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Wendy's Co - Quarter Report: 2019 September (Form 10-Q)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2019

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
THE WENDY’S COMPANY
(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.)
 
 
 
 
One Dave Thomas Blvd.
 
 
Dublin,
Ohio
 
43017
(Address of principal executive offices)
 
(Zip Code)

(614) 764-3100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.10 par value
WEN
The Nasdaq Stock Market LLC

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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No

There were 230,047,087 shares of The Wendy’s Company common stock outstanding as of October 30, 2019.
 



THE WENDY’S COMPANY AND SUBSIDIARIES
INDEX TO FORM 10-Q
 
Page
 
 
 

3


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Par Value)
 
September 29,
2019
 
December 30,
2018
ASSETS
(Unaudited)
Current assets:
 
 
 
Cash and cash equivalents
$
439,421

 
$
431,405

Restricted cash
28,769

 
29,860

Accounts and notes receivable, net
105,017

 
109,805

Inventories
3,549

 
3,687

Prepaid expenses and other current assets
12,638

 
14,452

Advertising funds restricted assets
84,380

 
76,509

Total current assets
673,774

 
665,718

Properties
980,872

 
1,023,267

Finance lease assets
198,415

 
189,969

Operating lease assets
871,108

 

Goodwill
755,588

 
747,884

Other intangible assets
1,251,699

 
1,294,153

Investments
46,898

 
47,660

Net investment in sales-type and direct financing leases
250,602

 
226,477

Other assets
107,264

 
96,907

Total assets
$
5,136,220

 
$
4,292,035

 


 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
22,750

 
$
23,250

Current portion of finance lease liabilities
10,584

 
8,405

Current portion of operating lease liabilities
43,474

 

Accounts payable
23,793

 
21,741

Accrued expenses and other current liabilities
146,693

 
150,636

Advertising funds restricted liabilities
90,152

 
80,153

Total current liabilities
337,446

 
284,185

Long-term debt
2,270,866

 
2,305,552

Long-term finance lease liabilities
471,704

 
447,231

Long-term operating lease liabilities
911,213

 

Deferred income taxes
273,097

 
269,160

Deferred franchise fees
91,437

 
92,232

Other liabilities
130,866

 
245,226

Total liabilities
4,486,629

 
3,643,586

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Common stock, $0.10 par value; 1,500,000 shares authorized;
     470,424 shares issued; 230,371 and 231,233 shares outstanding, respectively
47,042

 
47,042

Additional paid-in capital
2,885,404

 
2,884,696

Retained earnings
186,282

 
146,277

Common stock held in treasury, at cost; 240,053 and 239,191 shares, respectively
(2,415,027
)
 
(2,367,893
)
Accumulated other comprehensive loss
(54,110
)
 
(61,673
)
Total stockholders’ equity
649,591

 
648,449

Total liabilities and stockholders’ equity
$
5,136,220

 
$
4,292,035

See accompanying notes to condensed consolidated financial statements.

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Table of Contents
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)


 
Three Months Ended
 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Sales
$
181,977

 
$
165,323

 
$
530,724

 
$
486,316

Franchise royalty revenue and fees
109,155

 
103,212

 
320,233

 
308,679

Franchise rental income
59,918

 
50,474

 
176,931

 
152,110

Advertising funds revenue
86,830

 
81,541

 
253,923

 
245,011

 
437,880

 
400,550

 
1,281,811

 
1,192,116

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
152,425

 
139,348

 
446,096

 
409,721

Franchise support and other costs
9,739

 
5,349

 
19,823

 
18,553

Franchise rental expense
32,364

 
22,260

 
92,842

 
69,829

Advertising funds expense
87,883

 
81,541

 
257,031

 
245,011

General and administrative
46,169

 
46,545

 
146,266

 
146,064

Depreciation and amortization
33,306

 
29,070

 
97,975

 
94,649

System optimization gains, net
(1,040
)
 
(486
)
 
(1,162
)
 
(8
)
Reorganization and realignment costs
403

 
941

 
4,771

 
6,691

Impairment of long-lived assets

 
347

 
1,684

 
2,156

Other operating income, net
(2,392
)
 
(1,713
)
 
(9,377
)
 
(4,643
)
 
358,857

 
323,202

 
1,055,949

 
988,023

Operating profit
79,023

 
77,348

 
225,862

 
204,093

Interest expense, net
(27,930
)
 
(29,625
)
 
(86,943
)
 
(89,939
)
Loss on early extinguishment of debt

 

 
(7,150
)
 
(11,475
)
Investment income, net
340

 
450,133

 
999

 
450,432

Other income, net
1,878

 
1,061

 
6,166

 
2,423

Income before income taxes
53,311

 
498,917

 
138,934

 
555,534

Provision for income taxes
(7,184
)
 
(107,668
)
 
(28,527
)
 
(114,250
)
Net income
$
46,127

 
$
391,249

 
$
110,407

 
$
441,284

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
.20

 
$
1.65

 
$
.48

 
$
1.85

Diluted
.20

 
1.60

 
.47

 
1.79


See accompanying notes to condensed consolidated financial statements.

5

Table of Contents
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)


 
Three Months Ended
 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
 
(Unaudited)
Net income
$
46,127

 
$
391,249

 
$
110,407

 
$
441,284

Other comprehensive (loss) income, net:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(2,297
)
 
5,315

 
7,563

 
(5,054
)
Change in unrecognized pension loss:
 
 
 
 
 
 
 
Unrealized gains arising during the period

 

 

 
156

Income tax provision

 

 

 
(39
)
 

 

 

 
117

     Other comprehensive (loss) income, net
(2,297
)
 
5,315

 
7,563

 
(4,937
)
Comprehensive income
$
43,830

 
$
396,564

 
$
117,970

 
$
436,347


See accompanying notes to condensed consolidated financial statements.

6

Table of Contents
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)


 
Common
Stock
 
Additional Paid-In
Capital
 
Retained Earnings
(Accumulated
Deficit)
 
Common Stock Held in Treasury
 
Accumulated Other Comprehensive Loss
 
Total
 
 
 
 
 
 
 
(Unaudited)
Balance at December 30, 2018
$
47,042

 
$
2,884,696

 
$
146,277

 
$
(2,367,893
)
 
$
(61,673
)
 
$
648,449

Net income

 

 
31,894

 

 

 
31,894

Other comprehensive income, net

 

 

 

 
6,025

 
6,025

Cash dividends

 

 
(23,069
)
 

 

 
(23,069
)
Repurchases of common stock

 

 

 
(29,370
)
 

 
(29,370
)
Share-based compensation

 
5,022

 

 

 

 
5,022

Common stock issued upon exercises of stock options

 
(205
)
 

 
9,053

 

 
8,848

Common stock issued upon vesting of restricted shares

 
(8,874
)
 

 
2,819

 

 
(6,055
)
Cumulative effect of change in accounting principle

 

 
(1,105
)
 

 

 
(1,105
)
Other

 
24

 
(6
)
 
37

 

 
55

Balance at March 31, 2019
$
47,042

 
$
2,880,663

 
$
153,991

 
$
(2,385,354
)
 
$
(55,648
)
 
$
640,694

Net income

 

 
32,386

 

 

 
32,386

Other comprehensive income, net

 

 

 

 
3,835

 
3,835

Cash dividends

 

 
(23,124
)
 

 

 
(23,124
)
Repurchases of common stock

 

 

 
(20,391
)
 

 
(20,391
)
Share-based compensation

 
4,986

 

 

 

 
4,986

Common stock issued upon exercises of stock options

 
(339
)
 

 
10,830

 

 
10,491

Common stock issued upon vesting of restricted shares

 
(1,852
)
 

 
964

 

 
(888
)
Other

 
26

 
(4
)
 
37

 

 
59

Balance at June 30, 2019
$
47,042

 
$
2,883,484

 
$
163,249

 
$
(2,393,914
)
 
$
(51,813
)
 
$
648,048

Net income

 

 
46,127

 

 

 
46,127

Other comprehensive loss, net

 

 

 

 
(2,297
)
 
(2,297
)
Cash dividends

 

 
(23,087
)
 

 

 
(23,087
)
Repurchases of common stock

 

 

 
(26,462
)
 

 
(26,462
)
Share-based compensation

 
3,981

 

 

 

 
3,981

Common stock issued upon exercises of stock options

 
545

 

 
4,171

 

 
4,716

Common stock issued upon vesting of restricted shares

 
(2,636
)
 

 
1,147

 

 
(1,489
)
Other

 
30

 
(7
)
 
31

 

 
54

Balance at September 29, 2019
$
47,042

 
$
2,885,404

 
$
186,282

 
$
(2,415,027
)
 
$
(54,110
)
 
$
649,591


See accompanying notes to condensed consolidated financial statements.






7

Table of Contents
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED
(In Thousands)

 
Common
Stock
 
Additional Paid-In
Capital
 
Retained Earnings
(Accumulated
Deficit)
 
Common Stock Held in Treasury
 
Accumulated Other Comprehensive Loss
 
Total
 
 
 
 
 
 
 
(Unaudited)
Balance at December 31, 2017
$
47,042

 
$
2,885,955

 
$
(163,289
)
 
$
(2,150,307
)
 
$
(46,198
)
 
$
573,203

Net income

 

 
20,159

 

 

 
20,159

Other comprehensive loss, net

 

 

 

 
(5,927
)
 
(5,927
)
Cash dividends

 

 
(20,355
)
 

 

 
(20,355
)
Repurchases of common stock

 

 

 
(39,407
)
 

 
(39,407
)
Share-based compensation

 
4,458

 

 

 

 
4,458

Common stock issued upon exercises of stock options

 
(7,460
)
 

 
11,038

 

 
3,578

Common stock issued upon vesting of restricted shares

 
(4,170
)
 

 
1,620

 

 
(2,550
)
Cumulative effect of change in accounting principle

 

 
(70,210
)
 

 

 
(70,210
)
Other

 
21

 
(5
)
 
32

 

 
48

Balance at April 1, 2018
$
47,042

 
$
2,878,804

 
$
(233,700
)
 
$
(2,177,024
)
 
$
(52,125
)
 
$
462,997

Net income

 

 
29,876

 

 

 
29,876

Other comprehensive loss, net

 

 

 

 
(4,325
)
 
(4,325
)
Cash dividends

 

 
(20,290
)
 

 

 
(20,290
)
Repurchases of common stock

 

 

 
(45,787
)
 

 
(45,787
)
Share-based compensation

 
5,133

 

 

 

 
5,133

Common stock issued upon exercises of stock options

 
396

 

 
2,840

 

 
3,236

Common stock issued upon vesting of restricted shares

 
(1,199
)
 

 
828

 

 
(371
)
Other

 
33

 
(6
)
 
43

 

 
70

Balance at July 1, 2018
$
47,042

 
$
2,883,167

 
$
(224,120
)
 
$
(2,219,100
)
 
$
(56,450
)
 
$
430,539

Net income

 

 
391,249

 

 

 
391,249

Other comprehensive income, net

 

 

 

 
5,315

 
5,315

Cash dividends

 

 
(20,141
)
 

 

 
(20,141
)
Repurchases of common stock

 

 

 
(56,421
)
 

 
(56,421
)
Share-based compensation

 
4,810

 

 

 

 
4,810

Common stock issued upon exercises of stock options

 
(2,409
)
 

 
31,484

 

 
29,075

Common stock issued upon vesting of restricted shares

 
(2,300
)
 

 
1,132

 

 
(1,168
)
Other

 
30

 
(5
)
 
35

 

 
60

Balance at September 30, 2018
$
47,042

 
$
2,883,298

 
$
146,983

 
$
(2,242,870
)
 
$
(51,135
)
 
$
783,318


See accompanying notes to condensed consolidated financial statements.

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Table of Contents
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
110,407

 
$
441,284

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
97,975

 
94,649

Share-based compensation
13,989

 
14,401

Impairment of long-lived assets
1,684

 
2,156

Deferred income tax
5,524

 
(1,527
)
Non-cash rental expense (income), net
18,722

 
(10,868
)
Change in operating lease liabilities
(31,481
)
 

Net receipt of deferred vendor incentives
2,269

 
2,689

System optimization gains, net
(1,162
)
 
(8
)
Gain on sale of investments, net
(130
)
 
(450,000
)
Distributions received from joint ventures, net of equity in earnings
2,926

 
3,250

Long-term debt-related activities, net
12,386

 
16,860

Changes in operating assets and liabilities and other, net
4,391

 
116,776

Net cash provided by operating activities
237,500

 
229,662

Cash flows from investing activities:
 

 
 

Capital expenditures
(40,984
)
 
(39,717
)
Acquisitions
(5,052
)
 
(21,401
)
Dispositions
2,038

 
2,863

Proceeds from sale of investments
130

 
450,000

Notes receivable, net
(1,834
)
 
(283
)
Payments for investments

 
(13
)
Net cash (used in) provided by investing activities
(45,702
)
 
391,449

Cash flows from financing activities:
 

 
 

Proceeds from long-term debt
850,000

 
934,837

Repayments of long-term debt
(883,564
)
 
(888,689
)
Repayments of finance lease liabilities
(5,178
)
 
(4,350
)
Deferred financing costs
(14,008
)
 
(17,340
)
Repurchases of common stock
(76,948
)
 
(140,199
)
Dividends
(69,280
)
 
(60,786
)
Proceeds from stock option exercises
24,069

 
42,299

Payments related to tax withholding for share-based compensation
(8,447
)
 
(10,464
)
Contingent consideration payment

 
(6,269
)
Net cash used in financing activities
(183,356
)
 
(150,961
)
Net cash provided by operations before effect of exchange rate changes on cash
8,442

 
470,150

Effect of exchange rate changes on cash
2,755

 
(2,195
)
Net increase in cash, cash equivalents and restricted cash
11,197

 
467,955

Cash, cash equivalents and restricted cash at beginning of period
486,512

 
212,824

Cash, cash equivalents and restricted cash at end of period
$
497,709

 
$
680,779


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Table of Contents
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED
(In Thousands)

 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
 
(Unaudited)
Supplemental non-cash investing and financing activities:
 
 
 
Capital expenditures included in accounts payable
$
7,582

 
$
9,588

Finance leases
34,084

 
6,569

 
 
 
 
 
September 29,
2019
 
December 30,
2018
Reconciliation of cash, cash equivalents and restricted cash at end of period:
 
 
 
Cash and cash equivalents
$
439,421

 
$
431,405

Restricted cash
28,769

 
29,860

Restricted cash, included in Advertising funds restricted assets
29,519

 
25,247

Total cash, cash equivalents and restricted cash
$
497,709

 
$
486,512


See accompanying notes to condensed consolidated financial statements.



10

Table of Contents
THE WENDY’S COMPANY 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 The Wendy’s Company (“The Wendy’s Company” 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, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of September 29, 2019, the results of our operations for the three and nine months ended September 29, 2019 and September 30, 2018 and cash flows for the nine months ended September 29, 2019 and September 30, 2018. The results of operations for the three and nine months ended September 29, 2019 are not necessarily indicative of the results to be expected for the full 2019 fiscal year. The Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018 (the “Form 10-K”).

The principal 100% owned subsidiary of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s® restaurants in North America (defined as the United States of America (“U.S.”) and Canada) comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material. As a result of the realignment of our management and operating structure in May 2019, the Company is continuing to evaluate the impact these changes will have on its existing operating segment structure. The Company currently expects to report its results in the following three segments beginning with our Annual Report on Form 10-K for the fiscal year ended December 29, 2019: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. See Note 6 for further information.

We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.

Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue.

Certain reclassifications have been made to the prior year presentation to conform to the current year presentation. See Note 2 for further information.

(2) New Accounting Standards

New Accounting Standards

Credit Losses

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an amendment that will require the Company to use a current expected credit loss model that will result in the immediate recognition of an estimate of credit losses that are expected to occur over the life of the financial instruments that are within the scope of the guidance, including trade receivables. The amendment is effective commencing with our 2020 fiscal year. We are currently evaluating the impact of the adoption of this guidance on our condensed consolidated financial statements.

New Accounting Standards Adopted

Cloud Computing

In August 2018, the FASB issued new guidance on accounting for implementation costs of a cloud computing arrangement that is a service contract. The new guidance aligns the accounting for such implementation costs of a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The Company adopted this amendment during the first quarter of 2019. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

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Table of Contents
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)




Nonemployee Share-Based Payments

In June 2018, the FASB issued new guidance on nonemployee share-based payment arrangements. The new guidance aligns the requirements for nonemployee share-based payments with the requirements for employee share-based payments. The Company adopted this amendment during the first quarter of 2019. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

Leases

In February 2016, the FASB issued new guidance on leases, which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases. The Company adopted the new guidance during the first quarter of 2019 using the effective date as the date of initial application; therefore, the comparative period has not been adjusted and continues to be reported under the previous lease guidance.

The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. For those leases that fall under the definition of a short-term lease, the Company elected the short-term lease recognition exemption. Under this practical expedient, for those leases that qualify, we did not recognize right-of-use (“ROU”) assets or liabilities, which included not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient for lessees to account for lease components and nonlease components as a single lease component for all underlying classes of assets. In addition, the Company elected the practical expedient for lessors to account for lease components and nonlease components as a single lease component in instances where the lease component is predominant, the timing and pattern of transfer for the lease component and nonlease component are the same and the lease component, if accounted for separately, would be classified as an operating lease. The Company did not elect the use-of-hindsight practical expedient.

The standard had a material impact on our condensed consolidated balance sheets and related disclosures. Upon adoption at the beginning of 2019, we recognized operating lease liabilities of $1,011,000 based on the present value of the remaining minimum rental payments, with corresponding ROU assets of $934,000. The measurement of the operating lease ROU assets included, among other items, favorable lease amounts of $23,000 and unfavorable lease amounts of $30,000, which were previously included in “Other intangible assets” and “Other liabilities,” respectively, as well as the excess of rent expense recognized on a straight-line basis over the minimum rents paid of $67,000, which was previously included in “Other liabilities.” In addition, the standard requires lessors to recognize lessees’ payments to the Company for executory costs on a gross basis as revenue with a corresponding expense, which we expect will result in an increase of approximately $40,000 to our 2019 franchise rental income and expense. The Company also recognized a decrease to retained earnings of $1,105 as a result of impairing newly recognized ROU assets upon transition to the new guidance. The adoption of the guidance did not have a material impact on our condensed consolidated statement of cash flows.

In connection with the adoption of the standard, the Company has reclassified finance lease ROU assets to “Finance lease assets,” which were previously recorded to “Properties.” The Company also reclassified the current and long-term finance lease liabilities to “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively, which were previously recorded to “Current portion of long-term debt” and “Long-term debt,” respectively. The prior period reflects the reclassifications of these assets and liabilities to conform to the current year presentation.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



The following table illustrates the reclassifications made to the condensed consolidated balance sheet as of December 30, 2018:
 
As Previously Reported
 
Reclassifications
 
As Currently Reported
Properties
$
1,213,236

 
$
(189,969
)
 
$
1,023,267

Finance lease assets

 
189,969

 
189,969

Current portion of long-term debt
31,655

 
(8,405
)
 
23,250

Current portion of finance lease liabilities

 
8,405

 
8,405

Long-term debt
2,752,783

 
(447,231
)
 
2,305,552

Long-term finance lease liabilities

 
447,231

 
447,231




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



(3) Revenue

Disaggregation of Revenue

The following tables disaggregate revenue by primary geographical market and source:
 
U.S.
 
Canada
 
Other International
 
Total
Three Months Ended September 29, 2019
 
 
 
 
 
 
 
Sales at Company-operated restaurants
$
181,977

 
$

 
$

 
$
181,977

Franchise royalty revenue
90,791

 
6,529

 
4,947

 
102,267

Franchise fees
5,838

 
877

 
173

 
6,888

Franchise rental income
50,987

 
8,931

 

 
59,918

Advertising funds revenue
81,386

 
5,444

 

 
86,830

Total revenues
$
410,979

 
$
21,781

 
$
5,120

 
$
437,880

 
 
 
 
 
 
 
 
Nine Months Ended September 29, 2019
 
 
 
 
 
 
 
Sales at Company-operated restaurants
$
530,724

 
$

 
$

 
$
530,724

Franchise royalty revenue
266,599

 
18,341

 
14,991

 
299,931

Franchise fees
17,563

 
1,997

 
742

 
20,302

Franchise rental income
151,693

 
25,238

 

 
176,931

Advertising funds revenue
238,804

 
15,119

 

 
253,923

Total revenues
$
1,205,383

 
$
60,695

 
$
15,733

 
$
1,281,811

 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
Sales at Company-operated restaurants
$
165,323

 
$

 
$

 
$
165,323

Franchise royalty revenue
84,648

 
6,260

 
4,593

 
95,501

Franchise fees
5,575

 
1,855

 
281

 
7,711

Franchise rental income
43,900

 
6,574

 

 
50,474

Advertising funds revenue
76,492

 
5,049

 

 
81,541

Total revenues
$
375,938

 
$
19,738

 
$
4,874

 
$
400,550

 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
Sales at Company-operated restaurants
$
486,316

 
$

 
$

 
$
486,316

Franchise royalty revenue
252,094

 
17,696

 
13,812

 
283,602

Franchise fees
19,671

 
4,776

 
630

 
25,077

Franchise rental income
133,046

 
19,064

 

 
152,110

Advertising funds revenue
230,391

 
14,620

 

 
245,011

Total revenues
$
1,121,518

 
$
56,156

 
$
14,442

 
$
1,192,116


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)




Contract Balances

The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers:
 
September 29,
2019 (a)
 
December 30,
2018 (a)
Receivables, which are included in “Accounts and notes receivable, net” (b)
$
39,669

 
$
40,300

Receivables, which are included in “Advertising funds restricted assets”
49,102

 
47,332

Deferred franchise fees (c)
100,751

 
102,205

_______________

(a)
Excludes funds collected from the sale of gift cards, which are primarily reimbursed to franchisees upon redemption at franchised restaurants and do not ultimately result in the recognition of revenue in the Company’s condensed consolidated statements of operations.

(b)
Includes receivables related to “Sales” and “Franchise royalty revenue and fees.”

(c)
Deferred franchise fees are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees” and totaled $9,314 and $91,437 as of September 29, 2019, respectively, and $9,973 and $92,232 as of December 30, 2018, respectively.

Significant changes in deferred franchise fees are as follows:
 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
Deferred franchise fees at beginning of period
$
102,205

 
$
102,492

Revenue recognized during the period
(6,635
)
 
(7,393
)
New deferrals due to cash received and other
5,181

 
7,913

Deferred franchise fees at end of period
$
100,751

 
$
103,012



Anticipated Future Recognition of Deferred Franchise Fees

The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:
Estimate for fiscal year:
 
2019 (a)
$
2,164

2020
7,399

2021
6,118

2022
5,858

2023
5,633

Thereafter
73,579

 
$
100,751

_______________

(a)
Represents franchise fees expected to be recognized for the remainder of 2019, which includes development-related franchise fees expected to be recognized over a duration of one year or less.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



(4) Acquisitions

During the nine months ended September 29, 2019, the Company acquired five restaurants from franchisees for total net cash consideration of $5,052. The Company did not incur any material acquisition-related costs associated with the acquisitions and such transactions were not significant to our condensed consolidated financial statements. The table below presents the allocation of the total purchase price to the fair value of assets acquired and liabilities assumed for restaurants acquired from franchisees:
 
Nine Months Ended
 
September 29,
2019
Restaurants acquired from franchisees
5

 
 
Total consideration paid, net of cash received
$
5,052

Identifiable assets acquired and liabilities assumed:
 
Properties
666

Acquired franchise rights
1,354

Finance lease assets
5,350

Finance lease liabilities
(4,084
)
Other
(2,316
)
Total identifiable net assets
970

Goodwill
$
4,082



During 2018, the Company acquired 16 restaurants from a franchisee for total net cash consideration of $21,401. The fair values of the identifiable intangible assets related to the acquisition were provisional amounts as of December 30, 2018, pending final purchase accounting adjustments. The Company finalized the purchase price allocation during the three months ended March 31, 2019, which resulted in a decrease in the fair value of acquired franchise rights of $2,989 and an increase in deferred tax assets of $140.

(5) System Optimization Gains, Net

The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”). As of January 1, 2017, the Company completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system. While the Company has no plans to reduce its ownership below the approximately 5% level, the Company expects to continue to optimize the Wendy’s system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base, drive new restaurant development and accelerate reimages.

During the nine months ended September 29, 2019 and September 30, 2018, the Company facilitated three and 73 Franchise Flips, respectively. Additionally, during the nine months ended September 30, 2018, the Company completed the sale of three Company-operated restaurants to a franchisee. No Company-operated restaurants were sold to franchisees during the nine months ended September 29, 2019.

Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 6. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



The following is a summary of the disposition activity recorded as a result of our system optimization initiative:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
Gain on sale of restaurants, net (a)
$

 
$

 
$

 
$
89

Post-closing adjustments on sales of restaurants (b)
1,033

 
279

 
1,087

 
54

Gain (loss) on sales of other assets, net (c)
7

 
207

 
75

 
(135
)
System optimization gains, net
$
1,040

 
$
486

 
$
1,162

 
$
8

_______________

(a)
During the nine months ended September 30, 2018, the Company received cash proceeds of $1,436 from the sale of three Company-operated restaurants. The value of the net assets that were included in the sale totaled $1,139 and consisted primarily of equipment. In addition, goodwill of $208 was written off in connection with the sale.

(b)
The three and nine months ended September 29, 2019 and September 30, 2018 include the recognition of deferred gains of $911 and $503, respectively, as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. The nine months ended September 30, 2018 also includes cash proceeds, net of payments of $6.

(c)
During the three and nine months ended September 29, 2019, the Company received cash proceeds of $798 and $2,038, respectively, and during the three and nine months ended September 30, 2018 received cash proceeds of $1,049 and $1,421, respectively, primarily from the sale of surplus properties.

Assets Held for Sale

As of September 29, 2019 and December 30, 2018, the Company had assets held for sale of $2,391 and $2,435, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”

(6) Reorganization and Realignment Costs

The following is a summary of the initiatives included in “Reorganization and realignment costs:”
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
G&A realignment
$
396

 
$
629

 
$
4,695

 
$
6,375

System optimization initiative
7

 
312

 
76

 
316

Reorganization and realignment costs
$
403

 
$
941

 
$
4,771

 
$
6,691



General and Administrative (G&A”) Realignment

In May 2017, the Company initiated a plan to further reduce its G&A expenses. Additionally, the Company announced in May 2019 changes to its leadership structure that includes the creation of two new positions, a President, U.S and Chief Commercial Officer and a President, International and Chief Development Officer, and the elimination of the Chief Operations Officer position. During the nine months ended September 29, 2019 and September 30, 2018, the Company recognized costs related to the plan totaling $4,695 and $6,375, respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $2,700, comprised of (1) severance and related employee costs of approximately $1,900, (2) recruitment and relocation costs of approximately $450, (3) third-party and other costs of approximately $50 and (4) share-based compensation of approximately $300. The Company expects to incur total costs aggregating approximately $35,000 to $38,000 related to the plan.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



As a result of the realignment of our management and operating structure as described above, the Company is continuing to evaluate the impact these changes will have on its existing operating segment structure. The Company currently expects to report its results in the following three segments beginning with our Annual Report on Form 10-K for the fiscal year ended December 29, 2019: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development.

The following is a summary of the activity recorded as a result of the G&A realignment plan:
 
Three Months Ended
 
Nine Months Ended
 
Total
Incurred Since Inception
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
 
Severance and related employee costs
$
214

 
$
57

 
$
2,816

 
$
3,168

 
$
21,569

Recruitment and relocation costs
58

 
200

 
654

 
708

 
2,220

Third-party and other costs
25

 
39

 
112

 
971

 
2,222

 
297

 
296

 
3,582

 
4,847

 
26,011

Share-based compensation (a)
99

 
333

 
1,113

 
1,528

 
7,797

Termination of defined benefit plans

 

 

 

 
1,335

Total G&A realignment
$
396

 
$
629

 
$
4,695

 
$
6,375

 
$
35,143

_______________

(a)
Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under our G&A realignment plan.

The accruals for our G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $3,491 and $507 as of September 29, 2019, respectively, and $6,817 and $1,432 as of September 30, 2018, respectively. The tables below present a rollforward of our accruals for the plan.
 
Balance
December 30,
2018
 
Charges
 
Payments
 
Balance
September 29,
2019
Severance and related employee costs
$
7,241

 
$
2,816

 
$
(6,216
)
 
$
3,841

Recruitment and relocation costs
83

 
654

 
(580
)
 
157

Third-party and other costs

 
112

 
(112
)
 

 
$
7,324

 
$
3,582

 
$
(6,908
)
 
$
3,998


 
Balance
December 31,
2017
 
Charges
 
Payments
 
Balance
September 30,
2018
Severance and related employee costs
$
12,093

 
$
3,168

 
$
(7,103
)
 
$
8,158

Recruitment and relocation costs
177

 
708

 
(794
)
 
91

Third-party and other costs

 
971

 
(971
)
 

 
$
12,270

 
$
4,847

 
$
(8,868
)
 
$
8,249



System Optimization Initiative

The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. The Company has incurred costs of $72,268 under the initiative since inception and does not expect to incur any additional costs during the remainder of 2019.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



(7) Investments

Equity Investments

Wendy’s has a 50% share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons® brand. (Tim Hortons is a registered trademark of Tim Hortons USA Inc.) In addition, a wholly-owned subsidiary of Wendy’s has a 20% share in a joint venture for the operation of Wendy’s restaurants in Brazil (the “Brazil JV”). The Company has significant influence over these investees. Such investments are accounted for using the equity method of accounting, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.”

Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements:
 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
Balance at beginning of period
$
47,021

 
$
55,363

 
 
 
 
Investment

 
13

 
 
 
 
Equity in earnings for the period
8,812

 
7,566

Amortization of purchase price adjustments (a)
(1,700
)
 
(1,756
)
 
7,112

 
5,810

Distributions received
(10,038
)
 
(9,060
)
Foreign currency translation adjustment included in “Other comprehensive (loss) income, net” and other
2,164

 
(191
)
Balance at end of period
$
46,259

 
$
51,935

_______________

(a)
Purchase price adjustments that impacted the carrying value of the Company’s investment in TimWen are being amortized over the average original aggregate life of 21 years.

Other Investments in Equity Securities

On October 11, 2019, the Company received a $25,000 cash settlement related to a previously held investment.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



(8) Long-Term Debt

Long-term debt consisted of the following:
 
September 29,
2019
 
December 30,
2018
Series 2019-1 Class A-2 Notes:
 
 
 
3.783% Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026
$
399,000

 
$

4.080% Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029
448,875

 

Series 2018-1 Class A-2 Notes:
 
 
 
3.573% Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025
442,125

 
445,500

3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028
466,688

 
470,250

Series 2015-1 Class A-2 Notes:
 
 
 
4.080% Series 2015-1 Class A-2-II Notes, repaid in connection with the June 2019 refinancing

 
870,750

4.497% Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025
480,000

 
483,750

7% debentures, due in 2025
91,722

 
90,769

Unamortized debt issuance costs
(34,794
)
 
(32,217
)
 
2,293,616

 
2,328,802

Less amounts payable within one year
(22,750
)
 
(23,250
)
Total long-term debt
$
2,270,866

 
$
2,305,552



On June 26, 2019, Wendy’s Funding, LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of the Company, completed a debt refinancing transaction under which the Master Issuer issued fixed rate senior secured notes in the following 2019-1 series: Class A-2-I with an initial principal amount of $400,000 and Class A-2-II with an initial principal amount of $450,000 (collectively, the “Series 2019-1 Class A-2 Notes”). Interest payments on the Series 2019-1 Class A-2 Notes are payable on a quarterly basis. The legal final maturity date of the Series 2019-1 Class A-2 Notes is in June 2049. If the Master Issuer has not repaid or refinanced the Series 2019-1 Class A-2 Notes prior to the respective anticipated repayment date, additional interest will accrue on each tranche of the Series 2019-1 Class A-2 Notes at a rate equal to the greater of (A) 5.00% per annum and (B) a per annum interest rate equal to the amount, if any, by which the sum of (i) the yield to maturity (adjusted to a quarterly bond-equivalent basis) on such anticipated repayment date of the United States Treasury Security having a term closest to 10 years, plus (ii) 5.00%, plus (iii) (1) with respect to the Series 2019-1 Class A-2-I Notes, 1.863%, and (2) with respect to the Series 2019-1 Class A-2-II Notes, 2.051%, exceeds the original interest rate with respect to such tranche. The Master Issuer’s outstanding Series 2015-1 Class A-2-II Notes were repaid as part of the refinancing transaction. As a result, the Company recorded a loss on early extinguishment of debt of $7,150 during the nine months ended September 29, 2019, which was comprised of the write-off of certain unamortized deferred financing costs. The Series 2019-1 Class A-2 Notes have scheduled principal payments of $4,250 in 2019, $8,500 annually from 2020 through 2025, $378,500 in 2026, $4,500 in each of 2027 and 2028 and $407,250 in 2029.

In connection with the issuance of the Series 2019-1 Class A-2 Notes, the Master Issuer also entered into a revolving financing facility of Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2019-1 Class A-1 Notes” and, together with the Series 2019-1 Class A-2 Notes, the “Series 2019-1 Senior Notes”), which allows for the drawing of up to $150,000 on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2019-1 Class A-1 Notes during the nine months ended September 29, 2019. The Series 2019-1 Class A-1 Notes replaced the Company’s $150,000 Series 2018-1 Class A-1 Notes, which were canceled on the closing date, and the letters of credit outstanding against the Series 2018-1 Class A-1 Notes were transferred to the Series 2019-1 Class A-1 Notes.

The Series 2019-1 Senior Notes are secured by substantially all of the assets of the Master Issuer and certain other limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company that act as guarantors (the “Guarantors”), excluding certain real estate assets and subject to certain limitations. The Series 2019-1 Senior Notes are subject to the same series of covenants and restrictions as the Company’s outstanding Series 2018-1 Class A-2 Notes and Series 2015-1 Class A-2 Notes.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



During the nine months ended September 29, 2019, the Company incurred debt issuance costs of $14,008 in connection with the issuance of the Series 2019-1 Senior Notes. The debt issuance costs will be amortized to “Interest expense, net” through the anticipated repayment dates of the Series 2019-1 Senior Notes utilizing the effective interest rate method.

Wendy’s U.S. advertising fund has a revolving line of credit of $25,000. Neither the Company nor Wendy’s is the guarantor of the debt. The advertising fund facility was established to fund the advertising fund operations. During the nine months ended September 30, 2018, the Company borrowed $9,837 and repaid $11,124 under the line of credit. There were no borrowings or repayments under the line of credit during the nine months ended September 29, 2019.

(9) Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques under the accounting guidance related to fair value measurements are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. These inputs are classified into the following hierarchy:

Level 1 Inputs - Quoted prices for identical assets or liabilities in active markets.

Level 2 Inputs - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs - Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation.

Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
 
September 29,
2019
 
December 30,
2018
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Fair Value
Measurements
Financial assets
 
 
 
 
 
 
 
 
 
Cash equivalents
$
206,094

 
$
206,094

 
$
222,228

 
$
222,228

 
Level 1
Other investments in equity securities (a)
639

 
1,818

 
639

 
2,181

 
Level 3
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Series 2019-1 Class A-2-I Notes (b)
399,000

 
405,863

 

 

 
Level 2
Series 2019-1 Class A-2-II Notes (b)
448,875

 
463,598

 

 

 
Level 2
Series 2018-1 Class A-2-I Notes (b)
442,125

 
448,580

 
445,500

 
424,026

 
Level 2
Series 2018-1 Class A-2-II Notes (b)
466,688

 
476,208

 
470,250

 
439,353

 
Level 2
Series 2015-1 Class A-2-II Notes (b)

 

 
870,750

 
865,342

 
Level 2
Series 2015-1 Class A-2-III Notes (b)
480,000

 
492,624

 
483,750

 
482,522

 
Level 2
7% debentures, due in 2025 (b)
91,722

 
107,500

 
90,769

 
102,750

 
Level 2
Guarantees of franchisee loan obligations (c)
2

 
2

 
17

 
17

 
Level 3
_______________

(a)
The fair values of our investments are not significant and are based on our review of information provided by the investment managers or investees which was based on (1) valuations performed by the investment managers or investees, (2) quoted market or broker/dealer prices for similar investments and (3) quoted market or broker/dealer prices adjusted by the investment managers for legal or contractual restrictions, risk of nonperformance or lack of marketability, depending upon the underlying investments.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)




(b)
The fair values were based on quoted market prices in markets that are not considered active markets.

(c)
Wendy’s has provided loan guarantees to various lenders on behalf of franchisees entering into debt arrangements for equipment financing. We have accrued a liability for the fair value of these guarantees, the calculation of which was based upon a weighted average risk percentage.

The carrying amounts of cash, accounts payable and accrued expenses approximated fair value due to the short-term nature of those items. The carrying amounts of accounts and notes receivable, net (both current and non-current) approximated fair value due to the effect of the related allowance for doubtful accounts. Our cash equivalents and guarantees are the only financial assets and liabilities measured and recorded at fair value on a recurring basis.

Non-Recurring Fair Value Measurements

Assets and liabilities remeasured to fair value on a non-recurring basis resulted in impairment that we have recorded to “Impairment of long-lived assets” in our condensed consolidated statements of operations.

Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements, favorable lease assets and ROU assets) to fair value as a result of (1) declines in operating performance at Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants, including any subsequent lease modifications. The fair values of long-lived assets held and used presented in the tables below represents the remaining carrying value and were estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future anticipated Company-operated restaurant performance.

Total impairment losses may also include the impact of remeasuring long-lived assets held for sale, which primarily include surplus properties. The fair values of long-lived assets held for sale presented in the tables below represents the remaining carrying value and were estimated based on current market values. See Note 10 for further information on impairment of our long-lived assets.
 
 
 
Fair Value Measurements
 
September 29,
2019
 
Level 1
 
Level 2
 
Level 3
Held and used
$
1,866

 
$

 
$

 
$
1,866

Held for sale
988

 

 

 
988

Total
$
2,854

 
$

 
$

 
$
2,854



 
 
 
Fair Value Measurements
 
December 30,
2018
 
Level 1
 
Level 2
 
Level 3
Held and used
$
462

 
$

 
$

 
$
462

Held for sale
1,031

 

 

 
1,031

Total
$
1,493

 
$

 
$

 
$
1,493


(10) Impairment of Long-Lived Assets

The Company records impairment charges as a result of (1) closing Company-operated restaurants and classifying such surplus properties as held for sale, (2) the deterioration of operating performance of certain Company-operated restaurants and (3) the Company’s decision to lease and/or sublease properties to franchisees in connection with the sale or anticipated sale of Company-operated restaurants, including any subsequent lease modifications.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets:”
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
Surplus properties
$

 
$
229

 
$
1,397

 
$
270

Company-operated restaurants

 

 
287

 
1,603

Restaurants leased or subleased to franchisees

 
118

 

 
283

 
$

 
$
347

 
$
1,684

 
$
2,156



(11) Income Taxes

The Company’s effective tax rate for the three months ended September 29, 2019 and September 30, 2018 was 13.5% and 21.6% respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to (1) a reduction in unrecognized tax benefits due to a lapse of statute of limitations in the three months ended September 29, 2019, (2) a reduction for stock-based compensation, which included net excess tax benefits of $1,103 and $5,251 for the three months ended September 29, 2019 and September 30, 2018, respectively, and (3) an increase due to state income taxes, including non-recurring changes to state deferred taxes net of federal benefits.

The Company’s effective tax rate for the nine months ended September 29, 2019 and September 30, 2018 was 20.5% and 20.6% respectively. The Company’s effective tax rate varied immaterially from the U.S. federal statutory rate of 21% primarily due to (1) a reduction in unrecognized tax benefits due to a lapse of statute of limitations in the nine months ended September 29, 2019, (2) a reduction for stock-based compensation, which included net excess tax benefits of $4,028 and $12,142 for the nine months ended September 29, 2019 and September 30, 2018, respectively, and (3) an increase due to state income taxes, including non-recurring changes to state deferred taxes net of federal benefits.

On December 22, 2017, the U.S. government enacted the Tax Act. In our continued analysis of the impact of the Tax Act during the first nine months of 2018 under Staff Accounting Bulletin 118, we adjusted our provisional amounts for a discrete net tax expense of $2,076. This included a net expense of $2,426 related to the impact of the corporate rate reduction on our net deferred tax liabilities and a net expense of $991 related to limitations on the deductibility of certain executive compensation, partially offset by $1,341 for the tax benefit of foreign tax credits.

Unrecognized tax benefits for the Company decreased by $5,639 and $6,475 during the three and nine months ended September 29, 2019, respectively. The decrease was primarily related to the lapse of statutes of limitations during the third quarter of 2019. During the next twelve months, we believe it is reasonably possible the Company’s unrecognized tax benefits will decrease by up to $2,081 due to the lapse of statutes of limitations and expected settlements with taxing authorities.

The current portion of refundable income taxes was $6,719 and $14,475 as of September 29, 2019 and December 30, 2018, respectively, and is included in “Accounts and notes receivable, net” in the condensed consolidated balance sheets. There were no long-term refundable income taxes as of September 29, 2019 and December 30, 2018.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



(12) Net Income Per Share

Basic net income per share was computed by dividing net income amounts by the weighted average number of shares of common stock outstanding.

The weighted average number of shares used to calculate basic and diluted net income per share were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
Common stock:
 
 
 
 
 
 
 
Weighted average basic shares outstanding
230,723

 
237,696

 
230,779

 
238,872

Dilutive effect of stock options and restricted shares
4,995

 
7,070

 
5,122

 
7,574

Weighted average diluted shares outstanding
235,718

 
244,766

 
235,901

 
246,446



Diluted net income per share for the three and nine months ended September 29, 2019 and September 30, 2018 was computed by dividing net income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. We excluded potential common shares of 3,257 and 2,488 for the three and nine months ended September 29, 2019, respectively, and 1,121 and 1,287 for the three and nine months ended September 30, 2018, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.

(13) Stockholders’ Equity

Dividends

During each of the first three quarters of 2019, the Company paid quarterly cash dividends of $.10 per share. During each of the first three quarters of 2018, the Company paid quarterly cash dividends of $.085 per share.

Repurchases of Common Stock

In February 2019, our Board of Directors authorized a repurchase program for up to $225,000 of our common stock through March 1, 2020, when and if market conditions warrant and to the extent legally permissible. In connection with the February 2019 authorization, the Company’s previous November 2018 repurchase authorization for up to $220,000 of our common stock was canceled. During the nine months ended September 29, 2019, the Company repurchased 4,153 shares with an aggregate purchase price of $76,165, of which $1,102 was accrued at September 29, 2019, and excluding commissions of $58, under the November 2018 and February 2019 authorizations. As of September 29, 2019, the Company had $170,292 of availability remaining under its February 2019 authorization. Subsequent to September 29, 2019 through October 30, 2019, the Company repurchased 443 shares under the February 2019 authorization with an aggregate purchase price of $9,190, excluding commissions of $6. As part of the February 2019 authorization, the Company announced on October 11, 2019 its intention to launch a $100,000 accelerated share repurchase program during the fourth quarter of 2019.

In February 2018, our Board of Directors authorized a repurchase program for up to $175,000 of our common stock through March 3, 2019, when and if market conditions warranted and to the extent legally permissible. During the nine months ended September 30, 2018, the Company repurchased 6,896 shares under the February 2018 repurchase authorization with an aggregate purchase price of $118,866, of which $2,675 was accrued at September 30, 2018, and excluding commissions of $97. Additionally, during the nine months ended September 30, 2018, the Company completed its previous February 2017 repurchase authorization for up to $150,000 of our common stock with the repurchase of 1,385 shares with an aggregate purchase price of $22,633, excluding commissions of $19.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



Accumulated Other Comprehensive Loss

The following table provides a rollforward of the components of accumulated other comprehensive loss, net of tax as applicable:
 
Foreign Currency Translation
 
Pension
 
Total
Balance at December 30, 2018
$
(61,673
)
 
$

 
$
(61,673
)
Current-period other comprehensive income
7,563

 

 
7,563

Balance at September 29, 2019
$
(54,110
)
 
$

 
$
(54,110
)
 
 
 
 
 
 
Balance at December 31, 2017
$
(45,149
)
 
$
(1,049
)
 
$
(46,198
)
Current-period other comprehensive (loss) income
(5,054
)
 
117

 
(4,937
)
Balance at September 30, 2018
$
(50,203
)
 
$
(932
)
 
$
(51,135
)


(14) Leases

Nature of Leases

The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition, the Company owns sites and leases sites from third parties, which it leases and/or subleases to franchisees. At September 29, 2019, Wendy’s and its franchisees operated 6,743 Wendy’s restaurants. Of the 356 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 143 restaurants, owned the building and held long-term land leases for 144 restaurants and held leases covering the land and building for 69 restaurants. Wendy’s also owned 512 and leased 1,255 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment.

Determination of Whether a Contract Contains a Lease

The Company evaluates the contracts it enters into to determine whether such contracts contain leases. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.

ROU Model and Determination of Lease Term

The Company uses the ROU model to account for leases where the Company is the lessee, which requires an entity to recognize a lease liability and ROU asset on the lease commencement date. A lease liability is measured equal to the present value of the remaining lease payments over the lease term and is discounted using the incremental borrowing rate, as the rate implicit in the Company’s leases is not readily determinable. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease payments include payments made before the commencement date and any residual value guarantees, if applicable. The initial ROU asset consists of the initial measurement of the lease liability, adjusted for any favorable or unfavorable terms for leases acquired from franchisees, as well as payments made before the commencement date, initial direct costs and lease incentives earned. When determining the lease term, the Company includes option periods that it is reasonably certain to exercise as failure to renew the lease would impose a significant economic detriment. For properties used for Company-operated restaurants, the primary economic detriment relates to the existence of unamortized leasehold improvements which might be impaired if we choose not to exercise the available renewal options. The lease term for properties leased or subleased to franchisees is determined based upon the economic detriment to the franchisee and includes consideration of the length of the franchise agreement, historical performance of the restaurant and the existence of bargain renewal options. Lease terms for real estate are generally initially between 15 and 20 years and, in most cases, provide for rent escalations and renewal options.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



Operating Leases

For operating leases, minimum lease payments or receipts, including minimum scheduled rent increases, are recognized as rent expense where the Company is a lessee, or income where the Company is a lessor, as applicable, on a straight-line basis (“Straight-Line Rent”) over the applicable lease terms. There is a period under certain lease agreements referred to as a rent holiday (“Rent Holiday”) that generally begins on the possession date and ends on the rent commencement date. During a Rent Holiday, no cash rent payments are typically due under the terms of the lease; however, expense is recorded for that period on a straight-line basis. The excess of the Straight-Line Rent over the minimum rents paid is included in the ROU asset where the Company is a lessee. The excess of the Straight-Line Rent over the minimum rents received is recorded as a deferred lease asset and is included in “Other assets” where the Company is a lessor. Certain leases contain provisions, referred to as contingent rent (“Contingent Rent”), that require additional rental payments based upon restaurant sales volume. Contingent Rent is recognized each period as the liability is incurred or the asset is earned.

Lease cost for operating leases is recognized on a straight-line basis and includes the amortization of the ROU asset and interest expense related to the operating lease liability. Variable lease cost for operating leases includes Contingent Rent and payments for executory costs such as real estate taxes, insurance and common area maintenance, which are excluded from the measurement of the lease liability. Short-term lease cost for operating leases includes rental expense for leases with a term of less than 12 months. Lease costs are recorded in the condensed consolidated statements of operations based on the nature of the underlying lease as follows: (1) rental expense related to leases for Company-operated restaurants is recorded to “Cost of sales,” (2) rental expense for leased properties that are subsequently subleased to franchisees is recorded to “Franchise rental expense” and (3) rental expense related to leases for corporate offices and equipment is recorded to “General and administrative.”

Favorable and unfavorable lease amounts for operating leases where the Company is the lessor are recorded as components of “Other intangible assets” and “Other liabilities,” respectively. Favorable and unfavorable lease amounts are amortized on a straight-line basis over the term of the leases. When the expected term of a lease is determined to be shorter than the original amortization period, the favorable or unfavorable lease balance associated with the lease is adjusted to reflect the revised lease term.

Rental income and favorable and unfavorable lease amortization for operating leases on properties leased or subleased to franchisees is recorded to “Franchise rental income.” Lessees’ variable payments to the Company for executory costs under operating leases are recognized on a gross basis as “Franchise rental income” with a corresponding expense recorded to “Franchise rental expense.”

Finance Leases

Lease cost for finance leases includes the amortization of the ROU asset, which is amortized on a straight-line basis and recorded to “Depreciation and amortization,” and interest expense on the finance lease liability, which is calculated using the interest method and recorded to “Interest expense, net.”

Sales-Type and Direct Financing Leases

For sales-type and direct financing leases where the Company is the lessor, the Company records its investment in properties leased to franchisees on a net basis, which is comprised of the present value of the lease payments not yet received and the present value of the guaranteed and unguaranteed residual assets. The current and long-term portions of our net investment in sales-type and direct financing leases are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. Unearned income is recognized as interest income over the lease term and is included in “Interest expense, net.” Sales-type leases result in the recognition of gain or loss at the commencement of the lease, which is recorded to “Other operating income, net.” The gain or loss recognized upon commencement of the lease is directly affected by the Company’s estimate of the amount to be derived from the guaranteed and unguaranteed residual assets at the end of the lease term. The Company’s main component of this estimate is the expected fair value of the underlying assets, primarily the fair value of land. Lessees’ variable payments to the Company for executory costs under sales-type and direct financing leases are recognized on a gross basis as “Franchise rental income” with a corresponding expense recorded to “Franchise rental expense.”

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)




Significant Assumptions and Judgments

Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, property lives, discount rates and probable term, all of which can impact (1) the classification and accounting for a lease or sublease as operating or finance, including sales-type and direct financing, (2) the Rent Holiday and escalations in payment that are taken into consideration when calculating Straight-Line Rent, (3) the term over which leasehold improvements for each restaurant are amortized and (4) the values and lives of adjustments to the initial ROU asset where the Company is the lessee, or favorable and unfavorable leases where the Company is the lessor. The amount of depreciation and amortization, interest and rent expense and income reported would vary if different estimates and assumptions were used.

Company as Lessee

The components of lease cost are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2019
 
September 29,
2019
Finance lease cost:
 
 
 
Amortization of finance lease assets
$
3,201

 
$
7,949

Interest on finance lease liabilities
10,116

 
26,808

 
13,317

 
34,757

Operating lease cost
23,358

 
67,087

Variable lease cost (a)
15,435

 
44,910

Short-term lease cost
1,141

 
3,420

Total operating lease cost (b)
39,934

 
115,417

Total lease cost
$
53,251

 
$
150,174

_______________

(a)
The three and nine months ended September 29, 2019 includes expenses for executory costs of $9,908 and $29,211, respectively, for which the Company is reimbursed by sublessees.

(b)
The three and nine months ended September 29, 2019 includes $32,342 and $92,815, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees and $6,892 and $20,492, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants.

The following table includes supplemental cash flow and non-cash information related to leases:
 
Nine Months Ended
 
September 29,
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from finance leases
$
29,683

Operating cash flows from operating leases
69,277

Financing cash flows from finance leases
5,178

Right-of-use assets obtained in exchange for lease obligations:
 
Finance lease liabilities
34,084

Operating lease liabilities
8,212




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



The following table includes supplemental information related to leases:
 
September 29,
2019
Weighted-average remaining lease term (years):
 
Finance leases
17.3

Operating leases
15.5

 
 
Weighted average discount rate:
 
Finance leases
10.03
%
Operating leases
5.10
%


The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of September 29, 2019:
 
Finance
Leases
 
Operating
Leases
Fiscal Year
Company-Operated
 
Franchise
and Other
 
Company-Operated
 
Franchise
and Other
2019 (a)
$
707

 
$
12,759

 
$
5,001

 
$
17,602

2020
2,862

 
45,340

 
19,921

 
70,690

2021
2,973

 
46,826

 
19,733

 
70,540

2022
3,023

 
47,830

 
19,421

 
70,696

2023
2,975

 
49,504

 
19,400

 
70,655

Thereafter
39,104

 
704,276

 
201,762

 
827,387

Total minimum payments
$
51,644

 
$
906,535

 
$
285,238

 
$
1,127,570

Less interest
(23,407
)
 
(452,484
)
 
(88,577
)
 
(369,544
)
Present value of minimum lease payments (b) (c)
$
28,237

 
$
454,051

 
$
196,661

 
$
758,026

_______________

(a)
Represents future minimum rental payments for non-cancelable leases for the remainder of 2019.

(b)
The present value of minimum finance lease payments of $10,584 and $471,704 are included in “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively.

(c)
The present value of minimum operating lease payments of $43,474 and $911,213 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)




The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of December 30, 2018:
 
Finance
Leases
 
Operating
Leases
Fiscal Year
Company-Operated
 
Franchise
and Other
 
Company-Operated
 
Franchise
and Other
2019
$
1,962

 
$
45,125

 
$
20,174

 
$
75,703

2020
1,978

 
43,969

 
20,052

 
73,320

2021
2,082

 
45,522

 
19,820

 
73,167

2022
2,114

 
46,573

 
19,530

 
73,300

2023
2,084

 
48,109

 
19,430

 
73,377

Thereafter
23,558

 
676,139

 
203,073

 
854,964

Total minimum payments
$
33,778

 
$
905,437

 
$
302,079

 
$
1,223,831

Less interest
(16,874
)
 
(466,705
)
 
 
 
 
Present value of minimum lease payments (a)
$
16,904

 
$
438,732

 
 
 
 
_______________

(a)
The present value of minimum finance lease payments of $8,405 and $447,231 are included in “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively.

Company as Lessor

The components of lease income are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2019
 
September 29,
2019
Sales-type and direct-financing leases:
 
 
 
Selling (loss) profit
$
(97
)
 
$
1,874

Interest income
7,240

 
19,045

 
 
 
 
Operating lease income
$
44,892

 
$
134,056

Variable lease income
15,026

 
42,875

Franchise rental income (a)
$
59,918

 
$
176,931

_______________

(a)
Includes sublease income of $44,821 and $130,763 recognized during the three and nine months ended September 29, 2019, respectively, of which $9,683 and $28,894, respectively, represents lessees’ variable payments to the Company for executory costs.


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THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



The following table illustrates the Company’s future minimum rental receipts for non-cancelable leases and subleases as of September 29, 2019:
 
Sales-Type and
Direct Financing Leases
 
Operating
Leases
Fiscal Year
Subleases
 
Owned Properties
 
Subleases
 
Owned Properties
2019 (a)
$
6,953

 
$
489

 
$
27,614

 
$
13,129

2020
28,528

 
2,036

 
111,227

 
52,912

2021
29,668

 
2,068

 
111,946

 
54,700

2022
30,342

 
2,148

 
113,017

 
56,173

2023
31,381

 
2,192

 
114,021

 
56,378

Thereafter
486,141

 
27,115

 
1,339,940

 
861,865

Total future minimum receipts
613,013

 
36,048

 
$
1,817,765

 
$
1,095,157

Unearned interest income
(376,192
)
 
(19,472
)
 
 
 
 
Net investment in sales-type and direct financing leases (b)
$
236,821

 
$
16,576

 
 
 
 
_______________

(a)
Represents future minimum rental receipts for non-cancelable leases for the remainder of 2019.

(b)
The present value of minimum direct financing rental receipts of $2,795 and $250,602 are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. The present value of minimum direct financing rental receipts includes a net investment in unguaranteed residual assets of $195.

The following table illustrates the Company’s future minimum rental receipts for non-cancelable leases and subleases as of December 30, 2018:
 
Sales-Type and
Direct Financing Leases
 
Operating
Leases
Fiscal Year
Subleases
 
Owned Properties
 
Subleases
 
Owned Properties
2019
$
26,239

 
$
1,937

 
$
113,180

 
$
52,527

2020
26,859

 
2,006

 
113,578

 
53,066

2021
27,904

 
2,043

 
114,447

 
54,615

2022
28,563

 
2,119

 
115,552

 
56,092

2023
29,512

 
2,159

 
116,463

 
56,284

Thereafter
448,851

 
26,404

 
1,372,646

 
858,755

Total future minimum receipts
587,928

 
36,668

 
$
1,945,866

 
$
1,131,339

Unearned interest income
(377,046
)
 
(20,338
)
 
 
 
 
Net investment in sales-type and direct financing leases (a)
$
210,882

 
$
16,330

 
 
 
 
_______________

(a)
The present value of minimum direct financing rental receipts of $735 and $226,477 are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



Properties owned by the Company and leased to franchisees and other third parties under operating leases include:
 
September 29,
2019
Land
$
281,744

Buildings and improvements
310,936

Restaurant equipment
1,726

 
594,406

Accumulated depreciation and amortization
(153,379
)
 
$
441,027



(15) Transactions with Related Parties

Except as described below, the Company did not have any significant changes in or transactions with its related parties during the current fiscal period since those reported in the Form 10-K.

TimWen Lease and Management Fee Payments

A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen for the operation of Wendy’s/Tim Hortons combo units in Canada. During the nine months ended September 29, 2019 and September 30, 2018, Wendy’s paid TimWen $12,710 and $9,967, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $155 and $161 during the nine months ended September 29, 2019 and September 30, 2018, respectively, which has been included as a reduction to “General and administrative.”

(16) Guarantees and Other Commitments and Contingencies

Except as described below, the Company did not have any significant changes in guarantees and other commitments and contingencies during the current fiscal period since those reported in the Form 10-K. Refer to the Form 10-K for further information regarding the Company’s additional commitments and obligations.

Lease Guarantees

Wendy’s has guaranteed the performance of certain leases and other obligations, primarily from former Company-operated restaurant locations now operated by franchisees, amounting to $74,898 as of September 29, 2019. These leases extend through 2056. We have not received any notice of default related to these leases as of September 29, 2019. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations.

Letters of Credit

As of September 29, 2019, the Company had outstanding letters of credit with various parties totaling $25,082. The outstanding letters of credit include amounts outstanding against the Series 2019-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit.


31

Table of Contents
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



Purchase and Capital Commitments

Beverage Agreement

The Company has an agreement with a beverage vendor that provides fountain beverage products and certain marketing support funding to the Company and its franchisees. This agreement requires minimum purchases of certain fountain beverages (“Fountain Beverages”) by the Company and its franchisees at certain agreed upon prices until the total contractual gallon volume usage is reached. This agreement also provides for an annual advance to be paid to the Company based on the vendor’s expectation of the Company’s annual Fountain Beverages usage, which is amortized over actual usage during the year. In January 2019, the Company amended its contract with the beverage vendor, which now expires at the later of reaching a threshold usage requirement or December 31, 2025. Beverage purchases made by the Company under this agreement during the nine months ended September 29, 2019 were $8,417. As of September 29, 2019, the Company estimates future purchases to be approximately $2,700 for the remainder of 2019, $10,800 in 2020, $11,100 in 2021, $11,600 in 2022 and $12,100 in 2023 based on current pricing and the expected ratio of usage at Company-operated restaurants to usage at franchised restaurants.

(17) Legal and Environmental Matters

The Company is involved in litigation and claims incidental to our current and prior businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. We believe we have adequate accruals for continuing operations for all of our legal and environmental matters. We cannot estimate the aggregate possible range of loss for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations or cash flows of a particular reporting period.

We previously described certain legal proceedings in the Form 10-K. Except as set forth below, there were no material developments in those legal proceedings as of September 29, 2019.

As previously reported, the Company was named as a defendant in putative class action lawsuits alleging, among other things, that the Company failed to safeguard customer credit card information and failed to provide notice that credit card information had been compromised. Jonathan Torres and other consumers filed an action in the U.S. District Court for the Middle District of Florida (the “Torres Case”). On August 23, 2018, the court preliminarily approved a class-wide settlement. A final approval hearing of the settlement of the Torres Case was held on February 26, 2019, and final approval was granted by the court. At this time, the action has been dismissed with prejudice (with no appeal taken), all claims and other amounts payable per the terms of the settlement agreement have been paid, and the matter is considered closed.

Also as previously reported, certain financial institutions have also filed class actions lawsuits in the U.S. District Court for the Western District of Pennsylvania, which sought to certify a nationwide class of financial institutions that issued payment cards that were allegedly impacted. Those cases were consolidated into a single case (the “FI Case”). On February 13, 2019, the Company and the plaintiffs filed a settlement agreement and a motion for preliminary approval of a class-wide settlement of the FI Case with the court. Under the terms of the settlement agreement, if approved and finalized, a settlement class of financial institutions will receive $50,000, inclusive of attorneys’ fees and costs. After exhaustion of applicable insurance, the Company now expects to pay approximately $25,000 of this amount. In exchange, the Company and its franchisees will receive a full release of all claims that have or could have been brought by financial institutions who do not opt out of the settlement related to the cybersecurity incidents described herein. On February 26, 2019, the court preliminarily approved the settlement agreement and scheduled a final approval hearing for November 6, 2019. The settlement agreement remains subject to a notice and objection process and final court approval. If approved, the Company anticipates that payment will occur in early 2020. The Company recorded a liability of $50,000 and insurance receivables of $22,500 for the FI case during 2018. As a result of cost savings related to the settlement of the Torres Case in the three months ended September 29, 2019, the Company adjusted its insurance receivables for the FI case to approximately $25,000.


32


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report 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 30, 2018 (the “Form 10-K”). There have been no material changes as of September 29, 2019 to the application of our critical accounting policies as described in Item 7 of the 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” of this report. 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, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).

The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). The principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). Wendy’s franchises and operates Wendy’s® quick-service restaurants specializing in hamburger sandwiches throughout North America (defined as the United States of America (“U.S.”) and Canada). Wendy’s also has franchised restaurants in 30 foreign countries and U.S. territories.

Each Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty® desserts and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited time basis. Wendy’s also currently offers breakfast in more than 300 restaurants in the United States.

The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s restaurants in North America comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material. The results of operations discussed below may not necessarily be indicative of future results.

The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31. All three- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.

We adopted the new accounting guidance for leases effective December 31, 2018, which had a material impact on our condensed consolidated financial statements. Beginning with the first quarter of 2019, our financial condition and results of operations reflect adoption of the guidance; however, prior period results were not restated. See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information.

Executive Overview

Our Business

As of September 29, 2019, the Wendy’s restaurant system was comprised of 6,743 restaurants, of which 356 were owned and operated by the Company. All of our Company-operated restaurants are located in the United States.

Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and decreased consumer spending levels, general economic and market trends and weather.


33


Wendy’s long-term growth opportunities include (1) systemwide same-restaurant sales growth through continuing core menu improvement, product innovation, customer count growth and strategic price increases on our menu items, (2) system investment in our Image Activation program, which includes innovative exterior and interior restaurant designs for our new and reimaged restaurants and focused execution of operational excellence, (3) growth in new restaurants, including global growth, (4) increased focus on consumer-facing digital platforms and technologies, (5) increased restaurant utilization in various dayparts, including the Company’s recent announcement of its plan to launch breakfast across the U.S. system in the first quarter of 2020 (see “Breakfast Launch” below), (6) strengthening our operations through our system optimization initiative and (7) building stockholder value through financial management strategies.

Key Business Measures

We track our results of operations and manage our business using the following key business measures, which includes a non-GAAP financial measure:

Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. This methodology is consistent with the metric used by our management for internal reporting and analysis. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes.

Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs. Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs.

Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company believes systemwide sales data is useful in assessing consumer demand for the Company’s products, the overall success of the Wendy’s brand and, ultimately, the performance of the Company. The Company’s royalty revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty revenues and profitability.

The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability.

Same-restaurant sales and systemwide sales exclude sales from Venezuela and, beginning in the third quarter of 2018, exclude sales from Argentina, due to the highly inflationary economies of those countries. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary.

The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure.

Breakfast Launch

In September 2019, the Company announced that it plans to launch breakfast across the U.S. system in the first quarter of 2020. The Company expects to make one-time investments during 2019 of approximately $20.0 million to support the U.S. system in preparation of the national launch. The 2019 investments are primarily comprised of (1) the purchase of smallwares and menuboards for franchisees and (2) a national recruiting advertising campaign and other talent acquisition costs.

Other Investments in Equity Securities

On October 11, 2019, the Company received a $25.0 million cash settlement related to a previously held investment.


34


General and Administrative (“G&A”) Realignment

In May 2017, the Company initiated a plan to further reduce its G&A expenses. Additionally, the Company announced in May 2019 changes to its leadership structure that includes the creation of two new positions, a President, U.S and Chief Commercial Officer and a President, International and Chief Development Officer, and the elimination of the Chief Operations Officer position. During the nine months ended September 29, 2019 and September 30, 2018, the Company recognized costs related to the plan totaling $4.7 million and $6.4 million, respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $2.7 million, comprised of (1) severance and related employee costs of approximately $1.9 million, (2) recruitment and relocation costs of approximately $0.4 million, (3) third-party and other costs of approximately $0.1 million and (4) share-based compensation of approximately $0.3 million. The Company expects to incur total costs aggregating approximately $35.0 million to $38.0 million, of which $26.0 million to $29.0 million will be cash expenditures, related to the plan. The Company expects to realize a total G&A expense reduction through the plan of approximately $35.0 million.
As a result of the realignment of our management and operating structure as described above, the Company is continuing to evaluate the impact these changes will have on its existing operating segment structure. The Company currently expects to report its results in the following three segments beginning with our Annual Report on Form 10-K for the fiscal year ended December 29, 2019: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development.

35


Results of Operations

The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the third quarter and the first nine months of 2019 and 2018.
 
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Sales
$
182.0

 
$
165.3

 
$
16.7

 
$
530.7

 
$
486.3

 
$
44.4

Franchise royalty revenue and fees
109.2

 
103.2

 
6.0

 
320.3

 
308.7

 
11.6

Franchise rental income
59.9

 
50.5

 
9.4

 
176.9

 
152.1

 
24.8

Advertising funds revenue
86.8

 
81.6

 
5.2

 
253.9

 
245.0

 
8.9

 
437.9

 
400.6

 
37.3

 
1,281.8

 
1,192.1

 
89.7

Costs and expenses:
 
 
 
 
 

 
 
 
 
 
 

Cost of sales
152.4

 
139.3

 
13.1

 
446.1

 
409.7

 
36.4

Franchise support and other costs
9.7

 
5.4

 
4.3

 
19.8

 
18.6

 
1.2

Franchise rental expense
32.4

 
22.3

 
10.1

 
92.8

 
69.8

 
23.0

Advertising funds expense
87.9

 
81.6

 
6.3

 
257.0

 
245.0

 
12.0

General and administrative
46.2

 
46.5

 
(0.3
)
 
146.3

 
146.1

 
0.2

Depreciation and amortization
33.3

 
29.1

 
4.2

 
98.0

 
94.6

 
3.4

System optimization gains, net
(1.0
)
 
(0.5
)
 
(0.5
)
 
(1.2
)
 

 
(1.2
)
Reorganization and realignment costs
0.4

 
0.9

 
(0.5
)
 
4.8

 
6.7

 
(1.9
)
Impairment of long-lived assets

 
0.3

 
(0.3
)
 
1.7

 
2.2

 
(0.5
)
Other operating income, net
(2.4
)
 
(1.6
)
 
(0.8
)
 
(9.4
)
 
(4.7
)
 
(4.7
)
 
358.9

 
323.3

 
35.6

 
1,055.9

 
988.0

 
67.9

Operating profit
79.0

 
77.3

 
1.7

 
225.9

 
204.1

 
21.8

Interest expense, net
(27.9
)
 
(29.6
)
 
1.7

 
(86.9
)
 
(89.9
)
 
3.0

Loss on early extinguishment of debt

 

 

 
(7.2
)
 
(11.5
)
 
4.3

Investment income, net
0.3

 
450.1

 
(449.8
)
 
1.0

 
450.4

 
(449.4
)
Other income, net
1.9

 
1.1

 
0.8

 
6.1

 
2.4

 
3.7

Income before income taxes
53.3

 
498.9

 
(445.6
)
 
138.9

 
555.5

 
(416.6
)
Provision for income taxes
(7.2
)
 
(107.7
)
 
100.5

 
(28.5
)
 
(114.2
)
 
85.7

Net income
$
46.1

 
$
391.2

 
$
(345.1
)
 
$
110.4

 
$
441.3

 
$
(330.9
)

36



 
Third Quarter
 
Nine Months
 
2019
 
% of
Total Revenues
 
2018
 
% of
Total Revenues
 
2019
 
% of
Total Revenues
 
2018
 
% of
Total Revenues
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
$
182.0

 
41.6
%
 
$
165.3

 
41.3
%
 
$
530.7

 
41.4
%
 
$
486.3

 
40.8
%
Franchise royalty revenue and fees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Royalty revenue
102.3

 
23.4
%
 
95.5

 
23.8
%
 
300.0

 
23.4
%
 
283.6

 
23.8
%
Franchise fees
6.9

 
1.5
%
 
7.7

 
1.9
%
 
20.3

 
1.6
%
 
25.1

 
2.1
%
Total franchise royalty revenue and fees
109.2

 
24.9
%
 
103.2

 
25.7
%
 
320.3

 
25.0
%
 
308.7

 
25.9
%
Franchise rental income
59.9

 
13.7
%
 
50.5

 
12.6
%
 
176.9

 
13.8
%
 
152.1

 
12.8
%
Advertising funds revenue
86.8

 
19.8
%
 
81.6

 
20.4
%
 
253.9

 
19.8
%
 
245.0

 
20.5
%
Total revenues
$
437.9

 
100.0
%
 
$
400.6

 
100.0
%
 
$
1,281.8

 
100.0
%
 
$
1,192.1

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Third Quarter
 
Nine Months
 
2019
 
% of 
Sales
 
2018
 
% of 
Sales
 
2019
 
% of 
Sales
 
2018
 
% of 
Sales
Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Food and paper
$
57.2

 
31.4
%
 
$
53.0

 
32.1
%
 
$
167.3

 
31.5
%
 
$
154.8

 
31.8
%
Restaurant labor
54.7

 
30.1
%
 
48.4

 
29.3
%
 
160.1

 
30.2
%
 
144.1

 
29.6
%
Occupancy, advertising and other operating costs
40.5

 
22.3
%
 
37.9

 
22.9
%
 
118.7

 
22.4
%
 
110.8

 
22.8
%
Total cost of sales
$
152.4

 
83.8
%
 
$
139.3

 
84.3
%
 
$
446.1

 
84.1
%
 
$
409.7

 
84.2
%

 
Third Quarter
 
Nine Months
 
2019
 
% of
Sales
 
2018
 
% of
Sales
 
2019
 
% of
Sales
 
2018
 
% of
Sales
Restaurant margin
$
29.6

 
16.2
%
 
$
26.0

 
15.7
%
 
$
84.6

 
15.9
%
 
$
76.6

 
15.8
%

The tables below present key business measures which are defined and further discussed in the “Executive Overview” section included herein.
 
Third Quarter
 
Nine Months
 
2019
 
2018
 
2019
 
2018
Key business measures:
 
 
 
 
 
 
 
North America same-restaurant sales growth:
 
 
 
 
 
 
 
Company-operated
4.7
%
 
1.2
 %
 
2.5
%
 
1.4
%
Franchised
4.3
%
 
(0.3
)%
 
2.4
%
 
1.1
%
Systemwide
4.4
%
 
(0.2
)%
 
2.4
%
 
1.1
%
 
 
 
 
 
 
 
 
Global same-restaurant sales growth:
 
 
 
 
 
 
 
Company-operated
4.7
%
 
1.2
 %
 
2.5
%
 
1.4
%
Franchised (a)
4.4
%
 
(0.1
)%
 
2.5
%
 
1.3
%
Systemwide (a)
4.4
%
 
0.0
 %
 
2.5
%
 
1.3
%
________________

(a) Includes international franchised same-restaurant sales (excluding Venezuela, and excluding Argentina beginning in the third quarter of 2018, due to the impact of the highly inflationary economies of those countries).

37


 
Third Quarter
 
Nine Months
 
2019
 
2018
 
2019
 
2018
Key business measures (continued):
 
 
 
 
 
 
 
Systemwide sales: (a)
 
 
 
 
 
 
 
Company-operated
$
182.0

 
$
165.3

 
$
530.7

 
$
486.3

North America franchised
2,478.2

 
2,358.5

 
7,251.4

 
7,043.4

North America systemwide
2,660.2

 
2,523.8

 
7,782.1

 
7,529.7

International franchised (b)
137.8

 
126.5

 
410.8

 
385.8

Global systemwide
$
2,798.0

 
$
2,650.3

 
$
8,192.9

 
$
7,915.5

________________

(a)
During the third quarter of 2019 and 2018, global systemwide sales increased 5.7% and 1.7%, respectively, North America systemwide sales increased 5.5% and 1.2%, respectively, and international franchised sales increased 9.2% and 13.2%, respectively, on a constant currency basis. During the first nine months of 2019 and 2018, global systemwide sales increased 4.1% and 2.7%, respectively, North America systemwide sales increased 3.8% and 2.2%, respectively, and international franchised sales increased 9.8% and 13.2%, respectively, on a constant currency basis.

(b)
Excludes Venezuela, and excludes Argentina beginning in the third quarter of 2018, due to the impact of the highly inflationary economies of those countries.

 
Third Quarter
 
Company-operated
 
North America Franchised
 
International Franchised
 
Systemwide
Restaurant count:
 
 
 
 
 
 
 
Restaurant count at June 30, 2019
358

 
5,828

 
533

 
6,719

Opened

 
27

 
13

 
40

Closed
(2
)
 
(10
)
 
(4
)
 
(16
)
Net purchased from (sold by) franchisees

 

 

 

Restaurant count at September 29, 2019
356

 
5,845

 
542

 
6,743

 
 
 
 
 
 
 
 
 
Nine Months
 
Company-operated
 
North America Franchised
 
International Franchised
 
Systemwide
Restaurant count:
 
 
 
 
 
 
 
Restaurant count at December 30, 2018
353

 
5,825

 
533

 
6,711

Opened

 
76

 
35

 
111

Closed
(2
)
 
(51
)
 
(26
)
 
(79
)
Net purchased from (sold by) franchisees
5

 
(5
)
 

 

Restaurant count at September 29, 2019
356

 
5,845

 
542

 
6,743


Sales
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Sales
$
182.0

 
$
165.3

 
$
16.7

 
$
530.7

 
$
486.3

 
$
44.4


The increase in sales for the third quarter and the first nine months of 2019 was primarily due to a net increase in the number of Company-operated restaurants in operation during 2019 compared to 2018. In addition, sales for the third quarter and the first nine months of 2019 benefited from a 4.7% and 2.5% increase in Company-operated same-restaurant sales, respectively. Company-operated same-restaurant sales improved due to an increase in our average per customer check amount, reflecting benefits from strategic price increases on our menu items and changes in product mix. These benefits were partially offset by a decrease in customer count.


38


Franchise Royalty Revenue and Fees
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Royalty revenue
$
102.3

 
$
95.5

 
$
6.8

 
$
300.0

 
$
283.6

 
$
16.4

Franchise fees
6.9

 
7.7

 
(0.8
)
 
20.3

 
25.1

 
(4.8
)
 
$
109.2

 
$
103.2

 
$
6.0

 
$
320.3

 
$
308.7

 
$
11.6


The increase in franchise royalty revenue during the third quarter and the first nine months of 2019 was primarily due to a 4.4% and 2.5% increase in franchise same-restaurant sales, respectively. Royalty revenue was also positively impacted by a net increase in the number of franchise restaurants in operation.

The decrease in franchise fees during the third quarter of 2019 was primarily due to lower other miscellaneous franchise fees, partially offset by higher fees for providing information technology and other services to franchisees. The decrease in franchise fees during the first nine months of 2019 was primarily due to lower other miscellaneous franchise fees and facilitating fewer franchisee-to-franchisee restaurant transfers (“Franchise Flips”) in 2019, partially offset by higher fees for providing information technology and other services to franchisees.

Franchise Rental Income
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Franchise rental income
$
59.9

 
$
50.5

 
$
9.4

 
$
176.9

 
$
152.1

 
$
24.8


The increase in franchise rental income during the third quarter and the first nine months of 2019 was primarily due to the adoption of new accounting guidance for leases. Under the new guidance, lessees’ payments to the Company for executory costs are recorded on a gross basis as revenue with a corresponding expense. See “Franchise Rental Expense” below. The increase during the first nine months of 2019 was partially offset by the assignment of certain leases to a franchisee.

Advertising Funds Revenue
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Advertising funds revenue
$
86.8

 
$
81.6

 
$
5.2

 
$
253.9

 
$
245.0

 
$
8.9


The Company maintains two national advertising funds established to collect and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Franchisees make contributions to the national advertising funds based on a percentage of sales of the franchised restaurants. The increase in advertising funds revenue during the third quarter and the first nine months of 2019 was primarily due to an increase in North America franchise same-restaurant sales, as well as a net increase in the number of North America franchise restaurants in operation. These increases were partially offset by reductions in advertising receipts under the Company’s restaurant development incentive program.

Cost of Sales, as a Percent of Sales
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Food and paper
31.4
%
 
32.1
%
 
(0.7
)%
 
31.5
%
 
31.8
%
 
(0.3
)%
Restaurant labor
30.1
%
 
29.3
%
 
0.8
 %
 
30.2
%
 
29.6
%
 
0.6
 %
Occupancy, advertising and other operating costs
22.3
%
 
22.9
%
 
(0.6
)%
 
22.4
%
 
22.8
%
 
(0.4
)%
 
83.8
%
 
84.3
%
 
(0.5
)%
 
84.1
%
 
84.2
%
 
(0.1
)%

The decrease in cost of sales, as a percent of sales, during the third quarter and the first nine months of 2019 was primarily due to benefits from strategic price increases on certain of our menu items and changes in product mix. This decrease was partially offset by an increase in restaurant labor rates and commodity costs.


39


Franchise Support and Other Costs
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Franchise support and other costs
$
9.7

 
$
5.4

 
$
4.3

 
$
19.8

 
$
18.6

 
$
1.2


The increase in franchise support and other costs during the third quarter and the first nine months of 2019 was primarily due to the purchase of digital scanning equipment for franchisees of $3.9 million, partially offset by lower costs incurred to provide information technology and other services to our franchisees.

Franchise Rental Expense
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Franchise rental expense
$
32.4

 
$
22.3

 
$
10.1

 
$
92.8

 
$
69.8

 
$
23.0


The increase in franchise rental expense during the third quarter and the first nine months of 2019 was primarily due to the adoption of new accounting guidance for leases. Under the new guidance, lessees’ payments to the Company for executory costs are recorded on a gross basis as revenue with a corresponding expense. See “Franchise Rental Income” above. The increase during the first nine months of 2019 was partially offset by the impact of assigning certain leases to a franchisee.

Advertising Funds Expense
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Advertising funds expense
$
87.9

 
$
81.6

 
$
6.3

 
$
257.0

 
$
245.0

 
$
12.0


The increase in advertising funds expense during the third quarter and the first nine months of 2019 was primarily due to the same factors as described above for advertising funds revenue. On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. During the third quarter and the first nine months of 2019, advertising funds expense exceeded advertising funds revenue by $1.1 million and $3.1 million, respectively, reflecting a portion of the expected advertising spend in excess of advertising funds revenue for the remainder of 2019. This excess for 2019 is expected to approximate the amount by which advertising funds revenue exceeded advertising funds expense in 2018.

General and Administrative
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Employee compensation and related expenses
$
43.4

 
$
39.4

 
$
4.0

 
$
125.3

 
$
120.7

 
$
4.6

Legal reserves
(2.8
)
 

 
(2.8
)
 
(2.3
)
 
0.1

 
(2.4
)
Other, net
5.6

 
7.1

 
(1.5
)
 
23.3

 
25.3

 
(2.0
)
 
$
46.2

 
$
46.5

 
$
(0.3
)
 
$
146.3

 
$
146.1

 
$
0.2


The decrease in general and administrative expenses during the third quarter of 2019 was primarily due to a reduction in legal reserves as a result of an increase in anticipated insurance proceeds available for use related to the proposed settlement of the Financial Institutions case (see Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 of Part 1 herein for further information). This decrease was offset by higher employee compensation and related expenses, reflecting an increase in incentive compensation accruals.

The increase in general and administrative expenses during the first nine months of 2019 was primarily due to higher employee compensation and related expenses, reflecting an increase in incentive compensation accruals and additional expenditures to support our digital experience and international organizations. This increase was partially offset by (1) a reduction in legal reserves as a result of an increase in anticipated insurance proceeds available for use related to the proposed settlement of the Financial Institutions case (see Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 of Part 1 herein for further information) and (2) changes in staffing driven by our G&A realignment plan.




40


Depreciation and Amortization
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Restaurants
$
21.8

 
$
17.4

 
$
4.4

 
$
63.7

 
$
60.3

 
$
3.4

Corporate and other
11.5

 
11.7

 
(0.2
)
 
34.3

 
34.3

 

 
$
33.3

 
$
29.1

 
$
4.2

 
$
98.0

 
$
94.6

 
$
3.4


The increase in restaurant depreciation and amortization during the third quarter and the first nine months of 2019 was primarily due to the assignment of certain leases to a franchisee in 2018, resulting in the write-off of the related net investment in the leases.

System Optimization Gains, Net
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
System optimization gains, net
$
(1.0
)
 
$
(0.5
)
 
$
(0.5
)
 
$
(1.2
)
 
$

 
$
(1.2
)

System optimization gains, net for the third quarter and the first nine months of 2019 and 2018 were primarily comprised of post-closing adjustments on previous sales of restaurants.

Reorganization and Realignment Costs
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
G&A realignment
$
0.4

 
$
0.6

 
$
(0.2
)
 
$
4.7

 
$
6.4

 
(1.7
)
System optimization initiative

 
0.3

 
(0.3
)
 
0.1

 
0.3

 
(0.2
)
 
$
0.4

 
$
0.9

 
$
(0.5
)
 
$
4.8

 
$
6.7

 
$
(1.9
)

In May 2017, the Company initiated a G&A realignment plan to further reduce its G&A expenses. In addition, the Company announced changes to its leadership structure in May 2019. G&A realignment costs for the third quarter and the first nine months of 2019 and 2018 were primarily comprised of severance and related employee costs and share-based compensation.

Impairment of Long-Lived Assets
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Impairment of long-lived assets
$

 
$
0.3

 
$
(0.3
)
 
$
1.7

 
$
2.2

 
$
(0.5
)

The change in impairment charges during the third quarter of 2019 was primarily driven by lower impairment charges as a result of closing Company-operated restaurants and classifying such surplus properties as held for sale when compared to the third quarter of 2018. The change in impairment charges during the first nine months of 2019 was primarily driven by lower impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants when compared to the first nine months of 2018, partially offset by higher impairment charges as a result of closing Company-operated restaurants and classifying such surplus properties as held for sale.

Other Operating Income, Net
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Equity in earnings in joint ventures, net
$
(2.1
)
 
$
(2.2
)
 
$
0.1

 
$
(7.0
)
 
$
(5.8
)
 
$
(1.2
)
Losses (gains) on sales-type leases
0.1

 

 
0.1

 
(1.9
)
 

 
(1.9
)
Lease buyout
(0.4
)
 
0.3

 
(0.7
)
 
(0.6
)
 
0.9

 
(1.5
)
Other, net

 
0.3

 
(0.3
)
 
0.1

 
0.2

 
(0.1
)
 
$
(2.4
)
 
$
(1.6
)
 
$
(0.8
)
 
$
(9.4
)
 
$
(4.7
)
 
$
(4.7
)

The change in other operating income, net during the third quarter of 2019 was primarily due to lease buyout activity. The change in other operating income, net during the first nine months of 2019 was due to (1) gains on new and modified sales-type leases as a result of the new accounting guidance for leases, (2) lease buyout activity and (3) an increase in the equity in earnings from our TimWen joint venture.


41


Interest Expense, Net
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Interest expense, net
$
27.9

 
$
29.6

 
$
(1.7
)
 
$
86.9

 
$
89.9

 
$
(3.0
)

Interest expense, net decreased during the third quarter and the first nine months of 2019 primarily due to lower outstanding principal amounts of long-term debt, reflecting the impact of the completion of refinancing a portion of the Company’s securitized financing facility during the first nine months of 2019. Interest expense, net also decreased during the first nine months of 2019 due to the timing of interest expense on the Company’s finance lease obligations.

Loss on Early Extinguishment of Debt
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Loss on early extinguishment of debt
$

 
$

 
$

 
$
7.2

 
$
11.5

 
$
(4.3
)

During the second quarter of 2019, in connection with the refinancing of a portion of the Company’s securitized financing facility, the Company incurred a loss on the early extinguishment of debt as a result of repaying its outstanding Series 2015-1 Class A-2-II Notes primarily with the proceeds from the issuance of its Series 2019-1 Class A-2 Notes. The loss on the early extinguishment of debt of $7.2 million was comprised of the write-off of certain deferred financing costs.

During the first quarter of 2018, in connection with the refinancing of a portion of the Company’s securitized financing facility, the Company incurred a loss on the early extinguishment of debt as a result of repaying its outstanding Series 2015-1 Class A-2-I Notes with the proceeds from the issuance of its Series 2018-1 Class A-2 Notes. The loss on the early extinguishment of debt of $11.5 million was comprised of the write-off of certain deferred financing costs and a specified make-whole payment.

Investment Income, Net
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Investment income, net
$
0.3

 
$
450.1

 
$
(449.8
)
 
$
1.0

 
$
450.4

 
$
(449.4
)

Investment income, net decreased during the third quarter and the first nine months of 2019 due to the $450.0 million gain recorded on the sale of the Company’s ownership interest in Inspire Brands, Inc. (“Inspire Brands”) on August 16, 2018.

Other Income, Net
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Other income, net
$
1.9

 
$
1.1

 
$
0.8

 
$
6.1

 
$
2.4

 
$
3.7


Other income, net increased during the third quarter and the first nine months of 2019 primarily due to higher interest income earned on our cash equivalents.

Provision for Income Taxes
Third Quarter
 
Nine Months
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Income before income taxes
$
53.3

 
$
498.9

 
$
(445.6
)
 
$
138.9

 
$
555.5

 
$
(416.6
)
Provision for income taxes
(7.2
)
 
(107.7
)
 
100.5

 
(28.5
)
 
(114.2
)
 
85.7

Effective tax rate on income
13.5
%
 
21.6
%
 
(8.1
)%
 
20.5
%
 
20.6
%
 
(0.1
)%

Our effective tax rates for the third quarter of 2019 and 2018 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. Discrete items, which may occur in any given year but are not consistent from year to year, include the following: (1) a reduction in unrecognized tax benefits due to a lapse of statute of limitations in the third quarter of 2019, (2) a reduction for the impact of stock-based compensation, which included net excess tax benefits of $1.1 million and $5.3 million for the third quarter of 2019 and 2018, respectively, and (3) an increase due to non-recurring changes to state deferred taxes.


42


Our effective tax rates for the first nine months of 2019 and 2018 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. Discrete items, which may occur in any given year but are not consistent from year to year, include the following: (1) a reduction in unrecognized tax benefits due to a lapse of statute of limitations in the first nine months of 2019, (2) a reduction for the impact of stock-based compensation, which included net excess tax benefits of $4.0 million and $12.1 million for the first nine months of 2019 and 2018, respectively, and (3) an increase due to non-recurring changes to state deferred taxes.

Liquidity and Capital Resources

Cash Flows

Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our securitized
financing facility. Principal uses of cash are operating expenses, capital expenditures, repurchases of common stock and dividends to stockholders.

Our anticipated cash requirements for the remainder of 2019, exclusive of operating cash flow requirements, consist principally of:

capital expenditures of approximately $34.0 million to $39.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $75.0 million to $80.0 million;

cash dividends aggregating up to approximately $27.6 million as discussed below in “Dividends;” and

potential stock repurchases of up to $170.3 million, of which $9.2 million was repurchased subsequent to September 29, 2019 through October 30, 2019, as discussed below in “Stock Repurchases.”

In addition to the anticipated cash requirements above, the Company expects to make one-time investments during 2019 of approximately $20.0 million to support the U.S. system in preparation of the launch of breakfast in the first quarter of 2020.

Based on current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months.

The table below summarizes our cash flows from operating, investing and financing activities for the first nine months of 2019 and 2018:
 
Nine Months
 
2019
 
2018
 
Change
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
237.5

 
$
229.7

 
$
7.8

Investing activities
(45.7
)
 
391.4

 
(437.1
)
Financing activities
(183.4
)
 
(151.0
)
 
(32.4
)
Effect of exchange rate changes on cash
2.8

 
(2.1
)
 
4.9

Net increase in cash, cash equivalents and restricted cash
$
11.2

 
$
468.0

 
$
(456.8
)

Operating Activities

Cash provided by operating activities was $237.5 million and $229.7 million in the first nine months of 2019 and 2018, respectively. Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, deferred income tax and share-based compensation, and the net change in operating assets and liabilities. Cash provided by operating activities increased $7.8 million during the first nine months of 2019 as compared to the first nine months of 2018, primarily due to (1) higher net income from operations, adjusted for non-cash expenses and (2) a decrease in payments for incentive compensation. These favorable changes were partially offset by (1) the timing of collections of royalty receivables and (2) changes in receivables for income tax refunds. Further, income taxes payable decreased significantly in the first nine months of 2019 as compared to the first nine months of 2018 due to income taxes associated with the gain on sale of our ownership interest in Inspire Brands during the first nine months of 2018 (which offset the income tax expense recognized in net income for the first nine months of 2018).


43


Investing Activities

Cash used in investing activities increased $437.1 million during the first nine months of 2019 as compared to the first nine months of 2018, primarily due to the proceeds from the sale of our ownership interest in Inspire Brands during the first nine months of 2018 of $450.0 million. This change was partially offset by a decrease in cash used for the Company’s acquisition of restaurants from franchisees of $16.3 million.

Financing Activities

Cash used in financing activities increased $32.4 million during the first nine months of 2019 as compared to the first nine months of 2018, primarily due to (1) a net increase in cash used for long-term debt activities of $76.4 million, reflecting the respective impacts of the completion of debt refinancing transactions during the first nine months of 2019 and 2018, (2) a decrease in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $16.2 million, and (3) an increase in dividends of $8.5 million. These changes were partially offset by (1) a decrease in repurchases of common stock of $63.3 million and (2) the settlement of a supplemental purchase price liability associated with the acquisition of 140 Wendy’s restaurants from DavCo Restaurants, LLC of $6.3 million during the first nine months of 2018.

Long-Term Debt, Including Current Portion

Except as described below, there were no material changes to the terms of any debt obligations since December 30, 2018. The Company was in compliance with its debt covenants as of September 29, 2019. See Note 8 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.

On June 26, 2019, Wendy’s Funding, LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of the Company, completed a debt refinancing transaction under which the Master Issuer issued fixed rate senior secured notes in the following 2019-1 series: Class A-2-I with an interest rate of 3.783% and initial principal amount of $400.0 million and Class A-2-II with an interest rate of 4.080% and initial principal amount of $450.0 million (collectively, the “Series 2019-1 Class A-2 Notes”). The Master Issuer’s outstanding Series 2015-1 Class A-2-II Notes were redeemed as part of the refinancing transaction.

In connection with the issuance of the Series 2019-1 Class A-2 Notes, the Master Issuer also entered into a revolving financing facility of Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2019-1 Class A-1 Notes”), which allows for the drawing of up to $150.0 million using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2019-1 Class A-1 Notes during the nine months ended September 29, 2019. The Series 2019-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2018-1 Class A-1 Notes, which were canceled on the closing date and the letters of credit outstanding against the Series 2018-1 Class A-1 Notes were transferred to the Series 2019-1 Class A-1 Notes.

Dividends

On March 15, 2019, June 17, 2019 and September 17, 2019, the Company paid quarterly cash dividends of $.10 per share on its common stock, aggregating $69.3 million. On October 11, 2019, the Company declared a dividend of $.12 per share to be paid on December 16, 2019 to stockholders of record as of December 2, 2019. As a result of the October 11 declaration, the Company expects that its total cash requirements for the fourth quarter of 2019 will be approximately $27.6 million based on the number of shares of its common stock outstanding at October 30, 2019. The Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any.

Stock Repurchases

In February 2019, our Board of Directors authorized a repurchase program for up to $225.0 million of our common stock through March 1, 2020, when and if market conditions warrant and to the extent legally permissible. In connection with the February 2019 authorization, the Company’s previous November 2018 repurchase authorization for up to $220.0 million of our common stock was canceled. During the nine months ended September 29, 2019, the Company repurchased 4.2 million shares with an aggregate purchase price of $76.2 million, of which $1.1 million was accrued at September 29, 2019, and excluding commissions of $0.1 million, under the November 2018 and February 2019 authorizations. As of September 29, 2019, the Company had $170.3 million of availability remaining under its February 2019 authorization. Subsequent to September 29, 2019 through October 30, 2019, the Company repurchased 0.4 million shares under the February 2019 authorization with an aggregate purchase price of $9.2 million, excluding commissions. As part of the February 2019 authorization, the Company

44


announced on October 11, 2019 its intention to launch a $100.0 million accelerated share repurchase program during the fourth quarter of 2019.

In February 2018, our Board of Directors authorized a repurchase program for up to $175.0 million of our common stock through March 3, 2019, when and if market conditions warranted and to the extent legally permissible. During the nine months ended September 30, 2018, the Company repurchased 6.9 million shares under the February 2018 repurchase authorization with an aggregate purchase price of $118.9 million, of which $2.7 million was accrued at September 30, 2018, and excluding commissions of $0.1 million. Additionally, during the nine months ended September 30, 2018, the Company completed its previous February 2017 repurchase authorization for up to $150.0 million of our common stock with the repurchase of 1.4 million shares with an aggregate purchase price of $22.6 million, excluding commissions.

General Inflation, Commodities and Changing Prices

We believe that general inflation did not have a significant effect on our consolidated results of operations. We attempt to manage any inflationary costs and commodity price increases through product mix and selective menu price increases. Delays in implementing such menu price increases and competitive pressures may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets, such as those for beef, chicken, pork, cheese and grains, could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through product mix and selective menu price increases.

Seasonality

Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for a particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

This “Quantitative and Qualitative Disclosures about Market Risk” 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 30, 2018 (the “Form 10-K”).

As of September 29, 2019, there were no material changes from the information contained in the Form 10-K, except as described below.

Interest Rate Risk

As discussed in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation” under “Liquidity and Capital Resources,” the Company completed an $850.0 million debt refinancing transaction on June 26, 2019. The Company’s outstanding Series 2015-1 Class A-2-II Notes were repaid as part of the refinancing transaction. In aggregate, the Company’s new Series 2019-1 Class A-2 Notes bear a weighted-average fixed-rate interest at rates slightly lower than our historical effective rates on the Series 2015-1 Class A-2-II Notes. In addition, the principal amounts outstanding on the Series 2019-1 Class A-2 Notes are lower than the amounts that were outstanding on the Series 2015-1 Class A-2-II Notes. In connection with the issuance of the Series 2019-1 Class A-2 Notes, a wholly-owned subsidiary of the Company also entered into a revolving financing facility, the Series 2019-1 Class A-1 Notes, which allows for the drawing of up to $150.0 million using various credit instruments, including a letter of credit facility. The Series 2019-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2018-1 Class A-1 Notes, which were canceled on the closing date, and the letters of credit outstanding against the Series 2018-1 Class A-1 Notes were transferred to the Series 2019-1 Class A-1 Notes.

Consequently, our long-term debt, including the current portion, aggregated $2,336.7 million as of September 29, 2019 (excluding unamortized debt issuance costs and the effect of purchase accounting adjustments). The Company’s predominantly fixed-rate debt structure has reduced its exposure to interest rate increases that could adversely affect its earnings and cash flows. The Company is exposed to interest rate increases under the Series 2019-1 Class A-1 Notes; however, the Company had no outstanding borrowings under the Series 2019-1 Class A-1 Notes as of September 29, 2019.


45


Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The management of the Company, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s 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 29, 2019. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 29, 2019, the disclosure controls and procedures of the Company were effective at a reasonable assurance level in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and (2) ensuring that information required to be disclosed by the Company in such reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in the internal control over financial reporting of the Company during the third quarter of 2019 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

There are inherent limitations in the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a 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, the management of the Company, including its Chief Executive Officer and Chief Financial Officer, does not expect that the control system can prevent or detect all errors 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.

46


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, initiatives 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 in 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, couponing, aggressive marketing and the potential impact of competitors’ new unit openings on sales of Wendy’s restaurants;

consumers’ perceptions of the relative quality, variety, affordability and value of the food products we offer, and changes in consumer tastes and preferences;

food safety events, including instances of food-borne illness (such as salmonella or E. coli) involving Wendy’s or its supply chain;

consumer concerns over nutritional aspects of beef, chicken, french fries or other products we sell, the ingredients in our products and/or the cooking processes used in our restaurants;

conditions beyond our control, such as weather, natural disasters, disease outbreaks, epidemics or pandemics impacting our customers or food supplies, or acts of war or terrorism;

the effects of negative publicity that can occur from increased use of social media;

success of operating and marketing initiatives, including advertising and promotional efforts and new product and concept development by us and our competitors;

prevailing economic, market and business conditions affecting us, including competition from other food service providers, unemployment and decreased consumer spending levels, particularly in geographic regions that contain a high concentration of Wendy’s restaurants;

changes in the quick-service restaurant industry, spending patterns and demographic trends, such as consumer trends toward value-oriented products and promotions or toward consuming fewer 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 franchisees to open new restaurants and reimage existing restaurants in accordance with their development and franchise commitments, including their ability to finance restaurant development and reimages;

increased labor costs due to competition or increased minimum wage or employee benefit costs;     

changes in commodity costs (including beef, chicken, pork, cheese and grains), labor, supplies, fuel, utilities, distribution and other operating costs;

the availability of suitable locations and terms for restaurant development by us and our franchisees;

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development costs, including real estate and construction costs;

delays in opening new restaurants or completing reimages of existing restaurants, including risks associated with our Image Activation program;

the ability to effectively manage the acquisition and disposition of restaurants or successfully implement other strategic initiatives;

anticipated or unanticipated restaurant closures by us and our franchisees;

our ability to identify, attract and retain franchisees with sufficient experience and financial resources to develop and operate Wendy’s restaurants successfully;

availability of qualified restaurant personnel to us and 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 restaurants at competitive rates and in adequate amounts, and the potential financial impact of any interruptions in such distribution;

availability and cost of insurance;

availability, terms (including changes in interest rates) and deployment of capital, and changes in debt, equity and securities markets;

changes in, and our ability to comply with, legal, regulatory or similar requirements, including franchising laws, payment card industry rules, overtime rules, minimum wage rates, wage and hour laws, tax legislation, federal ethanol policy and accounting standards, policies and practices;

the costs, uncertainties and other effects of legal, environmental and administrative proceedings;

the effects of charges for impairment of goodwill or for the impairment of other long-lived assets;

risks associated with failures, interruptions or security breaches of our computer systems or technology, or the occurrence of cyber incidents or a deficiency in cybersecurity that impacts us or our franchisees, including the cybersecurity incident described in the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2019 (the “Form 10-K”);

the difficulty in predicting the ultimate costs that will be incurred in connection with our plan to reduce general and administrative expense, and the future impact on our earnings;

risks associated with our securitized financing facility and other debt agreements, including the ability to generate sufficient cash flow to meet increased debt service obligations, compliance with operational and financial covenants, and restrictions on our ability to raise additional capital;

risks associated with the amount and timing of share repurchases under share repurchase programs approved by our Board of Directors;

risks associated with the proposed settlement of the Financial Institutions case described in the Form 10-K, including the timing and amount of payments;

risks associated with our digital commerce strategy, platforms and technologies, including our ability to adapt to changes in industry trends and consumer preferences;

risks associated with our evolving organizational and leadership structure;

risks associated with our plans to enter the breakfast daypart across the U.S. system in 2020, including related investments;

risks associated with our international growth strategy, including related investments; and

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other risks and uncertainties affecting us and our subsidiaries referred to in 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, we do not endorse any projections regarding future performance that may be made by third parties.

Item 1. Legal Proceedings.

The Company is involved in litigation and claims incidental to our current and prior businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. The Company believes it has adequate accruals for continuing operations for all of its legal and environmental matters. We cannot estimate the aggregate possible range of loss for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations or cash flows of a particular reporting period.

See Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 of Part 1 herein for further information regarding certain legal proceedings in which we are involved.

Item 1A. Risk Factors.

In addition to the information contained in this report, you should carefully consider the risk factors disclosed in our Form 10-K and our Quarterly Report on Form 10-Q for the period ended March 31, 2019, which could materially affect our business, financial condition or future results. Except as set forth below or as may otherwise be described elsewhere in this report, there have been no material changes from the risk factors previously disclosed in our Form 10-K and our Quarterly Report on Form 10-Q for the period ended March 31, 2019.

Wendy’s plans to launch breakfast across the U.S. system in 2020. The breakfast daypart is competitive across the restaurant industry and it may prove difficult to achieve market share and reach targeted levels of breakfast sales and profits.

As previously announced, Wendy’s plans to enter the breakfast daypart across the U.S. system in the first quarter of 2020. The Company and franchisee leadership have worked closely to align with the U.S. system on a breakfast program that the Company believes will drive incremental sales and profits through a strong economic model. However, previous breakfast initiatives were accompanied by competitive pressures and responses from our competitors, some of whom are well-established in the breakfast daypart, operational complexity, challenging food and labor costs, varied consumer acceptance and discretionary spending patterns that differ from other dayparts, and these factors could again impact our ability to achieve market share and reach targeted levels of breakfast sales and profits. In addition, breakfast sales could cannibalize sales during other parts of the day and may have negative impacts on restaurant margins. The continued active support and engagement of our franchisees is also critical for the successful launch and execution of breakfast. The Company and its franchisees plan to hire approximately 20,000 crew members across the country to support the breakfast initiative. Qualified individuals needed to fill these positions are in short supply in some geographic areas and our inability to successfully recruit, hire, train, motivate and retain qualified employees could adversely affect our operations. The launch of breakfast will also require significant financial resources, including the Company’s plans to support the system by investing approximately $20 million in 2019 to offset certain start-up costs and by reinvesting royalties from breakfast sales beginning in 2020 to fund incremental marketing and advertising campaigns. Our strategy to launch breakfast across the U.S. system may expose us to additional risks and our inability to successfully execute on our strategy could have a material adverse impact on our business, financial condition and results of operations.


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Wendy’s planned expansion into the United Kingdom and other European markets may present increased risks due to low brand awareness, geopolitical risks and other factors.

As previously announced, Wendy’s intends to open Company-operated restaurants in the United Kingdom beginning in the next 12 to 18 months and, if successful, plans to expand into other anchor markets in Europe utilizing a franchise model. New markets, such as the United Kingdom, may have low brand awareness as well as competitive conditions, consumer tastes, discretionary spending patterns and social and cultural differences that are more difficult to predict or satisfy than our existing markets. We may need to make greater investments than we originally planned in advertising and promotional activity to build brand awareness, which could negatively impact the profitability of our operations. In addition, we may be unable to obtain desirable locations for new restaurants at reasonable prices, or at all, and restaurants may have higher construction, occupancy, food and labor costs than we currently anticipate. Geopolitical risks, including the United Kingdom’s decision to leave the European Union through a negotiated exit over a period of time, may result in increased regulatory complexities and economic uncertainty. Any of these risks and uncertainties, and other factors we cannot anticipate, could have a material adverse impact on our business, financial condition and results of operations.

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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 Exchange Act) during the third quarter of 2019:

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
Plans
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans (2)
July 1, 2019
through
August 4, 2019
525,920


$19.19

520,672


$186,755

August 5, 2019
through
September 1, 2019
317,484


$20.50

253,946


$181,515

September 2, 2019
through
September 29, 2019
560,105


$20.30

553,750


$170,292

Total
1,403,509


$19.93

1,328,368


$170,292


(1)
Includes 75,141 shares reacquired by the Company from holders of share-based awards to satisfy certain requirements associated with the vesting or exercise of the respective awards. The shares were valued at the average of the high and low trading prices of our common stock on the vesting or exercise date of such awards.

(2)
In February 2019, our Board of Directors authorized a repurchase program for up to $225.0 million of our common stock through March 1, 2020, when and if market conditions warrant and to the extent legally permissible.

Subsequent to September 29, 2019 through October 30, 2019, the Company repurchased 0.4 million shares under the February 2019 authorization with an aggregate purchase price of $9.2 million, excluding commissions.


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Item 6. Exhibits.
EXHIBIT NO.
DESCRIPTION
 
 
31.1
31.2
32.1
101
The following financial information from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2019 formatted in Inline eXtensible Business Reporting Language: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.
104
The cover page from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2019, formatted in Inline XBRL and contained in Exhibit 101.
____________________
*
Filed herewith.

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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.

 
THE WENDY’S COMPANY
(Registrant)
Date: November 6, 2019
 

By: /s/ Gunther Plosch                                                             
 
Gunther Plosch                                                             
 
Chief Financial Officer
 
(On behalf of the registrant)
 
 
Date: November 6, 2019
 By: /s/ Leigh A. Burnside                                                        
 
Leigh A. Burnside
 
Senior Vice President, Finance and
Chief Accounting Officer
 
(Principal Accounting Officer)











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