Wendy's Co - Quarter Report: 2021 October (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 October 3, 2021
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 220,634,432 shares of The Wendy’s Company common stock outstanding as of November 3, 2021.
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)
| October 3, 2021 | January 3, 2021 | ||||||||||
| ASSETS | (Unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 571,502 | $ | 306,989 | |||||||
| Restricted cash | 36,321 | 33,973 | |||||||||
| Accounts and notes receivable, net | 100,265 | 109,891 | |||||||||
| Inventories | 4,257 | 4,732 | |||||||||
| Prepaid expenses and other current assets | 23,820 | 89,732 | |||||||||
| Advertising funds restricted assets | 107,320 | 142,306 | |||||||||
| Total current assets | 843,485 | 687,623 | |||||||||
| Properties | 873,250 | 915,889 | |||||||||
| Finance lease assets | 210,660 | 206,153 | |||||||||
| Operating lease assets | 783,986 | 821,480 | |||||||||
| Goodwill | 751,805 | 751,049 | |||||||||
| Other intangible assets | 1,209,695 | 1,224,960 | |||||||||
| Investments | 41,356 | 44,574 | |||||||||
| Net investment in sales-type and direct financing leases | 305,242 | 268,221 | |||||||||
| Other assets | 137,468 | 120,057 | |||||||||
| Total assets | $ | 5,156,947 | $ | 5,040,006 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | 32,750 | $ | 28,962 | |||||||
| Current portion of finance lease liabilities | 15,915 | 12,105 | |||||||||
| Current portion of operating lease liabilities | 45,541 | 45,346 | |||||||||
| Accounts payable | 26,506 | 31,063 | |||||||||
| Accrued expenses and other current liabilities | 158,800 | 155,321 | |||||||||
| Advertising funds restricted liabilities | 127,673 | 140,511 | |||||||||
| Total current liabilities | 407,185 | 413,308 | |||||||||
| Long-term debt | 2,360,763 | 2,218,163 | |||||||||
| Long-term finance lease liabilities | 528,775 | 506,076 | |||||||||
| Long-term operating lease liabilities | 830,488 | 865,325 | |||||||||
| Deferred income taxes | 279,813 | 280,755 | |||||||||
| Deferred franchise fees | 90,086 | 89,094 | |||||||||
| Other liabilities | 117,083 | 117,689 | |||||||||
| Total liabilities | 4,614,193 | 4,490,410 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 221,301 and 224,268 shares outstanding, respectively | 47,042 | 47,042 | |||||||||
| Additional paid-in capital | 2,911,552 | 2,899,276 | |||||||||
| Retained earnings | 317,956 | 238,674 | |||||||||
Common stock held in treasury, at cost; 249,123 and 246,156 shares, respectively | (2,685,063) | (2,585,755) | |||||||||
| Accumulated other comprehensive loss | (48,733) | (49,641) | |||||||||
| Total stockholders’ equity | 542,754 | 549,596 | |||||||||
| Total liabilities and stockholders’ equity | $ | 5,156,947 | $ | 5,040,006 | |||||||
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 | Nine Months Ended | ||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Sales | $ | 171,078 | $ | 191,946 | $ | 553,660 | $ | 522,961 | |||||||||||||||
| Franchise royalty revenue and fees | 138,755 | 116,820 | 398,246 | 321,645 | |||||||||||||||||||
| Franchise rental income | 62,446 | 58,721 | 182,190 | 173,434 | |||||||||||||||||||
| Advertising funds revenue | 97,976 | 84,755 | 289,699 | 241,468 | |||||||||||||||||||
| 470,255 | 452,242 | 1,423,795 | 1,259,508 | ||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of sales | 146,436 | 159,545 | 457,440 | 450,170 | |||||||||||||||||||
| Franchise support and other costs | 10,509 | 5,960 | 27,080 | 19,427 | |||||||||||||||||||
| Franchise rental expense | 34,424 | 32,426 | 101,058 | 93,024 | |||||||||||||||||||
| Advertising funds expense | 108,529 | 92,048 | 310,642 | 253,353 | |||||||||||||||||||
| General and administrative | 62,840 | 47,322 | 178,576 | 147,553 | |||||||||||||||||||
| Depreciation and amortization | 30,940 | 32,966 | 93,243 | 98,726 | |||||||||||||||||||
| System optimization gains, net | (1,437) | (23) | (32,719) | (2,333) | |||||||||||||||||||
| Reorganization and realignment costs | 345 | 3,375 | 7,381 | 10,196 | |||||||||||||||||||
| Impairment of long-lived assets | 566 | 23 | 1,831 | 4,727 | |||||||||||||||||||
| Other operating income, net | (3,092) | (2,748) | (10,800) | (6,076) | |||||||||||||||||||
| 390,060 | 370,894 | 1,133,732 | 1,068,767 | ||||||||||||||||||||
| Operating profit | 80,195 | 81,348 | 290,063 | 190,741 | |||||||||||||||||||
| Interest expense, net | (26,000) | (29,086) | (82,990) | (86,696) | |||||||||||||||||||
| Loss on early extinguishment of debt | — | — | (17,917) | — | |||||||||||||||||||
| Other income, net | 171 | 181 | 461 | 1,113 | |||||||||||||||||||
| Income before income taxes | 54,366 | 52,443 | 189,617 | 105,158 | |||||||||||||||||||
| Provision for income taxes | (13,195) | (12,690) | (41,356) | (26,060) | |||||||||||||||||||
| Net income | $ | 41,171 | $ | 39,753 | $ | 148,261 | $ | 79,098 | |||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | .19 | $ | .18 | $ | .67 | $ | .35 | |||||||||||||||
| Diluted | .18 | .17 | .66 | .35 | |||||||||||||||||||
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 | Nine Months Ended | ||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
| Net income | $ | 41,171 | $ | 39,753 | $ | 148,261 | $ | 79,098 | |||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Foreign currency translation adjustment | (4,659) | 3,220 | 908 | (5,138) | |||||||||||||||||||
| Other comprehensive (loss) income | (4,659) | 3,220 | 908 | (5,138) | |||||||||||||||||||
Comprehensive income | $ | 36,512 | $ | 42,973 | $ | 149,169 | $ | 73,960 | |||||||||||||||
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 | Common Stock Held in Treasury | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Balance at January 3, 2021 | $ | 47,042 | $ | 2,899,276 | $ | 238,674 | $ | (2,585,755) | $ | (49,641) | $ | 549,596 | |||||||||||||||||||||||
| Net income | — | — | 41,366 | — | — | 41,366 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 2,220 | 2,220 | |||||||||||||||||||||||||||||
| Cash dividends | — | — | (20,156) | — | — | (20,156) | |||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | (56,084) | — | (56,084) | |||||||||||||||||||||||||||||
| Share-based compensation | — | 5,151 | — | — | — | 5,151 | |||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | — | (20) | — | 683 | — | 663 | |||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | — | (2,996) | — | 817 | — | (2,179) | |||||||||||||||||||||||||||||
| Other | — | 49 | (5) | 44 | — | 88 | |||||||||||||||||||||||||||||
| Balance at April 4, 2021 | $ | 47,042 | $ | 2,901,460 | $ | 259,879 | $ | (2,640,295) | $ | (47,421) | $ | 520,665 | |||||||||||||||||||||||
| Net income | — | — | 65,724 | — | — | 65,724 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 3,347 | 3,347 | |||||||||||||||||||||||||||||
| Cash dividends | — | — | (22,123) | — | — | (22,123) | |||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | (27,291) | — | (27,291) | |||||||||||||||||||||||||||||
| Share-based compensation | — | 5,882 | — | — | — | 5,882 | |||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | — | 850 | — | 23,466 | — | 24,316 | |||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | — | (959) | — | 714 | — | (245) | |||||||||||||||||||||||||||||
| Other | — | 41 | (5) | 45 | — | 81 | |||||||||||||||||||||||||||||
| Balance at July 4, 2021 | $ | 47,042 | $ | 2,907,274 | $ | 303,475 | $ | (2,643,361) | $ | (44,074) | $ | 570,356 | |||||||||||||||||||||||
| Net income | — | — | 41,171 | — | — | 41,171 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (4,659) | (4,659) | |||||||||||||||||||||||||||||
| Cash dividends | — | — | (26,684) | — | — | (26,684) | |||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | (43,857) | — | (43,857) | |||||||||||||||||||||||||||||
| Share-based compensation | — | 5,702 | — | — | — | 5,702 | |||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | — | 351 | — | 1,465 | — | 1,816 | |||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | — | (1,835) | — | 642 | — | (1,193) | |||||||||||||||||||||||||||||
| Other | — | 60 | (6) | 48 | — | 102 | |||||||||||||||||||||||||||||
| Balance at October 3, 2021 | $ | 47,042 | $ | 2,911,552 | $ | 317,956 | $ | (2,685,063) | $ | (48,733) | $ | 542,754 | |||||||||||||||||||||||
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 | Common Stock Held in Treasury | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Balance at December 29, 2019 | $ | 47,042 | $ | 2,874,001 | $ | 185,725 | $ | (2,536,581) | $ | (53,828) | $ | 516,359 | |||||||||||||||||||||||
| Net income | — | — | 14,441 | — | — | 14,441 | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (12,507) | (12,507) | |||||||||||||||||||||||||||||
| Cash dividends | — | — | (26,793) | — | — | (26,793) | |||||||||||||||||||||||||||||
Repurchases of common stock, including accelerated share repurchase | — | 15,000 | — | (58,336) | — | (43,336) | |||||||||||||||||||||||||||||
| Share-based compensation | — | 4,539 | — | — | — | 4,539 | |||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | — | 280 | — | 1,330 | — | 1,610 | |||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | — | (4,017) | — | 726 | — | (3,291) | |||||||||||||||||||||||||||||
| Other | — | 33 | (7) | 27 | — | 53 | |||||||||||||||||||||||||||||
| Balance at March 29, 2020 | $ | 47,042 | $ | 2,889,836 | $ | 173,366 | $ | (2,592,834) | $ | (66,335) | $ | 451,075 | |||||||||||||||||||||||
| Net income | — | — | 24,904 | — | — | 24,904 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 4,149 | 4,149 | |||||||||||||||||||||||||||||
| Cash dividends | — | — | (11,181) | — | — | (11,181) | |||||||||||||||||||||||||||||
| Share-based compensation | — | 4,787 | — | — | — | 4,787 | |||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | — | (902) | — | 11,361 | — | 10,459 | |||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | — | (1,041) | — | 773 | — | (268) | |||||||||||||||||||||||||||||
| Other | — | 19 | (3) | 42 | — | 58 | |||||||||||||||||||||||||||||
| Balance at June 28, 2020 | $ | 47,042 | $ | 2,892,699 | $ | 187,086 | $ | (2,580,658) | $ | (62,186) | $ | 483,983 | |||||||||||||||||||||||
| Net income | — | — | 39,753 | — | — | 39,753 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 3,220 | 3,220 | |||||||||||||||||||||||||||||
| Cash dividends | — | — | (11,202) | — | — | (11,202) | |||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | (1,708) | — | (1,708) | |||||||||||||||||||||||||||||
| Share-based compensation | — | 5,786 | — | — | — | 5,786 | |||||||||||||||||||||||||||||
Common stock issued upon exercises of stock options | — | 838 | — | 2,465 | — | 3,303 | |||||||||||||||||||||||||||||
Common stock issued upon vesting of restricted shares | — | (2,600) | — | 918 | — | (1,682) | |||||||||||||||||||||||||||||
| Other | — | 44 | (2) | 40 | — | 82 | |||||||||||||||||||||||||||||
| Balance at September 27, 2020 | $ | 47,042 | $ | 2,896,767 | $ | 215,635 | $ | (2,578,943) | $ | (58,966) | $ | 521,535 | |||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
8
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| Nine Months Ended | |||||||||||
| October 3, 2021 | September 27, 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 148,261 | $ | 79,098 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 93,243 | 98,726 | |||||||||
| Share-based compensation | 16,735 | 15,112 | |||||||||
| Impairment of long-lived assets | 1,831 | 4,727 | |||||||||
| Deferred income tax | (25) | 5,878 | |||||||||
| Non-cash rental expense, net | 28,421 | 19,967 | |||||||||
| Change in operating lease liabilities | (34,220) | (29,539) | |||||||||
| Net receipt of deferred vendor incentives | 1,906 | 5,061 | |||||||||
| System optimization gains, net | (32,719) | (2,333) | |||||||||
| Distributions received from joint ventures, net of equity in earnings | 3,561 | 1,187 | |||||||||
| Long-term debt-related activities, net | 23,043 | 4,866 | |||||||||
| Changes in operating assets and liabilities and other, net | 26,636 | 3,009 | |||||||||
| Net cash provided by operating activities | 276,673 | 205,759 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (43,401) | (44,876) | |||||||||
| Acquisitions | 4,879 | — | |||||||||
| Dispositions | 52,657 | 3,570 | |||||||||
| Proceeds from sale of investments | — | 169 | |||||||||
| Notes receivable, net | 907 | 138 | |||||||||
| Net cash provided by (used in) investing activities | 15,042 | (40,999) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from long-term debt | 1,100,000 | 153,315 | |||||||||
| Repayments of long-term debt | (955,782) | (174,959) | |||||||||
| Repayments of finance lease liabilities | (9,021) | (5,850) | |||||||||
| Deferred financing costs | (20,873) | (2,122) | |||||||||
| Repurchases of common stock | (125,656) | (46,667) | |||||||||
| Dividends | (68,963) | (49,176) | |||||||||
| Proceeds from stock option exercises | 27,204 | 15,540 | |||||||||
| Payments related to tax withholding for share-based compensation | (4,390) | (5,409) | |||||||||
| Net cash used in financing activities | (57,481) | (115,328) | |||||||||
| Net cash provided by operations before effect of exchange rate changes on cash | 234,234 | 49,432 | |||||||||
| Effect of exchange rate changes on cash | 177 | (1,715) | |||||||||
| Net increase in cash, cash equivalents and restricted cash | 234,411 | 47,717 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 418,241 | 358,707 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 652,652 | $ | 406,424 | |||||||
| Supplemental non-cash investing and financing activities: | |||||||||||
| Capital expenditures included in accounts payable | $ | 4,363 | $ | 4,789 | |||||||
| Finance leases | 43,277 | 24,617 | |||||||||
| October 3, 2021 | January 3, 2021 | ||||||||||
| Reconciliation of cash, cash equivalents and restricted cash at end of period: | |||||||||||
| Cash and cash equivalents | $ | 571,502 | $ | 306,989 | |||||||
| Restricted cash | 36,321 | 33,973 | |||||||||
| Restricted cash, included in Advertising funds restricted assets | 44,829 | 77,279 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 652,652 | $ | 418,241 | |||||||
See accompanying notes to condensed consolidated financial statements.
9
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 October 3, 2021, the results of our operations for the three and nine months ended October 3, 2021 and September 27, 2020 and cash flows for the nine months ended October 3, 2021 and September 27, 2020. The results of operations for the nine months ended October 3, 2021 are not necessarily indicative of the results to be expected for the full 2021 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 January 3, 2021 (the “Form 10-K”).
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic. We continue to monitor the dynamic nature of the COVID-19 pandemic on our business, results and financial condition; however, we cannot predict the ultimate duration, scope or severity of the COVID-19 pandemic or its ultimate impact on our results of operations, financial condition and prospects.
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 in the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. See Note 17 for further information.
We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years, quarters and months 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.
(2) Revenue
Disaggregation of Revenue
The following tables disaggregate revenue by segment and source:
| Wendy’s U.S. | Wendy’s International | Global Real Estate & Development | Total | ||||||||||||||||||||
| Three Months Ended October 3, 2021 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | 169,961 | $ | 1,117 | $ | — | $ | 171,078 | |||||||||||||||
| Franchise royalty revenue | 102,603 | 13,918 | — | 116,521 | |||||||||||||||||||
| Franchise fees (a) | 19,759 | 1,144 | 1,331 | 22,234 | |||||||||||||||||||
| Franchise rental income | — | — | 62,446 | 62,446 | |||||||||||||||||||
| Advertising funds revenue | 91,481 | 6,495 | — | 97,976 | |||||||||||||||||||
| Total revenues | $ | 383,804 | $ | 22,674 | $ | 63,777 | $ | 470,255 | |||||||||||||||
10
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
| Wendy’s U.S. | Wendy’s International | Global Real Estate & Development | Total | ||||||||||||||||||||
| Nine Months Ended October 3, 2021 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | 552,297 | $ | 1,363 | $ | — | $ | 553,660 | |||||||||||||||
| Franchise royalty revenue | 305,373 | 39,048 | — | 344,421 | |||||||||||||||||||
| Franchise fees (a) | 46,020 | 4,041 | 3,764 | 53,825 | |||||||||||||||||||
| Franchise rental income | — | — | 182,190 | 182,190 | |||||||||||||||||||
| Advertising funds revenue | 271,911 | 17,788 | — | 289,699 | |||||||||||||||||||
| Total revenues | $ | 1,175,601 | $ | 62,240 | $ | 185,954 | $ | 1,423,795 | |||||||||||||||
| Three Months Ended September 27, 2020 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | 191,946 | $ | — | $ | — | $ | 191,946 | |||||||||||||||
| Franchise royalty revenue | 98,128 | 11,216 | — | 109,344 | |||||||||||||||||||
| Franchise fees (a) | 5,651 | 463 | 1,362 | 7,476 | |||||||||||||||||||
| Franchise rental income | — | — | 58,721 | 58,721 | |||||||||||||||||||
| Advertising funds revenue | 79,170 | 5,585 | — | 84,755 | |||||||||||||||||||
| Total revenues | $ | 374,895 | $ | 17,264 | $ | 60,083 | $ | 452,242 | |||||||||||||||
| Nine Months Ended September 27, 2020 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | 522,961 | $ | — | $ | — | $ | 522,961 | |||||||||||||||
| Franchise royalty revenue | 271,082 | 30,809 | — | 301,891 | |||||||||||||||||||
| Franchise fees (a) | 16,244 | 1,369 | 2,141 | 19,754 | |||||||||||||||||||
| Franchise rental income | — | — | 173,434 | 173,434 | |||||||||||||||||||
| Advertising funds revenue | 226,907 | 14,561 | — | 241,468 | |||||||||||||||||||
| Total revenues | $ | 1,037,194 | $ | 46,739 | $ | 175,575 | $ | 1,259,508 | |||||||||||||||
_______________
(a)Includes fees for providing information technology services to franchisees, which are recognized as revenue as earned.
Contract Balances
The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers:
| October 3, 2021 (a) | January 3, 2021 (a) | ||||||||||
| Receivables, which are included in “Accounts and notes receivable, net” (b) | $ | 46,747 | $ | 57,677 | |||||||
Receivables, which are included in “Advertising funds restricted assets” | 57,222 | 63,252 | |||||||||
| Deferred franchise fees (c) | 99,057 | 97,785 | |||||||||
_______________
(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 $8,971 and $90,086 as of October 3, 2021, respectively, and $8,691 and $89,094 as of January 3, 2021, respectively.
11
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Significant changes in deferred franchise fees are as follows:
| Nine Months Ended | |||||||||||
| October 3, 2021 | September 27, 2020 | ||||||||||
| Deferred franchise fees at beginning of period | $ | 97,785 | $ | 100,689 | |||||||
Revenue recognized during the period | (14,001) | (6,286) | |||||||||
| New deferrals due to cash received and other | 15,273 | 3,642 | |||||||||
| Deferred franchise fees at end of period | $ | 99,057 | $ | 98,045 | |||||||
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: | |||||
| 2021 (a) | $ | 4,428 | |||
| 2022 | 6,293 | ||||
| 2023 | 6,128 | ||||
| 2024 | 5,938 | ||||
| 2025 | 5,758 | ||||
| Thereafter | 70,512 | ||||
| $ | 99,057 | ||||
_______________
(a)Represents franchise fees expected to be recognized for the remainder of 2021, which includes development-related franchise fees expected to be recognized over a duration of one year or less.
(3) Acquisitions
No restaurants were acquired from franchisees during the nine months ended October 3, 2021 and September 27, 2020.
NPC Quality Burgers, Inc. (“NPC”)
As previously announced, NPC, formerly the Company’s largest franchisee, filed for chapter 11 bankruptcy in July 2020 and commenced a process to sell all or substantially all of its assets, including its interest in approximately 393 Wendy’s restaurants across eight different markets, pursuant to a court-approved auction process. On November 18, 2020, the Company submitted a consortium bid together with a group of pre-qualified franchisees to acquire NPC’s Wendy’s restaurants. Under the terms of the consortium bid, several existing and new franchisees would have been the ultimate purchasers of seven of the NPC markets, while the Company would have acquired one market. As part of the consortium bid, the Company submitted a deposit of $43,240, which was included in “Prepaid expenses and other current assets” as of January 3, 2021. The deposit included $38,361 received from the group of prequalified franchisees, which was payable to the franchisees and included in “Accrued expenses and other current liabilities” as of January 3, 2021 pending resolution of the bankruptcy sale process.
During the three months ended April 4, 2021, following a court-approved mediation process, NPC and certain affiliates of Flynn Restaurant Group (“FRG”) and the Company entered into separate asset purchase agreements under which all of NPC’s Wendy’s restaurants were sold to Wendy’s approved franchisees. Under the transaction, FRG acquired approximately half of NPC’s Wendy’s restaurants in four markets, while several existing Wendy’s franchisees that were part of the Company’s consortium bid acquired the other half of NPC’s Wendy’s restaurants in the other four markets. The Company did not acquire any restaurants as part of this transaction. In addition, the deposits outstanding as of January 3, 2021 were settled during the three months ended April 4, 2021 upon resolution of the bankruptcy sale process. The net settlement of deposits of $4,879 is included in “Acquisitions” in the condensed consolidated statements of cash flows.
12
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(4) System Optimization Gains, Net
The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”). As of January 1, 2017, the Company completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system. While the Company has no plans to reduce its ownership below the approximately 5% level, the Company expects to continue to optimize the Wendy’s system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base, drive new restaurant development and accelerate reimages. During the nine months ended October 3, 2021 and September 27, 2020, the Company facilitated 34 and 22 Franchise Flips, respectively. In addition, during the nine months ended October 3, 2021, the Company completed the sale of 47 Company-operated restaurants in New York (including Manhattan) to franchisees. No Company-operated restaurants were sold to franchisees during the nine months ended September 27, 2020.
Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 5. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.”
The following is a summary of the disposition activity recorded as a result of our system optimization initiative:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||
| Number of restaurants sold to franchisees | — | — | 47 | — | |||||||||||||||||||
| Proceeds from sales of restaurants (a) | $ | — | $ | — | $ | 50,518 | $ | — | |||||||||||||||
| Net assets sold (b) | — | — | (16,939) | — | |||||||||||||||||||
| Goodwill related to sales of restaurants | — | — | (4,847) | — | |||||||||||||||||||
| Net unfavorable leases (c) | — | — | (2,939) | — | |||||||||||||||||||
| Gain on sales-type leases | — | — | 7,156 | — | |||||||||||||||||||
| Other (d) | — | — | (2,148) | — | |||||||||||||||||||
| — | — | 30,801 | — | ||||||||||||||||||||
| Post-closing adjustments on sales of restaurants (e) | 5 | 23 | 520 | 368 | |||||||||||||||||||
| Gain on sales of restaurants, net | 5 | 23 | 31,321 | 368 | |||||||||||||||||||
| (Loss) gain on sales of other assets, net (f) | 1,432 | — | 1,398 | 1,965 | |||||||||||||||||||
| System optimization gains, net | $ | 1,437 | $ | 23 | $ | 32,719 | $ | 2,333 | |||||||||||||||
_______________
(a)In addition to the proceeds noted herein, the Company received cash proceeds of $26 during the three and nine months ended October 3, 2021 related to a note receivable issued in connection with the sale of the Manhattan Company-operated restaurants.
(b)Net assets sold consist primarily of equipment.
(c)During the nine months ended October 3, 2021, the Company recorded favorable lease assets of $3,799 and unfavorable lease liabilities of $6,738 as a result of leasing and/or subleasing land, buildings, and/or leasehold improvements to franchisees, in connection with the sale of the New York Company-operated restaurants (including Manhattan).
(d)The nine months ended October 3, 2021 include a deferred gain of $3,500 as a result of certain contingencies related to the extension of lease terms.
13
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(e)The nine months ended October 3, 2021 includes the recognition of deferred gains of $515 as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. The three and nine months ended September 27, 2020 represent the recognition of such deferred gains.
(f)During the three and nine months ended October 3, 2021, the Company received net cash proceeds of $2,100 and $2,113, respectively, primarily from the sale of surplus and other properties. During the nine months ended September 27, 2020, the Company received net cash proceeds of $3,570, primarily from the sale of surplus and other properties.
Assets Held for Sale
| October 3, 2021 | January 3, 2021 | ||||||||||
| Number of restaurants classified as held for sale | — | 43 | |||||||||
| Net restaurant assets held for sale (a) | $ | — | $ | 20,587 | |||||||
| Other assets held for sale (b) | $ | 3,749 | $ | 1,732 | |||||||
_______________
(a)Net restaurant assets held for sale as of January 3, 2021 included New York Company-operated restaurants (excluding Manhattan) and consisted primarily of cash, inventory, property and an estimate of allocable goodwill. During the three months ended April 4, 2021, the Company also classified its four Manhattan restaurants as held for sale.
(b)Other assets held for sale primarily consist of surplus properties.
Assets held for sale are included in “Prepaid expenses and other current assets.”
(5) Reorganization and Realignment Costs
The following is a summary of the initiatives included in “Reorganization and realignment costs:”
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||
| Operations and field realignment | $ | 74 | $ | 3,021 | $ | 1,563 | $ | 3,021 | |||||||||||||||
| IT realignment | (17) | 403 | (11) | 6,809 | |||||||||||||||||||
| G&A realignment | (7) | (49) | (41) | 282 | |||||||||||||||||||
| System optimization initiative | 295 | — | 5,870 | 84 | |||||||||||||||||||
| Reorganization and realignment costs | $ | 345 | $ | 3,375 | $ | 7,381 | $ | 10,196 | |||||||||||||||
Operations and Field Realignment
In September 2020, the Company initiated a plan to reallocate resources to better support the long-term growth strategies for Company and franchise operations (the “Operations and Field Realignment Plan”). The Operations and Field Realignment Plan realigned the Company’s restaurant operations team, including transitioning from separate leaders of Company and franchise operations to a single leader of all U.S. restaurant operations. The Operations and Field Realignment Plan also includes contract terminations, including the closure of certain field offices. The Company expects to incur total costs aggregating approximately $5,500 to $6,000 related to the Operations and Field Realignment Plan. During the nine months ended October 3, 2021, the Company recognized costs totaling $1,563, which primarily included third-party and other costs. During the three and nine months ended September 27, 2020, the Company recognized costs totaling $3,021, which included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating up to approximately $500, comprised primarily of third-party and other costs. The Company expects to recognize the majority of the remaining costs associated with the Operations and Field Realignment Plan during the remainder of 2021.
14
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 Operations and Field Realignment Plan:
| Three Months Ended | Nine Months Ended | Total Incurred Since Inception | |||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||||||||
| Severance and related employee costs | $ | — | $ | 2,502 | $ | 333 | $ | 2,502 | $ | 3,446 | |||||||||||||||||||
| Third-party and other costs | 74 | — | 1,230 | — | 1,297 | ||||||||||||||||||||||||
| 74 | 2,502 | 1,563 | 2,502 | 4,743 | |||||||||||||||||||||||||
| Share-based compensation (a) | — | 519 | — | 519 | 621 | ||||||||||||||||||||||||
| Total operations and field realignment | $ | 74 | $ | 3,021 | $ | 1,563 | $ | 3,021 | $ | 5,364 | |||||||||||||||||||
_______________
(a)Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the Operations and Field Realignment Plan.
The table below presents a rollforward of our accruals for the Operations and Field Realignment Plan, which are included in “Accrued expenses and other current liabilities” as of October 3, 2021.
| Balance January 3, 2021 | Charges | Payments | Balance October 3, 2021 | ||||||||||||||||||||
| Severance and related employee costs | $ | 2,600 | $ | 333 | $ | (2,377) | $ | 556 | |||||||||||||||
| Third-party and other costs | — | 1,230 | (1,230) | — | |||||||||||||||||||
| $ | 2,600 | $ | 1,563 | $ | (3,607) | $ | 556 | ||||||||||||||||
| Balance December 29, 2019 | Charges | Payments | Balance September 27, 2020 | ||||||||||||||||||||
| Severance and related employee costs | $ | — | $ | 2,502 | $ | — | $ | 2,502 | |||||||||||||||
Information Technology (“IT”) Realignment
In December 2019, our Board of Directors approved a plan to realign and reinvest resources in the Company’s IT organization to strengthen its ability to accelerate growth (the “IT Realignment Plan”). The Company has partnered with a third-party global IT consultant on this new structure to leverage their global capabilities, enabling a more seamless integration between its digital and corporate IT assets. The IT Realignment Plan has reduced certain employee compensation and other related costs that the Company has reinvested back into IT to drive additional capabilities and capacity across all of its technology platforms. Additionally, in June 2020, the Company made changes to its leadership structure that included the elimination of the Chief Digital Experience Officer position and the creation of a Chief Information Officer position, for which the Company completed the hiring process in October 2020. During the nine months ended September 27, 2020, the Company recognized costs totaling $6,809, which primarily included third-party and other costs and severance and related employee costs. The Company does not expect to incur any material additional costs under the IT Realignment Plan.
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 activity recorded as a result of the IT Realignment Plan:
| Three Months Ended | Nine Months Ended | Total Incurred Since Inception | |||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||||||||
Severance and related employee costs (a) | $ | (32) | $ | 34 | $ | (151) | $ | 1,009 | $ | 8,240 | |||||||||||||||||||
| Recruitment and relocation costs | 12 | 345 | 133 | 659 | 1,429 | ||||||||||||||||||||||||
| Third-party and other costs | 3 | 24 | 7 | 5,141 | 6,542 | ||||||||||||||||||||||||
| (17) | 403 | (11) | 6,809 | 16,211 | |||||||||||||||||||||||||
| Share-based compensation (b) | — | — | — | — | 193 | ||||||||||||||||||||||||
| Total IT realignment | $ | (17) | $ | 403 | $ | (11) | $ | 6,809 | $ | 16,404 | |||||||||||||||||||
_______________
(a)The three and nine months ended October 3, 2021 include a reversal of an accrual as a result of a change in estimate.
(b)Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under the IT Realignment Plan.
As of October 3, 2021, the accruals for the IT Realignment Plan are included in “Accrued expenses and other current liabilities.” As of September 27, 2020, the accruals for the IT Realignment Plan were included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $2,739 and $178, respectively. The tables below present a rollforward of our accruals for the IT Realignment Plan.
| Balance January 3, 2021 | Charges | Payments | Balance October 3, 2021 | ||||||||||||||||||||
| Severance and related employee costs | $ | 1,508 | $ | (151) | $ | (1,115) | $ | 242 | |||||||||||||||
| Recruitment and relocation costs | — | 133 | (133) | — | |||||||||||||||||||
| Third-party and other costs | — | 7 | (7) | — | |||||||||||||||||||
| $ | 1,508 | $ | (11) | $ | (1,255) | $ | 242 | ||||||||||||||||
| Balance December 29, 2019 | Charges | Payments | Balance September 27, 2020 | ||||||||||||||||||||
| Severance and related employee costs | $ | 7,548 | $ | 1,009 | $ | (5,640) | $ | 2,917 | |||||||||||||||
| Recruitment and relocation costs | — | 659 | (659) | — | |||||||||||||||||||
| Third-party and other costs | 1,076 | 5,141 | (6,217) | — | |||||||||||||||||||
| $ | 8,624 | $ | 6,809 | $ | (12,516) | $ | 2,917 | ||||||||||||||||
General and Administrative (“G&A”) Realignment
In May 2017, the Company initiated a plan to further reduce its G&A expenses (the “G&A Realignment Plan”). Additionally, in May 2019, the Company announced changes to its management and operating structure that included the creation of two new positions, a President, U.S. and Chief Commercial Officer and a President, International and Chief Development Officer, and the elimination of the Chief Operations Officer position. During the nine months ended September 27, 2020, the Company recognized costs totaling $282, which primarily included share-based compensation. The Company does not expect to incur any material additional costs under the G&A Realignment Plan.
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 | Nine Months Ended | Total Incurred Since Inception | |||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||||||||
Severance and related employee costs (a) | $ | (8) | $ | (116) | $ | (61) | $ | 30 | $ | 24,205 | |||||||||||||||||||
| Recruitment and relocation costs | 1 | 27 | 1 | 42 | 2,877 | ||||||||||||||||||||||||
| Third-party and other costs | — | 9 | — | 10 | 2,223 | ||||||||||||||||||||||||
| (7) | (80) | (60) | 82 | 29,305 | |||||||||||||||||||||||||
| Share-based compensation (b) | — | 31 | 19 | 200 | 8,130 | ||||||||||||||||||||||||
| Termination of defined benefit plans | — | — | — | — | 1,335 | ||||||||||||||||||||||||
| Total G&A realignment | $ | (7) | $ | (49) | $ | (41) | $ | 282 | $ | 38,770 | |||||||||||||||||||
_______________
(a)The three and nine months ended October 3, 2021 and September 27, 2020 include a reversal of an accrual as a result of a change in estimate.
(b)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.
As of October 3, 2021, the accruals for the G&A realignment plan are included in “Accrued expenses and other current liabilities.” As of September 27, 2020, the accruals for the G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled and $1,705 and $18, respectively. The tables below present a rollforward of our accruals for the G&A Realignment Plan.
| Balance January 3, 2021 | Charges | Payments | Balance October 3, 2021 | ||||||||||||||||||||
| Severance and related employee costs | $ | 932 | $ | (61) | $ | (828) | $ | 43 | |||||||||||||||
| Recruitment and relocation costs | — | 1 | (1) | — | |||||||||||||||||||
| Third-party and other costs | — | — | — | — | |||||||||||||||||||
| $ | 932 | $ | (60) | $ | (829) | $ | 43 | ||||||||||||||||
| Balance December 29, 2019 | Charges | Payments | Balance September 27, 2020 | ||||||||||||||||||||
| Severance and related employee costs | $ | 5,276 | $ | 30 | $ | (3,627) | $ | 1,679 | |||||||||||||||
| Recruitment and relocation costs | 83 | 42 | (81) | 44 | |||||||||||||||||||
| Third-party and other costs | — | 10 | (10) | — | |||||||||||||||||||
| $ | 5,359 | $ | 82 | $ | (3,718) | $ | 1,723 | ||||||||||||||||
System Optimization Initiative
The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. During the nine months ended October 3, 2021, the Company recognized costs totaling $5,870, which were primarily comprised of the write-off of certain lease assets and lease termination fees associated with the NPC bankruptcy sale process. See Note 3 for further information. The Company expects to recognize a gain of approximately $1,000 related to the write-off of certain NPC-related lease liabilities upon final termination of the leases.
17
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 costs recorded as a result of our system optimization initiative:
| Three Months Ended | Nine Months Ended | Total Incurred Since Inception | |||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||||||||
| Severance and related employee costs | $ | — | $ | — | $ | 661 | $ | — | $ | 18,898 | |||||||||||||||||||
| Professional fees | 277 | — | 1,016 | 80 | 23,123 | ||||||||||||||||||||||||
| Other (a) | — | — | 1,354 | 4 | 7,207 | ||||||||||||||||||||||||
| 277 | — | 3,031 | 84 | 49,228 | |||||||||||||||||||||||||
| Accelerated depreciation and amortization (b) | — | — | — | — | 25,398 | ||||||||||||||||||||||||
| NPC lease termination costs (c) | 18 | — | 2,839 | — | 2,839 | ||||||||||||||||||||||||
| Share-based compensation (d) | — | — | — | — | 5,013 | ||||||||||||||||||||||||
| Total system optimization initiative | $ | 295 | $ | — | $ | 5,870 | $ | 84 | $ | 82,478 | |||||||||||||||||||
_______________
(a)The nine months ended October 3, 2021 includes transaction fees of $1,350 associated with the NPC bankruptcy sale process.
(b)Primarily includes accelerated amortization of previously acquired franchise rights related to the Company-operated restaurants in territories that have been sold to franchisees in connection with our system optimization initiative.
(c)The nine months ended October 3, 2021 includes the write-off of lease assets of $1,359 and lease termination fees paid of $1,480.
(d)Represents incremental share-based compensation resulting from the modification of stock options and performance-based awards in connection with the termination of employees under our system optimization initiative.
The table below presents a rollforward of our accruals for our system optimization initiative, which were included in “Accrued expenses and other current liabilities” as of January 3, 2021.
| Balance January 3, 2021 | Charges | Payments | Balance October 3, 2021 | ||||||||||||||||||||
| Severance and related employee costs | $ | — | $ | 661 | $ | (661) | $ | — | |||||||||||||||
| Professional fees | 1,230 | 1,016 | (2,246) | — | |||||||||||||||||||
| Other | — | 1,354 | (1,354) | — | |||||||||||||||||||
| $ | 1,230 | $ | 3,031 | $ | (4,261) | $ | — | ||||||||||||||||
(6) Investments
Equity Method 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.”
18
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements:
| Nine Months Ended | |||||||||||
| October 3, 2021 | September 27, 2020 | ||||||||||
| Balance at beginning of period | $ | 44,574 | $ | 45,310 | |||||||
| Equity in earnings for the period | 8,005 | 6,113 | |||||||||
| Amortization of purchase price adjustments (a) | (2,392) | (1,671) | |||||||||
| 5,613 | 4,442 | ||||||||||
| Distributions received | (9,174) | (5,629) | |||||||||
Foreign currency translation adjustment included in “Other comprehensive (loss) income” and other | 343 | (701) | |||||||||
| Balance at end of period | $ | 41,356 | $ | 43,422 | |||||||
_______________
(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.
(7) Long-Term Debt
Long-term debt consisted of the following:
| October 3, 2021 | January 3, 2021 | ||||||||||
| Series 2021-1 Class A-2 Notes: | |||||||||||
2.370% Series 2021-1 Class A-2-I Notes, anticipated repayment date 2029 | $ | 448,875 | $ | — | |||||||
2.775% Series 2021-1 Class A-2-II Notes, anticipated repayment date 2031 | 648,375 | — | |||||||||
| Series 2019-1 Class A-2 Notes: | |||||||||||
3.783% Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 | 373,000 | 386,000 | |||||||||
4.080% Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 | 419,625 | 434,250 | |||||||||
| Series 2018-1 Class A-2 Notes: | |||||||||||
3.573% Series 2018-1 Class A-2-I Notes, repaid in connection with the June 2021 refinancing | — | 436,500 | |||||||||
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 | 457,188 | 460,750 | |||||||||
| Series 2015-1 Class A-2 Notes: | |||||||||||
4.497% Series 2015-1 Class A-2-III Notes, repaid in connection with the June 2021 refinancing | — | 473,750 | |||||||||
| Canadian revolving credit facility | — | 1,962 | |||||||||
7% debentures, due in 2025 | 84,880 | 83,998 | |||||||||
| Unamortized debt issuance costs | (38,430) | (30,085) | |||||||||
| 2,393,513 | 2,247,125 | ||||||||||
| Less amounts payable within one year | (32,750) | (28,962) | |||||||||
| Total long-term debt | $ | 2,360,763 | $ | 2,218,163 | |||||||
Senior Notes
Wendy’s Funding, LLC, a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, is the master issuer (the “Master Issuer”) of outstanding senior secured notes under a securitized financing facility that was entered into in June 2015. In June 2021, the Master Issuer completed a refinancing transaction with respect to this facility under which the Master Issuer issued fixed rate senior secured notes in the following 2021-1 series: Class A-2-I with an
19
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
initial principal amount of $450,000 and Class A-2-II with an initial principal amount of $650,000 (collectively, the “Series 2021-1 Class A-2 Notes”). Interest and principal payments on the Series 2021-1 Class A-2 Notes are payable on a quarterly basis. The legal final maturity date of the Series 2021-1 Class A-2 Notes is in June 2051. If the Master Issuer has not repaid or refinanced the Series 2021-1 Class A-2 Notes prior to their respective anticipated repayment dates, additional interest will accrue pursuant to the indenture governing the Series 2021-1 Class A-2 Notes. The net proceeds from the sale of the Series 2021-1 Class A-2 Notes were used to repay in full the Master Issuer’s outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes, including the payment of prepayment and transaction costs. The remaining funds will be used for general corporate purposes, which may include funding for growth initiatives, return of capital to shareholders, or additional debt retirement. As a result of the refinancing, the Company recorded a loss on early extinguishment of debt of $17,917 during the nine months ended October 3, 2021, which was comprised of a specified make-whole payment of $9,632 and the write-off of certain unamortized deferred financing costs of $8,285. The Series 2021-1 Class A-2 Notes have scheduled principal payments of $5,500 in 2021 (of which $2,750 was paid during the three months ended October 3, 2021), $11,000 annually from 2022 through 2028, $422,750 in 2029, $6,500 in 2030 and $588,250 in 2031.
In connection with the issuance of the Series 2021-1 Class A-2 Notes, the Master Issuer also entered into a revolving financing facility of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2021-1 Class A-1 Notes” and, together with the Series 2021-1 Class A-2 Notes, the “Series 2021-1 Senior Notes”), which allows for the drawing of up to $300,000 on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2021-1 Class A-1 Notes during the nine months ended October 3, 2021. The Series 2021-1 Class A-1 Notes replaced the Company’s $150,000 Series 2019-1 Class A-1 Notes and $100,000 Series 2020-1 Class A-1 Notes, which were canceled on the closing date, and the letters of credit outstanding against the Series 2019-1 Class A-1 Notes were transferred to the Series 2021-1 Class A-1 Notes.
The Series 2021-1 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, except for certain real estate assets and subject to certain limitations. The Series 2021-1 Senior Notes are subject to substantially the same series of covenants and restrictions as the Company’s outstanding Series 2019-1 Class A-2 Notes and Series 2018-1 Class A-2 Notes.
During the nine months ended October 3, 2021, the Company incurred debt issuance costs of $20,873 in connection with the issuance of the Series 2021-1 Senior Notes. The debt issuance costs will be amortized to “Interest expense, net” through the anticipated repayment dates of the Series 2021-1 Senior Notes utilizing the effective interest rate method.
Other Long-Term Debt
A Canadian subsidiary of Wendy’s has a revolving credit facility of C$6,000, which bears interest at the Bank of Montreal Prime Rate. Borrowings under the facility are guaranteed by Wendy’s. In March 2020, the Company drew down C$5,500 under the revolving credit facility, which the Company fully repaid through repayments of C$3,000 in the fourth quarter of 2020 and C$2,500 in the first quarter of 2021. As a result, as of October 3, 2021, the Company had no outstanding borrowings under the Canadian revolving credit facility.
20
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(8) 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:
| October 3, 2021 | January 3, 2021 | ||||||||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | Fair Value Measurements | |||||||||||||||||||||||||
| Financial assets | |||||||||||||||||||||||||||||
| Cash equivalents | $ | 125,042 | $ | 125,042 | $ | 75,067 | $ | 75,067 | Level 1 | ||||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||||||||
| Series 2021-1 Class A-2-I Notes (a) | 448,875 | 454,441 | — | — | Level 2 | ||||||||||||||||||||||||
| Series 2021-1 Class A-2-II Notes (a) | 648,375 | 663,806 | — | — | Level 2 | ||||||||||||||||||||||||
| Series 2019-1 Class A-2-I Notes (a) | 373,000 | 395,641 | 386,000 | 409,778 | Level 2 | ||||||||||||||||||||||||
| Series 2019-1 Class A-2-II Notes (a) | 419,625 | 454,874 | 434,250 | 469,555 | Level 2 | ||||||||||||||||||||||||
| Series 2018-1 Class A-2-I Notes (a) | — | — | 436,500 | 450,381 | Level 2 | ||||||||||||||||||||||||
| Series 2018-1 Class A-2-II Notes (a) | 457,188 | 486,037 | 460,750 | 491,021 | Level 2 | ||||||||||||||||||||||||
| Series 2015-1 Class A-2-III Notes (a) | — | — | 473,750 | 481,851 | Level 2 | ||||||||||||||||||||||||
| Canadian revolving credit facility | — | — | 1,962 | 1,962 | Level 2 | ||||||||||||||||||||||||
7% debentures, due in 2025 (a) | 84,880 | 100,800 | 83,998 | 98,775 | Level 2 | ||||||||||||||||||||||||
_______________
(a)The fair values were based on quoted market prices in markets that are not considered active markets.
The carrying amounts of cash, accounts payable and accrued expenses approximate 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) approximate fair value due to the effect of the related allowance for doubtful accounts. Our cash equivalents are the only financial assets measured and recorded at fair value on a recurring basis.
21
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
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 right-of-use 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 represent 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. The fair values of long-lived assets held for sale presented in the tables below represent the remaining carrying value and were estimated based on current market values. See Note 9 for further information on impairment of our long-lived assets.
| Fair Value Measurements | |||||||||||||||||||||||
| October 3, 2021 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Held and used | $ | 1,256 | $ | — | $ | — | $ | 1,256 | |||||||||||||||
| Held for sale | 340 | — | — | 340 | |||||||||||||||||||
| Total | $ | 1,596 | $ | — | $ | — | $ | 1,596 | |||||||||||||||
| Fair Value Measurements | |||||||||||||||||||||||
| January 3, 2021 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Held and used | $ | 2,653 | $ | — | $ | — | $ | 2,653 | |||||||||||||||
| Held for sale | 855 | — | — | 855 | |||||||||||||||||||
| Total | $ | 3,508 | $ | — | $ | — | $ | 3,508 | |||||||||||||||
(9) Impairment of Long-Lived Assets
The Company records impairment charges as a result of (1) the deterioration in operating performance of certain Company-operated restaurants, (2) 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, and (3) closing Company-operated restaurants and classifying such surplus properties as held for sale. Impairment charges during the nine months ended September 27, 2020 were primarily due to the expected deterioration in operating performance of certain Company-operated restaurants as a result of the COVID-19 pandemic.
The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets:”
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||
| Company-operated restaurants | $ | 566 | $ | — | $ | 1,500 | $ | 4,395 | |||||||||||||||
| Restaurants leased or subleased to franchisees | — | — | 189 | — | |||||||||||||||||||
| Surplus properties | — | 23 | 142 | 332 | |||||||||||||||||||
| $ | 566 | $ | 23 | $ | 1,831 | $ | 4,727 | ||||||||||||||||
22
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(10) Income Taxes
The Company’s effective tax rate for the three months ended October 3, 2021 and September 27, 2020 was 24.3% and 24.2%, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21% for the three months ended October 3, 2021 primarily due to state income taxes, partially offset by a benefit related to the filing of our 2020 federal income tax return.
The Company’s effective tax rate for the nine months ended October 3, 2021 and September 27, 2020 was 21.8% and 24.8%, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21% for the nine months ended October 3, 2021 primarily due to state income taxes, including discrete changes to state deferred taxes, partially offset by the tax benefit from share-based compensation.
Unrecognized tax benefits for the Company decreased $1,874 and $2,019 during the three and nine months ended October 3, 2021, respectively. The decrease was primarily related to settlements with various taxing jurisdictions. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $66 due primarily to the lapse of statutes of limitations and expected settlements.
The current portion of refundable income taxes was $1,813 and $5,399 as of October 3, 2021 and January 3, 2021, respectively, and is included in “Accounts and notes receivable, net.” There were no long-term refundable income taxes as of October 3, 2021 and January 3, 2021.
(11) Net Income Per Share
The calculation of basic and diluted net income per share was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||
| Net income | $ | 41,171 | $ | 39,753 | $ | 148,261 | $ | 79,098 | |||||||||||||||
| Common stock: | |||||||||||||||||||||||
| Weighted average basic shares outstanding | 222,373 | 223,907 | 222,527 | 223,521 | |||||||||||||||||||
Dilutive effect of stock options and restricted shares | 2,685 | 4,410 | 3,201 | 4,312 | |||||||||||||||||||
| Weighted average diluted shares outstanding | 225,058 | 228,317 | 225,728 | 227,833 | |||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | .19 | $ | .18 | $ | .67 | $ | .35 | |||||||||||||||
| Diluted | $ | .18 | $ | .17 | $ | .66 | $ | .35 | |||||||||||||||
Basic net income per share for the three and nine months ended October 3, 2021 and September 27, 2020 was computed by dividing net income amounts by the weighted average number of shares of common stock outstanding. Diluted net income per share for the three and nine months ended October 3, 2021 and September 27, 2020 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 2,746 and 2,147 for the three and nine months ended October 3, 2021, respectively, and 1,049 and 2,117 for the three and nine months ended September 27, 2020, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.
23
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(12) Stockholders’ Equity
Dividends
During the first, second and third quarter of 2021, the Company paid dividends per share of $.09, $.10 and $.12, respectively. During the first, second and third quarter of 2020, the Company paid dividends per share of $.12, $.05 and $.05, respectively.
Repurchases of Common Stock
In February 2020, our Board of Directors authorized a repurchase program for up to $100,000 of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible (the “February 2020 authorization”). As previously announced, beginning in March 2020, the Company temporarily suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. The Company resumed share repurchases in August 2020. In addition, in May 2021 and August 2021, the Board of Directors approved increases of $50,000 and $70,000, respectively, to the February 2020 authorization, resulting in an aggregate authorization of $220,000 that continues to expire on February 28, 2022. During the nine months ended October 3, 2021, the Company repurchased 5,876 shares under the February 2020 authorization with an aggregate purchase price of $127,150, of which $2,299 was accrued at October 3, 2021, and excluding commissions of $82. As of October 3, 2021, the Company had $60,566 of availability remaining under the February 2020 authorization. Subsequent to October 3, 2021 through November 3, 2021, the Company repurchased 697 shares under the February 2020 authorization with an aggregate purchase price of $15,494, excluding commissions of $10. In addition, in November 2021, the Board of Directors approved an increase of $80,000 to the February 2020 authorization, resulting in an aggregate authorization of $300,000 that continues to expire on February 28, 2022. The Company also announced in November 2021 its intention to launch a $125,000 accelerated share repurchase transaction during the fourth quarter of 2021 as part of the February 2020 authorization. The Company has availability of $125,072 remaining under the February 2020 authorization as of November 10, 2021.
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 warranted and to the extent legally permissible (the February 2019 authorization”). In November 2019, the Company entered into an accelerated share repurchase agreement (the “2019 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the February 2019 authorization. Under the 2019 ASR Agreement, the Company paid the financial institution an initial purchase price of $100,000 in cash and received an initial delivery of 4,051 shares of common stock, representing an estimated 85% of the total shares expected to be delivered under the 2019 ASR Agreement. In February 2020, the Company completed the 2019 ASR Agreement and received an additional 628 shares of common stock at an average purchase price of $23.89. The total number of shares of common stock ultimately purchased by the Company under the 2019 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of the 2019 ASR Agreement, less an agreed upon discount. In total, 4,679 shares were delivered under the 2019 ASR Agreement at an average purchase price of $21.37 per share.
In addition to the shares repurchased in connection with the 2019 ASR Agreement, during the nine months ended September 27, 2020, the Company repurchased 2,172 shares with an aggregate purchase price of $45,014, excluding commissions of $30, under the February 2020 authorization and the February 2019 authorization. After taking into consideration these repurchases, with the completion of the 2019 ASR Agreement in February 2020, the Company completed the February 2019 authorization.
24
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 accumulated other comprehensive loss:
| Nine Months Ended | |||||||||||
| October 3, 2021 | September 27, 2020 | ||||||||||
| Balance at beginning of period | $ | (49,641) | $ | (53,828) | |||||||
Foreign currency translation | 908 | (5,138) | |||||||||
| Balance at end of period | $ | (48,733) | $ | (58,966) | |||||||
(13) 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 October 3, 2021, Wendy’s and its franchisees operated 6,891 Wendy’s restaurants. Of the 313 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 136 restaurants, owned the building and held long-term land leases for 117 restaurants and held leases covering the land and building for 60 restaurants. Wendy’s also owned 510 and leased 1,275 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment.
Company as Lessee
The components of lease cost are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of finance lease assets | $ | 3,543 | $ | 3,471 | $ | 10,302 | $ | 9,995 | |||||||||||||||
| Interest on finance lease liabilities | 10,371 | 10,244 | 30,931 | 30,462 | |||||||||||||||||||
| 13,914 | 13,715 | 41,233 | 40,457 | ||||||||||||||||||||
| Operating lease cost | 22,388 | 23,170 | 68,761 | 68,304 | |||||||||||||||||||
| Variable lease cost (a) | 16,635 | 15,548 | 48,406 | 43,766 | |||||||||||||||||||
| Short-term lease cost | 1,125 | 1,006 | 3,721 | 3,327 | |||||||||||||||||||
| Total operating lease cost (b) | 40,148 | 39,724 | 120,888 | 115,397 | |||||||||||||||||||
| Total lease cost | $ | 54,062 | $ | 53,439 | $ | 162,121 | $ | 155,854 | |||||||||||||||
_______________
(a)Includes expenses for executory costs of $10,016 and $9,326 for the three months ended October 3, 2021 and September 27, 2020, respectively, and $30,166 and $28,526 for the nine months ended October 3, 2021 and September 27, 2020, respectively, for which the Company is reimbursed by sublessees.
(b)Includes $34,396 and $32,421 for the three months ended October 3, 2021 and September 27, 2020, respectively, and $101,011 and $92,975 for the nine months ended October 3, 2021 and September 27, 2020, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $5,213 and $6,651 for the three months ended October 3, 2021 and September 27, 2020, respectively, and $18,005 and $20,315 for the nine months ended October 3, 2021 and September 27, 2020, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants.
25
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
The following table includes supplemental cash flow and non-cash information related to leases:
| Nine Months Ended | |||||||||||
| October 3, 2021 | September 27, 2020 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from finance leases | $ | 31,608 | $ | 28,689 | |||||||
| Operating cash flows from operating leases | 69,476 | 62,026 | |||||||||
| Financing cash flows from finance leases | 9,021 | 5,850 | |||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Finance lease liabilities | 43,277 | 24,617 | |||||||||
| Operating lease liabilities | 11,404 | 12,149 | |||||||||
The following table includes supplemental information related to leases:
| October 3, 2021 | January 3, 2021 | ||||||||||
| Weighted-average remaining lease term (years): | |||||||||||
| Finance leases | 15.8 | 16.2 | |||||||||
| Operating leases | 14.2 | 14.6 | |||||||||
| Weighted average discount rate: | |||||||||||
| Finance leases | 9.19 | % | 9.54 | % | |||||||
| Operating leases | 5.01 | % | 5.06 | % | |||||||
| Supplemental balance sheet information: | |||||||||||
| Finance lease assets, gross | $ | 271,075 | $ | 261,308 | |||||||
| Accumulated amortization | (60,415) | (55,155) | |||||||||
| Finance lease assets | 210,660 | 206,153 | |||||||||
| Operating lease assets | 783,986 | 821,480 | |||||||||
The following table illustrates the Company’s future minimum rental payments for non-cancelable leases as of October 3, 2021:
| Finance Leases | Operating Leases | ||||||||||||||||||||||
| Fiscal Year | Company-Operated | Franchise and Other | Company-Operated | Franchise and Other | |||||||||||||||||||
| 2021 (a) (b) | $ | 1,398 | $ | 13,934 | $ | 3,504 | $ | 18,313 | |||||||||||||||
| 2022 | 3,699 | 51,912 | 14,412 | 73,572 | |||||||||||||||||||
| 2023 | 3,644 | 53,569 | 14,726 | 73,226 | |||||||||||||||||||
| 2024 | 3,712 | 54,001 | 14,738 | 73,145 | |||||||||||||||||||
| 2025 | 3,787 | 54,496 | 14,633 | 72,829 | |||||||||||||||||||
| Thereafter | 46,140 | 682,798 | 141,258 | 732,276 | |||||||||||||||||||
| Total minimum payments | $ | 62,380 | $ | 910,710 | $ | 203,271 | $ | 1,043,361 | |||||||||||||||
Less interest | (22,694) | (405,706) | (58,455) | (312,148) | |||||||||||||||||||
| Present value of minimum lease payments (c) (d) | $ | 39,686 | $ | 505,004 | $ | 144,816 | $ | 731,213 | |||||||||||||||
_______________
26
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(a)Represents future minimum rental payments for non-cancelable leases for the remainder of 2021.
(b)In addition to the 2021 future minimum rental payments, the Company expects to pay $1,038 primarily during 2021 related to rent deferrals obtained due to the COVID-19 pandemic. The related payable is included in “Accrued expenses and other current liabilities.”
(c)The present value of minimum finance lease payments of $15,915 and $528,775 are included in “Current portion of finance lease liabilities” and “Long-term finance lease liabilities,” respectively.
(d)The present value of minimum operating lease payments of $45,541 and $830,488 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively.
Company as Lessor
The components of lease income are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||
| Sales-type and direct-financing leases: | |||||||||||||||||||||||
| Selling profit | $ | 705 | $ | 182 | $ | 4,244 | $ | 1,379 | |||||||||||||||
| Interest income (a) | 7,786 | 7,296 | 22,861 | 21,804 | |||||||||||||||||||
| Operating lease income | 45,834 | 43,510 | 134,312 | 130,514 | |||||||||||||||||||
| Variable lease income | 16,612 | 15,211 | 47,878 | 42,920 | |||||||||||||||||||
| Franchise rental income (b) | $ | 62,446 | $ | 58,721 | $ | 182,190 | $ | 173,434 | |||||||||||||||
_______________
(a)Included in “Interest expense, net.”
(b)Includes sublease income of $46,102 and $43,122 for the three months ended October 3, 2021 and September 27, 2020, respectively, and $134,597 and $126,653 for the nine months ended October 3, 2021 and September 27, 2020, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $10,087 and $9,379 for the three months ended October 3, 2021 and September 27, 2020, respectively, and $30,156 and $28,538 for the nine months ended October 3, 2021 and September 27, 2020, 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 receipts for non-cancelable leases and subleases as of October 3, 2021:
| Sales-Type and Direct Financing Leases | Operating Leases | ||||||||||||||||||||||
| Fiscal Year | Subleases | Owned Properties | Subleases | Owned Properties | |||||||||||||||||||
| 2021 (a) (b) | $ | 8,409 | $ | 1,407 | $ | 28,841 | $ | 13,942 | |||||||||||||||
| 2022 | 34,188 | 2,610 | 116,068 | 56,305 | |||||||||||||||||||
| 2023 | 35,247 | 2,656 | 116,795 | 56,614 | |||||||||||||||||||
| 2024 | 37,248 | 2,667 | 116,962 | 57,720 | |||||||||||||||||||
| 2025 | 36,149 | 2,784 | 116,443 | 58,323 | |||||||||||||||||||
| Thereafter | 479,695 | 32,057 | 1,172,444 | 748,781 | |||||||||||||||||||
| Total future minimum receipts | 630,936 | 44,181 | $ | 1,667,553 | $ | 991,685 | |||||||||||||||||
| Unearned interest income | (341,031) | (21,892) | |||||||||||||||||||||
| Net investment in sales-type and direct financing leases (c) | $ | 289,905 | $ | 22,289 | |||||||||||||||||||
(a)Represents future minimum rental receipts for non-cancelable leases for the remainder of 2021.
(b)In addition to the 2021 future minimum rental receipts, the Company expects to collect $273 primarily during 2021 related to its offer to franchisees to defer base rent payments in response to the COVID-19 pandemic. The related receivable is included in “Accounts and notes receivable, net.”
(c)The present value of minimum sales-type and direct financing rental receipts of $6,952 and $305,242 are included in “Accounts and notes receivable, net” and “Net investment in sales-type and direct financing leases,” respectively. The present value of minimum sales-type and direct financing rental receipts includes a net investment in unguaranteed residual assets of $535.
Properties owned by the Company and leased to franchisees and other third parties under operating leases include:
| October 3, 2021 | January 3, 2021 | ||||||||||
| Land | $ | 280,767 | $ | 279,956 | |||||||
| Buildings and improvements | 307,593 | 309,605 | |||||||||
| Restaurant equipment | 1,701 | 1,701 | |||||||||
| 590,061 | 591,262 | ||||||||||
| Accumulated depreciation and amortization | (179,439) | (170,722) | |||||||||
| $ | 410,622 | $ | 420,540 | ||||||||
(14) 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, which are then subleased to franchisees for the operation of Wendy’s/Tim Hortons combo units in Canada. During the nine months ended October 3, 2021 and September 27, 2020, Wendy’s paid TimWen $13,994 and $11,970, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $165 and $152 during the nine months ended October 3, 2021 and September 27, 2020, respectively, which has been included as a reduction to “General and administrative.”
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THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Transactions with Yellow Cab
Certain family members and affiliates of Mr. Nelson Peltz, our Chairman, and Mr. Peter May, our Vice Chairman, as well as Mr. Matthew Peltz, a director of the Company, hold indirect, minority ownership interests in operating companies managed by Yellow Cab Holdings, LLC (“Yellow Cab”), a Wendy’s franchisee, that as of October 3, 2021 owned and operated 78 Wendy’s restaurants (including Wendy’s restaurants acquired from NPC during the first quarter of 2021 as described below). During the nine months ended October 3, 2021, the Company recognized $7,016 in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of October 3, 2021, $866 was due from Yellow Cab for such income, which is included in “Accounts and notes receivable, net” and “Advertising funds restricted assets.”
In November 2020, the Company submitted a consortium bid together with a group of pre-qualified franchisees (of which Yellow Cab was a member) to acquire the Wendy’s restaurants owned by NPC, the Company’s largest franchisee, which filed for chapter 11 bankruptcy in July 2020. As part of the consortium bid, in November 2020, the Company received deposits from each of the pre-qualified franchisees (including Yellow Cab), which amounts were transferred to a third-party escrow account pending resolution of the bankruptcy sale process. On January 7, 2021, following a court-approved mediation process, Yellow Cab was selected as the purchaser for 54 of NPC’s Wendy’s restaurants. In March 2021, Yellow Cab closed on its acquisition of these restaurants and its deposit was applied against the purchase price for the restaurants. See Note 3 for further information.
(15) 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 $89,574 as of October 3, 2021. These leases extend through 2045. We have had no judgments against us as guarantor of these leases as of October 3, 2021. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations. The liability recorded for our probable exposure associated with these lease guarantees was not material as of October 3, 2021.
Letters of Credit
As of October 3, 2021, the Company had outstanding letters of credit with various parties totaling $23,569. Substantially all of the outstanding letters of credit include amounts outstanding against the 2021-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit.
(16) Legal and Environmental Matters
The Company is involved in litigation and claims incidental to our business. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. We believe we have adequate accruals for all of our legal and environmental matters. We cannot estimate the aggregate possible range of loss for our existing litigation and claims for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows of a particular reporting period.
We previously described certain legal proceedings in the Form 10-K. Except as set forth below, there were no material developments in those legal proceedings as of October 3, 2021.
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THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
In a Form 8-K filed with the Securities and Exchange Commission on June 28, 2021 (the “Form 8-K”), the Company provided an update on the proposed settlement of the previously-disclosed shareholder derivative action arising out of the criminal cyberattacks that targeted the point of sale systems of certain Wendy’s franchisees in 2015 and 2016 (the “Derivative Lawsuit”).
As described in the Form 8-K, on February 14, 2019, the Company entered into a Stipulation and Agreement of Settlement (the “Settlement”) to resolve the Derivative Lawsuit. On January 24, 2020, the United States District Court for the Southern District of Ohio (the “Court”) issued an order granting preliminary approval of the Settlement, which consists of certain corporate governance undertakings and the payment of plaintiffs’ attorneys’ fees and expenses up to $950 (covered by applicable insurance). On September 15, 2021, the Court issued an order granting final approval of the Settlement, with the final judgment entered on September 24, 2021. On October 20, 2021, Thomas Caracci, one of the plaintiffs in the matter, filed a Notice of Appeal.
(17) Segment Information
Revenues by segment were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||
| Wendy’s U.S. | $ | 383,804 | $ | 374,895 | $ | 1,175,601 | $ | 1,037,194 | |||||||||||||||
| Wendy’s International | 22,674 | 17,264 | 62,240 | 46,739 | |||||||||||||||||||
| Global Real Estate & Development | 63,777 | 60,083 | 185,954 | 175,575 | |||||||||||||||||||
| Total revenues | $ | 470,255 | $ | 452,242 | $ | 1,423,795 | $ | 1,259,508 | |||||||||||||||
The following table reconciles profit by segment to the Company’s consolidated income before income taxes:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||
| Wendy’s U.S. (a) | $ | 108,878 | $ | 108,297 | $ | 347,615 | $ | 283,261 | |||||||||||||||
| Wendy’s International | 6,949 | 6,567 | 21,161 | 15,256 | |||||||||||||||||||
| Global Real Estate & Development | 27,027 | 25,340 | 79,849 | 75,541 | |||||||||||||||||||
| Total segment profit | $ | 142,854 | $ | 140,204 | $ | 448,625 | $ | 374,058 | |||||||||||||||
| Unallocated franchise support and other costs | (70) | — | (70) | — | |||||||||||||||||||
| Advertising funds deficit | (1,574) | (1,140) | (4,440) | (3,547) | |||||||||||||||||||
| Unallocated general and administrative (b) | (30,744) | (21,424) | (84,715) | (68,594) | |||||||||||||||||||
| Depreciation and amortization | (30,940) | (32,966) | (93,243) | (98,726) | |||||||||||||||||||
| System optimization gains, net | 1,437 | 23 | 32,719 | 2,333 | |||||||||||||||||||
| Reorganization and realignment costs | (345) | (3,375) | (7,381) | (10,196) | |||||||||||||||||||
| Impairment of long-lived assets | (566) | (23) | (1,831) | (4,727) | |||||||||||||||||||
| Unallocated other operating income, net | 143 | 49 | 399 | 140 | |||||||||||||||||||
| Interest expense, net | (26,000) | (29,086) | (82,990) | (86,696) | |||||||||||||||||||
| Loss on early extinguishment of debt | — | — | (17,917) | — | |||||||||||||||||||
| Other income, net | 171 | 181 | 461 | 1,113 | |||||||||||||||||||
| Income before income taxes | $ | 54,366 | $ | 52,443 | $ | 189,617 | $ | 105,158 | |||||||||||||||
_______________
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THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(a)Includes advertising funds expense of $8,979 and $16,503 for the three and nine months ended October 3, 2021, respectively, and $6,153 and $8,338 for the three and nine months ended September 27, 2020, respectively, related to the Company funding of incremental advertising.
(b)Includes corporate overhead costs, such as employee compensation and related benefits.
(18) New Accounting Standards
In July 2021, the Financial Accounting Standards Board issued an amendment that addresses an issue related to a lessor’s accounting for certain leases with variable lease payments that could result in the recognition of a selling loss at lease commencement even if the lessor expects the arrangement to be profitable overall. The amendment specifies lessors should classify and account for such a lease with variable lease payments as an operating lease, dependent upon meeting certain criteria, for which a selling profit or loss is not recognized. The Company early adopted this amendment during the three months ended October 3, 2021 by applying the guidance prospectively to leases that commence or are modified on or after the date of adoption. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
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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 January 3, 2021 (the “Form 10-K”). There have been no material changes as of October 3, 2021 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 the risks discussed in “Item 1A. Risk Factors” in “Part II. Other Information” of this report and 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 is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the second largest quick-service restaurant company in the hamburger sandwich segment in the United States (the “U.S.”) based on traffic share, and the third largest globally with 6,891 restaurants in the U.S. and 31 foreign countries and U.S. territories as of October 3, 2021.
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, Wendy’s restaurants sell a variety of promotional products on a limited time basis. In March 2020, Wendy’s entered the breakfast daypart across the U.S. system. Wendy’s breakfast menu features a variety of breakfast sandwiches, biscuits and croissants, sides such as seasoned potatoes, oatmeal bars and seasonal fruit, and a beverage platform that includes hot coffee, cold brew iced coffee and our vanilla and chocolate Frosty-ccino iced coffee.
The Company is comprised of the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Wendy’s U.S. includes the operation and franchising of Wendy’s restaurants in the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Wendy’s International includes the operation and franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of the income of our TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”) and providing other development-related services to franchisees. In this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company reports on the segment profit for each of the three segments described above. The Company measures segment profit based on segment adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Segment adjusted EBITDA excludes certain unallocated general and administrative expenses and other items that vary from period to period without correlation to the Company’s core operating performance. See “Results of Operations” below and Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for segment financial information.
The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31. All three- and nine-month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years, quarters and months relate to fiscal periods rather than calendar periods.
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Executive Overview
Our Business
As of October 3, 2021, the Wendy’s restaurant system was comprised of 6,891 restaurants, with 5,901 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 311 were operated by the Company and 5,590 were operated by a total of 225 franchisees. In addition, at October 3, 2021, there were 990 Wendy’s restaurants in operation in 31 foreign countries and U.S. territories. Of the international restaurants, 988 were operated by franchisees and two were operated by the Company in the United Kingdom (the “U.K.”).
The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants and (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of October 3, 2021.
Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and consumer spending levels, general economic and market trends and weather. The COVID-19 pandemic has had and may continue to have the effect of heightening the impact of many of these factors.
Wendy’s long-term growth opportunities include investing in accelerated global growth through (1) building our breakfast daypart, (2) continued implementation of consumer-facing digital platforms and technologies and (3) expanding the Company’s footprint through targeted U.S. expansion and accelerated international expansion through same-restaurant sales growth and net new restaurant development.
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. Restaurants temporarily closed for more than one fiscal week are excluded from same-restaurant sales. For fiscal 2020, same-restaurant sales excluded the impact of a 53rd operating week. In fiscal 2020, same-restaurant sales compared the 52 weeks from December 30, 2019 through December 27, 2020 to the 52 weeks from December 31, 2018 through December 29, 2019. For fiscal 2021, same-restaurant sales will compare the 52 weeks from January 4, 2021 through January 2, 2022 to the 52 weeks from January 6, 2020 through January 3, 2021. 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’s royalty and advertising funds 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 and advertising funds 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.
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Same-restaurant sales and systemwide sales exclude sales from Argentina and Venezuela 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 Company believes its presentation of same-restaurant sales, restaurant margin and systemwide sales provide a meaningful perspective of the underlying operating performance of the Company’s current business and enables investors to better understand and evaluate the Company’s historical and prospective operating performance. The Company believes that these metrics are important supplemental measures of operating performance because they highlight trends in the Company’s business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes investors, analysts and other interested parties use these metrics in evaluating issuers and that the presentation of these measures facilitates a comparative assessment of the Company’s operating performance. With respect to same-restaurant sales and systemwide sales, the Company also believes that the data is useful in assessing consumer demand for the Company’s products and the overall success of the Wendy’s brand.
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.
Third Quarter Financial Highlights
•Revenue increased 4.0% to $470.3 million in the third quarter of 2021 compared to $452.2 million in the third quarter of 2020;
•Global same-restaurant sales increased 3.3%, U.S. same-restaurant sales increased 2.1% and international same-restaurant sales increased 14.7% compared to the third quarter of 2020;
•Company-operated restaurant margin was 14.4% in the third quarter of 2021, a decrease of 250 basis points from the third quarter of 2020; and
•Net income increased 3.6% to $41.2 million in the third quarter of 2021 compared to $39.8 million in the third quarter of 2020.
Year-to-Date Financial Highlights
•Revenue increased 13.0% to $1.4 billion in the first nine months of 2021 compared to $1.3 billion in the first nine months of 2020;
•Global same-restaurant sales increased 10.9%, U.S. same-restaurant sales increased 10.2% and international same-restaurant sales increased 17.4% compared to the first nine months of 2020;
•Company-operated restaurant margin was 17.4% in the first nine months of 2021, an increase of 350 basis points from the first nine months of 2020; and
•Net income increased 87.4% to $148.3 million in the first nine months of 2021 compared to $79.1 million in the first nine months of 2020.
COVID-19 Update
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic. We continue to monitor the dynamic nature of the COVID-19 pandemic on our business, results and financial condition; however, we cannot predict the ultimate duration, scope or severity of the COVID-19 pandemic or its ultimate impact on our results of operations, financial condition and prospects.
In response to the pandemic, in March 2020, Wendy’s updated its brand standard to include the closure of all dining rooms except where there were specific needs, or a drive-thru or pick-up window option was not available, subject to applicable federal, state and local requirements. Substantially all Wendy’s restaurants continued to offer drive-thru and delivery service to our customers. During the second quarter of 2020, the Company began to implement its restaurant and dining room reopening
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process through a phased approach in accordance with federal, state and local requirements, with customer and team member safety as its top priority. Dining rooms have been re-opening at each restaurant owner’s discretion, subject to applicable regulatory restrictions. During the third quarter and the first nine months of 2021, restaurant operations have been impacted by increased pressure on labor availability brought about by both the COVID-19 pandemic and other macroeconomic factors; however, as of October 3, 2021, substantially all restaurants were open across the Wendy’s system, and the majority of restaurants had dining rooms open. Global systemwide same-restaurant sales during the first nine months of 2021 increased 10.9%, in part due to a significant increase in customer count compared with the adversely impacted fiscal months of March through June 2020.
Breakfast
Wendy’s long-term growth opportunities include investing in accelerated global growth, which includes building upon our breakfast daypart. Since the launch of breakfast across the U.S. system on March 2, 2020, systemwide sales have benefited from this new daypart, with breakfast representing approximately 7.2% of U.S. systemwide sales during the nine months ended October 3, 2021. As previously disclosed, the Company expects to fund a total of $25.0 million of incremental advertising to support the breakfast daypart during 2021, which the Company expects will continue to drive trial and acceleration of the Company’s breakfast offering.
Digital
Wendy’s long-term growth opportunities include accelerating same-restaurant sales through continued implementation of consumer-facing digital platforms and technologies. The Company has invested significant resources to focus on consumer-facing technology, including activating mobile ordering via Wendy’s mobile app, launching the Wendy’s Rewards loyalty program and establishing delivery agreements with third-party vendors. The Company’s digital business continues to grow and represented approximately 8.0% of global systemwide sales during the nine months ended October 3, 2021.
Debt Refinancing
In June 2021, the Company completed a refinancing transaction under which the Company issued fixed rate senior secured notes in the following 2021-1 series: Class A-2-I with an interest rate of 2.370% and initial principal amount of $450.0 million and Class A-2-II with an interest rate of 2.775% and initial principal amount of $650.0 million (collectively, the “Series 2021-1 Class A-2 Notes”). A portion of the net proceeds from the sale of the Series 2021-1 Class A-2 Notes were used to repay in full the Company’s outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes, including the payment of prepayment and transaction costs. The Company also entered into a revolving financing facility of Series 2021-1 Variable Funding Senior Secured Notes, Class A-1 (the “Series 2021-1 Class A-1 Notes”), which allows for the drawing of up to $300.0 million on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2021-1 Class A-1 Notes during the nine months ended October 3, 2021. The Series 2021-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2019-1 Class A-1 Notes and $100.0 million Series 2020-1 Class A-1 Notes, which were cancelled on the closing date. As a result of the refinancing transaction, the Company incurred a loss on the early extinguishment of debt of $17.9 million, which was comprised of a specified make-whole payment of $9.6 million and the write-off of certain unamortized deferred financing costs of $8.3 million. See “Liquidity and Capital Resources” below and Note 7 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information on the Company’s debt refinancing transaction.
New Restaurant Development
REEF Kitchens Development Commitment
On August 11, 2021, the Company announced a development commitment by REEF Kitchens (“REEF”) to open and operate 700 delivery kitchens over the next five years across the U.S., Canada and the U.K.
Strategic Build to Suit Development Fund
On August 11, 2021, the Company announced the creation of a $100.0 million strategic build to suit development fund to drive additional new restaurant growth that is being funded by the additional cash that was obtained as part of the Company’s debt refinancing transaction completed in June 2021. The Company expects the development fund to drive approximately 80 to 90 new franchise restaurants from 2022 to 2025.
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System Optimization Initiative
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 Franchise Flips. As of January 1, 2017, the Company completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system. While the Company has no plans to reduce its ownership below the approximately 5% level, the Company expects to continue to optimize the Wendy’s system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base, drive new restaurant development and accelerate reimages.
During the nine months ended October 3, 2021, the Company completed the sale of 47 Company-operated restaurants in New York (including Manhattan) to franchisees, resulting in net gains totaling $30.8 million. Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations.
NPC Quality Burgers, Inc. (“NPC”)
As previously announced, NPC, formerly the Company’s largest franchisee, filed for chapter 11 bankruptcy in July 2020 and commenced a process to sell all or substantially all of its assets, including its interest in approximately 393 Wendy’s restaurants across eight different markets, pursuant to a court-approved auction process. On November 18, 2020, the Company submitted a consortium bid together with a group of pre-qualified franchisees to acquire NPC’s Wendy’s restaurants. Under the terms of the consortium bid, several existing and new franchisees would have been the ultimate purchasers of seven of the NPC markets, while the Company would have acquired one market.
During the three months ended April 4, 2021, following a court-approved mediation process, NPC and certain affiliates of Flynn Restaurant Group (“FRG”) and the Company entered into separate asset purchase agreements under which all of NPC’s Wendy’s restaurants were sold to Wendy’s approved franchisees. Under the transaction, FRG acquired approximately half of NPC’s Wendy’s restaurants in four markets, while several existing Wendy’s franchisees that were part of the Company’s consortium bid acquired the other half of NPC’s Wendy’s restaurants in the other four markets. The Company did not acquire any restaurants as part of this transaction.
Operations and Field Realignment
In September 2020, the Company initiated a plan to reallocate resources to better support the long-term growth strategies for Company and franchise operations (the “Operations and Field Realignment Plan”). The Operations and Field Realignment Plan realigned the Company’s restaurant operations team, including transitioning from separate leaders of Company and franchise operations to a single leader of all U.S. restaurant operations. The Operations and Field Realignment Plan also includes contract terminations, including the closure of certain field offices. The Company expects to incur total costs aggregating approximately $5.5 million to $6.0 million, of which approximately $5.0 million to $5.5 million will be cash expenditures, related to the Operations and Field Realignment Plan. Costs related to the Operations and Field Realignment Plan are recorded to “Reorganization and realignment costs.” During the nine months ended October 3, 2021, the Company recognized costs totaling $1.6 million, which primarily included third-party and other costs. The Company expects to incur additional costs aggregating up to approximately $0.5 million, comprised primarily of third-party and other costs. The Company expects to recognize the majority of the remaining costs and make the majority of the remaining cash expenditures associated with the Operations and Field Realignment Plan during the remainder of 2021.
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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 third quarter and the first nine months of 2021 and 2020.
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Sales | $ | 171.1 | $ | 191.9 | $ | (20.8) | $ | 553.7 | $ | 523.0 | $ | 30.7 | |||||||||||||||||||||||
| Franchise royalty revenue and fees | 138.8 | 116.8 | 22.0 | 398.2 | 321.6 | 76.6 | |||||||||||||||||||||||||||||
| Franchise rental income | 62.4 | 58.7 | 3.7 | 182.2 | 173.4 | 8.8 | |||||||||||||||||||||||||||||
| Advertising funds revenue | 98.0 | 84.8 | 13.2 | 289.7 | 241.5 | 48.2 | |||||||||||||||||||||||||||||
| 470.3 | 452.2 | 18.1 | 1,423.8 | 1,259.5 | 164.3 | ||||||||||||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||||||||||||||
| Cost of sales | 146.4 | 159.5 | (13.1) | 457.4 | 450.2 | 7.2 | |||||||||||||||||||||||||||||
| Franchise support and other costs | 10.5 | 6.0 | 4.5 | 27.1 | 19.4 | 7.7 | |||||||||||||||||||||||||||||
| Franchise rental expense | 34.4 | 32.4 | 2.0 | 101.1 | 93.0 | 8.1 | |||||||||||||||||||||||||||||
| Advertising funds expense | 108.5 | 92.0 | 16.5 | 310.6 | 253.4 | 57.2 | |||||||||||||||||||||||||||||
| General and administrative | 62.8 | 47.3 | 15.5 | 178.6 | 147.6 | 31.0 | |||||||||||||||||||||||||||||
| Depreciation and amortization | 30.9 | 33.0 | (2.1) | 93.2 | 98.7 | (5.5) | |||||||||||||||||||||||||||||
| System optimization gains, net | (1.4) | — | (1.4) | (32.7) | (2.3) | (30.4) | |||||||||||||||||||||||||||||
| Reorganization and realignment costs | 0.4 | 3.4 | (3.0) | 7.4 | 10.2 | (2.8) | |||||||||||||||||||||||||||||
| Impairment of long-lived assets | 0.6 | — | 0.6 | 1.8 | 4.7 | (2.9) | |||||||||||||||||||||||||||||
| Other operating income, net | (3.0) | (2.7) | (0.3) | (10.8) | (6.1) | (4.7) | |||||||||||||||||||||||||||||
| 390.1 | 370.9 | 19.2 | 1,133.7 | 1,068.8 | 64.9 | ||||||||||||||||||||||||||||||
| Operating profit | 80.2 | 81.3 | (1.1) | 290.1 | 190.7 | 99.4 | |||||||||||||||||||||||||||||
| Interest expense, net | (26.0) | (29.1) | 3.1 | (83.0) | (86.7) | 3.7 | |||||||||||||||||||||||||||||
| Loss on early extinguishment of debt | — | — | — | (17.9) | — | (17.9) | |||||||||||||||||||||||||||||
| Other income, net | 0.2 | 0.2 | — | 0.4 | 1.2 | (0.8) | |||||||||||||||||||||||||||||
| Income before income taxes | 54.4 | 52.4 | 2.0 | 189.6 | 105.2 | 84.4 | |||||||||||||||||||||||||||||
| Provision for income taxes | (13.2) | (12.6) | (0.6) | (41.3) | (26.1) | (15.2) | |||||||||||||||||||||||||||||
| Net income | $ | 41.2 | $ | 39.8 | $ | 1.4 | $ | 148.3 | $ | 79.1 | $ | 69.2 | |||||||||||||||||||||||
37
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | % of Total Revenues | 2020 | % of Total Revenues | 2021 | % of Total Revenues | 2020 | % of Total Revenues | ||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Sales | $ | 171.1 | 36.4 | % | $ | 191.9 | 42.4 | % | $ | 553.7 | 38.9 | % | $ | 523.0 | 41.5 | % | |||||||||||||||||||||||||||||||
Franchise royalty revenue and fees: | |||||||||||||||||||||||||||||||||||||||||||||||
| Franchise royalty revenue | 116.6 | 24.8 | % | 109.3 | 24.2 | % | 344.4 | 24.2 | % | 301.9 | 24.0 | % | |||||||||||||||||||||||||||||||||||
| Franchise fees | 22.2 | 4.7 | % | 7.5 | 1.6 | % | 53.8 | 3.8 | % | 19.7 | 1.5 | % | |||||||||||||||||||||||||||||||||||
| Total franchise royalty revenue and fees | 138.8 | 29.5 | % | 116.8 | 25.8 | % | 398.2 | 28.0 | % | 321.6 | 25.5 | % | |||||||||||||||||||||||||||||||||||
Franchise rental income | 62.4 | 13.3 | % | 58.7 | 13.0 | % | 182.2 | 12.8 | % | 173.4 | 13.8 | % | |||||||||||||||||||||||||||||||||||
Advertising funds revenue | 98.0 | 20.8 | % | 84.8 | 18.8 | % | 289.7 | 20.3 | % | 241.5 | 19.2 | % | |||||||||||||||||||||||||||||||||||
Total revenues | $ | 470.3 | 100.0 | % | $ | 452.2 | 100.0 | % | $ | 1,423.8 | 100.0 | % | $ | 1,259.5 | 100.0 | % | |||||||||||||||||||||||||||||||
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | % of Sales | 2020 | % of Sales | 2021 | % of Sales | 2020 | % of Sales | ||||||||||||||||||||||||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||||||||||||||||||||||||||
| Food and paper | $ | 54.8 | 32.0 | % | $ | 59.6 | 31.1 | % | $ | 165.5 | 29.9 | % | $ | 161.4 | 30.9 | % | |||||||||||||||||||||||||||||||
| Restaurant labor | 54.8 | 32.0 | % | 59.4 | 30.9 | % | 173.5 | 31.3 | % | 170.3 | 32.6 | % | |||||||||||||||||||||||||||||||||||
Occupancy, advertising and other operating costs | 36.8 | 21.6 | % | 40.5 | 21.1 | % | 118.4 | 21.4 | % | 118.5 | 22.6 | % | |||||||||||||||||||||||||||||||||||
| Total cost of sales | $ | 146.4 | 85.6 | % | $ | 159.5 | 83.1 | % | $ | 457.4 | 82.6 | % | $ | 450.2 | 86.1 | % | |||||||||||||||||||||||||||||||
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | % of Sales | 2020 | % of Sales | 2021 | % of Sales | 2020 | % of Sales | ||||||||||||||||||||||||||||||||||||||||
| Restaurant margin | $ | 24.7 | 14.4 | % | $ | 32.4 | 16.9 | % | $ | 96.3 | 17.4 | % | $ | 72.8 | 13.9 | % | |||||||||||||||||||||||||||||||
38
The table below presents certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein.
| Third Quarter | Nine Months | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Key business measures: | |||||||||||||||||||||||
U.S. same-restaurant sales: | |||||||||||||||||||||||
| Company-operated | 3.4 | % | 4.2 | % | 13.2 | % | (2.2) | % | |||||||||||||||
| Franchised | 2.0 | % | 7.2 | % | 10.0 | % | 1.1 | % | |||||||||||||||
Systemwide | 2.1 | % | 7.0 | % | 10.2 | % | 0.9 | % | |||||||||||||||
| International same-restaurant sales (a) | 14.7 | % | (2.1) | % | 17.4 | % | (7.3) | % | |||||||||||||||
Global same-restaurant sales: | |||||||||||||||||||||||
| Company-operated | 3.4 | % | 4.2 | % | 13.2 | % | (2.2) | % | |||||||||||||||
| Franchised (a) | 3.3 | % | 6.2 | % | 10.8 | % | 0.2 | % | |||||||||||||||
| Systemwide (a) | 3.3 | % | 6.1 | % | 10.9 | % | — | % | |||||||||||||||
| Systemwide sales: (b) | |||||||||||||||||||||||
| U.S. Company-operated | $ | 170.0 | $ | 191.9 | $ | 552.3 | $ | 523.0 | |||||||||||||||
| U.S. franchised | 2,621.2 | 2,499.7 | 7,783.6 | 6,913.1 | |||||||||||||||||||
U.S. systemwide | 2,791.2 | 2,691.6 | 8,335.9 | 7,436.1 | |||||||||||||||||||
| International Company-operated | 1.1 | — | 1.4 | — | |||||||||||||||||||
| International franchised (a) | 361.3 | 291.3 | 1,018.3 | 784.1 | |||||||||||||||||||
| International systemwide (a) | 362.4 | 291.3 | 1,019.7 | 784.1 | |||||||||||||||||||
| Global systemwide (a) | $ | 3,153.6 | $ | 2,982.9 | $ | 9,355.6 | $ | 8,220.2 | |||||||||||||||
________________
(a)Excludes Argentina and Venezuela due to the impact of the highly inflationary economies of those countries.
(b)During the third quarter of 2021 and 2020, global systemwide sales increased 5.3% and 6.7%, respectively, U.S. systemwide sales increased 3.7% and 7.9%, respectively, and international systemwide sales increased 20.2% and decreased 3.5%, respectively, on a constant currency basis. During the first nine months of 2021 and 2020, global systemwide sales increased 13.2% and 0.5%, respectively, U.S. systemwide sales increased 12.1% and 1.6%, respectively, and international systemwide sales increased 23.6% and decreased 9.3%, respectively, on a constant currency basis.
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| Third Quarter | |||||||||||||||||||||||||||||
| U.S. Company-operated | U.S. Franchised | International Company-operated | International Franchised | Systemwide | |||||||||||||||||||||||||
| Restaurant count: | |||||||||||||||||||||||||||||
| Restaurant count at July 4, 2021 | 314 | 5,581 | 1 | 970 | 6,866 | ||||||||||||||||||||||||
| Opened | 1 | 26 | 1 | 20 | 48 | ||||||||||||||||||||||||
| Closed (a) | (4) | (17) | — | (2) | (23) | ||||||||||||||||||||||||
Restaurant count at October 3, 2021 | 311 | 5,590 | 2 | 988 | 6,891 | ||||||||||||||||||||||||
| Nine Months | |||||||||||||||||||||||||||||
| U.S. Company-operated | U.S. Franchised | International Company-operated | International Franchised | Systemwide | |||||||||||||||||||||||||
Restaurant count at January 3, 2021 | 361 | 5,520 | — | 947 | 6,828 | ||||||||||||||||||||||||
| Opened | 4 | 65 | 2 | 58 | 129 | ||||||||||||||||||||||||
| Closed (a) | (6) | (43) | — | (17) | (66) | ||||||||||||||||||||||||
| Net (sold to) purchased by franchisees | (48) | 48 | — | — | — | ||||||||||||||||||||||||
Restaurant count at October 3, 2021 | 311 | 5,590 | 2 | 988 | 6,891 | ||||||||||||||||||||||||
________________
(a)Excludes restaurants temporarily closed due to the impact of the COVID-19 pandemic.
| Sales | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Sales | $ | 171.1 | $ | 191.9 | $ | (20.8) | $ | 553.7 | $ | 523.0 | $ | 30.7 | |||||||||||||||||||||||
The decrease in sales for the third quarter of 2021 was primarily due to the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021, partially offset by a 3.4% increase in Company-operated same-restaurant sales. Company-operated same-restaurant sales increased due to higher average check, partially offset by a decrease in customer count.
The increase in sales for the first nine months of 2021 was primarily due to a 13.2% increase in Company-operated same-restaurant sales, partially offset by the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021. Company-operated same-restaurant sales increased due to (1) higher average check and (2) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic. Company-operated same-restaurant sales during the first nine months of 2021 benefited from (1) government stimulus payments to consumers during the first quarter of 2021 and (2) the positive impact from the breakfast daypart.
| Franchise Royalty Revenue and Fees | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Franchise royalty revenue | $ | 116.6 | $ | 109.3 | $ | 7.3 | $ | 344.4 | $ | 301.9 | $ | 42.5 | |||||||||||||||||||||||
| Franchise fees | 22.2 | 7.5 | 14.7 | 53.8 | 19.7 | 34.1 | |||||||||||||||||||||||||||||
| $ | 138.8 | $ | 116.8 | $ | 22.0 | $ | 398.2 | $ | 321.6 | $ | 76.6 | ||||||||||||||||||||||||
The increase in franchise royalty revenue during the third quarter and the first nine months of 2021 was primarily due to (1) a 3.3% and 10.8% increase in global franchise same-restaurant sales, respectively, and (2) a net increase in the number of franchise restaurants in operation during 2021 compared to 2020. Franchise same-restaurant sales during the third quarter of 2021 increased due to higher average check, partially offset by a decrease in customer count. Franchise same-restaurant sales during the first nine months of 2021 increased due to (1) higher average check and (2) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic. Franchise same-restaurant sales during the first nine months of 2021
40
benefited from (1) government stimulus payments to consumers during the first quarter of 2021 and (2) the positive impact from the breakfast daypart.
The increase in franchise fees during the third quarter and the first nine months of 2021 was primarily due to (1) an increase in fees for providing information technology services to franchisees and (2) the accelerated recognition of franchise agreement revenue as a result of franchisee-to-franchisee restaurant transfers.
| Franchise Rental Income | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Franchise rental income | $ | 62.4 | $ | 58.7 | $ | 3.7 | $ | 182.2 | $ | 173.4 | $ | 8.8 | |||||||||||||||||||||||
The increase in franchise rental income during the third quarter and the first nine months of 2021 was primarily due to (1) an increase in percent rent, reflecting higher systemwide sales compared with 2020, and (2) the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021.
| Advertising Funds Revenue | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Advertising funds revenue | $ | 98.0 | $ | 84.8 | $ | 13.2 | $ | 289.7 | $ | 241.5 | $ | 48.2 | |||||||||||||||||||||||
The Company maintains two national advertising funds established to collect and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Franchisees make contributions to the national advertising funds based on a percentage of sales of the franchised restaurants. The increase in advertising funds revenue during the third quarter and the first nine months of 2021 was primarily due to (1) an increase in franchise same-restaurant sales in the U.S. and Canada and (2) the prior year abatement of national advertising fund contributions on breakfast sales.
| Cost of Sales, as a Percent of Sales | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Food and paper | 32.0 | % | 31.1 | % | 0.9 | % | 29.9 | % | 30.9 | % | (1.0) | % | |||||||||||||||||||||||
| Restaurant labor | 32.0 | % | 30.9 | % | 1.1 | % | 31.3 | % | 32.6 | % | (1.3) | % | |||||||||||||||||||||||
| Occupancy, advertising and other operating costs | 21.6 | % | 21.1 | % | 0.5 | % | 21.4 | % | 22.6 | % | (1.2) | % | |||||||||||||||||||||||
| 85.6 | % | 83.1 | % | 2.5 | % | 82.6 | % | 86.1 | % | (3.5) | % | ||||||||||||||||||||||||
The increase in cost of sales, as a percent of sales, during the third quarter of 2021 was primarily due to (1) an increase in restaurant labor rates, (2) higher commodity costs, (3) lower local advertising spend during 2020 and (4) a decrease in customer count. These impacts were partially offset by higher average check.
The decrease in cost of sales, as a percent of sales, during the first nine months of 2021 was primarily due to (1) higher average check, (2) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (3) incremental recognition pay during April and May of 2020. These impacts were partially offset by (1) an increase in restaurant labor rates and (2) higher commodity costs.
| Franchise Support and Other Costs | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Franchise support and other costs | $ | 10.5 | $ | 6.0 | $ | 4.5 | $ | 27.1 | $ | 19.4 | $ | 7.7 | |||||||||||||||||||||||
The increase in franchise support and other costs during the third quarter and the first nine months of 2021 was primarily due to an increase in costs incurred to provide information technology and other services to our franchisees. The increases in the first nine months were partially offset by investments made in 2020 to support U.S. franchisees in preparation of the national launch of breakfast on March 2, 2020.
41
| Franchise Rental Expense | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Franchise rental expense | $ | 34.4 | $ | 32.4 | $ | 2.0 | $ | 101.1 | $ | 93.0 | $ | 8.1 | |||||||||||||||||||||||
The increase in franchise rental expense during the third quarter and the first nine months of 2021 was primarily due to (1) an increase in percent rent, reflecting higher systemwide sales compared with 2020 and (2) the impact of the sale of 47 Company-operated restaurants in New York to franchisees during the second quarter of 2021. Franchise rental expense for the first nine months of 2021 also increased due to the impact of assigning certain leases to a franchisee in 2020.
| Advertising Funds Expense | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Advertising funds expense | $ | 108.5 | $ | 92.0 | $ | 16.5 | $ | 310.6 | $ | 253.4 | $ | 57.2 | |||||||||||||||||||||||
On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. The Company expects advertising funds expense to exceed advertising funds revenue by approximately $31.0 million for 2021, which includes (1) the Company’s previously announced decision to fund up to $25.0 million of incremental advertising and (2) the amount by which advertising funds revenue exceeded advertising funds expense in 2020 (excluding the Company’s funding of $14.6 million of incremental advertising) and 2019 of approximately $6.0 million. During the third quarter and the first nine months of 2021, advertising funds expense increased due to (1) an increase in franchise same-restaurant sales in the U.S. and Canada and (2) an increase of $3.3 million and $9.0 million, respectively, in the recognition of the expected advertising spend in excess of advertising funds revenue compared with the prior year.
| General and Administrative | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Incentive compensation | $ | 11.0 | $ | 4.2 | $ | 6.8 | 33.5 | 13.2 | 20.3 | ||||||||||||||||||||||||||
| Professional fees | 11.7 | 8.0 | 3.7 | 29.4 | 20.8 | 8.6 | |||||||||||||||||||||||||||||
| Share-based compensation | 5.7 | 5.2 | 0.5 | 16.7 | 14.4 | 2.3 | |||||||||||||||||||||||||||||
| Travel-related expenses | 1.9 | 0.8 | 1.1 | 3.9 | 4.7 | (0.8) | |||||||||||||||||||||||||||||
| Other, net | 32.5 | 29.1 | 3.4 | 95.1 | 94.5 | 0.6 | |||||||||||||||||||||||||||||
| $ | 62.8 | $ | 47.3 | $ | 15.5 | $ | 178.6 | $ | 147.6 | $ | 31.0 | ||||||||||||||||||||||||
The increase in general and administrative expenses during the third quarter and the first nine months of 2021 was primarily due to (1) an increase in incentive compensation accruals and higher share-based compensation, reflecting higher operating performance as compared to plan in the first nine months of 2021 versus the first nine months of 2020, and (2) higher professional fees, primarily as a result of costs associated with the Company’s enterprise resource planning implementation. General and administrative expenses also increased during the third quarter of 2021 due to higher travel-related expenses.
| Depreciation and Amortization | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Restaurants | $ | 18.4 | $ | 21.2 | $ | (2.8) | $ | 56.5 | $ | 63.7 | $ | (7.2) | |||||||||||||||||||||||
| Technology support, corporate and other | 12.5 | 11.8 | 0.7 | 36.7 | 35.0 | 1.7 | |||||||||||||||||||||||||||||
| $ | 30.9 | $ | 33.0 | $ | (2.1) | $ | 93.2 | $ | 98.7 | $ | (5.5) | ||||||||||||||||||||||||
The decrease in depreciation and amortization during the third quarter and the first nine months of 2021 was primarily due to assets becoming fully depreciated, partially offset by an increase in depreciation and amortization for technology investments. Depreciation and amortization during the first nine months of 2021 also decreased due to the impact of a prior year change in useful lives for certain asset categories.
42
| System Optimization Gains, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| System optimization gains, net | $ | (1.4) | $ | — | $ | (1.4) | $ | (32.7) | $ | (2.3) | $ | (30.4) | |||||||||||||||||||||||
System optimization gains, net for the third quarter of 2021 were primarily comprised of gains on the sale of surplus and other properties. System optimization gains, net for the first nine months of 2021 were primarily comprised of a gain on the sale of 47 Company-operated restaurants in New York. See Note 4 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information on the sale of the Company-operated restaurants in New York.
| Reorganization and Realignment Costs | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Operations and field realignment | $ | 0.1 | $ | 3.0 | $ | (2.9) | $ | 1.6 | $ | 3.0 | $ | (1.4) | |||||||||||||||||||||||
| IT realignment | — | 0.4 | (0.4) | — | 6.8 | (6.8) | |||||||||||||||||||||||||||||
| G&A realignment | — | — | — | — | 0.3 | (0.3) | |||||||||||||||||||||||||||||
| System optimization initiative | 0.3 | — | 0.3 | 5.8 | 0.1 | 5.7 | |||||||||||||||||||||||||||||
| $ | 0.4 | $ | 3.4 | $ | (3.0) | $ | 7.4 | $ | 10.2 | $ | (2.8) | ||||||||||||||||||||||||
In September 2020, the Company initiated the Operations and Field Realignment Plan. The Operations and Field Realignment Plan realigned the Company’s restaurant operations team, including transitioning from separate leaders of Company and franchise operations to a single leader of all U.S. restaurant operations. The Operations and Field Realignment Plan also includes contract terminations, including the closure of certain field offices. During the first nine months of 2021, the Company recognized costs totaling $1.6 million, which primarily included third-party and other costs. The Company expects to incur additional costs aggregating up to approximately $0.5 million, comprised primarily of third-party and other costs. The Company expects to recognize the majority of the remaining costs associated with the Operations and Field Realignment Plan during the remainder of 2021.
As part of the Company’s system optimization initiative, the Company expects to continue to optimize the Wendy’s system through strategic restaurant acquisitions and dispositions, as well as by facilitating Franchise Flips. During the nine months ended October 3, 2021, the Company recognized costs associated with its system optimization initiative totaling $5.8 million, which were primarily comprised of the write-off of certain lease assets, lease termination fees and transaction fees associated with the NPC bankruptcy sale process. The Company expects to recognize a gain of approximately $1.0 million related to the write-off of certain NPC-related lease liabilities upon final termination of the leases.
| Impairment of Long-Lived Assets | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Impairment of long-lived assets | $ | 0.6 | $ | — | $ | 0.6 | $ | 1.8 | $ | 4.7 | $ | (2.9) | |||||||||||||||||||||||
The change in impairment charges during the third quarter of 2021 was primarily driven by impairment charges as a result of the deterioration in operating performance of certain Company-operated restaurants when compared to the third quarter of 2020. The change in impairment charges during the first nine months of 2021 was primarily driven by the expected deterioration in operating performance of certain Company-operated restaurants in the first nine months of 2020 as a result of the COVID-19 pandemic.
| Other Operating Income, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Gains on sales-type leases | $ | (0.7) | $ | (0.2) | $ | (0.5) | $ | (4.2) | $ | (1.4) | $ | (2.8) | |||||||||||||||||||||||
| Equity in earnings in joint ventures, net | (2.3) | (2.1) | (0.2) | (5.6) | (4.4) | (1.2) | |||||||||||||||||||||||||||||
| Other, net | — | (0.4) | 0.4 | (1.0) | (0.3) | (0.7) | |||||||||||||||||||||||||||||
| $ | (3.0) | $ | (2.7) | $ | (0.3) | $ | (10.8) | $ | (6.1) | $ | (4.7) | ||||||||||||||||||||||||
The change in other operating income, net during the third quarter and the first nine months of 2021 was primarily due to (1) gains on new and modified sales-type leases and (2) an increase in the equity in earnings from our TimWen joint venture.
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| Interest Expense, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Interest expense, net | $ | 26.0 | $ | 29.1 | $ | (3.1) | $ | 83.0 | $ | 86.7 | $ | (3.7) | |||||||||||||||||||||||
Interest expense, net decreased during the third quarter and the first nine months of 2021 primarily due to the impact of completing the refinancing of a portion of the Company’s securitized financing facility in the second quarter of 2021.
| Loss on Early Extinguishment of Debt | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Loss on early extinguishment of debt | $ | — | $ | — | $ | — | $ | 17.9 | $ | — | $ | 17.9 | |||||||||||||||||||||||
During the second quarter of 2021, 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 the outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes with the proceeds from the issuance of its Series 2021-1 Class A-2 Notes. The loss on the early extinguishment of debt of $17.9 million was comprised of a specified make-whole payment of $9.6 million and the write-off of certain unamortized deferred financing costs of $8.3 million.
| Other Income, Net | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Other income, net | $ | 0.2 | $ | 0.2 | $ | — | $ | 0.4 | $ | 1.2 | $ | (0.8) | |||||||||||||||||||||||
The change in other income, net during the first nine months of 2021 was primarily due to fluctuations in interest income earned on our cash equivalents.
| Provision for Income Taxes | Third Quarter | Nine Months | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Income before income taxes | $ | 54.4 | $ | 52.4 | $ | 2.0 | $ | 189.6 | $ | 105.2 | $ | 84.4 | |||||||||||||||||||||||
Provision for income taxes | (13.2) | (12.6) | (0.6) | (41.3) | (26.1) | (15.2) | |||||||||||||||||||||||||||||
Effective tax rate on income | 24.3 | % | 24.2 | % | 0.1 | % | 21.8 | % | 24.8 | % | (3.0) | % | |||||||||||||||||||||||
Our effective tax rates for the third quarter and the first nine months of 2021 and 2020 were impacted by variations in income before income taxes, including uncertainty in 2020 income before income taxes arising from the COVID-19 pandemic, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. The increase in the effective tax rate for the third quarter of 2021 compared with the third quarter of 2020 was primarily due to a decrease in the tax benefit from share-based compensation. The decrease in the effective tax rate for the first nine months of 2021 compared with the first nine months of 2020 was primarily due to a decrease in the tax effects of our foreign operations and an increase in the tax benefit from share-based compensation.
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Segment Information
See Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s segments.
Wendy’s U.S.
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Sales | $ | 170.0 | $ | 191.9 | $ | (21.9) | $ | 552.3 | $ | 523.0 | $ | 29.3 | |||||||||||||||||||||||
| Franchise royalty revenue | 102.6 | 98.1 | 4.5 | 305.4 | 271.1 | 34.3 | |||||||||||||||||||||||||||||
| Franchise fees | 19.7 | 5.7 | 14.0 | 46.0 | 16.2 | 29.8 | |||||||||||||||||||||||||||||
| Advertising fund revenue | 91.5 | 79.2 | 12.3 | 271.9 | 226.9 | 45.0 | |||||||||||||||||||||||||||||
| Total revenues | $ | 383.8 | $ | 374.9 | $ | 8.9 | $ | 1,175.6 | $ | 1,037.2 | $ | 138.4 | |||||||||||||||||||||||
| Segment profit | $ | 108.9 | $ | 108.3 | $ | 0.6 | $ | 347.6 | $ | 283.3 | $ | 64.3 | |||||||||||||||||||||||
The increase in Wendy’s U.S. revenues during the third quarter and the first nine months of 2021 was primarily due to (1) an increase in systemwide same-restaurant sales and (2) higher franchise fees, reflecting an increase in fees for providing information technology services to franchisees. Same-restaurant sales increased during the third quarter and the first nine months of 2021 primarily due to higher average check. Same-restaurant sales during the first nine months of 2021 also benefited from (1) an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic, and (2) the positive impact from the breakfast daypart. These increases were partially offset by the impact of the sale of 47 Company-operated restaurants in New York during the second quarter of 2021.
The increase in Wendy’s U.S. segment profit during the third quarter of 2021 was primarily due to higher revenues, partially offset by (1) higher cost of sales, as a percent of sales, for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales,” (2) higher franchise support and other costs, (3) higher general and administrative expenses and (4) higher advertising fund expense, reflecting the Company’s decision to fund incremental advertising to support the breakfast daypart. The increase in Wendy’s U.S. segment profit during the first nine months of 2021 was primarily due to (1) higher revenues and (2) lower cost of sales, as a percent of sales, for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales.” These changes were partially offset by (1) higher general and administrative expenses, (2) higher advertising fund expense, reflecting the Company’s decision to fund incremental advertising to support the breakfast daypart and (3) higher franchise support and other costs.
Wendy’s International
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Sales | $ | 1.1 | $ | — | $ | 1.1 | $ | 1.4 | $ | — | $ | 1.4 | |||||||||||||||||||||||
| Franchise royalty revenue | 13.9 | 11.2 | 2.7 | 39.0 | 30.8 | 8.2 | |||||||||||||||||||||||||||||
| Franchise fees | 1.2 | 0.5 | 0.7 | 4.0 | 1.3 | 2.7 | |||||||||||||||||||||||||||||
| Advertising fund revenue | 6.5 | 5.6 | 0.9 | 17.8 | 14.6 | 3.2 | |||||||||||||||||||||||||||||
| Total revenues | $ | 22.7 | $ | 17.3 | $ | 5.4 | $ | 62.2 | $ | 46.7 | $ | 15.5 | |||||||||||||||||||||||
| Segment profit | $ | 6.9 | $ | 6.6 | $ | 0.3 | $ | 21.2 | $ | 15.3 | $ | 5.9 | |||||||||||||||||||||||
The increase in Wendy’s International revenues during the third quarter and the first nine months of 2021 was primarily due to an increase in same-restaurant sales. Same-restaurant sales increased during the third quarter and the first nine months of 2021 due to an increase in customer count, reflecting the prior year impact of the COVID-19 pandemic. The increase in Wendy’s International segment profit during the third quarter and the first nine months of 2021 was primarily due to higher revenues, partially offset by higher general and administrative expenses.
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Global Real Estate & Development
| Third Quarter | Nine Months | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||
| Franchise fees | $ | 1.4 | $ | 1.4 | $ | — | $ | 3.8 | $ | 2.2 | $ | 1.6 | |||||||||||||||||||||||
| Franchise rental income | 62.4 | 58.7 | 3.7 | 182.2 | 173.4 | 8.8 | |||||||||||||||||||||||||||||
| Total revenues | $ | 63.8 | $ | 60.1 | $ | 3.7 | $ | 186.0 | $ | 175.6 | $ | 10.4 | |||||||||||||||||||||||
| Segment profit | $ | 27.0 | $ | 25.3 | $ | 1.7 | $ | 79.8 | $ | 75.5 | $ | 4.3 | |||||||||||||||||||||||
The increase in Global Real Estate & Development revenues during the third quarter and the first nine months of 2021 was primarily due to higher franchise rental income. See “Franchise Rental Income” above for further information.
The increase in Global Real Estate & Development segment profit during the third quarter of 2021 was primarily due to an increase in net rental income, reflecting the impact of the sale of 47 Company-operated restaurants in New York to franchisees during the second quarter of 2021. The increase in Global Real Estate & Development segment profit during the first nine months of 2021 was primarily due to (1) gains on new and modified sales-type leases and (2) an increase in the equity in earnings from the TimWen joint venture.
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. Our 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 2021, exclusive of operating cash flow requirements, consist principally of:
•capital expenditures of approximately $30.0 million to $40.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $75.0 million to $85.0 million;
•cash dividends aggregating approximately $26.5 million as discussed below in “Dividends;” and
•potential stock repurchases of up to $140.6 million, of which $15.5 million was repurchased subsequent to October 3, 2021 through November 3, 2021, 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.
We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us.
The table below summarizes our cash flows from operating, investing and financing activities for the first nine months of 2021 and 2020:
| Nine Months | |||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 276.7 | $ | 205.8 | $ | 70.9 | |||||||||||
| Investing activities | 15.0 | (41.0) | 56.0 | ||||||||||||||
| Financing activities | (57.5) | (115.3) | 57.8 | ||||||||||||||
| Effect of exchange rate changes on cash | 0.2 | (1.8) | 2.0 | ||||||||||||||
| Net increase in cash, cash equivalents and restricted cash | $ | 234.4 | $ | 47.7 | $ | 186.7 | |||||||||||
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Operating Activities
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 was $276.7 million and $205.8 million in the first nine months of 2021 and 2020, respectively. The increase was primarily due to (1) higher net income, adjusted for non-cash expenses, (2) a cash payment of $24.7 million related to the settlement of the financial institutions class action in January 2020, (3) the timing of receipt of franchisee rental payments and (4) a decrease in payments for incentive compensation for the 2020 fiscal year paid in 2021. These increases were partially offset by (1) the timing of payments for marketing expenses of the national advertising funds and (2) an increase in cash paid for income taxes.
Investing Activities
Cash provided by (used in) investing activities was $15.0 million and $(41.0) million in the first nine months of 2021 and 2020, respectively. The change was primarily due to (1) an increase in proceeds from dispositions of $49.1 million, reflecting the sale of 47 Company-operated restaurants in New York during the second quarter of 2021, (2) the net settlement of deposits associated with the Company’s consortium bid to acquire NPC’s Wendy’s restaurants of $4.9 million in the first quarter of 2021 and (3) a decrease in capital expenditures of $1.5 million.
Financing Activities
Cash used in financing activities was $57.5 million and $115.3 million in the first nine months of 2021 and 2020, respectively. The change was primarily due to (1) a net increase in cash provided by long-term debt activities of $147.1 million, reflecting the impact of the completion of the Company’s debt refinancing transaction during the second quarter of 2021, and (2) an increase in proceeds from stock option exercises, net of payments related to tax withholding for share-based compensation, of $12.7 million. These changes were partially offset by (1) an increase in repurchases of common stock of $79.0 million and (2) an increase in dividends of $19.8 million.
Long-Term Debt, Including Current Portion
Wendy’s Funding, LLC, a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, is the master issuer (the “Master Issuer”) of outstanding senior secured notes under a securitized financing facility that was entered into in June 2015. In June 2021, the Master Issuer completed a refinancing transaction with respect to this facility under which the Master Issuer issued the Series 2021-1 Class A-2 Notes with initial principal amounts totaling $1.1 billion. The net proceeds from the sale of the Series 2021-1 Class A-2 Notes were used to repay in full the Master Issuer’s outstanding Series 2015-1 Class A-2-III Notes and Series 2018-1 Class A-2-I Notes, including the payment of prepayment and transaction costs. The remaining funds will be used for general corporate purposes, which may include funding for growth initiatives, return of capital to shareholders, or additional debt retirement.
In connection with the issuance of the Series 2021-1 Class A-2 Notes, the Master Issuer also issued the Series 2021-1 Class A-1 Notes, which allow for the drawing of up to $300.0 million on a revolving basis using various credit instruments, including a letter of credit facility. No amounts were borrowed under the Series 2021-1 Class A-1 Notes during the nine months ended October 3, 2021. The Series 2021-1 Class A-1 Notes replaced the Company’s $150.0 million Series 2019-1 Class A-1 Notes and $100.0 million Series 2020-1 Class A-1 Notes, which were cancelled on the closing date, and the letters of credit outstanding against the Series 2019-1 Class A-1 Notes were transferred to the Series 2021-1 Class A-1 Notes.
Except as described above, there were no material changes to the terms of any debt obligations since January 3, 2021. The Company was in compliance with its debt covenants as of October 3, 2021. See Note 7 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.
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Dividends
On March 15, 2021, June 15, 2021 and September 15, 2021, the Company paid quarterly cash dividends per share of $.09, $0.10 and $.12, respectively, aggregating $69.0 million. On November 10, 2021, the Company announced a dividend of $.12 per share to be paid on December 15, 2021 to stockholders of record as of December 1, 2021. As a result of the November 10 announcement, the Company expects that its total cash requirement for the fourth quarter of 2021 will be approximately $26.5 million based on the number of shares of its common stock outstanding at November 3, 2021. 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 2020, our Board of Directors authorized a repurchase program for up to $100.0 million of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible (the “February 2020 authorization”). As previously announced, beginning in March 2020, the Company temporarily suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. The Company resumed share repurchases in August 2020. In addition, in May 2021 and August 2021, the Board of Directors approved increases of $50.0 million and $70.0 million, respectively, to the February 2020 authorization, resulting in an aggregate authorization of $220.0 million that continues to expire on February 28, 2022. During the nine months ended October 3, 2021, the Company repurchased 5.9 million shares under the February 2020 authorization with an aggregate purchase price of $127.2 million, of which $2.3 million was accrued at October 3, 2021, and excluding commissions of $0.1 million. As of October 3, 2021, the Company had $60.6 million of availability remaining under the February 2020 authorization. Subsequent to October 3, 2021 through November 3, 2021, the Company repurchased 0.7 million shares under the February 2020 authorization with an aggregate purchase price of $15.5 million, excluding commissions. In addition, in November 2021, the Board of Directors approved an increase of $80.0 million to the February 2020 authorization, resulting in an aggregate authorization of $300.0 million that continues to expire on February 28, 2022. The Company also announced in November 2021 its intention to launch a $125.0 million accelerated share repurchase transaction during the fourth quarter of 2021 as part of the February 2020 authorization. The Company has availability of $125.1 million remaining under the February 2020 authorization as of November 10, 2021.
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 January 3, 2021 (the “Form 10-K”).
As of October 3, 2021, 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
Following the Company’s debt refinancing transaction, our long-term debt, including the current portion, aggregated $2,437.1 million as of October 3, 2021 (excluding unamortized debt issuance costs and the effect of purchase accounting adjustments). The Company’s predominantly fixed-rate debt structure reduces its exposure to interest rate increases that could adversely affect its earnings and cash flows. The Company is exposed to interest rate increases under its Series 2021-1 Class A-1 Notes and other lines of credit; however, the Company had no outstanding borrowings under the 2021-1 Class A-1 Notes and other lines of credit as of October 3, 2021. See “Liquidity and Capital Resources” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s debt refinancing transaction.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its 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 October 3, 2021. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that as of October 3, 2021, the disclosure controls and procedures of the Company were effective at a reasonable assurance level in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and (2) ensuring that information required to be disclosed by the Company in such reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the internal control over financial reporting of the Company during the third quarter of 2021 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 error or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with policies or procedures.
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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 “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Generally, forward-looking statements include the words “may,” “believes,” “plans,” “expects,” “anticipates,” “intends,” “estimate,” “goal,” “upcoming,” “outlook,” “guidance” or the negation thereof, or similar expressions. In addition, all statements that address future operating, financial or business performance, strategies or initiatives, future efficiencies or savings, anticipated costs or charges, future capitalization, anticipated impacts of recent or pending investments or transactions and statements expressing general views about future results or brand health are forward-looking statements within the meaning of the Reform Act. 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. For all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act. Our actual results, performance and achievements may differ materially from any future results, performance or achievements expressed in or implied by our forward-looking statements. Many important factors could affect our future results and cause those results to differ materially from those expressed in or implied by our forward-looking statements. Such factors include, but are not limited to, the following:
•the disruption to our business from the novel coronavirus (COVID-19) pandemic and the impact of the pandemic on our results of operations, financial condition and prospects;
•the impact of competition or poor customer experiences at Wendy’s restaurants;
•economic disruptions, including in regions with a high concentration of Wendy’s restaurants;
•changes in discretionary consumer spending and consumer tastes and preferences;
•impacts to our corporate reputation or the value and perception of our brand;
•the effectiveness of our marketing and advertising programs and new product development;
•our ability to manage the accelerated impact of social media;
•our ability to protect our intellectual property;
•food safety events or health concerns involving our products;
•our ability to achieve our growth strategy through new restaurant development and our Image Activation program;
•our ability to effectively manage the acquisition and disposition of restaurants or successfully implement other
strategic initiatives;
•risks associated with leasing and owning significant amounts of real estate, including environmental matters;
•our ability to achieve and maintain market share in the breakfast daypart;
•risks associated with our international operations, including our ability to execute our international growth strategy;
•changes in commodity and other operating costs;
•shortages or interruptions in the supply or distribution of our products and other risks associated with our independent
supply chain purchasing co-op;
•the impact of increased labor costs or labor shortages;
•the continued succession and retention of key personnel and the effectiveness of our leadership structure;
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•risks associated with our digital commerce strategy, platforms and technologies, including our ability to adapt to changes in industry trends and consumer preferences;
•our dependence on computer systems and information technology, including risks associated with the failure, misuse, interruption or breach of our systems or technology or other cyber incidents or deficiencies;
•risks associated with our securitized financing facility and other debt agreements, including compliance with operational and financial covenants, restrictions on our ability to raise additional capital, the impact of our overall debt levels and our ability to generate sufficient cash flow to meet our debt service obligations and operate our business;
•risks associated with our capital allocation policy, including the amount and timing of equity and debt repurchases and
dividend payments;
•risks associated with complaints and litigation, compliance with legal and regulatory requirements and an increased focus on environmental, social and governance issues;
•risks associated with the availability and cost of insurance, changes in accounting standards, the recognition of impairment or other charges, the impact of reorganization and realignment initiatives, changes in tax rates or tax laws and fluctuations in foreign currency exchange rates;
•conditions beyond our control, such as adverse weather conditions, natural disasters, hostilities, social unrest, health epidemics or pandemics or other catastrophic events; and
•other risks and uncertainties affecting us and our subsidiaries referred to in our Annual Report on Form 10-K filed with the SEC on March 3, 2021 (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 SEC.
In addition to the factors described above, there are risks associated with our predominantly franchised business model that could impact our results, performance and achievements. Such risks include our ability to identify, attract and retain experienced and qualified franchisees, our ability to effectively manage the transfer of restaurants between and among franchisees, the business and financial health of franchisees, the ability of franchisees to meet their royalty, advertising, development, reimaging and other commitments, participation by franchisees in brand strategies and the fact that franchisees are independent third parties that own, operate and are responsible for overseeing the operations of their restaurants. Our predominantly franchised business model may also impact the ability of the Wendy’s system to effectively respond and adapt to market changes. Many of these risks have been or in the future may be heightened due to the business disruption and impact from the COVID-19 pandemic.
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 above. New risks and uncertainties arise from time to time, and factors that we currently deem immaterial may become material, 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, although we may do so from time to time. 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 business. We provide accruals for such litigation and claims when payment is probable and reasonably estimable. The Company believes it has adequate accruals for all of its legal and environmental matters. We cannot estimate the aggregate possible range of loss for our existing litigation and claims 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.
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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, 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to repurchases of shares of our common stock by us and our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the third quarter of 2021:
Issuer Repurchases of Equity Securities
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (2) | ||||||||||
| July 5, 2021 through August 8, 2021 | 193,284 | $22.76 | 193,251 | $100,000,049 | ||||||||||
| August 9, 2021 through September 5, 2021 | 805,356 | $23.46 | 763,165 | $82,118,243 | ||||||||||
| September 6, 2021 through October 3, 2021 | 972,272 | $22.38 | 963,721 | $60,565,642 | ||||||||||
| Total | 1,970,912 | $22.86 | 1,920,137 | $60,565,642 | ||||||||||
(1)Includes 50,775 shares reacquired by the Company from holders of share-based awards to satisfy certain requirements associated with the vesting or exercise of the respective award. The shares were valued at the fair market value of the Company’s common stock on the vesting or exercise date of such awards, as set forth in the applicable plan document.
(2)In February 2020, our Board of Directors authorized the repurchase of up to $100.0 million of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible. As previously announced, in March 2020, the Company temporarily suspended all share repurchase activity in connection with the Company’s response to the COVID-19 pandemic. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. The Company resumed share repurchases in August 2020. In addition, in May 2021 and August 2021, the Board of Directors approved increases of $50.0 million and $70.0 million, respectively, to the February 2020 authorization, resulting in an aggregate authorization of $220.0 million that continues to expire on February 28, 2022.
Subsequent to October 3, 2021 through November 3, 2021, the Company repurchased 0.7 million shares under the February 2020 authorization with an aggregate purchase price of $15.5 million, excluding commissions. In addition, in November 2021, the Board of Directors approved an increase of $80.0 million to the February 2020 authorization, resulting in an aggregate authorization of $300.0 million that continues to expire on February 28, 2022.
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Item 6. Exhibits.
| EXHIBIT NO. | DESCRIPTION | ||||
| 3.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 101 | The following financial information from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2021 formatted in Inline eXtensible Business Reporting Language: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. | ||||
| 104 | The cover page from The Wendy’s Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2021, formatted in Inline XBRL and contained in Exhibit 101. | ||||
____________________
| * | Filed herewith. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE WENDY’S COMPANY (Registrant) | |||||
| Date: November 10, 2021 | By: /s/ Gunther Plosch | ||||
| Gunther Plosch | |||||
| Chief Financial Officer | |||||
| (On behalf of the registrant) | |||||
| Date: November 10, 2021 | By: /s/ Leigh A. Burnside | ||||
| Leigh A. Burnside | |||||
| Senior Vice President, Finance and | |||||
| Chief Accounting Officer | |||||
| (Principal Accounting Officer) | |||||
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