FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 1, 2001
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission File Number 1-8116
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WENDY'S INTERNATIONAL, INC.
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(Exact name of Registrant as specified in its charter)
Ohio 31-0785108
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 256, 4288 West Dublin-Granville Road, Dublin, Ohio 43017-0256
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) 614-764-3100
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ______.
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Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 5, 2001
-------------------------------- -----------------------------
Common shares, $.10 stated value 114,013,000 shares
Exhibit index on page 17.
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Pages
-----
PART I: Financial Information
Item 1. Financial Statements:
Consolidated Condensed Statements of Income for the quarters
and year-to-date periods ended July 1, 2001 and July 2, 2000 3 - 4
Consolidated Condensed Balance Sheets as of July 1, 2001
and December 31, 2000 5 - 6
Consolidated Condensed Statements of Cash Flows for the
year-to-date periods ended July 1, 2001 and July 2, 2000 7
Notes to the Consolidated Condensed Financial Statements 8 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 14
PART II: Other Information
Item 4. Submission of Matters to Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
Index to Exhibits 17
Exhibit 99 18 - 19
2
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
Quarter Ended Quarter Ended
July 1, 2001 July 2, 2000
------------ ------------
Revenues
Retail sales............................................. $491,464 $458,308
Franchise revenues....................................... 118,146 110,169
-------- --------
609,610 568,477
-------- --------
Costs and expenses
Cost of sales............................................ 311,063 288,047
Company restaurant operating costs....................... 102,401 95,253
Operating costs.......................................... 20,821 20,534
General and administrative expenses...................... 53,329 51,733
Depreciation and amortization of property and equipment.. 29,372 26,609
Other (income) expense................................... (794) 768
Interest, net............................................ 4,506 4,446
-------- --------
520,698 487,390
-------- --------
Income before income taxes................................ 88,912 81,087
Income taxes.............................................. 32,898 30,409
-------- --------
Net income................................................ $ 56,014 $ 50,678
======== ========
Basic earnings per common share........................... $ .49 $ .45
======== ========
Diluted earnings per common share......................... $ .47 $ .43
======== ========
Dividends per common share................................ $ .06 $ .06
======== ========
Basic shares.............................................. 113,849 113,712
======== ========
Diluted shares............................................ 122,590 121,791
======== ========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
3
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
Year-to-Date Ended Year-to-Date Ended
July 1, 2001 July 2, 2000
------------ ------------
Revenues
Retail sales............................................. $ 941,067 $ 880,633
Franchise revenues....................................... 224,081 206,416
---------- ----------
1,165,148 1,087,049
---------- ----------
Costs and expenses
Cost of sales............................................ 599,565 555,634
Company restaurant operating costs....................... 200,810 186,469
Operating costs.......................................... 41,850 39,335
General and administrative expenses...................... 107,090 102,731
Depreciation and amortization of property and equipment.. 58,078 52,446
Other (income) expense................................... (1,325) 3,966
Interest, net............................................ 8,742 7,902
---------- ----------
1,014,810 948,483
---------- ----------
Income before income taxes................................ 150,338 138,566
Income taxes.............................................. 55,625 51,963
---------- ----------
Net income................................................ $ 94,713 $ 86,603
========== ==========
Basic earnings per common share........................... $ .83 $ .75
========== ==========
Diluted earnings per common share......................... $ .80 $ .73
========== ==========
Dividends per common share................................ $ .12 $ .12
========== ==========
Basic shares.............................................. 114,095 115,055
========== ==========
Diluted shares............................................ 122,853 123,030
========== ==========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
4
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
July 1, 2001 December 31, 2000
------------ -----------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents...................... $ 163,880 $ 169,718
Accounts receivable, net....................... 76,207 75,960
Notes receivable, net.......................... 14,073 11,832
Deferred income taxes.......................... 19,004 21,503
Inventories and other.......................... 39,572 40,086
---------- ----------
312,736 319,099
---------- ----------
Property and equipment.......................... 2,140,195 2,074,574
Accumulated depreciation and amortization...... (607,505) (577,484)
---------- ----------
1,532,690 1,497,090
---------- ----------
Notes receivable, net........................... 37,520 38,932
Goodwill, net................................... 42,355 43,719
Deferred income taxes........................... 15,856 20,572
Other assets.................................... 39,884 38,304
---------- ----------
$1,981,041 $1,957,716
========== ==========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
5
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
July 1, 2001 December 31, 2000
------------ -----------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable............................................ $ 80,277 $ 125,564
Accrued expenses:
Salaries and wages........................................ 24,912 34,663
Taxes..................................................... 62,490 50,867
Insurance................................................. 40,131 38,414
Other..................................................... 40,789 42,965
Current portion of long-term obligations.................... 4,043 3,943
---------- ----------
252,642 296,416
---------- ----------
Long-term obligations
Term debt................................................... 203,847 204,027
Capital leases.............................................. 45,747 44,357
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249,594 248,384
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Deferred income taxes........................................ 68,915 72,750
Other long-term liabilities.................................. 14,611 14,023
Commitments and contingencies
Company-obligated mandatorily redeemable preferred securities
of Wendy's Financing I, holding solely Wendy's
Convertible Debentures.................................... 200,000 200,000
Shareholders' equity
Preferred stock, authorized: 250,000 shares
Common stock, $.10 stated value per share
Authorized: 200,000,000 shares
Issued and Exchangeable:
137,042,000 and 136,188,000 shares, respectively........ 12,159 12,074
Capital in excess of stated value........................... 439,578 423,144
Retained earnings........................................... 1,292,041 1,211,015
Accumulated other comprehensive expense..................... (30,226) (27,133)
---------- ----------
1,713,552 1,619,100
Treasury stock at cost: 23,128,000 and 21,978,000
shares, respectively...................................... (518,273) (492,957)
---------- ----------
1,195,279 1,126,143
---------- ----------
$1,981,041 $1,957,716
========== ==========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
6
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Year-to-Date Year-to-Date
Ended Ended
July 1, 2001 July 2, 2000
------------ ------------
Net cash provided by operating activities................ 137,382 $ 127,053
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Cash flows from investing activities
Proceeds from asset dispositions........................ 21,116 32,107
Capital expenditures.................................... (133,123) (135,430)
Payments on notes receivable............................ 2,531 2,467
Other investing activities.............................. (7,391) 410
----------- ------------
Net cash used in investing activities................. (116,867) (100,446)
----------- ------------
Cash flows from financing activities
Proceeds from issuance of common stock.................. 14,501 1,985
Repurchase of common shares............................. (25,315) (87,107)
Principal payments on long-term obligations............. (1,852) (2,548)
Dividends paid on common and
exchangeable shares................................... (13,687) (13,877)
----------- ------------
Net cash used in financing activities................. (26,353) (101,547)
----------- ------------
Decrease in cash and cash equivalents.................... (5,838) (74,940)
Cash and cash equivalents at beginning of period......... 169,718 210,785
----------- ------------
Cash and cash equivalents at end of period............... $ 163,880 $ 135,845
=========== ============
Supplemental disclosures of cash flow
Information:
Interest paid........................................... $ 14,485 $ 14,314
Capitalized lease obligations incurred.................. 3,310 2,377
Income taxes paid....................................... 41,455 42,951
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
7
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. MANAGEMENT'S STATEMENT
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In the opinion of management, the accompanying consolidated condensed
financial statements contain all adjustments (all of which are normal and
recurring in nature) necessary to present fairly the condensed financial
position of Wendy's International, Inc. and Subsidiaries (the Company) as of
July 1, 2001 and December 31, 2000 and the condensed results of operations and
comprehensive income (see Note 3) for the quarters and year-to-date periods
ended July 1, 2001 and July 2, 2000 and cash flows for the year-to-date
periods ended July 1, 2001 and July 2, 2000. All of these financial statements
are unaudited with the exception of the December 31, 2000 balance sheet. The
Notes to the audited Consolidated Financial Statements, which are contained in
the Financial Statements and Other Information furnished with the Company's
2001 Proxy Statement, should be read in conjunction with these Consolidated
Condensed Financial Statements.
NOTE 2. NET INCOME PER SHARE
-----------------------------
Basic earnings per common share are computed by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding. Diluted computations include assumed conversions of stock
options, net of shares repurchased from proceeds, and company-obligated
mandatorily redeemable preferred securities, when dilutive, and the
elimination of related expenses, net of income taxes. Options to purchase 3.4
million shares of common stock in the current quarter and year-to-date, and
6.6 million shares in the prior year quarter and year-to-date, were not
included in the computation of diluted earnings per common share. These
options were excluded from the calculation because the exercise price of these
options was greater than the average market price of the common shares in the
respective periods, and therefore, they are antidilutive.
The computations of basic and diluted earnings per common share are shown
below:
Quarter Quarter Year-to-Date Year-to-Date
Ended Ended Ended Ended
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
----------------- ----------------- ----------------- -----------------
(In thousands, except per share data)
Income for computation of basic earnings
per common share................................ $ 56,014 $ 50,678 $ 94,713 $ 86,603
Interest savings (net of income taxes) on
assumed conversions............................. 1,598 1,585 3,195 3,170
------------- ------------- --------------- ---------------
Income for computation of diluted
earnings per common share....................... $ 57,612 $ 52,263 $ 97,908 $ 89,773
============= ============= =============== ===============
Weighted average shares for computation
of basic earnings per common share.............. 113,849 113,712 114,095 115,055
Dilutive stock options............................ 1,168 506 1,185 402
Assumed conversions............................... 7,573 7,573 7,573 7,573
------------- ------------- --------------- ---------------
Weighted average shares for computation
of diluted earnings per common share............ 122,590 121,791 122,853 123,030
============= ============= =============== ===============
Basic earnings per common share................... $ .49 $ .45 $ .83 $ .75
============= ============= =============== ===============
Diluted earnings per common share................. $ .47 $ .43 $ .80 $ .73
============= ============= =============== ===============
8
NOTE 3. CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
------------------------------------------------------------------
The components of other comprehensive income expense and total comprehensive
income are shown below:
Quarter Quarter Year-to-Date Year-to-Date
Ended Ended Ended Ended
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
------------ ------------- ------------- -------------
(In thousands)
Net income......................................... $56,014 $50,678 $94,713 $86,603
Other comprehensive income (expense):
Translation adjustments............................ 15,768 (6,726) (3,093) (7,777)
------- ------- ------- -------
Comprehensive income............................... $71,782 $43,952 $91,620 $78,826
======= ======= ======= =======
The translation adjustments change of $22.5 million in the current quarter
reflects a strengthening of the Canadian dollar during the second quarter of
2001, versus a weakening during the second quarter of 2000. The $4.7 million
translation adjustment change year-to-date reflects a more significant weakening
of the Canadian dollar last year versus the current year.
NOTE 4. SEGMENT REPORTING
--------------------------
The Company operates exclusively in the food-service industry and has determined
that its reportable segments are those that are based on the Company's methods
of internal reporting and management structure. The Company's reportable
segments are Wendy's and Tim Hortons. There were no material amounts of
revenues or transfers between reportable segments. The table below presents
information about reportable segments:
Wendy's Tim Hortons Total
------- ----------- -----
(In thousands)
Quarter Ended July 1, 2001
--------------------------
Revenues $470,399 $139,211 $ 609,610
Income before income taxes 85,773 32,378 118,151
Capital expenditures 49,524 17,587 67,111
Quarter Ended July 2, 2000
--------------------------
Revenues $438,698 $129,779 $ 568,477
Income before income taxes 77,923 28,606 106,529
Capital expenditures 57,287 15,732 73,019
Year-to-Date Ended July 1, 2001
-------------------------------
Revenues $895,348 $269,800 $1,165,148
Income before income taxes 148,293 60,718 209,011
Capital expenditures 97,586 35,537 133,123
Year-to-Date Ended July 2, 2000
-------------------------------
Revenues $839,833 $247,216 $1,087,049
Income before income taxes 140,664 53,599 194,263
Capital expenditures 99,332 36,098 135,430
A reconciliation of reportable segment income before income taxes to
consolidated income before income taxes follows:
Quarter Quarter Year-to-Date Year-to-Date
Ended Ended Ended Ended
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
------------ ------------ ------------ ------------
(In thousands)
Income before income taxes...................... $118,151 $106,529 $209,011 $194,263
Corporate charges............................... (29,239) (25,442) (58,673) (55,697)
-------- -------- -------- --------
Consolidated income before income taxes......... $ 88,912 $ 81,087 $150,338 $138,566
======== ======== ======== ========
Corporate charges include certain overhead costs and net interest expense.
9
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
The Company's diluted earnings per common share increased 9.3% to $.47 in the
current quarter, and 9.6% to $.80 in the year-to-date period. In the quarter,
consolidated revenues increased 7.2% to $610 million and systemwide sales
increased 8.5% to $2.1 billion. Year-to-date, consolidated revenues increased
7.2% to $1.2 billion and systemwide sales increased 7.8% to $4.0 billion.
Consolidated revenues include sales from company operated units, as well as
royalties, rents and franchise fees from franchise restaurants. Systemwide
sales include sales from both company and franchise restaurants. Average same-
store sales increased for both Wendy's and Tim Hortons Canadian and U.S.
restaurants during the quarter and year-to-date.
WENDY'S
Retail Sales
Wendy's retail sales for the second quarter 2001 increased $27.2 million, or
7.3%, to $401.6 million, and $47.3 million, or 6.6%, to $767.1 million for year-
to-date 2001. Of this total, domestic Wendy's retail sales increased 8.3% to
$361.0 million in the quarter, and 7.7% to $690.7 million for the year-to-date.
For domestic company operated Wendy's, average restaurant sales increased 2.4%
to $344,684 per restaurant in the quarter, and 1.9% to $661,443 year-to-date.
Average same-store sales in Wendy's domestic company restaurants increased 2.8%
in the quarter and 2.2% for the year-to-date. The average number of
transactions in domestic company operated Wendy's decreased .2% in the quarter
and .4% year-to-date, while the average check increased 3.1% in the quarter and
2.5% year-to-date. In addition, domestic selling prices increased 2.2% in the
quarter and 2.0% year-to-date. In the second quarter and year-to-date, the
average number of Wendy's company operated domestic restaurants increased by 57
compared to the prior year quarter and year-to-date.
Canadian Wendy's retail sales increased $2.9 million, or 11.5% in the second
quarter, and $5.1 million, or 10.7% for the year-to-date. Canadian Wendy's
same-store sales for company operated restaurants, in local currency, increased
7.2% in the quarter and 6.0% year-to-date. With the closure of the Company's
Argentina market in fourth quarter 2000, other international retail sales
decreased $4.0 million in the quarter and $8.1 million year-to-date.
Franchise Revenues
Wendy's franchise revenues increased $4.5 million, or 6.9%, to $68.8 million in
the quarter, and increased $8.2 million, or 6.8%, to $128.2 million year-to-
date. Royalties, before reserves, increased $4.2 million, or 8.4%, to $53.3
million in the quarter, and increased $6.8 million, or 7.2%, to $101.1 million
year-to-date. This was primarily a result of an average of 167 more Wendy's
domestic franchise restaurants being open in the current quarter compared to the
prior year quarter and an average of 171 more restaurants open year-to-date. In
addition, average net sales at franchise domestic restaurants increased 3.8% to
$299,135 in the quarter and 2.6% to $569,600 year-to-date. In local currency,
Canadian Wendy's same-store franchise sales increased 5.4% in the quarter and
4.2% year-to-date, while other international same-store franchise sales
decreased .4% in the quarter and 1.1% year-to-date. Total Wendy's franchise
restaurants open at quarter-end were 4,715 and 4,497, respectively, in 2001 and
2000.
Cost of Sales and Restaurant Operating Costs
Wendy's cost of sales increased $18.1 million, or 8.2%, to $240.4 million in the
quarter, and $33.2 million, or 7.7%, to $463.3 million year-to-date. Of this
total, Wendy's domestic restaurant cost of sales increased 9.2% to $215.1
million in the quarter, and 8.8% to $415.3 million year-to-date. Cost of sales
as a percent of Wendy's domestic retail sales, increased .5% in the quarter and
.6% year-to-date. Domestic food costs, as a percent of domestic retail sales,
increased .2% in the quarter and year-to-date, primarily reflecting an increase
in beef costs of 13.3% in the quarter and 11.1% year-to-date, partly offset by a
selling price increase of 2.2% for the quarter and 2.0% year-to-date. Domestic
labor costs, as a percent of sales, increased .4% in the quarter and .5% year-
to-date, reflecting an increase in the average hourly crew rate of 3.8% in the
quarter and 3.9% year-to-date, and average sales increases insufficient to
leverage labor costs.
10
As a percent of retail sales, Canadian Wendy's cost of sales increased .1% in
the quarter and .4% year-to-date, reflecting higher commodity prices. Other
international restaurants reduced cost of sales $2.5 million in the quarter and
$4.9 million year-to-date, primarily due to the closure of the Argentina market.
Wendy's company restaurant operating costs increased $7.8 million, or 8.7%, to
$98.1 million in the quarter, and $15.5 million, or 8.8%, to $192.0 million
year-to-date. Of this total, domestic Wendy's company restaurant operating
costs increased 11.4% to $90.5 million in the quarter, and 11.7% to $177.1
million, year-to-date. As a percent of retail sales, domestic restaurant costs
increased .7% in the quarter and 1.0% for the year-to-date, reflecting higher
utility costs, as well as increased health insurance and pension costs. In
addition, health insurance costs were lower in the second quarter a year ago,
reflecting a $1.3 million insurance refund.
The factors discussed above resulted in Wendy's domestic company operating
margin decreasing 1.2% to 16.1% in the quarter and 1.6% to 15.0% for the year-
to-date.
Canadian Wendy's company restaurant operating costs increased $635,000 in the
quarter and $1.3 million year-to-date. As a percent of retail sales, Canadian
Wendy's company restaurant operating costs were 24.9% and 26.1% for second
quarter and year-to-date 2001, versus 25.3% and 26.2% for the prior year quarter
and year-to-date. Other international restaurant operating costs decreased $2.1
million in the quarter and $4.4 million year-to-date, reflecting the closure of
the Argentina market.
Operating Costs
Wendy's operating costs increased 18.7% to $3.7 million in the quarter and 10.3%
to $7.4 million year-to-date, reflecting higher percentage rent due to higher
average sales and additional rental properties in the current quarter and year-
to-date.
TIM HORTONS
Retail Sales
Tim Hortons (Hortons) retail sales increased $5.9 million, or 7.0%, to $89.8
million in second quarter 2001, and $13.1 million, or 8.2%, to $174.0 million
for the year-to-date. Of this total, Canadian warehouse sales (sales of dry
goods to franchisees) increased $8.7 million, or 12.8% to $76.3 million in the
quarter, and $16.8 million, or 13.1%, to $145.1 million year-to-date. This
reflected the increase in the number of Hortons' Canadian franchised restaurants
serviced and same-store sales growth in local currency of 7.1% for the quarter
and 8.5% for the year-to-date. Retail sales in the U.S. decreased $1.9 million
in the quarter and $4.4 million year-to-date, reflecting the strategy to sell
most of the company operated restaurants to franchisees.
Franchise Revenues
Hortons franchise revenues, before reserves, increased $3.5 million, or 7.7%, to
$49.4 million in second quarter 2001, and $9.5 million, or 10.9% to $95.8
million for the year-to-date. Canadian royalties increased 12.9% to $10.6
million in the quarter, and 13.4% to $20.4 million year-to-date. Canadian
rental income from restaurants leased to franchisees increased 16.6% to $30.8
million in the quarter, and 16.4% to $58.6 million for the year-to-date. These
increases reflected the increase in the number of Canadian franchise restaurants
open and the same-store sales growth in local currency of 7.1% for the quarter
and 8.5% for the year-to-date.
Franchise fees decreased $2.9 million in the quarter and $2.5 million year-to-
date, reflecting less full-sized restaurants being franchised in Canada in the
current quarter and year-to-date.
Cost of Sales
The Hortons' Canadian warehouse cost of sales increased $7.3 million, or 13.6%,
to $61.3 million in the quarter, and $13.9 million, or 13.6%, to $115.8 million
year-to-date, reflecting additional sales to Canadian franchisees due to the
increased number of restaurants serviced and higher average sales per
restaurant. Warehouse cost of sales, as a percent of warehouse sales, increased
to 80.4% in the second quarter 2001 from 79.8% in 2000, and increased to 79.8%
from 79.4% in the year-to-date period. The increases for both periods reflect
commodity prices and the change in the
11
Canadian currency exchange rate. Hortons U.S. cost of sales decreased $1.5
million in the quarter and $3.3 million year-to-date, reflecting the strategy to
franchise most of the company operated restaurants.
Operating Costs
Hortons operating costs decreased $296,000, or 1.7%, to $17.1 million in the
quarter, and increased $1.8 million, or 5.6%, to $34.5 million year-to-date.
Canadian Hortons rent expense increased 14.5% to $8.2 million in the quarter,
and 10.2% to $15.7 million year-to-date, reflecting the growth in the number of
properties being leased and then subleased to Canadian franchisees, as well as
higher percentage rent due to higher sales. Cost of equipment decreased 36.1%
to $3.6 million in the quarter and 13.2% to $8.0 million year-to-date due to a
decrease in the number of units being franchised in the current year. Costs of
operating and maintaining Canadian warehouse operations increased 14.1% to $4.2
million in the quarter, and increased 18.2% to $8.4 million for the year-to-
date.
CONSOLIDATED
General and Administrative Expenses
Company general and administrative expenses for the second quarter 2001
increased 3.1% to $53.3 million, and 4.2% to $107.1 million for the year-to-
date. As a percent of revenues, costs were .4% lower in the quarter at 8.7%
versus 9.1% last year. For the year-to-date, costs were .3% lower at 9.2%
versus 9.5% last year. The dollar increase in 2001 primarily reflects an
increase in salaries and benefits, as well as legal and professional fees.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for the quarter and year-to-date
increased over 2000 reflecting the Company's information technology initiatives
and additional restaurant development.
Other Expense
Other expense decreased $1.6 million in the quarter and $5.3 million year-to-
date, reflecting charges that were incurred in the prior year for a legal
reserve, executive search charges and asset write-offs. There were no similar
charges incurred in the current year.
Interest, Net
Net interest expense increased $840,000 to $8.7 million for year-to-date 2001 as
a result of lower interest income rates on investments.
Foreign Currency
The primary currency exposure the Company has is to the Canadian dollar. The
results of Wendy's and Tim Hortons' Canadian operations are translated into U.S.
dollars. The change in the Canadian dollar this year versus last year reduced
earnings per share by approximately $.015 for year-to-date 2001.
INTERNATIONAL CHARGES
---------------------
In the fourth quarter 2000, the Company recorded a pretax charge of $18.4
million related to the termination of operations in Argentina. This charge
included $6.8 million for asset impairment charges, $1.7 million for lease
termination costs, $3.2 million in employee-related costs, and $6.7 million in
other closure costs. At year-end 2000, $3.5 million of accrued expenses for
closure and employee costs remained. At the end of the current quarter, accrued
expenses related to the closure totalled $794,000. The resolution of these
issues has not resulted in any income impact in the second quarter or year-to-
date financial statements.
COMPREHENSIVE INCOME
--------------------
Comprehensive income increased $27.8 million in the quarter and $12.8 million
year-to-date. The increase in comprehensive income in the quarter reflects an
increase of $5.3 million in reported income and a $22.5 million benefit from the
movement in the Canadian exchange rate during the current quarter. The increase
in comprehensive income year-to-date reflects an increase of $8.1 million in
reported income and a $4.7 million relative benefit from movement in the
Canadian exchange rate (see Note 3).
12
FINANCIAL CONDITION
-------------------
The Company's financial condition continues to be very strong at the end of the
second quarter of 2001. The long-term debt to equity and debt-to-total
capitalization ratios were 21% and 17%, respectively, at July 1, 2001. Cash
flow from operations was $135 million for the year-to-date 2001, and $127
million for the prior year. Year-to-date, cash of $25.3 million was used to
repurchase 1,150,000 common shares. A total of $517 million in cash has been
used to purchase 23.0 million shares since 1998. Capital expenditures amounted
to $133 million for 2001 compared with $135 million for 2000.
OUTLOOK
-------
The Company continues to employ its strategic initiatives as outlined in the
Financial Statements and Other Information furnished with the Company's 2001
Proxy Statement. These initiatives include leveraging the Company's core assets,
growing same-store sales, improving store-level productivity to enhance margins,
improving underperforming operations, repurchasing common shares and
implementing new technology initiatives. The Company intends to allocate
resources to improve long-term return on assets and invested capital, and to
remain focused on established operational strategies of exceeding customer
expectations, fostering a performance-driven culture, delivering a balanced
message of brand equity plus value in marketing and growing a healthy restaurant
system. New restaurant development continues to be very important. The Company
also intends to evaluate potential mergers, acquisitions, joint venture
investments, alliances, vertical integration opportunities and divestitures.
The Company's long-term goal for EPS growth continues to be in the 12% to 15%
range, excluding unusual items. The Company anticipates current year EPS growth
will be in the 11% to 13% range (or $1.70 to $1.73) over 2000 EPS, exclusive of
the charge taken in the fourth quarter of 2000 related to the closure of the
Argentina market.
The Company currently anticipates that more than 500 new Wendy's and Hortons
restaurants could be opened systemwide (both company and franchise) during 2001,
subject to the continued ability of the Company and its franchisees to complete
permitting and meet other conditions and to comply with other regulatory
requirements for the completion of stores and to obtain financing for new
restaurant development. Year-to-date 2001, there have been 193 new restaurants
opened.
Cash flow from operations, cash and investments on hand, possible asset sales,
and cash available through existing revolving credit agreements and through the
possible issuance of securities should provide for the Company's projected short
and long-term cash requirements, including cash for capital expenditures, future
acquisitions of restaurants from franchisees, stock repurchases or other
corporate purposes. If additional funds are needed for mergers, acquisitions or
other strategic investments, the Company believes it could borrow additional
cash and still maintain its investment grade rating. Standard & Poors and
Moody's rate the Company's senior unsecured debt BBB+ and Baa-1, respectively.
Long term, the Company does not have significant future term debt maturities
until 2005. The Company believes it will be able to pay or refinance future
term debt obligations based on its strong financial condition and sources of
cash described in the preceding paragraph.
MARKET RISK
-----------
The Company's debt is primarily denominated in U.S. dollars, at fixed interest
rates, which limits financial instruments risk. Therefore, the Company does not
currently utilize any derivatives to alter interest rate risk. Currency
exposure is predominately related to Canadian operations, since cash exposure
outside North America is primarily limited to royalties. The Canadian currency
has been reasonably stable over time, and the Company currently does not hedge
its cash flow exposure to Canadian currency fluctuations. Also, the Company
does not hedge its exposure to currency fluctuations related to royalty
collections outside North America, because it does not believe the risk is
material.
The Company purchases certain products in the normal course of business, which
are affected by commodity prices. Therefore, the Company is exposed to some
price volatility related to weather, and various other market conditions outside
the Company's control. However, the Company does employ various purchasing and
pricing contract techniques, in an effort to minimize volatility. The Company
does not generally make use of financial instruments to hedge commodity prices,
partly because of the contract pricing utilized. While volatility can occur,
which would impact profit
13
margins, there are generally alternative suppliers available and if the pricing
problem is prolonged, the Company has some ability to increase selling prices to
offset the commodity prices.
RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
The Company adopted Financial Accounting Standard Number 133 - "Accounting for
Derivative Instruments and Hedging Activities" in the first quarter 2001. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities in the financial statements at fair
value. Currently this statement does not materially impact the Company's
financial statements.
In June 2001, Financial Accounting Standard Number 141 - "Business Combinations"
was issued. This statement requires that all business combinations initiated
after June 30, 2001 be accounted for using the purchase accounting method and
establishes specific criteria for the recognition of intangible assets
separately from goodwill. The Company will adopt the provisions of this
statement for any future business combinations.
Also in June 2001, Financial Accounting Standard Number 142 - "Goodwill and
Other Intangible Assets" was issued. This statement is effective for all
quarters of fiscal years beginning after December 15, 2001. This statement
addresses the accounting for goodwill and intangible assets subsequent to
acquisition. The Company is in the process of evaluating the impact of this
statement on its financial statements and will adopt the provisions of this
statement in the first quarter of fiscal year 2002.
SAFE HARBOR STATEMENT
---------------------
Certain information contained in this Form 10-Q, particularly information
regarding future economic performance and finances, plans and objectives of
management, is forward looking. In some cases, information regarding certain
important factors that could cause actual results to differ materially from any
such forward-looking statement appears together with such statement. In
addition, the following factors, in addition to other possible factors not
listed, could affect the Company's actual results and cause such results to
differ materially from those expressed in forward-looking statements. These
factors include: competition within the quick-service restaurant industry, which
remains extremely intense, both domestically and internationally, with many
competitors pursuing heavy price discounting; changes in economic conditions;
changes in consumer perceptions of food safety; harsh weather, particularly in
the first and fourth quarters; changes in consumer tastes; labor and benefit
costs; legal claims; risks inherent to international development (including
currency fluctuations); the continued ability of the Company and its franchisees
to obtain suitable locations and financing for new restaurant development;
governmental initiatives such as minimum wage rates, taxes and possible
franchise legislation; the ability of the Company to successfully complete
transactions designed to improve its return on investment; and other factors set
forth in Exhibit 99 attached hereto.
The number of systemwide restaurants open as of July 1, 2001 and July 2, 2000
was as follows:
2001 2000
---- ----
Wendy's
-------
Company............................... 1,159 1,124
Franchise............................. 4,715 4,497
----- -----
Total Wendy's......................... 5,874 5,621
===== =====
Tim Hortons
-----------
Company............................... 106 107
Franchise............................. 1,941 1,759
----- -----
Total Hortons......................... 2,047 1,866
===== =====
Total System.......................... 7,921 7,487
===== =====
14
PART II: OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders.
(a) The Annual Meeting of the Company's shareholders was held on May 2, 2001.
(b) The following table sets forth the name of each director elected at the
meeting and the number of votes for or withheld from each director:
Director For Withheld
-------- --- --------
R. David Thomas 69,740,232 31,469,826
Ernest S. Hayeck 83,702,159 17,507,898
Janet Hill 83,663,661 17,546,396
True H. Knowles 83,736,227 17,473,831
Paul D. House 83,738,018 17,472,038
The following directors did not stand for reelection at the meeting (the year in
which each director's term expires is indicated in parenthesis): Thekla R.
Shackelford (2002), Ronald E. Musick (2002), John T. Schuessler (2002), Kerrii
B. Anderson (2002), William E. Kirwan (2002), James V. Pickett (2003), Thomas F.
Keller (2003), Ronald V. Joyce (2003), Andrew G. McCaughey (2003) and David P.
Lauer (2003).
Item 6. Exhibits and Reports on Form 8-K.
(a) Index to Exhibits on Page 17.
(b) No report on Form 8-K was filed during the quarter ended July 1, 2001.
15
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WENDY'S INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: 08/14/01 /s/ Kerrii B. Anderson
--------- -----------------------------
Kerrii B. Anderson
Executive Vice President and
Chief Financial Officer
16
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number Description Page No.
------ ----------- --------
99 Safe Harbor Under 18-19
the Private Securities
Litigation Reform Act of 1995
17