by the
effect on interest expense of (1) the $232.5 million in prepayments of the
senior secured term loan since the third quarter of 2008, including $132.5
million paid during the 2009 first nine months and (2) the interest rate swaps
discussed in “Liquidity and Capital Resources – Derivatives.”
Liquidity
and Capital Resources
Sources
and Uses of Cash for the Nine Months Ended September 27, 2009
Cash and cash equivalents totaled
$644.6 million at September 27, 2009 compared to $90.1 million at December 28,
2008. For the nine months ended September 27, 2009, net cash provided by
continuing operating activities totaled $251.3 million, which includes the
following significant items:
|
·
|
Our
net income of $18.6 million;
|
|
·
|
Depreciation
and amortization of $143.4 million;
|
|
·
|
Impairment
of long-lived assets charges of $31.1
million;
|
|
·
|
The
write-off and amortization of deferred financing costs of $13.9
million;
|
|
·
|
The
receipt of deferred vendor incentives, net of amount recognized, of $13.0
million;
|
|
·
|
Distributions
received from our investment in a joint venture of $7.1 million;
and
|
|
·
|
Changes
in operating assets and liabilities which resulted in a net use of cash of
$1.1 million primarily due to a $7.6 million increase in prepaid
expenses and other current assets mostly offset by a $3.7 million increase
in accounts payable, accrued expenses and other current liabilities and a
$2.8 million decrease in
inventories.
|
We expect
positive cash flows from continuing operating activities during the fourth
quarter of 2009.
Additionally,
for the nine months ended September 27, 2009, we had the following significant
sources and uses of cash other than from operating activities:
|
·
|
Proceeds
of $556.0 million primarily from the issuance of the Senior Notes
discussed below under “Long-term
Debt”;
|
|
·
|
Net
repayments of other long-term debt of $154.4 million including a
prepayment of $132.5 million on our senior secured term
loan;
|
|
·
|
Cash
capital expenditures totaling $65.3 million, including the construction of
new restaurants (approximately $15.8 million) and the remodeling of
existing restaurants;
|
|
·
|
Deferred
financing costs of $38.0 million;
|
|
·
|
Net
investment adjustments of $36.8
million;
|
|
·
|
Repurchases
of common stock of $25.2 million;
and
|
|
·
|
Dividend
payments of $21.1 million.
|
The net
cash provided by continuing operations before the effect of exchange rate
changes on cash was approximately $553.4 million.
Working
Capital
Working
capital, which equals current assets less current liabilities, was $461.9
million at September 27, 2009, reflecting a current ratio, which equals current
assets divided by current liabilities, of 2.0:1. The working capital at
September 27, 2009 increased $583.6 million from a deficit of $121.7 million at
December 28, 2008, primarily related to $251.3 million in net cash provided by
continuing operating activities and $319.0 million in net cash provided by
continuing financing activities.
Long-term
Debt
There
were no material changes to the terms of any debt obligations since December 28,
2008, as discussed in our Form 10-K, except as follows:
Senior
Notes
On June
23, 2009, Wendy’s/Arby’s Restaurants, a direct wholly-owned subsidiary of
Wendy’s/Arby’s, issued $565.0 million principal amount of Senior Notes. The
Senior Notes will mature on July 15, 2016 and accrue interest at 10.00% per
annum, payable semi-annually on January 15 and July 15, with the first payment
on January 15, 2010. The Senior Notes were issued at 97.533% of the principal
amount, representing a yield to maturity of 10.50% and resulting in net proceeds
paid to us of $551.1 million. The $13.9 million discount is being accreted and
the related charge included in interest expense until the Senior Notes mature.
The Senior Notes are fully and unconditionally guaranteed, jointly and
severally, on an unsecured basis by certain direct and indirect domestic
subsidiaries of Wendy’s/Arby’s Restaurants (collectively, the
“Guarantors”).
Wendy’s/Arby’s
Restaurants incurred approximately $21.1 million in costs related to the
issuance of the Senior Notes which are being amortized to interest
expense over the Senior Notes’ term utilizing the effective interest
method.
An
Indenture dated as of June 23, 2009 (the “Indenture”) among Wendy’s/Arby’s
Restaurants, the Guarantors and U.S. Bank National Association, as trustee (the
“Trustee”), includes certain customary covenants that, subject to a number of
important exceptions and qualifications, limit the ability of Wendy’s/Arby’s
Restaurants and its restricted subsidiaries to, among other things, incur debt
or issue preferred or disqualified stock, pay dividends on equity interests,
redeem or repurchase equity interests or prepay or repurchase subordinated debt,
make some types of investments and sell assets, incur certain liens, engage in
transactions with affiliates (except on an arms-length basis), and consolidate,
merge or sell all or substantially all of their assets. The covenants
generally do not restrict Wendy’s/Arby’s Group or any of its subsidiaries that
are not Wendy’s/Arby’s Restaurants’ subsidiaries.
Senior
Secured Term Loan
On June
10, 2009, Wendy’s/Arby’s Restaurants entered into an Amendment No. 1 to the
amended and restated Arby’s Credit Agreement (as so amended, the “Credit
Agreement”) which, among other things (1) permitted the issuance by
Wendy’s/Arby’s Restaurants of the Senior Notes described above and the
incurrence of debt thereunder, and permitted Wendy’s/Arby’s Restaurants to
dividend to Wendy’s/Arby’s the net cash proceeds of the Senior Notes issuance
less amounts used to prepay the senior secured term loan under the Credit
Agreement (the “Term Loan”) and pay accrued interest thereon and certain other
payments, (2) modified certain total leverage financial covenants, added certain
financial covenants based on senior secured leverage ratios and modified the
minimum interest coverage ratio, (3) permitted the prepayment at any time prior
to maturity of certain Senior Notes of Wendy’s and eliminated certain
incremental debt baskets in the covenant prohibiting the incurrence of
additional indebtedness and (4) modified the interest margins to provide that
the margins will fluctuate based on Wendy’s/Arby’s Restaurants’ corporate credit
rating. Wendy’s/Arby’s Restaurants incurred approximately $3.1
million in costs related to such Amendment No. 1.
As
amended, the Term Loan and amounts borrowed under the revolving credit facility
(the “Amended Revolver”) under the Credit Agreement bear interest at our option
at either (1) the Eurodollar Base Rate (as defined in the Credit Agreement), as
adjusted pursuant to applicable regulations (but not less than 2.75%), plus an
interest rate margin of 4.00%, 4.50%, 5.00% or 6.00% per annum, depending on
Wendy’s/Arby’s Restaurants’ corporate credit rating, or (2) the Base Rate (as
defined in the Credit Agreement), which is the higher of the interest rate
announced by the administrative agent for the Credit Agreement as its base rate
and the Federal funds rate plus 0.50% (but not less that 3.75%), in either case
plus an interest rate margin of 3.00%, 3.50%, 4.00% or 5.00% per annum,
depending on Wendy’s/Arby’s Restaurants’ corporate credit rating. Based on
Wendy’s/Arby’s Restaurants’ corporate credit rating at the effective date of
Amendment No. 1 and as of September 27, 2009, the applicable interest rate
margins available to us were 4.50% for Eurodollar Base Rate borrowings and 3.50%
for Base Rate
borrowings.
Since the effective date of Amendment No. 1 and as of September 27, 2009, we
have elected to use the Eurodollar Base Rate which resulted in a rate of 7.25%
for the 2009 third quarter.
Concurrent
with the closing of the issuance of the Senior Notes, we prepaid the Term Loan
in an aggregate principal amount of $132.5 million and accrued interest
thereon.
During
the nine months ended September 27, 2009, we borrowed a net total of $51.2
million under the Amended Revolver; however, no amounts were outstanding as of
September 27, 2009. The Amended Revolver includes a sub-facility for the
issuance of letters of credit up to $50.0 million. The availability
under the Amended Revolver as of September 27, 2009 was $135.6 million, which is
net of $34.4 million for outstanding letters of credit.
Derivatives
During
the third quarter of 2009, we entered into $361.0 million of notional amount
interest rate swap agreements (the “Interest Rate Swaps”) that swap the fixed
rate interest rates on our 6.20% and 6.25% Wendy’s Senior Notes for floating
rates. The Company’s primary objective for entering into
derivative instruments is to manage its exposure to changes in interest rates,
as well as to maintain an appropriate mix of fixed and variable rate
debt.
The
Interest Rate Swaps are accounted for as fair value hedges and qualify for the
short-cut method under the applicable guidance. At September 27, 2009, the fair
value of our Interest Rate Swaps was $2.8 million and has been included in
“Deferred costs and other assets” and as an adjustment to the carrying amount of
the 6.20% and 6.25% Wendy’s Senior Notes.
Debt
Covenants
We were
in compliance with all the covenants of the Credit Agreement as of September 27,
2009 and we expect to remain in compliance with all of these covenants for the
next twelve months. As of September 27, 2009 there was $380.0 million available
for the payment of dividends indirectly to Wendy’s/Arby’s under the covenants of
the Credit Agreement which includes the net proceeds, as defined, from the
Senior Notes less any dividends paid since their issuance.
Wendy’s
6.20% and 6.25% Senior Notes and 7% Debentures (the "Wendy's Notes") contain
covenants that specify limits on the incurrence of indebtedness. We were in
compliance with these covenants as of September 27, 2009 and project that we
will be in compliance with these covenants for the next twelve
months.
A
significant number of the underlying leases in the Arby’s restaurants segment
for sale-leaseback obligations and capitalized lease obligations, as well as the
operating leases, require or required periodic financial reporting of certain
subsidiary entities within ARG or of individual restaurants, which in many cases
have not been prepared or reported. The Company has negotiated waivers and
alternative covenants with its most significant lessors which substitute
consolidated financial reporting of ARG for that of individual subsidiary
entities and which modify restaurant level reporting requirements for more than
half of the affected leases. Nevertheless, as of September 27, 2009,
the Company was not in compliance, and remains not in compliance, with the
reporting requirements under those leases for which waivers and alternative
financial reporting covenants have not been negotiated. However, none of the
lessors has asserted that the Company is in default of any of those lease
agreements. The Company does not believe that such non-compliance will have a
material adverse effect on its condensed consolidated financial position or
results of operations.
Contractual
Obligations
In our
2008 Form 10-K, we disclosed our contractual obligations. As of
September 27, 2009, there have been no material changes to those contractual
obligations outside of the ordinary course of business except: (1) the issuance
of $565.0 million of the Senior Notes in June 2009, (2) the repayment of $132.5
million of the Term Loan, (3) Interest Rate Swaps with a notional amount of
$361.0 million and (4) a supply chain relationship agreement with a $15.5
million commitment to fund expenses of a new purchasing co-operative for the
Wendy’s system entered into between Wendy’s and its franchisees.
Credit
Ratings
Wendy’s/Arby’s
Group, Inc. and its subsidiaries with specific debt issuances (Wendy’s/Arby’s
Restaurants and Wendy’s) are rated by Standard & Poor’s (“S&P”) and
Moody’s Investors Service (“Moody’s”).
In June
2009, the agencies assigned the following ratings for Wendy’s/Arby’s Group,
Inc., Wendy’s/Arby’s Restaurants and the Wendy’s Notes:
|
|
S&P
|
|
Moody’s
|
Corporate
family/corporate credit
|
|
|
|
|
Entity
|
|
Wendy’s/Arby’s
Group, Inc.
|
|
Wendy’s/Arby’s
Restaurants
|
Rating
|
|
B+
|
|
B2
|
Outlook
|
|
Negative
|
|
Stable
|
|
|
|
|
|
Wendy’s/Arby’s
Restaurants Senior Notes
|
|
B+
|
|
B2
|
|
|
|
|
|
Wendy’s/Arby’s
Restaurants Term Loan
|
|
BB
|
|
Ba2
|
|
|
|
|
|
Wendy’s
Notes
|
|
B-
|
|
Caa1
|
There are
many factors that could lead to future upgrades or downgrades of our credit
ratings. Credit rating upgrades or downgrades could lead to, among other things,
changes in borrowing costs and changes in our ability to access capital markets
on acceptable terms.
A rating
is not a recommendation to buy, sell or hold any security, and may be subject to
revision or withdrawal at any time by the rating agency. Each rating should be
evaluated independently of any other rating.
Dividends
On March
30, 2009, June 15, 2009 and September 15, 2009 we paid quarterly cash dividends
of $0.015 per share on our common stock, aggregating $21.1 million. On November
3, 2009 we declared a quarterly cash dividend of $0.015 per share on our common
stock payable on December
15, 2009 to holders of record on December
1, 2009. Based on these dividend declarations and payment dates, our
total cash requirement for dividends for the 2009 fourth quarter would be
approximately $7.0 million. We currently intend to continue to
declare and pay quarterly cash dividends; however, there can be no assurance
that any quarterly dividends will be declared or paid in the future or of the
amount or timing of such dividends, if any.
Stock
Repurchases
As
approved by our Board of Directors on August 4, 2009, our management is
currently authorized, when and if market conditions warrant and to the extent
legally permissible, to repurchase through January 2, 2011 up to a total of
$50.0 million of our Common Stock. As of the end of the third quarter
of 2009, we have repurchased 4.9 million shares with an aggregate purchase price
of $25.1 million, excluding commission of $0.1 million. As of November 5,
2009, we repurchased an additional 5.4 million shares for an aggregate purchase
price of $24.0 million, excluding commission of $0.1 million, which
substantially completed the August 2009 share repurchase
authorization.
On
November 3, 2009, our Board of Directors authorized our management, when and if
market conditions warrant and to the extent legally permissible, to repurchase
through January
2, 2011 up to an additional $50.0 million of our Common
Stock. As of the date of this report, no repurchases have occurred
under this new authorization.
Universal
Shelf Registration Statement
In
December 2008, the Company filed a universal shelf registration statement with
the Securities and Exchange Commission in connection with the possible future
offer and sale, from time to time, of an indeterminate amount of our common
stock, preferred stock, debt securities and warrants to purchase any of these
types of securities. This registration statement became effective automatically
upon filing. Unless otherwise described in the applicable prospectus supplement
relating to any offered securities, we anticipate using the net proceeds of each
offering for general corporate purposes, including financing of acquisitions and
capital expenditures, additions to working capital and repayment of existing
debt. We have not presently made any decision to issue any specific securities
under this universal shelf registration statement.
Sources
and Uses of Cash for the Fourth Quarter of 2009
Our
anticipated consolidated cash requirements for continuing operations for the
fourth quarter of 2009, exclusive of operating cash flow requirements, consist
principally of:
|
·
|
Cash
capital expenditures of approximately $58.7
million;
|
|
·
|
Quarterly
cash dividends aggregating up to approximately $7.0
million;
|
|
·
|
Scheduled
debt principal repayments aggregating $5.2
million;
|
|
·
|
Potential
stock repurchases of up to $74.9 million, of which $24.0 million,
excluding commission, was purchased through November 5, 2009;
and
|
|
·
|
The
costs of any potential business acquisitions or financing
activities.
|
We expect to meet these requirements
from operating cash flows and available cash.
Legal
and Environmental Matters
In the
Form 10-K for the fiscal year ended December 28, 2008, the Company disclosed an
environmental matter with Adams Packing Association, Inc., an inactive
subsidiary of the Company, whereby Adams was listed by the United States
Environmental Protection Agency on the Comprehensive Environmental Response,
Compensation and Liability Information System list of known or suspected
contaminated sites. Adams
completed additional testing at the site in August 2009 and reported the results
to the Florida Department of Environmental Protection (the “FDEP”) at that
time. Adams and the FDEP have been corresponding since then regarding
additional testing and documentation that the FDEP has asked Adams to perform
and provide. As discussed in our Form 10-K, based on amounts spent
prior to 2008 of approximately $1.7 million and after taking into consideration
various legal defenses available to us, including Adams, we expect that the
final resolution of this matter will not have a material effect on our financial
position or results of operations.
The
Company disclosed putative class action complaints in the Form 10-K for the
fiscal year ended December 28, 2008 that had been filed against Wendy’s, its
directors, and in two cases also the Company, between April 25 and June 13,
2008, alleging breach of fiduciary duties arising out of the Wendy’s board of
directors’ search for a merger partner and out of its approval of the merger
agreement with the Company on April 23, 2008, and failure to disclose material
information related to the merger in Amendment No. 3 to the Form S-4 under the
Securities Act of 1933. These cases were described in the Form 10-K as the
Guiseppone, Henzel, Smith and Ravanis cases. Updates on the status of
these cases were also included in the Company’s Form 10-Q for the quarters ended
March 29 and June 28, 2009.
On July
1, 2009, the Common Pleas Court of Franklin County, Ohio entered a final order
approving settlement of all claims in the Guiseppone, Henzel and Smith cases and
certifying a class for settlement purposes only. On July 9, 2009, the
Supreme Court of the State of New York, New York County, entered a dismissal of
the Ravanis case, with prejudice. The disposition of these cases was not
material to the results of operations or financial condition of the
Company.
In
addition to the matters described above, we are involved in other litigation and
claims incidental to our current and prior businesses. We have reserves for all
of our legal and environmental matters aggregating $3.2 million as of September
27, 2009. Although the outcome of these matters cannot be predicted with
certainty and some of these matters may be disposed of unfavorably to us, based
on currently available information, including legal defenses available to us,
and given the aforementioned reserves and our insurance coverage, we do not
believe that the outcome of these legal and environmental matters will have a
material adverse effect on our consolidated financial position or results of
operations.
Seasonality
Our
restaurant operations are moderately impacted by seasonality because Wendy’s
restaurant revenues are normally higher during the summer months than during the
winter months. Because of this seasonality, results for any
particular quarter are not necessarily indicative of the results that may be
achieved for any other quarter or for the full fiscal year.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In June
2009, the FASB issued guidelines on the consolidation of variable interest
entities which alters how a company determines when an entity that is
insufficiently capitalized or not controlled through voting should be
consolidated. A company has to determine whether it should provide consolidated
reporting of an entity based upon the entity's purpose and design and the parent
company's ability to direct the entity's actions. The guidance is effective
commencing with our 2010 fiscal year. We are currently evaluating the effects,
if any, that adoption of this standard will have on our consolidated financial
statements.
In August
2009, the FASB issued a standard on the fair value measurement of liabilities
which is based on an assumed transfer of the liability to a market participant
as of the measurement date and also provides guidance for the measurement of the
fair value of liabilities. The guidance is effective commencing with our 2009
fourth quarter. We are currently evaluating the effects, if any, that adoption
of this standard will have on our consolidated financial
statements.
Item
3. Quantitative and
Qualitative Disclosures about Market Risk
This
“Quantitative and Qualitative Disclosures about Market Risk” has been presented
in accordance with Item 305 of Regulation S-K promulgated by the Securities and
Exchange Commission (the “SEC”) and should be read in conjunction with “Item 7A.
Quantitative and Qualitative Disclosures about Market Risk” in our annual report
on Form 10-K for the fiscal year ended December 28, 2008 (the “Form 10-K”).
Certain statements we make under this Item 3 constitute “forward-looking
statements” under the Private Securities Litigation Reform Act of 1995. See
“Special Note Regarding Forward-Looking Statements and Projections” in “Part II
– Other Information” preceding “Item 1.”
We are
exposed to the impact of interest rate changes, changes in commodity prices,
changes in the fair value of our investments and foreign currency fluctuations
primarily related to the Canadian dollar. In the normal course of business, we
employ established policies and procedures to manage our exposure to these
changes using financial instruments we deem appropriate.
Interest
Rate Risk
Our
objective in managing our exposure to interest rate changes is to limit the
impact on our earnings and cash flows. Our policy is to maintain a target, over
time and subject to market conditions, of between 50% and 75% of “Long-term
debt” as fixed rate debt. As of September 27, 2009 our long-term debt, including
current portion and excluding the effect of interest rate swaps discussed below,
aggregated $1,525.3 million and consisted of $1,055.3 million of fixed-rate
debt, $252.8 million of variable-rate debt, and $217.2 million of capitalized
lease and sale-leaseback obligations. Our variable interest rate debt consists
of $252.8 million of term loan borrowings under a variable-rate senior secured
term loan facility due through 2012 (the “Credit Agreement”). The term loan
borrowings under the Credit Agreement and amounts borrowed under the revolving
credit facility included in the Credit Agreement bear interest at the borrowers’
option at either (1) LIBOR (0.60% at June 28, 2009) of not less than 2.75% plus
an interest rate margin of 4.5% or (2) the higher of a base rate determined by
the administrative agent for the Credit Agreement or the Federal funds rate plus
0.5% (but not less than 3.75%), in either case plus an interest rate margin of
3.5%. The Base Rate option was chosen as of September 27, 2009 with a resulting
7.25% interest rate. Consistent with our policy, we entered into several
outstanding interest rate swap agreements (the “Interest Rate Swaps”) during the
third quarter of 2009 with notional amounts totaling $361.0 million that swap
the fixed rate interest rates on our 6.20% and 6.25% Wendy’s senior notes for
floating rates. The Interest Rate Swaps are accounted for as fair value hedges
and qualify for the short-cut method under the applicable
guidance. At September 27, 2009, the fair value of our Interest Rate
Swaps was $2.8 million and was included in “Deferred costs and other assets” and
as an adjustment to the carrying amount of the 6.20% and 6.25% Wendy’s Senior
Notes. Our policies prohibit the use of derivative instruments for trading
purposes, and we have procedures in place to monitor and control their use. If
any portion of the hedge is determined to be ineffective, any changes in fair
value would be recognized in our results of operations.
Overall
Market Risk
Our
overall market risk as of September 27, 2009 includes cash equivalents, certain
cost investments and our equity investment in TimWen. As of September 27, 2009,
these investments were classified in our unaudited condensed consolidated
balance sheet as follows (in millions):
Cash
equivalents included in “Cash and cash equivalents”
|
|
$ |
366.9 |
|
Restricted
cash equivalents:
|
|
|
|
|
Current
|
|
|
1.0 |
|
Non-current
|
|
|
6.7 |
|
Equity
investment
|
|
|
99.4 |
|
Cost
investments
|
|
|
10.7 |
|
|
|
$ |
484.7 |
|
Our cash
equivalents are short-term, highly liquid investments with maturities of three
months or less when acquired and consisted principally of cash in bank money
market and mutual fund accounts, and are primarily not in Federal Deposit
Insurance Corporation (“FDIC”) insured accounts, $7.7 million of which was
restricted as of September 27, 2009.
At
September 27, 2009 our investments were classified in the following general
types or categories (in millions):
|
|
|
|
|
At
Fair Value
|
|
|
Carrying
Value
|
|
Type
|
|
At
Cost
|
|
|
(a)
|
|
|
Amount
|
|
|
Percent
|
|
Cash
equivalents
|
|
$ |
366.9 |
|
|
$ |
366.9 |
|
|
$ |
366.9 |
|
|
|
76 |
% |
Current
and non-current restricted cash equivalents
|
|
|
7.7 |
|
|
|
7.7 |
|
|
|
7.7 |
|
|
|
2 |
% |
Other
non-current investments accounted for at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
99.4 |
|
|
|
99.4 |
|
|
|
99.4 |
|
|
|
20 |
% |
Cost
|
|
|
10.7 |
|
|
|
12.0 |
|
|
|
10.7 |
|
|
|
2 |
% |
|
|
$ |
484.7 |
|
|
$ |
486.0 |
|
|
$ |
484.7 |
|
|
|
100 |
% |
________________________
|
(a)
|
There
can be no assurance that we would be able to realize these
amounts.
|
Our
investments which are accounted for at cost included limited partnerships and
other non-current investments in which we do not have significant influence over
the investees. Realized gains and losses on our investments recorded at cost are
reported as income or loss in the period in which the securities are sold.
Investments accounted for in accordance with the equity method of accounting are
those in which we have significant influence over the investees and for which
our results of operations include our share of the income or loss of the
investees. We review all of our investments in which we have unrealized losses
and recognize investment losses currently for any unrealized losses we deem to
be other than temporary.
Sensitivity
Analysis
Our
estimate of market risk exposure is presented for each class of financial
instruments held by us at September 27, 2009 for which an immediate adverse
market movement would cause a potential material impact on our financial
position or results of operations. We believe that the adverse market movements
described below represent the hypothetical loss to our financial position or our
results of operations and do not represent the maximum possible loss nor any
expected actual loss, even under adverse conditions, because actual adverse
fluctuations would likely differ. The table below reflects the risk for those
financial instruments entered into as of September 27, 2009 based upon assumed
immediate adverse effects as noted below (in millions):
|
|
Carrying
Value
|
|
|
Interest
Rate Risk
|
|
|
Equity
Price Risk
|
|
|
Foreign
Currency Risk
|
|
Cash
equivalents
|
|
$ |
366.9 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Current
and non-current restricted cash equivalents
|
|
|
7.7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Equity
investments
|
|
|
99.4 |
|
|
|
- |
|
|
|
(9.9 |
) |
|
|
(9.9 |
) |
Cost
investments
|
|
|
10.7 |
|
|
|
(0.1 |
) |
|
|
(1.0 |
) |
|
|
- |
|
Deerfield
Capital Corp. notes receivable
|
|
|
25.6 |
|
|
|
(0.3 |
) |
|
|
- |
|
|
|
- |
|
Interest
Rate Swaps in an asset position
|
|
|
2.8 |
|
|
|
(12.1 |
) |
|
|
- |
|
|
|
- |
|
Long-term
debt, excluding capitalized lease and sale-leaseback obligations-variable
rate
|
|
|
252.8 |
|
|
|
(6.0 |
) |
|
|
- |
|
|
|
- |
|
Long-term
debt, excluding capitalized lease and sale-leaseback obligations-fixed
rate
|
|
|
1,055.3 |
|
|
|
(51.2 |
) |
|
|
- |
|
|
|
- |
|
The
sensitivity analysis of financial instruments held at September 27, 2009 assumes
an instantaneous one percentage point adverse change in market interest rates,
and an instantaneous 10% adverse change in the foreign currency exchange rates
versus the United States dollar, each from their levels at September 27, 2009
and with all other variables held constant. The equity price risk reflects the
impact of a 10% decrease in the carrying value of our equity securities,
including those in “Cost investments” in the tables above. The sensitivity
analysis also assumes that the decreases in the equity markets and foreign
exchange rates are other than temporary.
Our cash
equivalents and restricted cash equivalents included $374.6 million as of
September 27, 2009 of bank money market accounts and interest-bearing brokerage
and bank accounts which are all investments with a maturity of three months or
less when acquired and are designed to maintain a stable value.
As of
September 27, 2009, we had amounts of both fixed-rate debt and variable-rate
debt. On the fixed-rate debt, the interest rate risk presented with respect to
our long-term debt, excluding capitalized lease and sale-leaseback obligations,
primarily relates
to the
potential impact a decrease in interest rates of one percentage point has on the
fair value of our $1,055.3 million of fixed-rate debt and not on our financial
position or our results of operations. However, as discussed above under
“Interest Rate Risk,” we have interest rate swap agreements on a portion of our
fixed-rate debt. The interest rate risk of our fixed-rate debt
presented in the tables above exclude the effect of the $361.0 million for which
we designated interest rate swap agreements as fair value hedges for the terms
of the swap agreements. As interest rates decrease, the fair market
values of the interest rate swap agreements increase. The interest
rate risks presented with respect to the interest rate swap agreements represent
the potential impact the indicated change has on our results of operations. On
the variable-rate debt, the interest rate risk presented with respect to our
long-term debt, excluding capitalized lease and sale-leaseback obligations,
represents the potential impact an increase in interest rates of one percentage
point has on our results of operations related to our $252.8 million of
variable-rate long-term debt outstanding as of September 27, 2009. Our
variable-rate long-term debt outstanding as of September 27, 2009 had a weighted
average remaining maturity of approximately two years.
Item
4. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)), as of September 27, 2009. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that as of September 27, 2009, our
disclosure controls and procedures were effective in (1) recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by us in the reports that we file or submit under the Exchange Act and
(2) ensuring that information required to be disclosed by us in such reports is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Change
in Internal Control Over Financial Reporting
On
September 29, 2008, Triarc Companies, Inc. (renamed “Wendy’s/Arby’s Group,
Inc.”) completed the acquisition of Wendy’s and its subsidiaries. As part of the
integration activities, Wendy’s/Arby’s Group, Inc. financial reporting controls
and procedures are being incorporated into this acquired business. During the
third quarter of 2009, an additional phase of the integration of Wendy’s
accounting systems was successfully completed. The integrated accounting system
was used for the preparation of financial statements and other information
presented in this Quarterly Report on Form 10-Q. We expect further integration
of Wendy's processes and systems through the remainder of 2009 and into
2010.
There
were no other changes in our internal control over financial reporting made
during the quarter that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
There are
inherent limitations in the effectiveness of any control system, including the
potential for human error and the circumvention or overriding of the controls
and procedures. Additionally, judgments in decision-making can be faulty and
breakdowns can occur because of simple error or mistake. An effective control
system can provide only reasonable, not absolute, assurance that the control
objectives of the system are adequately met. Accordingly, our management,
including our Chief Executive Officer and Chief Financial Officer, does not
expect that our control system can prevent or detect all error or fraud.
Finally, projections of any evaluation or assessment of effectiveness of a
control system to future periods are subject to the risks that, over time,
controls may become inadequate because of changes in an entity’s operating
environment or deterioration in the degree of compliance with policies or
procedures.
Part
II. OTHER
INFORMATION
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This
Quarterly Report on Form 10-Q and oral statements made from time to time by
representatives of the Company may contain or incorporate by reference certain
statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of the
Company. Those statements, as well as statements preceded by, followed by, or
that include the words “may,” “believes,” “plans,” “expects,” “anticipates,” or
the negation thereof, or similar expressions, constitute “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995 (the “Reform Act”). All statements that address future operating,
financial or business performance; strategies or expectations; future synergies,
efficiencies or overhead savings; anticipated costs or charges; future
capitalization; and anticipated financial impacts of recent or pending
transactions are forward-looking statements within the meaning of the Reform
Act. The forward-looking statements are based on our expectations at the time
such statements are made, speak only as of the dates they are made and are
susceptible to a number of risks, uncertainties and other factors. Our actual
results, performance and achievements may differ materially from any future
results, performance or achievements expressed or implied by our forward-looking
statements. For all of our forward-looking statements, we claim the protection
of the safe harbor for forward-looking statements contained in the Reform Act.
Many important factors could affect our future results and could cause those
results to differ materially from those expressed in or implied by the
forward-looking statements contained herein. Such factors, all of which are
difficult or impossible to predict accurately, and many of which are beyond our
control, include, but are not limited to, the following:
|
·
|
competition,
including pricing pressures, aggressive marketing and the potential impact
of competitors’ new unit openings on sales of Wendy’s® and Arby’s®
restaurants;
|
|
·
|
consumers’
perceptions of the relative quality, variety, affordability and value of
the food products we offer;
|
|
·
|
success
of operating initiatives, including advertising and promotional efforts
and new product and concept development by us and our
competitors;
|
|
·
|
development
costs, including real estate and construction
costs;
|
|
·
|
changes
in consumer tastes and preferences, including changes resulting from
concerns over nutritional or safety aspects of beef, poultry, French fries
or other foods or the effects of food-borne illnesses such as “mad cow
disease” and avian influenza or “bird flu,” and changes in spending
patterns and demographic trends, such as the extent to which consumers eat
meals away from home;
|
|
·
|
certain
factors affecting our franchisees, including the business and financial
viability of franchisees, the timely payment of franchisees’ obligations
due to us or to national or local advertising organizations, and the
ability of our franchisees to open new restaurants in accordance with
their development commitments, including their ability to finance
restaurant development and
remodels;
|
|
·
|
availability,
location and terms of sites for restaurant development by us and our
franchisees;
|
|
·
|
delays
in opening new restaurants or completing remodels of existing
restaurants;
|
|
·
|
the
timing and impact of acquisitions and dispositions of
restaurants;
|
|
·
|
our
ability to successfully integrate acquired restaurant
operations;
|
|
·
|
anticipated
or unanticipated restaurant closures by us and our
franchisees;
|
|
·
|
our
ability to identify, attract and retain potential franchisees with
sufficient experience and financial resources to develop and operate
Wendy’s and Arby’s restaurants
successfully;
|
|
·
|
availability
of qualified restaurant personnel to us and to our franchisees, and the
ability to retain such personnel;
|
|
·
|
our
ability, if necessary, to secure alternative distribution of supplies of
food, equipment and other products to Wendy’s and Arby’s restaurants at
competitive rates and in adequate amounts, and the potential financial
impact of any interruptions in such
distribution;
|
|
·
|
changes
in commodity (including beef and chicken), labor, supply, fuel, utilities,
distribution and other operating
costs;
|
|
·
|
availability
and cost of insurance;
|
|
·
|
adverse
weather conditions;
|
|
·
|
availability,
terms (including changes in interest rates) and deployment of
capital;
|
|
·
|
changes
in legal or self-regulatory requirements, including franchising laws,
accounting standards, payment card industry rules, overtime rules, minimum
wage rates, government-mandated health benefits, tax legislation and
menu-board labeling requirements;
|
|
·
|
the
costs, uncertainties and other effects of legal, environmental and
administrative proceedings;
|
|
·
|
the
impact of general economic conditions on consumer spending, including a
slower consumer economy and high unemployment rates, particularly in
geographic regions that contain a high concentration of Wendy’s or Arby’s
restaurants, and the effects of war or terrorist
activities;
|
|
·
|
the
impact of our continuing investment in series A senior secured notes of
Deerfield Capital Corp. following our 2007 corporate restructuring;
and
|
|
·
|
other
risks and uncertainties affecting us and our subsidiaries referred to in
our Form 10-K for the fiscal year ended December 28, 2008 (the “Form
10-K”) (see especially “Item 1A. Risk Factors” and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations”)
and in our other current and periodic filings with the Securities and
Exchange Commission.
|
All
future written and oral forward-looking statements attributable to us or any
person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. New risks and
uncertainties arise from time to time, and it is impossible for us to predict
these events or how they may affect us. We assume no obligation to update any
forward-looking statements after the date of this Quarterly Report on Form 10-Q
as a result of new information, future events or developments, except as
required by Federal securities laws. In addition, it is our policy generally not
to make any specific projections as to future earnings, and we do not endorse
any projections regarding future performance that may be made by third
parties.
Item
1. Legal Proceedings
In the
Form 10-K for the fiscal year ended December 28, 2008, the Company disclosed an
environmental matter with Adams Packing Association, Inc., an inactive
subsidiary of the Company, whereby Adams was listed by the United States
Environmental Protection Agency on the Comprehensive Environmental Response,
Compensation and Liability Information System list of known or suspected
contaminated sites. Adams
completed additional testing at the site in August 2009 and reported the results
to Florida Department of Environmental Protection (the “FDEP”) at that
time. Adams and the FDEP have been corresponding since then regarding
additional testing and documentation that the FDEP has asked Adams to perform
and provide. As discussed in our Form 10-K, based on amounts spent
prior to 2008 of approximately $1.7 million and after taking into consideration
various legal defenses available to us, including Adams, we expect that the
final resolution of this matter will not have a material effect on our financial
position or results of operations.
The
Company disclosed putative class action complaints in the Form 10-K for the
fiscal year ended December 28, 2008 that had been filed against Wendy’s, its
directors, and in two cases also the Company, between April 25 and June 13,
2008, alleging breach of fiduciary duties arising out of the Wendy’s board of
directors’ search for a merger partner and out of its approval of the merger
agreement with the Company on April 23, 2008, and failure to disclose material
information related to the merger in Amendment No. 3 to the Form S-4 under the
Securities Act of 1933. These cases were described in the Form 10-K as the
Guiseppone, Henzel, Smith and Ravanis cases. Updates on the status of these
cases were also included in the Company’s Form 10-Q for the quarters ended March
29 and June 28, 2009.
On July
1, 2009, the Common Pleas Court of Franklin County, Ohio entered a final order
approving settlement of all claims in the Guiseppone, Henzel and Smith cases and
certifying a class for settlement purposes only. On July 9, 2009, the
Supreme
Court of
the State of New York, New York County, entered a dismissal of the Ravanis case,
with prejudice. The disposition of these cases was not material to the results
of operations or financial condition of the Company.
In
addition to the matters described above, we are involved in other litigation and
claims incidental to our current and prior businesses. We have reserves for all
of our legal and environmental matters aggregating $3.2 million as of September
27, 2009. Although the outcome of these matters cannot be predicted with
certainty and some of these matters may be disposed of unfavorably to us, based
on currently available information, including legal defenses available to us,
and given the aforementioned reserves and our insurance coverage, we do not
believe that the outcome of these legal and environmental matters will have a
material adverse effect on our consolidated financial position or results of
operations.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
The
following table provides information with respect to repurchases of shares of
our common stock by us and our “affiliated purchasers” (as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) during the
third fiscal quarter of 2009:
Issuer
Repurchases of Equity Securities
Period
|
Total
Number of Shares Purchased (1)
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased As Part of Publicly Announced Plan
(2)
|
Approximate
Dollar Value of Shares That May Yet Be Purchased Under the Plan
(2)
|
June
29, 2009 through
July
26, 2009
|
651
|
$
4.19
|
-
|
-
|
July
27, 2009
through
August
23, 2009
|
-
|
-
|
-
|
$50,000,000
|
August
24, 2009
through
September
27, 2009
|
4,848,600
|
$
5.19
|
4,848,600
|
$24,853,654
|
Total
|
4,849,251
|
$
5.19
|
|
|
(1)
|
Includes
651 shares reacquired by the Company from holders of restricted stock
awards to satisfy tax withholding requirements. The shares were valued at
the closing price of our Common Stock on the date of
activity.
|
(2)
|
On
August 4, 2009, our Board of Directors authorized a $50.0 million common
stock repurchase program to remain in effect through January 2, 2011,
which allows us to repurchase up to $50.0 million of our Common Stock when
and if market conditions warrant and to the extent legally
permissible. As of November 5, 2009, we substantially completed
this program purchasing a total of 10.3 million
shares.
|
On
November 3, 2009, our Board of Directors authorized our management, when and if
market conditions warrant and to the extent legally permissible, to repurchase
through January
2, 2011 up to an additional $50.0 million of our Common
Stock. As of the date of this report, no repurchases have occurred
under this new authorization.
Item
6. Exhibits.
EXHIBIT NO.
|
|
DESCRIPTION |
|
|
|
2.1
|
Agreement
and Plan of Merger, dated as of April 23, 2008, by and among Triarc
Companies, Inc., Green Merger Sub Inc. and Wendy’s International, Inc.,
incorporated herein by reference to Exhibit 2.1 to Triarc’s Current Report
on Form 8-K dated April 29, 2008 (SEC file no. 001-02207).
|
2.2
|
Side
Letter Agreement, dated August 14, 2008, by and among Triarc Companies,
Inc., Green Merger Sub, Inc. and Wendy’s International, Inc., incorporated
herein by reference to Exhibit 2.3 to Triarc’s Registration Statement on
Form S-4, Amendment No.3, filed on August 15, 2008 (Reg. no.
333-151336).
|
2.3
|
Agreement
and Plan of Merger, dated as of December 17, 2007, by and among Deerfield
Triarc Capital Corp., DFR Merger Company, LLC, Deerfield & Company LLC
and, solely for the purposes set forth therein, Triarc Companies, Inc. (in
such capacity, the Sellers’ Representative, incorporated herein by
reference to Exhibit 2.1 to Triarc’s Current Report on Form 8-K dated
December 21, 2007 (SEC file No. 001-02207).
|
3.1
|
Amended
and Restated Certificate of Incorporation of Wendy’s/Arby’s Group, Inc.,
as filed with the Secretary of State of the State of Delaware on May 28,
2009, incorporated herein by reference to Exhibit 3.1 to Wendy’s/Arby’s
Group’s Current Report on Form 8-K dated June 1, 2009 (SEC file no.
001-02207).
|
3.2
|
Amended
and Restated By-Laws of Wendy’s/Arby’s Group, Inc., as amended and
restated as of May 28, 2009, incorporated herein by reference to Exhibit
3.2 to Wendy’s/Arby’s Group’s Current Report on Form 8-K dated June 1,
2009 (SEC file no. 001-02207).
|
4.1
|
Supplemental
Indenture, dated as of July 8, 2009, among Wendy’s/Arby’s Restaurants,
LLC, the guarantors named therein and U.S. Bank National Association, as
Trustee, incorporated by reference to Exhibit 4.3 to Wendy’s/Arby’s
Group’s Quarterly Report on Form 10-Q for the quarterly period ended June
28, 2009 (SEC file no. 001-02207).
|
10.1
|
|
10.2
|
|
10.3
|
|
10.4
|
|
10.5
|
|
31.1
|
|
31.2
|
|
32.1
|
|
_______________________
* Filed
herewith.
SIGNATURES
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/ARBY’S
GROUP, INC.
(Registrant)
|
Date: November
5, 2009
|
By:
/s/ Stephen E.
Hare
|
|
Stephen
E. Hare
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|
|
(On
behalf of the Company)
|
|
|
Date: November
5, 2009
|
By:
/s/ Steven B.
Graham
|
|
Steven
B. Graham
|
|
Senior
Vice President and
|
|
Chief
Accounting Officer
|
|
(Principal
Accounting Officer)
|
EXHIBIT NO.
|
|
DESCRIPTION |
|
|
|
2.1
|
Agreement
and Plan of Merger, dated as of April 23, 2008, by and among Triarc
Companies, Inc., Green Merger Sub Inc. and Wendy’s International, Inc.,
incorporated herein by reference to Exhibit 2.1 to Triarc’s Current Report
on Form 8-K dated April 29, 2008 (SEC file no. 001-02207).
|
2.2
|
Side
Letter Agreement, dated August 14, 2008, by and among Triarc Companies,
Inc., Green Merger Sub, Inc. and Wendy’s International, Inc., incorporated
herein by reference to Exhibit 2.3 to Triarc’s Registration Statement on
Form S-4, Amendment No.3, filed on August 15, 2008 (Reg. no.
333-151336).
|
2.3
|
Agreement
and Plan of Merger, dated as of December 17, 2007, by and among Deerfield
Triarc Capital Corp., DFR Merger Company, LLC, Deerfield & Company LLC
and, solely for the purposes set forth therein, Triarc Companies, Inc. (in
such capacity, the Sellers’ Representative, incorporated herein by
reference to Exhibit 2.1 to Triarc’s Current Report on Form 8-K dated
December 21, 2007 (SEC file No. 001-02207).
|
3.1
|
Amended
and Restated Certificate of Incorporation of Wendy’s/Arby’s Group, Inc.,
as filed with the Secretary of State of the State of Delaware on May 28,
2009, incorporated herein by reference to Exhibit 3.1 to Wendy’s/Arby’s
Group’s Current Report on Form 8-K dated June 1, 2009 (SEC file no.
001-02207).
|
3.2
|
Amended
and Restated By-Laws of Wendy’s/Arby’s Group, Inc., as amended and
restated as of May 28, 2009, incorporated herein by reference to Exhibit
3.2 to Wendy’s/Arby’s Group’s Current Report on Form 8-K dated June 1,
2009 (SEC file no. 001-02207).
|
4.1
|
Supplemental
Indenture, dated as of July 8, 2009, among Wendy’s/Arby’s Restaurants,
LLC, the guarantors named therein and U.S. Bank National Association, as
Trustee, incorporated by reference to Exhibit 4.3 to Wendy’s/Arby’s
Group’s Quarterly Report on Form 10-Q for the quarterly period ended June
28, 2009 (SEC file no. 001-02207).
|
10.1
|
|
10.2
|
|
10.3
|
|
10.4
|
|
10.5
|
|
31.1
|
|
31.2
|
|
32.1
|
|
_______________________
* Filed
herewith.