Wendy's Co - Quarter Report: 2019 June (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 June 30, 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 230,603,094 shares of The Wendy’s Company common stock outstanding as of July 31, 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)
June 30, 2019 | December 30, 2018 | ||||||
ASSETS | (Unaudited) | ||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 426,216 | $ | 431,405 | |||
Restricted cash | 29,494 | 29,860 | |||||
Accounts and notes receivable, net | 101,083 | 109,805 | |||||
Inventories | 3,546 | 3,687 | |||||
Prepaid expenses and other current assets | 18,622 | 14,452 | |||||
Advertising funds restricted assets | 93,422 | 76,509 | |||||
Total current assets | 672,383 | 665,718 | |||||
Properties | 992,302 | 1,023,267 | |||||
Finance lease assets | 197,691 | 189,969 | |||||
Operating lease assets | 895,280 | — | |||||
Goodwill | 755,887 | 747,884 | |||||
Other intangible assets | 1,257,323 | 1,294,153 | |||||
Investments | 47,920 | 47,660 | |||||
Net investment in sales-type and direct financing leases | 241,584 | 226,477 | |||||
Other assets | 103,523 | 96,907 | |||||
Total assets | $ | 5,163,893 | $ | 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 | 9,917 | 8,405 | |||||
Current portion of operating lease liabilities | 43,321 | — | |||||
Accounts payable | 17,315 | 21,741 | |||||
Accrued expenses and other current liabilities | 148,852 | 150,636 | |||||
Advertising funds restricted liabilities | 99,120 | 80,153 | |||||
Total current liabilities | 341,275 | 284,185 | |||||
Long-term debt | 2,274,967 | 2,305,552 | |||||
Long-term finance lease liabilities | 465,226 | 447,231 | |||||
Long-term operating lease liabilities | 931,033 | — | |||||
Deferred income taxes | 271,283 | 269,160 | |||||
Deferred franchise fees | 91,588 | 92,232 | |||||
Other liabilities | 140,473 | 245,226 | |||||
Total liabilities | 4,515,845 | 3,643,586 | |||||
Commitments and contingencies | |||||||
Stockholders’ equity: | |||||||
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 231,092 and 231,233 shares outstanding, respectively | 47,042 | 47,042 | |||||
Additional paid-in capital | 2,883,484 | 2,884,696 | |||||
Retained earnings | 163,249 | 146,277 | |||||
Common stock held in treasury, at cost; 239,332 and 239,191 shares, respectively | (2,393,914 | ) | (2,367,893 | ) | |||
Accumulated other comprehensive loss | (51,813 | ) | (61,673 | ) | |||
Total stockholders’ equity | 648,048 | 648,449 | |||||
Total liabilities and stockholders’ equity | $ | 5,163,893 | $ | 4,292,035 | |||
See accompanying notes to condensed consolidated financial statements.
4
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
(Unaudited) | |||||||||||||||
Revenues: | |||||||||||||||
Sales | $ | 181,050 | $ | 167,344 | $ | 348,747 | $ | 320,993 | |||||||
Franchise royalty revenue and fees | 109,125 | 107,559 | 211,078 | 205,467 | |||||||||||
Franchise rental income | 58,561 | 51,529 | 117,013 | 101,636 | |||||||||||
Advertising funds revenue | 86,612 | 84,570 | 167,093 | 163,470 | |||||||||||
435,348 | 411,002 | 843,931 | 791,566 | ||||||||||||
Costs and expenses: | |||||||||||||||
Cost of sales | 151,092 | 138,154 | 293,671 | 270,373 | |||||||||||
Franchise support and other costs | 4,066 | 7,031 | 10,084 | 13,204 | |||||||||||
Franchise rental expense | 28,027 | 24,306 | 60,478 | 47,569 | |||||||||||
Advertising funds expense | 88,667 | 84,570 | 169,148 | 163,470 | |||||||||||
General and administrative | 50,784 | 49,163 | 100,097 | 99,519 | |||||||||||
Depreciation and amortization | 31,484 | 33,427 | 64,669 | 65,579 | |||||||||||
System optimization (gains) losses, net | (110 | ) | (92 | ) | (122 | ) | 478 | ||||||||
Reorganization and realignment costs | 3,570 | 3,124 | 4,368 | 5,750 | |||||||||||
Impairment of long-lived assets | 198 | 1,603 | 1,684 | 1,809 | |||||||||||
Other operating income, net | (3,003 | ) | (1,767 | ) | (6,985 | ) | (2,930 | ) | |||||||
354,775 | 339,519 | 697,092 | 664,821 | ||||||||||||
Operating profit | 80,573 | 71,483 | 146,839 | 126,745 | |||||||||||
Interest expense, net | (29,931 | ) | (30,136 | ) | (59,013 | ) | (60,314 | ) | |||||||
Loss on early extinguishment of debt | (7,150 | ) | — | (7,150 | ) | (11,475 | ) | ||||||||
Other income, net | 2,247 | 917 | 4,947 | 1,661 | |||||||||||
Income before income taxes | 45,739 | 42,264 | 85,623 | 56,617 | |||||||||||
Provision for income taxes | (13,353 | ) | (12,388 | ) | (21,343 | ) | (6,582 | ) | |||||||
Net income | $ | 32,386 | $ | 29,876 | $ | 64,280 | $ | 50,035 | |||||||
Net income per share | |||||||||||||||
Basic | $ | .14 | $ | .13 | $ | .28 | $ | .21 | |||||||
Diluted | $ | .14 | $ | .12 | $ | .27 | $ | .20 | |||||||
See accompanying notes to condensed consolidated financial statements.
5
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
(Unaudited) | |||||||||||||||
Net income | $ | 32,386 | $ | 29,876 | $ | 64,280 | $ | 50,035 | |||||||
Other comprehensive income (loss), net: | |||||||||||||||
Foreign currency translation adjustment | 3,835 | (4,325 | ) | 9,860 | (10,369 | ) | |||||||||
Change in unrecognized pension loss: | |||||||||||||||
Unrealized gains arising during the period | — | — | — | 156 | |||||||||||
Income tax provision | — | — | — | (39 | ) | ||||||||||
— | — | — | 117 | ||||||||||||
Other comprehensive income (loss), net | 3,835 | (4,325 | ) | 9,860 | (10,252 | ) | |||||||||
Comprehensive income | $ | 36,221 | $ | 25,551 | $ | 74,140 | $ | 39,783 | |||||||
See accompanying notes to condensed consolidated financial statements.
6
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 | |||||||||
See accompanying notes to condensed consolidated financial statements.
7
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 | ||||||||
See accompanying notes to condensed consolidated financial statements.
8
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended | |||||||
June 30, 2019 | July 1, 2018 | ||||||
(Unaudited) | |||||||
Cash flows from operating activities: | |||||||
Net income | $ | 64,280 | $ | 50,035 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 64,669 | 65,579 | |||||
Share-based compensation | 10,008 | 9,591 | |||||
Impairment of long-lived assets | 1,684 | 1,809 | |||||
Deferred income tax | 3,422 | (2,508 | ) | ||||
Non-cash rental expense (income), net | 11,519 | (6,239 | ) | ||||
Change in operating lease liabilities | (20,983 | ) | — | ||||
Net receipt of deferred vendor incentives | 5,312 | 4,904 | |||||
System optimization (gains) losses, net | (122 | ) | 478 | ||||
Distributions received from joint ventures, net of equity in earnings | 2,099 | 2,108 | |||||
Long-term debt-related activities, net | 10,799 | 15,036 | |||||
Changes in operating assets and liabilities and other, net | 1,373 | 7,628 | |||||
Net cash provided by operating activities | 154,060 | 148,421 | |||||
Cash flows from investing activities: | |||||||
Capital expenditures | (25,484 | ) | (23,898 | ) | |||
Acquisitions | (5,052 | ) | — | ||||
Dispositions | 1,240 | 1,814 | |||||
Proceeds from sale of investments | 130 | — | |||||
Notes receivable, net | (750 | ) | (538 | ) | |||
Payments for investments | — | (13 | ) | ||||
Net cash used in investing activities | (29,916 | ) | (22,635 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from long-term debt | 850,000 | 930,809 | |||||
Repayments of long-term debt | (877,876 | ) | (878,849 | ) | |||
Repayments of finance lease liabilities | (3,521 | ) | (2,784 | ) | |||
Deferred financing costs | (14,008 | ) | (17,340 | ) | |||
Repurchases of common stock | (50,781 | ) | (84,307 | ) | |||
Dividends | (46,193 | ) | (40,645 | ) | |||
Proceeds from stock option exercises | 19,160 | 13,197 | |||||
Payments related to tax withholding for share-based compensation | (6,957 | ) | (9,269 | ) | |||
Contingent consideration payment | — | (6,100 | ) | ||||
Net cash used in financing activities | (130,176 | ) | (95,288 | ) | |||
Net cash (used in) provided by operations before effect of exchange rate changes on cash | (6,032 | ) | 30,498 | ||||
Effect of exchange rate changes on cash | 3,866 | (4,401 | ) | ||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (2,166 | ) | 26,097 | ||||
Cash, cash equivalents and restricted cash at beginning of period | 486,512 | 212,824 | |||||
Cash, cash equivalents and restricted cash at end of period | $ | 484,346 | $ | 238,921 | |||
9
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED
(In Thousands)
Six Months Ended | |||||||
June 30, 2019 | July 1, 2018 | ||||||
(Unaudited) | |||||||
Supplemental non-cash investing and financing activities: | |||||||
Capital expenditures included in accounts payable | $ | 5,398 | $ | 7,463 | |||
Finance leases | 23,534 | 1,904 | |||||
June 30, 2019 | December 30, 2018 | ||||||
Reconciliation of cash, cash equivalents and restricted cash at end of period: | |||||||
Cash and cash equivalents | $ | 426,216 | $ | 431,405 | |||
Restricted cash | 29,494 | 29,860 | |||||
Restricted cash, included in Advertising funds restricted assets | 28,636 | 25,247 | |||||
Total cash, cash equivalents and restricted cash | $ | 484,346 | $ | 486,512 | |||
See accompanying notes to condensed consolidated financial statements.
10
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 June 30, 2019, the results of our operations for the three and six months ended June 30, 2019 and July 1, 2018 and cash flows for the six months ended June 30, 2019 and July 1, 2018. The results of operations for the three and six months ended June 30, 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.
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 six-month periods presented herein contain 13 weeks and 26 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 Adopted
Cloud Computing
In August 2018, the Financial Accounting Standards Board (“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.
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.
11
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
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.
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 | ||||||||
12
THE WENDY’S COMPANY AND SUBSIDIARIES
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 June 30, 2019 | |||||||||||||||
Sales at Company-operated restaurants | $ | 181,050 | $ | — | $ | — | $ | 181,050 | |||||||
Franchise royalty revenue | 91,430 | 6,304 | 5,087 | 102,821 | |||||||||||
Franchise fees | 5,716 | 708 | (120 | ) | 6,304 | ||||||||||
Franchise rental income | 50,041 | 8,520 | — | 58,561 | |||||||||||
Advertising funds revenue | 81,437 | 5,175 | — | 86,612 | |||||||||||
Total revenues | $ | 409,674 | $ | 20,707 | $ | 4,967 | $ | 435,348 | |||||||
Six Months Ended June 30, 2019 | |||||||||||||||
Sales at Company-operated restaurants | $ | 348,747 | $ | — | $ | — | $ | 348,747 | |||||||
Franchise royalty revenue | 175,808 | 11,812 | 10,044 | 197,664 | |||||||||||
Franchise fees | 11,725 | 1,120 | 569 | 13,414 | |||||||||||
Franchise rental income | 100,706 | 16,307 | — | 117,013 | |||||||||||
Advertising funds revenue | 157,418 | 9,675 | — | 167,093 | |||||||||||
Total revenues | $ | 794,404 | $ | 38,914 | $ | 10,613 | $ | 843,931 | |||||||
Three Months Ended July 1, 2018 | |||||||||||||||
Sales at Company-operated restaurants | $ | 167,344 | $ | — | $ | — | $ | 167,344 | |||||||
Franchise royalty revenue | 87,224 | 6,073 | 4,861 | 98,158 | |||||||||||
Franchise fees | 7,011 | 2,275 | 115 | 9,401 | |||||||||||
Franchise rental income | 44,881 | 6,648 | — | 51,529 | |||||||||||
Advertising funds revenue | 79,485 | 5,085 | — | 84,570 | |||||||||||
Total revenues | $ | 385,945 | $ | 20,081 | $ | 4,976 | $ | 411,002 | |||||||
Six Months Ended July 1, 2018 | |||||||||||||||
Sales at Company-operated restaurants | $ | 320,993 | $ | — | $ | — | $ | 320,993 | |||||||
Franchise royalty revenue | 167,446 | 11,436 | 9,219 | 188,101 | |||||||||||
Franchise fees | 14,096 | 2,921 | 349 | 17,366 | |||||||||||
Franchise rental income | 89,146 | 12,490 | — | 101,636 | |||||||||||
Advertising funds revenue | 153,899 | 9,571 | — | 163,470 | |||||||||||
Total revenues | $ | 745,580 | $ | 36,418 | $ | 9,568 | $ | 791,566 | |||||||
13
THE WENDY’S COMPANY AND SUBSIDIARIES
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:
June 30, 2019 (a) | December 30, 2018 (a) | ||||||
Receivables, which are included in “Accounts and notes receivable, net” (b) | $ | 43,398 | $ | 40,300 | |||
Receivables, which are included in “Advertising funds restricted assets” | 49,308 | 47,332 | |||||
Deferred franchise fees (c) | 101,267 | 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 $9,679 and $91,588 as of June 30, 2019, respectively, and $9,973 and $92,232 as of December 30, 2018, respectively. |
Significant changes in deferred franchise fees are as follows:
Six Months Ended | |||||||
June 30, 2019 | July 1, 2018 | ||||||
Deferred franchise fees at beginning of period | $ | 102,205 | $ | 102,492 | |||
Revenue recognized during the period | (4,609 | ) | (5,127 | ) | |||
New deferrals due to cash received and other | 3,671 | 6,358 | |||||
Deferred franchise fees at end of period | $ | 101,267 | $ | 103,723 | |||
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) | $ | 4,260 | |
2020 | 7,025 | ||
2021 | 5,985 | ||
2022 | 5,782 | ||
2023 | 5,527 | ||
Thereafter | 72,688 | ||
$ | 101,267 | ||
_______________
(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. |
14
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(4) Acquisitions
During the six months ended June 30, 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:
Six Months Ended | |||
June 30, 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) Losses, 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 six months ended July 1, 2018, the Company completed the sale of three Company-operated restaurants to a franchisee and facilitated 64 Franchise Flips. During the six months ended June 30, 2019, no Company-operated restaurants were sold to franchisees and no Franchise Flips were facilitated by the Company.
Gains and losses recognized on dispositions are recorded to “System optimization (gains) losses, 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.”
15
THE WENDY’S COMPANY AND SUBSIDIARIES
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 | Six Months Ended | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
Gain on sale of restaurants, net (a) | $ | — | $ | 89 | $ | — | $ | 89 | |||||||
Post-closing adjustments on sales of restaurants (b) | 62 | (13 | ) | 54 | (225 | ) | |||||||||
Gain (loss) on sales of other assets, net (c) | 48 | 16 | 68 | (342 | ) | ||||||||||
System optimization gains (losses), net | $ | 110 | $ | 92 | $ | 122 | $ | (478 | ) | ||||||
_______________
(a) | During the three and six months ended July 1, 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 six months ended July 1, 2018 includes cash proceeds, net of payments of $6. |
(c) | During the three and six months ended June 30, 2019, the Company received cash proceeds of $1,240, primarily from the sale of surplus properties. During the three and six months ended July 1, 2018, the Company received cash proceeds of $27 and $372, respectively, primarily from the sale of surplus properties. |
Assets Held for Sale
As of June 30, 2019 and December 30, 2018, the Company had assets held for sale of $2,952 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 | Six Months Ended | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
G&A realignment | $ | 3,517 | $ | 3,120 | $ | 4,299 | $ | 5,746 | |||||||
System optimization initiative | 53 | 4 | 69 | 4 | |||||||||||
Reorganization and realignment costs | $ | 3,570 | $ | 3,124 | $ | 4,368 | $ | 5,750 | |||||||
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 six months ended June 30, 2019 and July 1, 2018, the Company recognized costs related to the plan totaling $4,299 and $5,746, respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $1,700, comprised of (1) severance and related employee costs of approximately $100, (2) recruitment and relocation costs of approximately $1,000, (3) third-party and other costs of approximately $100 and (4) share-based compensation of approximately $500, the majority of which the Company expects to recognize during the remainder of 2019. The Company expects to incur total costs aggregating approximately $35,000 to $38,000 related to the plan.
As a result of the leadership changes described above, the Company is currently evaluating its management and operating structure and anticipates this evaluation will result in a change to its existing operating segment structure by the end of 2019.
16
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following is a summary of the activity recorded as a result of the G&A realignment plan:
Three Months Ended | Six Months Ended | Total Incurred Since Inception | |||||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||||||
Severance and related employee costs | $ | 2,130 | $ | 1,052 | $ | 2,602 | $ | 3,111 | $ | 21,355 | |||||||||
Recruitment and relocation costs | 482 | 360 | 596 | 508 | 2,162 | ||||||||||||||
Third-party and other costs | 71 | 604 | 87 | 932 | 2,197 | ||||||||||||||
2,683 | 2,016 | 3,285 | 4,551 | 25,714 | |||||||||||||||
Share-based compensation (a) | 834 | 1,104 | 1,014 | 1,195 | 7,698 | ||||||||||||||
Termination of defined benefit plans | — | — | — | — | 1,335 | ||||||||||||||
Total G&A realignment | $ | 3,517 | $ | 3,120 | $ | 4,299 | $ | 5,746 | $ | 34,747 | |||||||||
_______________
(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 $4,835 and $607 as of June 30, 2019, respectively, and $7,985 and $2,107 as of July 1, 2018, respectively. The tables below present a rollforward of our accruals for the plan.
Balance December 30, 2018 | Charges | Payments | Balance June 30, 2019 | ||||||||||||
Severance and related employee costs | $ | 7,241 | $ | 2,602 | $ | (4,724 | ) | $ | 5,119 | ||||||
Recruitment and relocation costs | 83 | 596 | (356 | ) | 323 | ||||||||||
Third-party and other costs | — | 87 | (87 | ) | — | ||||||||||
$ | 7,324 | $ | 3,285 | $ | (5,167 | ) | $ | 5,442 | |||||||
Balance December 31, 2017 | Charges | Payments | Balance July 1, 2018 | ||||||||||||
Severance and related employee costs | $ | 12,093 | $ | 3,111 | $ | (5,326 | ) | $ | 9,878 | ||||||
Recruitment and relocation costs | 177 | 508 | (471 | ) | 214 | ||||||||||
Third-party and other costs | — | 932 | (932 | ) | — | ||||||||||
$ | 12,270 | $ | 4,551 | $ | (6,729 | ) | $ | 10,092 | |||||||
System Optimization Initiative
The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. The Company has incurred costs of $72,261 under the initiative since inception and expects to incur additional costs of approximately $500 during the remainder of 2019, which are primarily comprised of professional fees.
17
THE WENDY’S COMPANY AND SUBSIDIARIES
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:
Six Months Ended | |||||||
June 30, 2019 | July 1, 2018 | ||||||
Balance at beginning of period | $ | 47,021 | $ | 55,363 | |||
Investment | — | 13 | |||||
Equity in earnings for the period | 6,048 | 4,827 | |||||
Amortization of purchase price adjustments (a) | (1,129 | ) | (1,179 | ) | |||
4,919 | 3,648 | ||||||
Distributions received | (7,018 | ) | (5,756 | ) | |||
Foreign currency translation adjustment included in “Other comprehensive income (loss), net” and other | 2,359 | (1,763 | ) | ||||
Balance at end of period | $ | 47,281 | $ | 51,505 | |||
_______________
(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. |
18
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(8) Long-Term Debt
Long-term debt consisted of the following:
June 30, 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 | $ | 400,000 | $ | — | |||
4.080% Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 | 450,000 | — | |||||
Series 2018-1 Class A-2 Notes: | |||||||
3.573% Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025 | 443,250 | 445,500 | |||||
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 | 467,875 | 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 | 481,250 | 483,750 | |||||
7% debentures, due in 2025 | 91,403 | 90,769 | |||||
Unamortized debt issuance costs | (36,061 | ) | (32,217 | ) | |||
2,297,717 | 2,328,802 | ||||||
Less amounts payable within one year | (22,750 | ) | (23,250 | ) | |||
Total long-term debt | $ | 2,274,967 | $ | 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 three months ended June 30, 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 three months ended June 30, 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.
19
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
During the three and six months ended June 30, 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 six months ended July 1, 2018, the Company borrowed $5,809 and repaid $7,096 under the line of credit. There were no borrowings or repayments under the line of credit during the six months ended June 30, 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:
June 30, 2019 | December 30, 2018 | ||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | Fair Value Measurements | |||||||||||||
Financial assets | |||||||||||||||||
Cash equivalents | $ | 221,818 | $ | 221,818 | $ | 222,228 | $ | 222,228 | Level 1 | ||||||||
Other investments in equity securities (a) | 639 | 1,945 | 639 | 2,181 | Level 3 | ||||||||||||
Financial liabilities | |||||||||||||||||
Series 2019-1 Class A-2-I Notes (b) | 400,000 | 402,704 | — | — | Level 2 | ||||||||||||
Series 2019-1 Class A-2-II Notes (b) | 450,000 | 453,146 | — | — | Level 2 | ||||||||||||
Series 2018-1 Class A-2-I Notes (b) | 443,250 | 446,747 | 445,500 | 424,026 | Level 2 | ||||||||||||
Series 2018-1 Class A-2-II Notes (b) | 467,875 | 469,756 | 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) | 481,250 | 500,519 | 483,750 | 482,522 | Level 2 | ||||||||||||
7% debentures, due in 2025 (b) | 91,403 | 105,750 | 90,769 | 102,750 | Level 2 | ||||||||||||
Guarantees of franchisee loan obligations (c) | 9 | 9 | 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. |
20
THE WENDY’S COMPANY AND SUBSIDIARIES
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 | |||||||||||||||
June 30, 2019 | Level 1 | Level 2 | Level 3 | ||||||||||||
Held and used | $ | 2,112 | $ | — | $ | — | $ | 2,112 | |||||||
Held for sale | 1,215 | — | — | 1,215 | |||||||||||
Total | $ | 3,327 | $ | — | $ | — | $ | 3,327 | |||||||
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) the deterioration of operating performance of certain Company-operated restaurants, (2) closing Company-operated restaurants and classifying such surplus properties as held for sale 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.
21
THE WENDY’S COMPANY AND SUBSIDIARIES
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 | Six Months Ended | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
Surplus properties | $ | 112 | $ | — | $ | 1,397 | $ | 41 | |||||||
Company-operated restaurants | 86 | 1,603 | 287 | 1,603 | |||||||||||
Restaurants leased or subleased to franchisees | — | — | — | 165 | |||||||||||
$ | 198 | $ | 1,603 | $ | 1,684 | $ | 1,809 | ||||||||
(11) Income Taxes
The Company’s effective tax rate for the three months ended June 30, 2019 and July 1, 2018 was 29.2% and 29.3% respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 21% primarily due to (1) state income taxes, including non-recurring changes to state deferred taxes, (2) net excess tax benefits related to share-based payments, which resulted in a benefit of $889 and $798 for the three months ended June 30, 2019 and July 1, 2018, respectively, (3) valuation allowance changes, net of federal benefit, and (4) the impact of the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).
The Company’s effective tax rate for the six months ended June 30, 2019 and July 1, 2018 was 24.9% and 11.6% respectively. The Company’s effective tax rate varies from the U.S. federal statutory rate of 21% primarily due to (1) net excess tax benefits related to share-based payments, which resulted in a benefit of $2,925 and $6,891 for the six months ended June 30, 2019 and July 1, 2018, respectively, (2) state income taxes, including non-recurring changes to state deferred taxes, (3) the impact of the Tax Act and (4) valuation allowance changes, net of federal benefit.
On December 22, 2017, the U.S. government enacted the Tax Act. In our continued analysis of the impact of the Tax Act in the first and second quarters of 2018 under Staff Accounting Bulletin 118, we adjusted our provisional amounts for a discrete net tax benefit of $2,795. This net benefit included $4,750 for the tax benefit of foreign tax credits, partially offset by a net expense of $1,955 related to the impact of the corporate rate reduction on our net deferred tax liabilities.
There were no significant changes to the unrecognized tax benefits or related interest and penalties for the three and six months ended June 30, 2019. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $7,760 due to the lapse of statutes of limitations and expected settlements with taxing authorities.
The current portion of refundable income taxes was $7,572 and $14,475 as of June 30, 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 June 30, 2019 and December 30, 2018.
22
THE WENDY’S COMPANY AND SUBSIDIARIES
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 | Six Months Ended | ||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||
Common stock: | |||||||||||
Weighted average basic shares outstanding | 231,029 | 238,991 | 230,807 | 239,459 | |||||||
Dilutive effect of stock options and restricted shares | 5,064 | 7,161 | 5,186 | 7,826 | |||||||
Weighted average diluted shares outstanding | 236,093 | 246,152 | 235,993 | 247,285 | |||||||
Diluted net income per share for the three and six months ended June 30, 2019 and July 1, 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 2,049 and 2,104 for the three and six months ended June 30, 2019, respectively, and 27 and 1,369 for the three and six months ended July 1, 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 and second quarters of 2019, the Company paid quarterly cash dividends of $.10 per share. During each of the first and second 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 six months ended June 30, 2019, the Company repurchased 2,824 shares with an aggregate purchase price of $49,721, of which $807 was accrued at June 30, 2019, and excluding commissions of $40, under the November 2018 and February 2019 authorizations. As of June 30, 2019, the Company had $196,736 of availability remaining under its February 2019 authorization. Subsequent to June 30, 2019 through July 31, 2019, the Company repurchased 521 shares under the February 2019 authorization with an aggregate purchase price of $9,980, excluding commissions of $7.
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 six months ended July 1, 2018, the Company repurchased 3,675 shares under the February 2018 repurchase authorization with an aggregate purchase price of $62,490, of which $2,146 was accrued at July 1, 2018, and excluding commissions of $52. Additionally, during the six months ended July 1, 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.
23
THE WENDY’S COMPANY AND SUBSIDIARIES
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 | 9,860 | — | 9,860 | ||||||||
Balance at June 30, 2019 | $ | (51,813 | ) | $ | — | $ | (51,813 | ) | |||
Balance at December 31, 2017 | $ | (45,149 | ) | $ | (1,049 | ) | $ | (46,198 | ) | ||
Current-period other comprehensive (loss) income | (10,369 | ) | 117 | (10,252 | ) | ||||||
Balance at July 1, 2018 | $ | (55,518 | ) | $ | (932 | ) | $ | (56,450 | ) | ||
(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 June 30, 2019, Wendy’s and its franchisees operated 6,719 Wendy’s restaurants. Of the 358 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 144 restaurants, owned the building and held long-term land leases for 144 restaurants and held leases covering the land and building for 70 restaurants. Wendy’s also owned 513 and leased 1,264 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.
24
THE WENDY’S COMPANY AND SUBSIDIARIES
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.”
25
THE WENDY’S COMPANY AND SUBSIDIARIES
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 | Six Months Ended | ||||||
June 30, 2019 | June 30, 2019 | ||||||
Finance lease cost: | |||||||
Amortization of finance lease assets | $ | 1,631 | $ | 4,748 | |||
Interest on finance lease liabilities | 9,939 | 16,692 | |||||
11,570 | 21,440 | ||||||
Operating lease cost | 19,086 | 43,729 | |||||
Variable lease cost (a) | 15,371 | 29,475 | |||||
Short-term lease cost | 1,153 | 2,279 | |||||
Total operating lease cost (b) | 35,610 | 75,483 | |||||
Total lease cost | $ | 47,180 | $ | 96,923 | |||
_______________
(a) | The three and six months ended June 30, 2019 includes expenses for executory costs of $9,779 and $19,303, respectively, for which the Company is reimbursed by sublessees. |
(b) | The three and six months ended June 30, 2019 includes $28,022 and $60,473, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees and $7,007 and $13,600, 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:
Six Months Ended | |||
June 30, 2019 | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating cash flows from finance leases | $ | 19,567 | |
Operating cash flows from operating leases | 46,425 | ||
Financing cash flows from finance leases | 3,521 | ||
Right-of-use assets obtained in exchange for lease obligations: | |||
Finance lease liabilities | 23,534 | ||
Operating lease liabilities | 5,677 | ||
26
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table includes supplemental information related to leases:
June 30, 2019 | ||
Weighted-average remaining lease term (years): | ||
Finance leases | 17.5 | |
Operating leases | 15.7 | |
Weighted average discount rate: | ||
Finance leases | 10.11 | % |
Operating leases | 5.10 | % |
The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of June 30, 2019:
Finance Leases | Operating Leases | ||||||||||||||
Fiscal Year | Company-Operated | Franchise and Other | Company-Operated | Franchise and Other | |||||||||||
2019 (a) | $ | 1,338 | $ | 23,714 | $ | 10,072 | $ | 35,660 | |||||||
2020 | 2,697 | 44,918 | 19,921 | 71,537 | |||||||||||
2021 | 2,808 | 46,315 | 19,733 | 71,433 | |||||||||||
2022 | 2,858 | 47,322 | 19,421 | 71,604 | |||||||||||
2023 | 2,810 | 48,988 | 19,400 | 71,571 | |||||||||||
Thereafter | 37,034 | 695,753 | 201,762 | 836,750 | |||||||||||
Total minimum payments | $ | 49,545 | $ | 907,010 | $ | 290,309 | $ | 1,158,555 | |||||||
Less interest | (23,169 | ) | (458,243 | ) | (91,101 | ) | (383,409 | ) | |||||||
Present value of minimum lease payments (b) (c) | $ | 26,376 | $ | 448,767 | $ | 199,208 | $ | 775,146 | |||||||
_______________
(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 $9,917 and $465,226 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 $43,321 and $931,033 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively. |
27
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 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 | Six Months Ended | ||||||
June 30, 2019 | June 30, 2019 | ||||||
Sales-type and direct-financing leases: | |||||||
Selling profit | $ | 37 | $ | 1,971 | |||
Interest income | 7,072 | 11,805 | |||||
Operating lease income | $ | 43,959 | $ | 89,164 | |||
Variable lease income | 14,602 | 27,849 | |||||
Franchise rental income (a) | $ | 58,561 | $ | 117,013 | |||
_______________
(a) | Includes sublease income of $42,921 and $85,942 recognized during the three and six months ended June 30, 2019, respectively, of which $9,779 and $19,211, respectively, represents lessees’ variable payments to the Company for executory costs. |
28
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 June 30, 2019:
Sales-Type and Direct Financing Leases | Operating Leases | ||||||||||||||
Fiscal Year | Subleases | Owned Properties | Subleases | Owned Properties | |||||||||||
2019 (a) | $ | 13,661 | $ | 1,028 | $ | 55,839 | $ | 26,240 | |||||||
2020 | 27,872 | 2,130 | 112,551 | 52,872 | |||||||||||
2021 | 28,910 | 2,162 | 113,162 | 54,661 | |||||||||||
2022 | 29,548 | 2,243 | 114,269 | 56,134 | |||||||||||
2023 | 30,587 | 2,287 | 115,190 | 56,339 | |||||||||||
Thereafter | 473,264 | 28,037 | 1,355,212 | 861,139 | |||||||||||
Total future minimum receipts | 603,842 | 37,887 | $ | 1,866,223 | $ | 1,107,385 | |||||||||
Unearned interest income | (377,235 | ) | (20,405 | ) | |||||||||||
Net investment in sales-type and direct financing leases (b) | $ | 226,607 | $ | 17,482 | |||||||||||
_______________
(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 $2,505 and $241,584 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 $237. |
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. |
29
THE WENDY’S COMPANY AND SUBSIDIARIES
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:
June 30, 2019 | |||
Land | $ | 281,650 | |
Buildings and improvements | 311,104 | ||
Restaurant equipment | 2,251 | ||
595,005 | |||
Accumulated depreciation and amortization | (149,931 | ) | |
$ | 445,074 | ||
(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 six months ended June 30, 2019 and July 1, 2018, Wendy’s paid TimWen $8,140 and $6,504, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $103 and $108 during the six months ended June 30, 2019 and July 1, 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 $68,953 as of June 30, 2019. These leases extend through 2056. We have not received any notice of default related to these leases as of June 30, 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 June 30, 2019, the Company had outstanding letters of credit with various parties totaling $25,086. 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.
30
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 six months ended June 30, 2019 were $5,481. As of June 30, 2019, the Company estimates future purchases to be approximately $5,400 for the remainder of 2019, $11,600 in 2020, $12,100 in 2021, $13,000 in 2022 and $13,700 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. As of June 30, 2019, there were no material developments in those legal proceedings.
31
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 June 30, 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 offers breakfast in some 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 six-month periods presented herein contain 13 weeks and 26 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 June 30, 2019, the Wendy’s restaurant system was comprised of 6,719 restaurants, of which 358 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.
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, (6)
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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.
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 six months ended June 30, 2019 and July 1, 2018, the Company recognized costs related to the plan totaling $4.3 million and $5.7 million, respectively, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $1.7 million, comprised of (1) severance and related employee costs of approximately $0.1 million, (2) recruitment and relocation costs of approximately $1.0 million, (3) third-party and other costs of approximately $0.1 million and (4) share-based compensation of approximately $0.5 million, the majority of which the Company expects to recognize during the remainder of 2019. 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 leadership changes described above, the Company is currently evaluating its management and operating structure and anticipates this evaluation will result in a change to its existing operating segment structure by the end of 2019.
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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 second quarter and the first six months of 2019 and 2018.
Second Quarter | Six Months | ||||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Sales | $ | 181.1 | $ | 167.3 | $ | 13.8 | $ | 348.7 | $ | 321.0 | $ | 27.7 | |||||||||||
Franchise royalty revenue and fees | 109.1 | 107.6 | 1.5 | 211.1 | 205.5 | 5.6 | |||||||||||||||||
Franchise rental income | 58.5 | 51.5 | 7.0 | 117.0 | 101.6 | 15.4 | |||||||||||||||||
Advertising funds revenue | 86.6 | 84.6 | 2.0 | 167.1 | 163.5 | 3.6 | |||||||||||||||||
435.3 | 411.0 | 24.3 | 843.9 | 791.6 | 52.3 | ||||||||||||||||||
Costs and expenses: | |||||||||||||||||||||||
Cost of sales | 151.1 | 138.2 | 12.9 | 293.7 | 270.4 | 23.3 | |||||||||||||||||
Franchise support and other costs | 4.0 | 7.0 | (3.0 | ) | 10.1 | 13.2 | (3.1 | ) | |||||||||||||||
Franchise rental expense | 28.0 | 24.3 | 3.7 | 60.5 | 47.6 | 12.9 | |||||||||||||||||
Advertising funds expense | 88.7 | 84.6 | 4.1 | 169.1 | 163.5 | 5.6 | |||||||||||||||||
General and administrative | 50.8 | 49.2 | 1.6 | 100.1 | 99.5 | 0.6 | |||||||||||||||||
Depreciation and amortization | 31.5 | 33.4 | (1.9 | ) | 64.7 | 65.6 | (0.9 | ) | |||||||||||||||
System optimization (gains) losses, net | (0.1 | ) | (0.1 | ) | — | (0.1 | ) | 0.5 | (0.6 | ) | |||||||||||||
Reorganization and realignment costs | 3.6 | 3.1 | 0.5 | 4.4 | 5.7 | (1.3 | ) | ||||||||||||||||
Impairment of long-lived assets | 0.2 | 1.6 | (1.4 | ) | 1.7 | 1.8 | (0.1 | ) | |||||||||||||||
Other operating income, net | (3.1 | ) | (1.8 | ) | (1.3 | ) | (7.1 | ) | (2.9 | ) | (4.2 | ) | |||||||||||
354.7 | 339.5 | 15.2 | 697.1 | 664.9 | 32.2 | ||||||||||||||||||
Operating profit | 80.6 | 71.5 | 9.1 | 146.8 | 126.7 | 20.1 | |||||||||||||||||
Interest expense, net | (29.9 | ) | (30.1 | ) | 0.2 | (59.0 | ) | (60.3 | ) | 1.3 | |||||||||||||
Loss on early extinguishment of debt | (7.2 | ) | — | (7.2 | ) | (7.2 | ) | (11.5 | ) | 4.3 | |||||||||||||
Other income, net | 2.2 | 0.9 | 1.3 | 5.0 | 1.7 | 3.3 | |||||||||||||||||
Income before income taxes | 45.7 | 42.3 | 3.4 | 85.6 | 56.6 | 29.0 | |||||||||||||||||
Provision for income taxes | (13.3 | ) | (12.4 | ) | (0.9 | ) | (21.3 | ) | (6.6 | ) | (14.7 | ) | |||||||||||
Net income | $ | 32.4 | $ | 29.9 | $ | 2.5 | $ | 64.3 | $ | 50.0 | $ | 14.3 | |||||||||||
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Second Quarter | Six Months | ||||||||||||||||||||||||||
2019 | % of Total Revenues | 2018 | % of Total Revenues | 2019 | % of Total Revenues | 2018 | % of Total Revenues | ||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||
Sales | $ | 181.1 | 41.6 | % | $ | 167.3 | 40.7 | % | $ | 348.7 | 41.3 | % | $ | 321.0 | 40.5 | % | |||||||||||
Franchise royalty revenue and fees: | |||||||||||||||||||||||||||
Royalty revenue | 102.8 | 23.6 | % | 98.2 | 23.9 | % | 197.7 | 23.4 | % | 188.1 | 23.8 | % | |||||||||||||||
Franchise fees | 6.3 | 1.5 | % | 9.4 | 2.3 | % | 13.4 | 1.6 | % | 17.4 | 2.2 | % | |||||||||||||||
Total franchise royalty revenue and fees | 109.1 | 25.1 | % | 107.6 | 26.2 | % | 211.1 | 25.0 | % | 205.5 | 26.0 | % | |||||||||||||||
Franchise rental income | 58.5 | 13.4 | % | 51.5 | 12.5 | % | 117.0 | 13.9 | % | 101.6 | 12.8 | % | |||||||||||||||
Advertising funds revenue | 86.6 | 19.9 | % | 84.6 | 20.6 | % | 167.1 | 19.8 | % | 163.5 | 20.7 | % | |||||||||||||||
Total revenues | $ | 435.3 | 100.0 | % | $ | 411.0 | 100.0 | % | $ | 843.9 | 100.0 | % | $ | 791.6 | 100.0 | % | |||||||||||
Second Quarter | Six Months | ||||||||||||||||||||||||||
2019 | % of Sales | 2018 | % of Sales | 2019 | % of Sales | 2018 | % of Sales | ||||||||||||||||||||
Cost of sales: | |||||||||||||||||||||||||||
Food and paper | $ | 57.8 | 31.9 | % | $ | 52.9 | 31.6 | % | $ | 110.0 | 31.5 | % | $ | 101.8 | 31.7 | % | |||||||||||
Restaurant labor | 53.8 | 29.7 | % | 48.9 | 29.2 | % | 105.4 | 30.2 | % | 95.7 | 29.8 | % | |||||||||||||||
Occupancy, advertising and other operating costs | 39.5 | 21.9 | % | 36.4 | 21.8 | % | 78.3 | 22.5 | % | 72.9 | 22.7 | % | |||||||||||||||
Total cost of sales | $ | 151.1 | 83.5 | % | $ | 138.2 | 82.6 | % | $ | 293.7 | 84.2 | % | $ | 270.4 | 84.2 | % | |||||||||||
Second Quarter | Six Months | ||||||||||||||||||||||||||
2019 | % of Sales | 2018 | % of Sales | 2019 | % of Sales | 2018 | % of Sales | ||||||||||||||||||||
Restaurant margin | $ | 30.0 | 16.5 | % | $ | 29.1 | 17.4 | % | $ | 55.0 | 15.8 | % | $ | 50.6 | 15.8 | % | |||||||||||
The tables below present key business measures which are defined and further discussed in the “Executive Overview” section included herein.
Second Quarter | Six Months | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Key business measures: | |||||||||||
North America same-restaurant sales growth: | |||||||||||
Company-operated | 0.8 | % | 2.0 | % | 1.4 | % | 1.4 | % | |||
Franchised | 1.5 | % | 1.9 | % | 1.4 | % | 1.8 | % | |||
Systemwide | 1.4 | % | 1.9 | % | 1.4 | % | 1.8 | % | |||
Global same-restaurant sales growth: | |||||||||||
Company-operated | 0.8 | % | 2.0 | % | 1.4 | % | 1.4 | % | |||
Franchised (a) | 1.6 | % | 2.1 | % | 1.5 | % | 1.9 | % | |||
Systemwide (a) | 1.6 | % | 2.1 | % | 1.5 | % | 1.9 | % | |||
________________
(a) Includes international franchised same-restaurant sales (excluding Venezuela, and excluding Argentina in 2019, due to the impact of the highly inflationary economies of those countries).
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Second Quarter | Six Months | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Key business measures (continued): | |||||||||||||||
Systemwide sales: (a) | |||||||||||||||
Company-operated | $ | 181.1 | $ | 167.3 | $ | 348.7 | $ | 321.0 | |||||||
North America franchised | 2,482.5 | 2,434.2 | 4,773.2 | 4,684.9 | |||||||||||
North America systemwide | 2,663.6 | 2,601.5 | 5,121.9 | 5,005.9 | |||||||||||
International franchised (b) | 140.1 | 132.1 | 273.0 | 259.3 | |||||||||||
Global systemwide | $ | 2,803.7 | $ | 2,733.6 | $ | 5,394.9 | $ | 5,265.2 | |||||||
________________
(a) | During the second quarter of 2019 and 2018, North America systemwide sales increased 3.0% and 2.7%, respectively, international franchised sales increased 10.4% and 12.8%, respectively, and global systemwide sales increased 3.3% and 3.1%, respectively, on a constant currency basis. During the first six months of 2019 and 2018, North America systemwide sales increased 3.0% and 2.7%, respectively, international franchised sales increased 10.2% and 13.2%, respectively, and global systemwide sales increased 3.3% and 3.2%, respectively, on a constant currency basis. |
(b) | Excludes Venezuela, and excludes Argentina in 2019, due to the impact of the highly inflationary economies of those countries. |
Second Quarter | |||||||||||
Company-operated | North America Franchised | International Franchised | Systemwide | ||||||||
Restaurant count: | |||||||||||
Restaurant count at March 31, 2019 | 358 | 5,825 | 527 | 6,710 | |||||||
Opened | — | 20 | 8 | 28 | |||||||
Closed | — | (17 | ) | (2 | ) | (19 | ) | ||||
Net purchased from (sold by) franchisees | — | — | — | — | |||||||
Restaurant count at June 30, 2019 | 358 | 5,828 | 533 | 6,719 | |||||||
Six Months | |||||||||||
Company-operated | North America Franchised | International Franchised | Systemwide | ||||||||
Restaurant count at December 30, 2018 | 353 | 5,825 | 533 | 6,711 | |||||||
Opened | — | 49 | 22 | 71 | |||||||
Closed | — | (41 | ) | (22 | ) | (63 | ) | ||||
Net purchased from (sold by) franchisees | 5 | (5 | ) | — | — | ||||||
Restaurant count at June 30, 2019 | 358 | 5,828 | 533 | 6,719 | |||||||
Sales | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Sales | $ | 181.1 | $ | 167.3 | $ | 13.8 | $ | 348.7 | $ | 321.0 | $ | 27.7 | |||||||||||
The increase in sales for the second quarter and the first six 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 second quarter and the first six months of 2019 benefited from a 0.8% and 1.4% 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.
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Franchise Royalty Revenue and Fees | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Royalty revenue | $ | 102.8 | $ | 98.2 | $ | 4.6 | $ | 197.7 | $ | 188.1 | $ | 9.6 | |||||||||||
Franchise fees | 6.3 | 9.4 | (3.1 | ) | 13.4 | 17.4 | (4.0 | ) | |||||||||||||||
$ | 109.1 | $ | 107.6 | $ | 1.5 | $ | 211.1 | $ | 205.5 | $ | 5.6 | ||||||||||||
The increase in franchise royalty revenue during the second quarter and the first six months of 2019 was primarily due to a 1.6% and 1.5% 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 second quarter and the first six months of 2019 was primarily due to not facilitating any franchisee-to-franchisee restaurant transfers (“Franchise Flips”) in 2019 and lower other miscellaneous franchise fees, partially offset by higher fees for providing information technology services and other services to franchisees.
Franchise Rental Income | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Franchise rental income | $ | 58.5 | $ | 51.5 | $ | 7.0 | $ | 117.0 | $ | 101.6 | $ | 15.4 | |||||||||||
The increase in franchise rental income during the second quarter and the first six 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. This increase was partially offset by the assignment of certain leases to a franchisee.
Advertising Funds Revenue | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Advertising funds revenue | $ | 86.6 | $ | 84.6 | $ | 2.0 | $ | 167.1 | $ | 163.5 | $ | 3.6 | |||||||||||
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 second quarter and the first six 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 new restaurant development incentive program.
Cost of Sales, as a Percent of Sales | Second Quarter | Six Months | |||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||
Food and paper | 31.9 | % | 31.6 | % | 0.3 | % | 31.5 | % | 31.7 | % | (0.2 | )% | |||||
Restaurant labor | 29.7 | % | 29.2 | % | 0.5 | % | 30.2 | % | 29.8 | % | 0.4 | % | |||||
Occupancy, advertising and other operating costs | 21.9 | % | 21.8 | % | 0.1 | % | 22.5 | % | 22.7 | % | (0.2 | )% | |||||
83.5 | % | 82.6 | % | 0.9 | % | 84.2 | % | 84.2 | % | — | % | ||||||
Cost of sales, as a percent of sales, during the second quarter and the first six months of 2019 was impacted by (1) an increase in restaurant labor rates, (2) a decrease in customer count and (3) an increase in commodity costs. These impacts were partially offset by benefits from strategic price increases on certain of our menu items.
Franchise Support and Other Costs | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Franchise support and other costs | $ | 4.0 | $ | 7.0 | $ | (3.0 | ) | $ | 10.1 | $ | 13.2 | $ | (3.1 | ) | |||||||||
The decrease in franchise support and other costs during the second quarter and the first six months of 2019 was primarily due to lower costs incurred to provide information technology and other services to our franchisees.
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Franchise Rental Expense | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Franchise rental expense | $ | 28.0 | $ | 24.3 | $ | 3.7 | $ | 60.5 | $ | 47.6 | $ | 12.9 | |||||||||||
The increase in franchise rental expense during the second quarter and the first six 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. This increase was partially offset by the impact of assigning certain leases to a franchisee.
Advertising Funds Expense | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Advertising funds expense | $ | 88.7 | $ | 84.6 | $ | 4.1 | $ | 169.1 | $ | 163.5 | $ | 5.6 | |||||||||||
The increase in advertising funds expense during the second quarter and the first six 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 second quarter and the first six months of 2019, advertising funds expense exceeded advertising funds revenue by $2.1 million, 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 | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Employee compensation and related expenses | $ | 40.8 | $ | 39.8 | $ | 1.0 | $ | 81.8 | $ | 81.3 | $ | 0.5 | |||||||||||
Other, net | 10.0 | 9.4 | 0.6 | 18.3 | 18.2 | 0.1 | |||||||||||||||||
$ | 50.8 | $ | 49.2 | $ | 1.6 | $ | 100.1 | $ | 99.5 | $ | 0.6 | ||||||||||||
The increase in general and administrative expenses during the second quarter and the first six months of 2019 was primarily due to higher employee compensation and related expenses, reflecting additional expenditures to support our digital experience and international organizations, as well as timing of other employee-related expenses. These increases were partially offset by changes in staffing driven by our G&A realignment plan.
Depreciation and Amortization | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Restaurants | $ | 20.0 | $ | 22.2 | $ | (2.2 | ) | $ | 41.9 | $ | 42.9 | $ | (1.0 | ) | |||||||||
Corporate and other | 11.5 | 11.2 | 0.3 | 22.8 | 22.7 | 0.1 | |||||||||||||||||
$ | 31.5 | $ | 33.4 | $ | (1.9 | ) | $ | 64.7 | $ | 65.6 | $ | (0.9 | ) | ||||||||||
The decrease in restaurant depreciation and amortization during the second quarter and the first six months of 2019 was primarily due to the assignment of certain leases to a franchisee, resulting in the write-off of the related net investment in the leases. Corporate and other expense increased due to depreciation and amortization for technology investments.
System Optimization (Gains) Losses, Net | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
System optimization (gains) losses, net | $ | (0.1 | ) | $ | (0.1 | ) | $ | — | $ | (0.1 | ) | $ | 0.5 | $ | (0.6 | ) | |||||||
System optimization (gains) losses, net for the second quarter and the first six months of 2019 and 2018 were primarily comprised of post-closing adjustments on previous sales of restaurants and gains (losses) on the sale of surplus properties.
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Reorganization and Realignment Costs | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
G&A realignment | $ | 3.5 | $ | 3.1 | $ | 0.4 | $ | 4.3 | $ | 5.7 | (1.4 | ) | |||||||||||
System optimization initiative | 0.1 | — | 0.1 | 0.1 | — | 0.1 | |||||||||||||||||
$ | 3.6 | $ | 3.1 | $ | 0.5 | $ | 4.4 | $ | 5.7 | $ | (1.3 | ) | |||||||||||
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 second quarter and the first six months of 2019 and 2018 were primarily comprised of severance and related employee costs and share-based compensation.
Impairment of Long-Lived Assets | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Impairment of long-lived assets | $ | 0.2 | $ | 1.6 | $ | (1.4 | ) | $ | 1.7 | $ | 1.8 | $ | (0.1 | ) | |||||||||
The change in impairment charges during the second quarter and the first six 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 six months of 2018. In addition, the change in impairment charges during the first six months of 2019 was offset by an increase in losses resulting from closing Company-operated restaurants and classifying such surplus properties as held for sale.
Other Operating Income, Net | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Equity in earnings in joint ventures, net | $ | (3.1 | ) | $ | (1.8 | ) | $ | (1.3 | ) | $ | (4.9 | ) | $ | (3.6 | ) | $ | (1.3 | ) | |||||
Gains on sales-type leases | — | — | — | (2.0 | ) | $ | — | (2.0 | ) | ||||||||||||||
Lease buyout | — | — | — | (0.2 | ) | 0.6 | (0.8 | ) | |||||||||||||||
Other, net | — | — | — | — | $ | 0.1 | (0.1 | ) | |||||||||||||||
$ | (3.1 | ) | $ | (1.8 | ) | $ | (1.3 | ) | $ | (7.1 | ) | $ | (2.9 | ) | $ | (4.2 | ) | ||||||
The change in other operating income, net during the second quarter of 2019 was due to an increase in the equity in earnings from our TimWen joint venture. The change in other operating income, net during the first six months of 2019 was primarily due to gains on new and modified sales-type leases as a result of the new accounting guidance for leases, as well as an increase in the equity in earnings from our TimWen joint venture.
Interest Expense, Net | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Interest expense, net | $ | 29.9 | $ | 30.1 | $ | (0.2 | ) | $ | 59.0 | $ | 60.3 | $ | (1.3 | ) | |||||||||
Interest expense, net decreased during the first six months of 2019 primarily due to the timing of interest expense on the Company’s finance lease obligations.
Loss on Early Extinguishment of Debt | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Loss on early extinguishment of debt | $ | 7.2 | $ | — | $ | 7.2 | $ | 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.
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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.
Other Income, Net | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Other income, net | $ | 2.2 | $ | 0.9 | $ | 1.3 | $ | 5.0 | $ | 1.7 | $ | 3.3 | |||||||||||
Other income, net increased during the second quarter and the first six months of 2019 primarily due to higher interest income earned on our cash equivalents.
Provision for Income Taxes | Second Quarter | Six Months | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Income before income taxes | $ | 45.7 | $ | 42.3 | $ | 3.4 | $ | 85.6 | $ | 56.6 | $ | 29.0 | |||||||||||
Provision for income taxes | (13.3 | ) | (12.4 | ) | (0.9 | ) | (21.3 | ) | (6.6 | ) | (14.7 | ) | |||||||||||
Effective tax rate on income | 29.2 | % | 29.3 | % | (0.1 | )% | 24.9 | % | 11.6 | % | 13.3 | % | |||||||||||
Our effective tax rates in the second 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) state income taxes, including non-recurring changes to state deferred taxes, (2) net excess benefits related to share-based payments, which resulted in a benefit of $0.9 million and $0.8 million in the second quarter of 2019 and 2018, respectively, (3) valuation allowance changes, net of federal benefit, and (4) the impact of the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).
Our effective tax rates in the first six 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) net excess tax benefits related to share-based payments, which resulted in a benefit of $2.9 million and $6.9 million in the first six months of 2019 and 2018, respectively, (2) state income taxes, including non-recurring changes to state deferred taxes, (3) the impact of the Tax Act and (4) valuation allowance changes, net of federal benefit.
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 $50.0 million to $55.0 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 $46.1 million as discussed below in “Dividends;” and |
• | potential stock repurchases of up to $196.7 million, of which $10.0 million was repurchased subsequent to June 30, 2019 through July 31, 2019, as discussed below in “Stock Repurchases.” |
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.
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The table below summarizes our cash flows from operating, investing and financing activities for the first six months of 2019 and 2018:
Six Months | |||||||||||
2019 | 2018 | Change | |||||||||
Net cash provided by (used in): | |||||||||||
Operating activities | $ | 154.1 | $ | 148.4 | $ | 5.7 | |||||
Investing activities | (29.9 | ) | (22.6 | ) | (7.3 | ) | |||||
Financing activities | (130.2 | ) | (95.3 | ) | (34.9 | ) | |||||
Effect of exchange rate changes on cash | 3.8 | (4.4 | ) | 8.2 | |||||||
Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (2.2 | ) | $ | 26.1 | $ | (28.3 | ) | |||
Operating Activities
Cash provided by operating activities was $154.1 million and $148.4 million in the first six 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 $5.7 million during the first six months of 2019 as compared to the first six months of 2018, primarily due to (1) a decrease in payments for incentive compensation (2) higher net income, adjusted for non-cash expenses and (3) the timing of receipt of rental payments from franchisees. These favorable changes were partially offset by (1) the timing of collections of royalty receivables and (2) the timing of payments for marketing expenses of the national advertising funds.
Investing Activities
Cash used in investing activities increased $7.3 million during the first six months of 2019 as compared to the first six months of 2018, primarily due to an increase in cash used for the Company’s acquisition of restaurants from franchisees of $5.1 million and an increase in capital expenditures of $1.6 million.
Financing Activities
Cash used in financing activities increased $34.9 million during the first six months of 2019 as compared to the first six months of 2018, primarily due to (1) a net increase in cash used for long-term debt activities of $76.5 million, reflecting the respective impacts of the completion of debt refinancing transactions during the first six months of 2019 and 2018 and (2) an increase in dividends of $5.5 million. These changes were partially offset by (1) a decrease in repurchases of common stock of $33.5 million, (2) an increase in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $8.3 million and (3) the settlement of a supplemental purchase price liability associated with the acquisition of 140 Wendy’s restaurants from DavCo Restaurants, LLC of $6.1 million during the first six 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 June 30, 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 three months ended June 30, 2019. The Series 2019-1 Class A-1
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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 and June 17, 2019, the Company paid quarterly cash dividends of $.10 per share on its common stock, aggregating $46.2 million. On August 1, 2019, the Company declared a dividend of $.10 per share to be paid on September 17, 2019 to stockholders of record as of September 3, 2019. If the Company pays regular quarterly cash dividends for the remainder of 2019 at the same rate as declared in the third quarter of 2019, the Company’s total cash requirement for dividends for the remainder of 2019 would be approximately $46.1 million based on the number of shares of its common stock outstanding at July 31, 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 six months ended June 30, 2019, the Company repurchased 2.8 million shares with an aggregate purchase price of $49.7 million, of which $0.8 million was accrued at June 30, 2019, and excluding commissions, under the November 2018 and February 2019 authorizations. As of June 30, 2019, the Company had $196.7 million of availability remaining under its February 2019 authorization. Subsequent to June 30, 2019 through July 31, 2019, the Company repurchased 0.5 million shares under the February 2019 authorization with an aggregate purchase price of $10.0 million, excluding commissions.
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 six months ended July 1, 2018, the Company repurchased 3.7 million shares under the February 2018 repurchase authorization with an aggregate purchase price of $62.5 million, of which $2.1 million was accrued at July 1, 2018, and excluding commissions of $0.1 million. Additionally, during the six months ended July 1, 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 June 30, 2019, there were no material changes from the information contained in the Form 10-K, except as described below.
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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 $2,342.4 million as of June 30, 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 June 30, 2019.
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 June 30, 2019. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 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 second 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.
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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 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; and |
• | 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. |
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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.
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 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.
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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 second 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) | ||||||
April 1, 2019 through May 5, 2019 | 349,393 | $18.40 | 307,555 | $211,458 | ||||||
May 6, 2019 through June 2, 2019 | 355,836 | $18.69 | 352,527 | $204,874 | ||||||
June 3, 2019 through June 30, 2019 | 424,461 | $19.38 | 420,110 | $196,736 | ||||||
Total | 1,129,690 | $18.86 | 1,080,192 | $196,736 | ||||||
(1) | Includes 49,498 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 June 30, 2019 through July 31, 2019, the Company repurchased 0.5 million shares under the February 2019 authorization with an aggregate purchase price of $10.0 million, excluding commissions.
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Item 6. Exhibits.
EXHIBIT NO. | DESCRIPTION |
4.1 | |
4.2 | |
10.1 | |
10.2 | |
10.3 | |
31.1 | |
31.2 | |
32.1 | |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | XBRL Taxonomy Extension Schema Document* |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document* |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* |
____________________
* | 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: August 7, 2019 | By: /s/ Gunther Plosch |
Gunther Plosch | |
Chief Financial Officer | |
(On behalf of the registrant) | |
Date: August 7, 2019 | By: /s/ Leigh A. Burnside |
Leigh A. Burnside | |
Senior Vice President, Finance and Chief Accounting Officer | |
(Principal Accounting Officer) | |
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