Wendy's Co - Quarter Report: 2021 April (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 April 4, 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 221,359,357 shares of The Wendy’s Company common stock outstanding as of May 5, 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)
| April 4, 2021 | January 3, 2021 | ||||||||||
| ASSETS | (Unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 316,488 | $ | 306,989 | |||||||
| Restricted cash | 37,948 | 33,973 | |||||||||
| Accounts and notes receivable, net | 100,312 | 109,891 | |||||||||
| Inventories | 4,733 | 4,732 | |||||||||
| Prepaid expenses and other current assets | 48,498 | 89,732 | |||||||||
| Advertising funds restricted assets | 133,518 | 142,306 | |||||||||
| Total current assets | 641,497 | 687,623 | |||||||||
| Properties | 898,420 | 915,889 | |||||||||
| Finance lease assets | 201,249 | 206,153 | |||||||||
| Operating lease assets | 806,614 | 821,480 | |||||||||
| Goodwill | 751,957 | 751,049 | |||||||||
| Other intangible assets | 1,219,089 | 1,224,960 | |||||||||
| Investments | 43,743 | 44,574 | |||||||||
| Net investment in sales-type and direct financing leases | 269,750 | 268,221 | |||||||||
| Other assets | 124,351 | 120,057 | |||||||||
| Total assets | $ | 4,956,670 | $ | 5,040,006 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | 31,250 | $ | 28,962 | |||||||
| Current portion of finance lease liabilities | 12,582 | 12,105 | |||||||||
| Current portion of operating lease liabilities | 45,498 | 45,346 | |||||||||
| Accounts payable | 29,325 | 31,063 | |||||||||
| Accrued expenses and other current liabilities | 140,720 | 155,321 | |||||||||
| Advertising funds restricted liabilities | 137,144 | 140,511 | |||||||||
| Total current liabilities | 396,519 | 413,308 | |||||||||
| Long-term debt | 2,205,652 | 2,218,163 | |||||||||
| Long-term finance lease liabilities | 501,422 | 506,076 | |||||||||
| Long-term operating lease liabilities | 850,448 | 865,325 | |||||||||
| Deferred income taxes | 280,077 | 280,755 | |||||||||
| Deferred franchise fees | 86,532 | 89,094 | |||||||||
| Other liabilities | 115,355 | 117,689 | |||||||||
| Total liabilities | 4,436,005 | 4,490,410 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 221,784 and 224,268 shares outstanding, respectively | 47,042 | 47,042 | |||||||||
| Additional paid-in capital | 2,901,460 | 2,899,276 | |||||||||
| Retained earnings | 259,879 | 238,674 | |||||||||
Common stock held in treasury, at cost; 248,640 and 246,156 shares, respectively | (2,640,295) | (2,585,755) | |||||||||
| Accumulated other comprehensive loss | (47,421) | (49,641) | |||||||||
| Total stockholders’ equity | 520,665 | 549,596 | |||||||||
| Total liabilities and stockholders’ equity | $ | 4,956,670 | $ | 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 | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Revenues: | |||||||||||
| Sales | $ | 189,057 | $ | 166,798 | |||||||
| Franchise royalty revenue and fees | 122,830 | 101,705 | |||||||||
| Franchise rental income | 58,876 | 57,856 | |||||||||
| Advertising funds revenue | 89,440 | 78,601 | |||||||||
| 460,203 | 404,960 | ||||||||||
| Costs and expenses: | |||||||||||
| Cost of sales | 156,850 | 149,999 | |||||||||
| Franchise support and other costs | 7,686 | 8,013 | |||||||||
| Franchise rental expense | 32,566 | 29,301 | |||||||||
| Advertising funds expense | 94,238 | 79,988 | |||||||||
| General and administrative | 52,622 | 51,639 | |||||||||
| Depreciation and amortization | 31,542 | 31,046 | |||||||||
| System optimization gains, net | (516) | (323) | |||||||||
| Reorganization and realignment costs | 4,934 | 3,910 | |||||||||
| Impairment of long-lived assets | 635 | 4,587 | |||||||||
| Other operating income, net | (3,476) | (1,932) | |||||||||
| 377,081 | 356,228 | ||||||||||
| Operating profit | 83,122 | 48,732 | |||||||||
| Interest expense, net | (28,786) | (28,525) | |||||||||
| Other income, net | 129 | 1,076 | |||||||||
| Income before income taxes | 54,465 | 21,283 | |||||||||
| Provision for income taxes | (13,099) | (6,842) | |||||||||
| Net income | $ | 41,366 | $ | 14,441 | |||||||
| Net income per share: | |||||||||||
| Basic | $ | .19 | $ | .06 | |||||||
| Diluted | .18 | .06 | |||||||||
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 | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Net income | $ | 41,366 | $ | 14,441 | |||||||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation adjustment | 2,220 | (12,507) | |||||||||
| Other comprehensive income (loss) | 2,220 | (12,507) | |||||||||
Comprehensive income | $ | 43,586 | $ | 1,934 | |||||||
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 | |||||||||||||||||||||||
| 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 | |||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
7
THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| Three Months Ended | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 41,366 | $ | 14,441 | |||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 31,542 | 31,046 | |||||||||
| Share-based compensation | 5,151 | 4,539 | |||||||||
| Impairment of long-lived assets | 635 | 4,587 | |||||||||
| Deferred income tax | (1,116) | 748 | |||||||||
| Non-cash rental expense, net | 10,152 | 6,218 | |||||||||
| Change in operating lease liabilities | (11,607) | (10,611) | |||||||||
| Net receipt (recognition) of deferred vendor incentives | 6,522 | (2,305) | |||||||||
| System optimization gains, net | (516) | (323) | |||||||||
| Distributions received from joint ventures, net of equity in earnings | 1,409 | 180 | |||||||||
| Long-term debt-related activities, net | 1,677 | 1,556 | |||||||||
| Changes in operating assets and liabilities and other, net | 615 | (69,445) | |||||||||
| Net cash provided by (used in) operating activities | 85,830 | (19,369) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (10,364) | (12,629) | |||||||||
| Acquisitions | 4,879 | — | |||||||||
| Dispositions | 3 | 195 | |||||||||
| Notes receivable, net | 397 | 313 | |||||||||
| Net cash used in investing activities | (5,085) | (12,121) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from long-term debt | — | 153,315 | |||||||||
| Repayments of long-term debt | (11,900) | (14,334) | |||||||||
| Repayments of finance lease liabilities | (2,659) | (1,967) | |||||||||
| Repurchases of common stock | (55,611) | (45,137) | |||||||||
| Dividends | (20,156) | (26,793) | |||||||||
| Proceeds from stock option exercises | 972 | 1,722 | |||||||||
| Payments related to tax withholding for share-based compensation | (2,308) | (3,402) | |||||||||
| Net cash (used in) provided by financing activities | (91,662) | 63,404 | |||||||||
| Net cash (used in) provided by operations before effect of exchange rate changes on cash | (10,917) | 31,914 | |||||||||
| Effect of exchange rate changes on cash | 823 | (5,086) | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (10,094) | 26,828 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 418,241 | 358,707 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 408,147 | $ | 385,535 | |||||||
| Supplemental non-cash investing and financing activities: | |||||||||||
| Capital expenditures included in accounts payable | $ | 5,461 | $ | 9,579 | |||||||
| Finance leases | 5,539 | 9,274 | |||||||||
| April 4, 2021 | January 3, 2021 | ||||||||||
| Reconciliation of cash, cash equivalents and restricted cash at end of period: | |||||||||||
| Cash and cash equivalents | $ | 316,488 | $ | 306,989 | |||||||
| Restricted cash | 37,948 | 33,973 | |||||||||
| Restricted cash, included in Advertising funds restricted assets | 53,711 | 77,279 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 408,147 | $ | 418,241 | |||||||
See accompanying notes to condensed consolidated financial statements.
8
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 April 4, 2021 and the results of our operations and cash flows for the three months ended April 4, 2021 and March 29, 2020. The results of operations for the three months ended April 4, 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-month periods presented herein contain 13 weeks. 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.
9
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(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 April 4, 2021 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | 189,057 | $ | — | $ | — | $ | 189,057 | |||||||||||||||
| Franchise royalty revenue | 96,764 | 11,570 | — | 108,334 | |||||||||||||||||||
| Franchise fees (a) | 11,930 | 1,443 | 1,123 | 14,496 | |||||||||||||||||||
| Franchise rental income | — | — | 58,876 | 58,876 | |||||||||||||||||||
| Advertising funds revenue | 84,203 | 5,237 | — | 89,440 | |||||||||||||||||||
| Total revenues | $ | 381,954 | $ | 18,250 | $ | 59,999 | $ | 460,203 | |||||||||||||||
| Three Months Ended March 29, 2020 | |||||||||||||||||||||||
| Sales at Company-operated restaurants | $ | 166,798 | $ | — | $ | — | $ | 166,798 | |||||||||||||||
| Franchise royalty revenue | 84,833 | 10,523 | — | 95,356 | |||||||||||||||||||
| Franchise fees (a) | 5,285 | 473 | 591 | 6,349 | |||||||||||||||||||
| Franchise rental income | — | — | 57,856 | 57,856 | |||||||||||||||||||
| Advertising funds revenue | 74,125 | 4,476 | — | 78,601 | |||||||||||||||||||
| Total revenues | $ | 331,041 | $ | 15,472 | $ | 58,447 | $ | 404,960 | |||||||||||||||
_______________
(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:
| April 4, 2021 (a) | January 3, 2021 (a) | ||||||||||
| Receivables, which are included in “Accounts and notes receivable, net” (b) | $ | 57,546 | $ | 57,677 | |||||||
Receivables, which are included in “Advertising funds restricted assets” | 55,721 | 63,252 | |||||||||
| Deferred franchise fees (c) | 95,247 | 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 $8,715 and $86,532 as of April 4, 2021, respectively, and $8,691 and $89,094 as of January 3, 2021, respectively.
10
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:
| Three Months Ended | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Deferred franchise fees at beginning of period | $ | 97,785 | $ | 100,689 | |||||||
Revenue recognized during the period | (4,337) | (2,144) | |||||||||
| New deferrals due to cash received and other | 1,799 | 1,066 | |||||||||
| Deferred franchise fees at end of period | $ | 95,247 | $ | 99,611 | |||||||
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) | $ | 7,204 | |||
| 2022 | 6,200 | ||||
| 2023 | 6,028 | ||||
| 2024 | 5,831 | ||||
| 2025 | 5,644 | ||||
| Thereafter | 64,340 | ||||
| $ | 95,247 | ||||
_______________
(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 three months ended April 4, 2021 and March 29, 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.
11
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 three months ended April 4, 2021, the Company facilitated no Franchise Flips. During the three months ended March 29, 2020, the Company facilitated three Franchise Flips. The Company expects to sell 47 Company-operated restaurants in New York (including Manhattan) to franchisees in the second quarter of 2021.
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 | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Post-closing adjustments on sales of restaurants (a) | $ | 515 | $ | 345 | |||||||
| Gain on sales of other assets, net (b) | 1 | (22) | |||||||||
| System optimization gains, net | $ | 516 | $ | 323 | |||||||
_______________
(a)Represents the recognition of deferred gains as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees.
(b)During the three months ended April 4, 2021 and March 29, 2020, the Company received net cash proceeds of $3 and $195, respectively, primarily from the sale of surplus and other properties.
Assets Held for Sale
| April 4, 2021 | January 3, 2021 | ||||||||||
| Number of restaurants classified as held for sale | 47 | 43 | |||||||||
| Net restaurant assets held for sale (a) | $ | 21,747 | $ | 20,587 | |||||||
| Other assets held for sale (b) | $ | 1,732 | $ | 1,732 | |||||||
_______________
(a)Net restaurant assets held for sale represent the New York Company-operated restaurants we expect to sell in the second quarter of 2021 (including Manhattan as of April 4, 2021) and consist primarily of cash, inventory, property and an estimate of allocable goodwill.
(b)Other assets held for sale primarily consist of surplus properties.
Assets held for sale are included in “Prepaid expenses and other current assets.”
12
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(5) Reorganization and Realignment Costs
The following is a summary of the initiatives included in “Reorganization and realignment costs:”
| Three Months Ended | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Operations and field realignment | $ | 274 | $ | — | |||||||
| IT realignment | — | 3,559 | |||||||||
| G&A realignment | (18) | 267 | |||||||||
| System optimization initiative | 4,678 | 84 | |||||||||
| Reorganization and realignment costs | $ | 4,934 | $ | 3,910 | |||||||
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. We also expect to incur contract termination charges, including the planned closure of certain field offices. The Company expects to incur total costs aggregating approximately $7,000 to $9,000 related to the Operations and Field Realignment Plan. During the three months ended April 4, 2021, the Company recognized costs totaling $274, which primarily included severance and related employee costs. The Company expects to incur additional costs aggregating approximately $3,000 to $5,000, 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.
The following is a summary of the activity recorded as a result of the Operations and Field Realignment Plan:
| Three Months Ended | Total Incurred Since Inception | ||||||||||
| April 4, 2021 | |||||||||||
| Severance and related employee costs | $ | 254 | $ | 3,367 | |||||||
| Third-party and other costs | 20 | 87 | |||||||||
| 274 | 3,454 | ||||||||||
| Share-based compensation (a) | — | 621 | |||||||||
| Total operations and field realignment | $ | 274 | $ | 4,075 | |||||||
_______________
(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 April 4, 2021.
| Balance January 3, 2021 | Charges | Payments | Balance April 4, 2021 | ||||||||||||||||||||
| Severance and related employee costs | $ | 2,600 | $ | 254 | $ | (1,410) | $ | 1,444 | |||||||||||||||
| Third-party and other costs | — | 20 | (20) | — | |||||||||||||||||||
| $ | 2,600 | $ | 274 | $ | (1,430) | $ | 1,444 | ||||||||||||||||
13
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
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, which will enable 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 three months ended March 29, 2020, the Company recognized costs totaling $3,559, which primarily included third-party and other costs. The Company does not expect to incur any material additional costs under the IT Realignment Plan.
The following is a summary of the activity recorded as a result of the IT Realignment Plan:
| Three Months Ended | Total Incurred Since Inception | ||||||||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||||||||
| Severance and related employee costs (a) | $ | (111) | $ | 145 | $ | 8,280 | |||||||||||
| Recruitment and relocation costs | 108 | 171 | 1,404 | ||||||||||||||
| Third-party and other costs | 3 | 3,243 | 6,538 | ||||||||||||||
| — | 3,559 | 16,222 | |||||||||||||||
| Share-based compensation (b) | — | — | 193 | ||||||||||||||
| Total IT realignment | $ | — | $ | 3,559 | $ | 16,415 | |||||||||||
_______________
(a)The three months ended April 4, 2021 includes 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.
The accruals for the IT Realignment Plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $689 and $41 as of April 4, 2021 and $6,744 and $237 as of March 29, 2020, respectively. The tables below present a rollforward of our accruals for the IT Realignment Plan.
| Balance January 3, 2021 | Charges | Payments | Balance April 4, 2021 | ||||||||||||||||||||
| Severance and related employee costs | $ | 1,508 | $ | (111) | $ | (667) | $ | 730 | |||||||||||||||
| Recruitment and relocation costs | — | 108 | (108) | — | |||||||||||||||||||
| Third-party and other costs | — | 3 | (3) | — | |||||||||||||||||||
| $ | 1,508 | $ | — | $ | (778) | $ | 730 | ||||||||||||||||
| Balance December 29, 2019 | Charges | Payments | Balance March 29, 2020 | ||||||||||||||||||||
| Severance and related employee costs | $ | 7,548 | $ | 145 | $ | (712) | $ | 6,981 | |||||||||||||||
| Recruitment and relocation costs | — | 171 | (171) | — | |||||||||||||||||||
| Third-party and other costs | 1,076 | 3,243 | (4,319) | — | |||||||||||||||||||
| $ | 8,624 | $ | 3,559 | $ | (5,202) | $ | 6,981 | ||||||||||||||||
14
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
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 three months ended March 29, 2020, the Company recognized costs totaling $267, which primarily included severance and related employee costs and share-based compensation. The Company does not expect to incur any material additional costs under the G&A Realignment Plan.
The following is a summary of the activity recorded as a result of the G&A Realignment Plan:
| Three Months Ended | Total Incurred Since Inception | ||||||||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||||||||
| Severance and related employee costs (a) | $ | (31) | $ | 152 | $ | 24,235 | |||||||||||
| Recruitment and relocation costs | 1 | 15 | 2,877 | ||||||||||||||
| Third-party and other costs | 1 | 1 | 2,224 | ||||||||||||||
| (29) | 168 | 29,336 | |||||||||||||||
| Share-based compensation (b) | 11 | 99 | 8,122 | ||||||||||||||
| Termination of defined benefit plans | — | — | 1,335 | ||||||||||||||
| Total G&A realignment | $ | (18) | $ | 267 | $ | 38,793 | |||||||||||
_______________
(a)The three months ended April 4, 2021 includes 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 April 4, 2021, the accruals for the G&A realignment plan are included in “Accrued expenses and other current liabilities.” As of March 29, 2020, the accruals for the G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled and $3,781 and $408, respectively. The tables below present a rollforward of our accruals for the G&A Realignment Plan.
| Balance January 3, 2021 | Charges | Payments | Balance April 4, 2021 | ||||||||||||||||||||
| Severance and related employee costs | $ | 932 | $ | (31) | $ | (501) | $ | 400 | |||||||||||||||
| Recruitment and relocation costs | — | 1 | (1) | — | |||||||||||||||||||
| Third-party and other costs | — | 1 | (1) | — | |||||||||||||||||||
| $ | 932 | $ | (29) | $ | (503) | $ | 400 | ||||||||||||||||
| Balance December 29, 2019 | Charges | Payments | Balance March 29, 2020 | ||||||||||||||||||||
| Severance and related employee costs | $ | 5,276 | $ | 152 | $ | (1,306) | $ | 4,122 | |||||||||||||||
| Recruitment and relocation costs | 83 | 15 | (31) | 67 | |||||||||||||||||||
| Third-party and other costs | — | 1 | (1) | — | |||||||||||||||||||
| $ | 5,359 | $ | 168 | $ | (1,338) | $ | 4,189 | ||||||||||||||||
System Optimization Initiative
The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. During the three months ended April 4, 2021, the Company recognized costs totaling $4,678, 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
15
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
information. The Company expects to recognize a gain of approximately $1,400 related to the write-off of certain NPC-related lease liabilities upon final termination of the leases.
The following is a summary of the costs recorded as a result of our system optimization initiative:
| Three Months Ended | Total Incurred Since Inception | ||||||||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||||||||
| Severance and related employee costs | $ | — | $ | — | $ | 18,237 | |||||||||||
| Professional fees | 235 | 80 | 22,342 | ||||||||||||||
| Other (a) | 1,354 | 4 | 7,207 | ||||||||||||||
| 1,589 | 84 | 47,786 | |||||||||||||||
| Accelerated depreciation and amortization (b) | — | — | 25,398 | ||||||||||||||
| NPC lease termination costs (c) | 3,089 | — | 3,089 | ||||||||||||||
| Share-based compensation (d) | — | — | 5,013 | ||||||||||||||
| Total system optimization initiative | $ | 4,678 | $ | 84 | $ | 81,286 | |||||||||||
_______________
(a)The three months ended April 4, 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 three months ended April 4, 2021 includes the write-off of lease assets of $1,609 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 are included in “Accrued expenses and other current liabilities.”
| Balance January 3, 2021 | Charges | Payments | Balance April 4, 2021 | ||||||||||||||||||||
| Professional fees | $ | 1,230 | $ | 235 | $ | (1,461) | $ | 4 | |||||||||||||||
| Other | — | 1,354 | (1,354) | — | |||||||||||||||||||
| $ | 1,230 | $ | 1,589 | $ | (2,815) | $ | 4 | ||||||||||||||||
(6) Investments
Equity Investments
Wendy’s has a 50% share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons® brand. (Tim Hortons is a registered trademark of Tim Hortons USA Inc.) In addition, a wholly-owned subsidiary of Wendy’s has a 20% share in a joint venture for the operation of Wendy’s restaurants in Brazil (the “Brazil JV”). The Company has significant influence over these investees. Such investments are accounted for using the equity method of accounting, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.”
16
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:
| Three Months Ended | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Balance at beginning of period | $ | 44,574 | $ | 45,310 | |||||||
| Equity in earnings for the period | 2,167 | 1,985 | |||||||||
| Amortization of purchase price adjustments (a) | (595) | (562) | |||||||||
| 1,572 | 1,423 | ||||||||||
| Distributions received | (2,981) | (1,603) | |||||||||
Foreign currency translation adjustment included in “Other comprehensive income (loss)” and other | 578 | (2,991) | |||||||||
| Balance at end of period | $ | 43,743 | $ | 42,139 | |||||||
_______________
(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:
| April 4, 2021 | January 3, 2021 | ||||||||||
| Series 2019-1 Class A-2 Notes: | |||||||||||
3.783% Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 | $ | 383,000 | $ | 386,000 | |||||||
4.080% Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 | 430,875 | 434,250 | |||||||||
| Series 2018-1 Class A-2 Notes: | |||||||||||
3.573% Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025 | 435,375 | 436,500 | |||||||||
3.884% Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 | 459,563 | 460,750 | |||||||||
| Series 2015-1 Class A-2 Notes: | |||||||||||
4.497% Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025 | 472,500 | 473,750 | |||||||||
| Canadian revolving credit facility | — | 1,962 | |||||||||
7% debentures, due in 2025 | 84,291 | 83,998 | |||||||||
| Unamortized debt issuance costs | (28,702) | (30,085) | |||||||||
| 2,236,902 | 2,247,125 | ||||||||||
| Less amounts payable within one year | (31,250) | (28,962) | |||||||||
| Total long-term debt | $ | 2,205,652 | $ | 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. Under this facility, in June 2019, the Master Issuer issued outstanding Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “2019-1 Class A-1 Notes”), which allow for the borrowing of up to $150,000 from time to time on a revolving basis using various credit instruments, including a letter of credit facility. In June 2020, the Master Issuer also issued outstanding Series 2020-1 Variable Funding Senior Secured Notes, Class A-1 (the “2020-1 Class A-1 Notes” and, together with the 2019-1 Class A-1 Notes, the “Class A-1 Notes”), which allow for the borrowing of up to $100,000 from time to time on a revolving basis using various credit instruments. As of April 4, 2021, the Company had no outstanding borrowings under the 2019-1 Class A-1 Notes or the 2020-1 Class A-1 Notes.
17
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
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 April 4, 2021, the Company had no outstanding borrowings under the Canadian revolving credit facility.
(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:
| April 4, 2021 | January 3, 2021 | ||||||||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | Fair Value Measurements | |||||||||||||||||||||||||
| Financial assets | |||||||||||||||||||||||||||||
| Cash equivalents | $ | 25,035 | $ | 25,035 | $ | 75,067 | $ | 75,067 | Level 1 | ||||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||||||||
| Series 2019-1 Class A-2-I Notes (a) | 383,000 | 405,482 | 386,000 | 409,778 | Level 2 | ||||||||||||||||||||||||
| Series 2019-1 Class A-2-II Notes (a) | 430,875 | 457,201 | 434,250 | 469,555 | Level 2 | ||||||||||||||||||||||||
| Series 2018-1 Class A-2-I Notes (a) | 435,375 | 445,563 | 436,500 | 450,381 | Level 2 | ||||||||||||||||||||||||
| Series 2018-1 Class A-2-II Notes (a) | 459,563 | 487,872 | 460,750 | 491,021 | Level 2 | ||||||||||||||||||||||||
| Series 2015-1 Class A-2-III Notes (a) | 472,500 | 475,949 | 473,750 | 481,851 | Level 2 | ||||||||||||||||||||||||
| Canadian revolving credit facility | — | — | 1,962 | 1,962 | Level 2 | ||||||||||||||||||||||||
7% debentures, due in 2025 (a) | 84,291 | 99,900 | 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.
18
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 | |||||||||||||||||||||||
| April 4, 2021 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Held and used | $ | 299 | $ | — | $ | — | $ | 299 | |||||||||||||||
| Held for sale | — | — | — | — | |||||||||||||||||||
| Total | $ | 299 | $ | — | $ | — | $ | 299 | |||||||||||||||
| 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 three months ended March 29, 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 | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Company-operated restaurants | $ | 446 | $ | 4,395 | |||||||
| Restaurants leased or subleased to franchisees | 189 | — | |||||||||
| Surplus properties | — | 192 | |||||||||
| $ | 635 | $ | 4,587 | ||||||||
19
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 April 4, 2021 and March 29, 2020 was 24.1% and 32.1%, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to (1) an increase related to the tax effects of our foreign operations and (2) an increase for state income taxes, including discrete changes to state deferred taxes. These increases were partially offset by a reduction for the benefit of share-based compensation.
There were no significant changes to the unrecognized tax benefits or related interest and penalties for the three months ended April 4, 2021. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $2,016 due primarily to the lapse of statutes of limitations and expected settlements.
The current portion of refundable income taxes was $1,740 and $5,399 as of April 4, 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 April 4, 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 | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Net income | $ | 41,366 | $ | 14,441 | |||||||
| Common stock: | |||||||||||
| Weighted average basic shares outstanding | 223,334 | 223,533 | |||||||||
Dilutive effect of stock options and restricted shares | 3,393 | 4,474 | |||||||||
| Weighted average diluted shares outstanding | 226,727 | 228,007 | |||||||||
| Net income per share: | |||||||||||
| Basic | $ | .19 | $ | .06 | |||||||
| Diluted | $ | .18 | $ | .06 | |||||||
Basic net income per share for the three months ended April 4, 2021 and March 29, 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 months ended April 4, 2021 and March 29, 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 1,870 and 2,667 for the three months ended April 4, 2021 and March 29, 2020, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects.
(12) Stockholders’ Equity
Dividends
During the first quarter of 2021 and 2020, the Company paid dividends per share of $.09 and $.12, 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. 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
20
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
in August 2020. During the three months ended April 4, 2021, the Company repurchased 2,763 shares under the February 2020 repurchase authorization with an aggregate purchase price of $56,046, of which $1,196 was accrued at April 4, 2021, and excluding commissions of $38. As of April 4, 2021, the Company had $11,670 of availability remaining under its February 2020 authorization. Subsequent to April 4, 2021 through May 5, 2021, the Company repurchased 529 shares under the February 2020 authorization with an aggregate purchase price of $11,670, excluding commissions of $7. In addition, in May 2021, the Board of Directors approved an increase of $50,000 to the February 2020 authorization, resulting in an aggregate authorization of $150,000 that continues to expire on February 28, 2022. The Company has $50,000 of availability remaining under the authorization as of May 12, 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. 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 Company’s existing share repurchase program. 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 three months ended March 29, 2020, the Company repurchased 2,091 shares with an aggregate purchase price of $43,307, excluding commissions of $29, 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 its February 2019 authorization.
Accumulated Other Comprehensive Loss
The following table provides a rollforward of accumulated other comprehensive loss:
| Three Months Ended | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Balance at beginning of period | $ | (49,641) | $ | (53,828) | |||||||
Foreign currency translation | 2,220 | (12,507) | |||||||||
| Balance at end of period | $ | (47,421) | $ | (66,335) | |||||||
(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 April 4, 2021, Wendy’s and its franchisees operated 6,838 Wendy’s restaurants. Of the 362 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 142 restaurants, owned the building and held long-term land leases for 151 restaurants and held leases covering the land and building for 69 restaurants. Wendy’s also owned 509 and leased 1,242 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment.
21
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
Company as Lessee
The components of lease cost are as follows:
| Three Months Ended | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Finance lease cost: | |||||||||||
| Amortization of finance lease assets | $ | 3,508 | $ | 3,186 | |||||||
| Interest on finance lease liabilities | 10,293 | 10,058 | |||||||||
| 13,801 | 13,244 | ||||||||||
| Operating lease cost | 23,361 | 21,165 | |||||||||
| Variable lease cost (a) | 15,188 | 14,370 | |||||||||
| Short-term lease cost | 1,326 | 1,330 | |||||||||
| Total operating lease cost (b) | 39,875 | 36,865 | |||||||||
| Total lease cost | $ | 53,676 | $ | 50,109 | |||||||
_______________
(a)Includes expenses for executory costs of $10,063 and $9,743 for the three months ended April 4, 2021 and March 29, 2020, respectively, for which the Company is reimbursed by sublessees.
(b)The three months ended April 4, 2021 and March 29, 2020 include $32,552 and $29,291, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees and $6,681 and $6,833, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants.
Company as Lessor
The components of lease income are as follows:
| Three Months Ended | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Sales-type and direct-financing leases: | |||||||||||
| Selling profit | $ | 1,912 | $ | 628 | |||||||
| Interest income | 7,489 | 7,248 | |||||||||
| Operating lease income | $ | 44,122 | $ | 43,952 | |||||||
| Variable lease income | 14,754 | 13,904 | |||||||||
| Franchise rental income (a) | $ | 58,876 | $ | 57,856 | |||||||
_______________
(a)The three months ended April 4, 2021 and March 29, 2020 include sublease income of $43,250 and $42,042, respectively, of which $9,874 and $9,709, respectively, represents lessees’ variable payments to the Company for executory costs.
22
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(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 three months ended April 4, 2021 and March 29, 2020, Wendy’s paid TimWen $4,026 and $3,855, respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $54 and $51 during the three months ended April 4, 2021 and March 29, 2020, respectively, which has been included as a reduction to “General and administrative.”
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 April 4, 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 three months ended April 4, 2021, the Company recognized $1,659 in royalty, advertising fund, lease and other income from Yellow Cab and related entities. As of April 4, 2021, $1,025 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 $87,477 as of April 4, 2021. These leases extend through 2045. We have had no judgments against us as guarantor of these leases as of April 4, 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 April 4, 2021.
Letters of Credit
As of April 4, 2021, the Company had outstanding letters of credit with various parties totaling $26,571. Substantially all of the outstanding letters of credit include amounts outstanding against the 2019-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit.
23
THE WENDY’S COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)
(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 continuing operations 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. As of April 4, 2021, there were no material developments in those legal proceedings.
(17) Segment Information
Revenues by segment were as follows:
| Three Months Ended | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Wendy’s U.S. | $ | 381,954 | $ | 331,041 | |||||||
| Wendy’s International | 18,250 | 15,472 | |||||||||
| Global Real Estate & Development | 59,999 | 58,447 | |||||||||
| Total revenues | $ | 460,203 | $ | 404,960 | |||||||
The following table reconciles profit by segment to the Company’s consolidated income before income taxes:
| Three Months Ended | |||||||||||
| April 4, 2021 | March 29, 2020 | ||||||||||
| Wendy’s U.S. (a) | $ | 112,087 | $ | 81,828 | |||||||
| Wendy’s International | 7,684 | 5,095 | |||||||||
| Global Real Estate & Development | 26,253 | 26,490 | |||||||||
| Total segment profit | $ | 146,024 | $ | 113,413 | |||||||
| Advertising funds deficit | (1,264) | (1,387) | |||||||||
| Unallocated general and administrative (b) | (25,107) | (24,119) | |||||||||
| Depreciation and amortization | (31,542) | (31,046) | |||||||||
| System optimization gains, net | 516 | 323 | |||||||||
| Reorganization and realignment costs | (4,934) | (3,910) | |||||||||
| Impairment of long-lived assets | (635) | (4,587) | |||||||||
| Unallocated other operating income, net | 64 | 45 | |||||||||
| Interest expense, net | (28,786) | (28,525) | |||||||||
| Other income, net | 129 | 1,076 | |||||||||
| Income before income taxes | $ | 54,465 | $ | 21,283 | |||||||
_______________
(a)For the three months ended April 4, 2021, includes advertising funds expense of $3,534 related to the expected Company funding of incremental advertising during 2021.
(b)Includes corporate overhead costs, such as employee compensation and related benefits.
24
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 April 4, 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 6,838 restaurants in the U.S. and 30 foreign countries and U.S. territories as of April 4, 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 franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from 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-month periods presented herein contain 13 weeks. All references to years, quarters and months relate to fiscal periods rather than calendar periods.
25
Executive Overview
Our Business
As of April 4, 2021, the Wendy’s restaurant system was comprised of 6,838 restaurants, with 5,885 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 362 were operated by the Company and 5,523 were operated by a total of 228 franchisees. In addition, at April 4, 2021, there were 953 Wendy’s restaurants in operation in 30 foreign countries and U.S. territories, all of which were franchised.
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 April 4, 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 new restaurant development, including the Company’s plan to open Company-operated restaurants in the United Kingdom (“U.K.”) in early June of 2021.
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.
26
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.
First Quarter 2021 Financial Highlights
•Revenue increased 13.6% to $460.2 million in the first quarter of 2021 compared to $405.0 million in the first quarter of 2020;
•Global same-restaurant sales increased 13.0%, U.S. same-restaurant sales increased 13.5% and international same-restaurant sales increased 7.9%;
•Company-operated restaurant margin was 17.0% in the first quarter of 2021, an increase of 690 basis points; and
•Net income was $41.4 million in the first quarter of 2021 compared to $14.4 million in the first quarter 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 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. As of April 4, 2021, approximately 85% of dining rooms were open across the Wendy’s system offering carryout and, in some cases, dine in services. Global systemwide same-restaurant sales during the first quarter of 2021 increased 13.0%, in part due to a significant increase in customer count compared with the adversely impacted fiscal month of March 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, same-restaurant sales have benefited from this new daypart, with breakfast contributing 3.7% to U.S. same-restaurant sales during the first quarter of 2021. The Company expects to fund $15.0 million of incremental advertising to support the breakfast daypart during 2021.
27
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 7.5% of U.S. systemwide sales during the first quarter of 2021, which is more than double the amount in the first quarter of 2020.
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. We also expect to incur contract termination charges, including the planned closure of certain field offices. The Company expects to incur total costs aggregating approximately $7.0 million to $9.0 million, of which approximately $6.5 million to $8.5 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 three months ended April 4, 2021, the Company recognized costs totaling $0.3 million, which primarily included severance and related employee costs. The Company expects to incur additional costs aggregating approximately $3.0 million to $5.0 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.
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.
28
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 first quarter of 2021 and 2020.
| First Quarter | |||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Revenues: | |||||||||||||||||
| Sales | $ | 189.1 | $ | 166.8 | $ | 22.3 | |||||||||||
| Franchise royalty revenue and fees | 122.8 | 101.7 | 21.1 | ||||||||||||||
| Franchise rental income | 58.9 | 57.9 | 1.0 | ||||||||||||||
| Advertising funds revenue | 89.4 | 78.6 | 10.8 | ||||||||||||||
| 460.2 | 405.0 | 55.2 | |||||||||||||||
| Costs and expenses: | |||||||||||||||||
| Cost of sales | 156.9 | 150.0 | 6.9 | ||||||||||||||
| Franchise support and other costs | 7.7 | 8.0 | (0.3) | ||||||||||||||
| Franchise rental expense | 32.6 | 29.3 | 3.3 | ||||||||||||||
| Advertising funds expense | 94.2 | 80.0 | 14.2 | ||||||||||||||
| General and administrative | 52.6 | 51.6 | 1.0 | ||||||||||||||
| Depreciation and amortization | 31.5 | 31.0 | 0.5 | ||||||||||||||
| System optimization gains, net | (0.5) | (0.3) | (0.2) | ||||||||||||||
| Reorganization and realignment costs | 4.9 | 3.9 | 1.0 | ||||||||||||||
| Impairment of long-lived assets | 0.6 | 4.6 | (4.0) | ||||||||||||||
| Other operating income, net | (3.4) | (1.8) | (1.6) | ||||||||||||||
| 377.1 | 356.3 | 20.8 | |||||||||||||||
| Operating profit | 83.1 | 48.7 | 34.4 | ||||||||||||||
| Interest expense, net | (28.8) | (28.5) | (0.3) | ||||||||||||||
| Other income, net | 0.2 | 1.1 | (0.9) | ||||||||||||||
| Income before income taxes | 54.5 | 21.3 | 33.2 | ||||||||||||||
| Provision for income taxes | (13.1) | (6.9) | (6.2) | ||||||||||||||
| Net income | $ | 41.4 | $ | 14.4 | $ | 27.0 | |||||||||||
29
| First Quarter | |||||||||||||||||||||||
| 2021 | % of Total Revenues | 2020 | % of Total Revenues | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Sales | $ | 189.1 | 41.1 | % | $ | 166.8 | 41.2 | % | |||||||||||||||
Franchise royalty revenue and fees: | |||||||||||||||||||||||
| Franchise royalty revenue | 108.3 | 23.5 | % | 95.4 | 23.6 | % | |||||||||||||||||
| Franchise fees | 14.5 | 3.2 | % | 6.3 | 1.5 | % | |||||||||||||||||
| Total franchise royalty revenue and fees | 122.8 | 26.7 | % | 101.7 | 25.1 | % | |||||||||||||||||
Franchise rental income | 58.9 | 12.8 | % | 57.9 | 14.3 | % | |||||||||||||||||
Advertising funds revenue | 89.4 | 19.4 | % | 78.6 | 19.4 | % | |||||||||||||||||
Total revenues | $ | 460.2 | 100.0 | % | $ | 405.0 | 100.0 | % | |||||||||||||||
| First Quarter | |||||||||||||||||||||||
| 2021 | % of Sales | 2020 | % of Sales | ||||||||||||||||||||
| Cost of sales: | |||||||||||||||||||||||
| Food and paper | $ | 54.8 | 29.0 | % | $ | 52.5 | 31.5 | % | |||||||||||||||
| Restaurant labor | 60.1 | 31.8 | % | 57.0 | 34.2 | % | |||||||||||||||||
Occupancy, advertising and other operating costs | 42.0 | 22.2 | % | 40.5 | 24.2 | % | |||||||||||||||||
| Total cost of sales | $ | 156.9 | 83.0 | % | $ | 150.0 | 89.9 | % | |||||||||||||||
| First Quarter | |||||||||||||||||||||||
| 2021 | % of Sales | 2020 | % of Sales | ||||||||||||||||||||
| Restaurant margin | $ | 32.2 | 17.0 | % | $ | 16.8 | 10.1 | % | |||||||||||||||
The tables below present certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein.
| First Quarter | |||||||||||
| 2021 | 2020 | ||||||||||
| Key business measures: | |||||||||||
U.S. same-restaurant sales: | |||||||||||
Company-operated restaurants | 13.0 | % | (0.7) | % | |||||||
Franchised restaurants | 13.6 | % | 0.1 | % | |||||||
Systemwide | 13.5 | % | 0.0 | % | |||||||
| International same-restaurant sales (a) | 7.9 | % | (1.6) | % | |||||||
Global same-restaurant sales: | |||||||||||
Company-operated restaurants | 13.0 | % | (0.7) | % | |||||||
Franchised restaurants (a) | 13.0 | % | (0.1) | % | |||||||
Systemwide (a) | 13.0 | % | (0.2) | % | |||||||
________________
(a)Includes international franchised restaurants same-restaurant sales (excluding Argentina and Venezuela due to the impact of the highly inflationary economies of those countries).
30
| First Quarter | |||||||||||
| 2021 | 2020 | ||||||||||
| Key business measures (continued): | |||||||||||
Systemwide sales: (a) | |||||||||||
Company-operated | $ | 189.1 | $ | 166.8 | |||||||
| U.S. franchised | 2,458.3 | 2,174.2 | |||||||||
U.S. systemwide | 2,647.4 | 2,341.0 | |||||||||
International franchised (b) | 303.6 | 272.6 | |||||||||
Global systemwide | $ | 2,951.0 | $ | 2,613.6 | |||||||
________________
(a)During the first quarter of 2021 and 2020, global systemwide sales increased 12.5% and 1.0%, respectively, U.S. systemwide sales increased 13.1% and 1.0%, respectively, and international franchised sales increased 7.3% and 1.0%, respectively, on a constant currency basis.
(b)Excludes Argentina and Venezuela due to the impact of the highly inflationary economies of those countries.
| First Quarter | |||||||||||||||||||||||
| Company-operated | U.S. Franchised | International Franchised | Systemwide | ||||||||||||||||||||
| Restaurant count: | |||||||||||||||||||||||
| Restaurant count at January 3, 2021 | 361 | 5,520 | 947 | 6,828 | |||||||||||||||||||
| Opened | 2 | 18 | 18 | 38 | |||||||||||||||||||
| Closed (a) | (1) | (15) | (12) | (28) | |||||||||||||||||||
Restaurant count at April 4, 2021 | 362 | 5,523 | 953 | 6,838 | |||||||||||||||||||
________________
(a)Excludes restaurants temporarily closed due to the impact of the COVID-19 pandemic.
| Sales | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Sales | $ | 189.1 | $ | 166.8 | $ | 22.3 | |||||||||||
The increase in sales for the first quarter of 2021 was primarily due to a 13.0% increase in Company-operated same-restaurant sales. Company-operated same-restaurant sales increased due to (1) higher average check and (2) the positive impact from the breakfast daypart, partially offset by a decrease in customer count. Company-operated same-restaurant sales benefited from government stimulus payments to consumers during the first quarter of 2021.
| Franchise Royalty Revenue and Fees | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Franchise royalty revenue | $ | 108.3 | $ | 95.4 | $ | 12.9 | |||||||||||
| Franchise fees | 14.5 | 6.3 | 8.2 | ||||||||||||||
| $ | 122.8 | $ | 101.7 | $ | 21.1 | ||||||||||||
The increase in franchise royalty revenue during the first quarter of 2021 was primarily due to a 13.0% increase in global franchise same-restaurant sales. Franchise same-restaurant sales increased due to (1) higher average check and (2) the positive impact from the breakfast daypart, partially offset by a decrease in customer count. Franchise same-restaurant sales benefited from government stimulus payments to consumers during the first quarter of 2021.
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The increase in franchise fees during the first quarter of 2021 was primarily due to (1) an increase in fees for providing information technology services to franchisees and (2) the accelerated recognition of fees associated with development agreements that were canceled primarily as a result of the NPC bankruptcy sale process.
| Franchise Rental Income | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Franchise rental income | $ | 58.9 | $ | 57.9 | $ | 1.0 | |||||||||||
The increase in franchise rental income during the first quarter of 2021 was primarily due to assigning certain leases to a franchisee during 2020.
| Advertising Funds Revenue | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Advertising funds revenue | $ | 89.4 | $ | 78.6 | $ | 10.8 | |||||||||||
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 first quarter of 2021 was primarily due to an increase in franchise same-restaurant sales in the U.S. and Canada.
| Cost of Sales, as a Percent of Sales | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Food and paper | 29.0 | % | 31.5 | % | (2.5) | % | |||||||||||
| Restaurant labor | 31.8 | % | 34.2 | % | (2.4) | % | |||||||||||
| Occupancy, advertising and other operating costs | 22.2 | % | 24.2 | % | (2.0) | % | |||||||||||
| 83.0 | % | 89.9 | % | (6.9) | % | ||||||||||||
The decrease in cost of sales, as a percent of sales, during the first quarter of 2021 was primarily due to (1) higher average check and (2) lower commodity costs. These impacts were partially offset by (1) restaurant labor rate increases and (2) a decrease in customer count.
| Franchise Support and Other Costs | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Franchise support and other costs | $ | 7.7 | $ | 8.0 | $ | (0.3) | |||||||||||
The decrease in franchise support and other costs during the first quarter of 2021 was primarily due to investments made during the first quarter of 2020 to support U.S. franchisees in preparation of the national launch of breakfast on March 2, 2020. This decrease was partially offset by an increase in costs incurred to provide information technology services to our franchisees.
| Franchise Rental Expense | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Franchise rental expense | $ | 32.6 | $ | 29.3 | $ | 3.3 | |||||||||||
The increase in franchise rental expense during the first quarter of 2021 was primarily due to the impact of assigning certain leases to a franchisee in 2020.
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| Advertising Funds Expense | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Advertising funds expense | $ | 94.2 | $ | 80.0 | $ | 14.2 | |||||||||||
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 $21.0 million for 2021, which includes (1) the Company’s decision to fund up to $15.0 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 first quarter of 2021, advertising funds expense increased due to (1) an increase in franchise same-restaurant sales in the U.S. and Canada and (2) the recognition of $4.8 million of the expected advertising spend in excess of advertising funds revenue.
| General and Administrative | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Incentive compensation | $ | 7.4 | $ | 3.0 | $ | 4.4 | |||||||||||
| Travel-related expenses | 0.5 | 3.1 | (2.6) | ||||||||||||||
| Other, net | 44.7 | 45.5 | (0.8) | ||||||||||||||
| $ | 52.6 | $ | 51.6 | $ | 1.0 | ||||||||||||
The increase in general and administrative expenses during the first quarter of 2021 was primarily due to an increase in incentive compensation accruals due to higher operating performance in the first quarter of 2021 versus the first quarter of 2020, partially offset by a decrease in travel-related expenses as a result of reduced travel.
| Depreciation and Amortization | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Restaurants | $ | 19.4 | $ | 19.5 | $ | (0.1) | |||||||||||
| Technology support, corporate and other | 12.1 | 11.5 | 0.6 | ||||||||||||||
| $ | 31.5 | $ | 31.0 | $ | 0.5 | ||||||||||||
The increase in depreciation and amortization during the first quarter of 2021 was primarily due to an increase in depreciation and amortization for technology investments.
| System Optimization Gains, Net | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| System optimization gains, net | $ | (0.5) | $ | (0.3) | $ | (0.2) | |||||||||||
System optimization gains, net for the first quarter of 2021 and 2020 were primarily comprised of post-closing adjustments on previous sales of restaurants.
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| Reorganization and Realignment Costs | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Operations and field realignment | $ | 0.2 | $ | — | $ | 0.2 | |||||||||||
| IT realignment | — | 3.5 | (3.5) | ||||||||||||||
| G&A realignment | — | 0.3 | (0.3) | ||||||||||||||
| System optimization initiative | 4.7 | 0.1 | 4.6 | ||||||||||||||
| $ | 4.9 | $ | 3.9 | $ | 1.0 | ||||||||||||
In December 2019, the Company’s Board of Directors approved the IT Realignment Plan to realign and reinvest resources in its IT organization to strengthen its ability to accelerate growth. 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. During the first quarter of 2020, the Company recognized costs associated with the IT Realignment Plan totaling $3.5 million, which primarily included third-party and other costs. The Company does not expect to incur any material additional costs under the IT Realignment Plan.
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 franchisee-to-franchisee restaurant transfers. During the first quarter of 2021, the Company recognized costs associated with its system optimization initiative totaling $4.7 million, which were primarily comprised of the write-off of certain lease assets and lease termination fees associated with the NPC bankruptcy sale process. The Company expects to recognize a gain of approximately $1.4 million related to the write-off of certain NPC-related lease liabilities upon final termination of the leases.
| Impairment of Long-Lived Assets | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Impairment of long-lived assets | $ | 0.6 | $ | 4.6 | $ | (4.0) | |||||||||||
The decrease in impairment charges during the first quarter of 2021 was primarily driven by the expected deterioration in operating performance of certain Company-operated restaurants in the first quarter of 2020 as a result of the COVID-19 pandemic.
| Other Operating Income, Net | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Gains on sales-type leases | $ | (1.9) | $ | (0.6) | $ | (1.3) | |||||||||||
| Equity in earnings in joint ventures, net | (1.6) | (1.4) | (0.2) | ||||||||||||||
| Other, net | 0.1 | 0.2 | (0.1) | ||||||||||||||
| $ | (3.4) | $ | (1.8) | $ | (1.6) | ||||||||||||
The change in other operating income, net during the first quarter of 2021 was primarily due to gains on new and modified sales-type leases.
| Interest Expense, Net | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Interest expense, net | $ | 28.8 | $ | 28.5 | $ | 0.3 | |||||||||||
Interest expense, net increased during the first quarter of 2021 primarily due to higher commitment fees on our Class A-1 Notes.
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| Other Income, Net | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Other income, net | $ | 0.2 | $ | 1.1 | $ | (0.9) | |||||||||||
Other income, net decreased during the first quarter of 2021 primarily due to lower interest income earned on our cash equivalents.
| Provision for Income Taxes | First Quarter | ||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Income before income taxes | $ | 54.5 | $ | 21.3 | $ | 33.2 | |||||||||||
Provision for income taxes | (13.1) | (6.9) | (6.2) | ||||||||||||||
Effective tax rate on income | 24.1 | % | 32.1 | % | (8.0) | % | |||||||||||
Our effective tax rates for the first quarter 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 decrease in the effective tax rate for the first quarter of 2021 compared with the first quarter of 2020 was primarily due to a decrease in the tax effect of our foreign operations, partially offset by a reduction in the benefit of share-based compensation.
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.
| First Quarter | |||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Sales | $ | 189.1 | $ | 166.8 | $ | 22.3 | |||||||||||
| Franchise royalty revenue | 96.8 | 84.8 | 12.0 | ||||||||||||||
| Franchise fees | 11.9 | 5.3 | 6.6 | ||||||||||||||
| Advertising fund revenue | 84.2 | 74.1 | 10.1 | ||||||||||||||
| Total revenues | $ | 382.0 | $ | 331.0 | $ | 51.0 | |||||||||||
| Segment profit | $ | 112.1 | $ | 81.8 | $ | 30.3 | |||||||||||
The increase in Wendy’s U.S. revenues during the first quarter of 2021 was primarily due to an increase in systemwide same-restaurant sales. Same-restaurant sales increased due to (1) higher average check and (2) the positive impact from the breakfast daypart, partially offset by a decrease in customer count. Wendy’s U.S. revenues also benefited from higher franchise fees, primarily due to an increase in fees for providing information technology services to franchisees.
The increase in Wendy’s U.S. segment profit during the first quarter 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 advertising funds expense of $3.5 million related to the expected Company funding of incremental advertising during 2021.
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Wendy’s International
| First Quarter | |||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Franchise royalty revenue | $ | 11.6 | $ | 10.5 | $ | 1.1 | |||||||||||
| Franchise fees | 1.4 | 0.5 | 0.9 | ||||||||||||||
| Advertising fund revenue | 5.2 | 4.5 | 0.7 | ||||||||||||||
| Total revenues | $ | 18.2 | $ | 15.5 | $ | 2.7 | |||||||||||
| Segment profit | $ | 7.7 | $ | 5.1 | $ | 2.6 | |||||||||||
The increase in Wendy’s International revenues during the first quarter of 2021 was primarily due to an increase in same-restaurant sales. Same-restaurant sales increased due to higher average check, partially offset by a decrease in customer count. The increase in Wendy’s International segment profit during the first quarter of 2021 was primarily due to higher revenues.
Global Real Estate & Development
| First Quarter | |||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Franchise fees | $ | 1.1 | $ | 0.5 | $ | 0.6 | |||||||||||
| Franchise rental income | 58.9 | 57.9 | 1.0 | ||||||||||||||
| Total revenues | $ | 60.0 | $ | 58.4 | $ | 1.6 | |||||||||||
| Segment profit | $ | 26.3 | $ | 26.5 | $ | (0.2) | |||||||||||
The increase in Global Real Estate & Development revenues during the first quarter of 2021 was primarily due to higher franchise rental income. See “Franchise Rental Income” above for further information.
The decrease in Global Real Estate & Development segment profit during the first quarter of 2021 was primarily due to a decrease in net rental income, reflecting the impact of assigning certain leases to a franchisee during 2020, partially offset by gains on new and modified sales-type leases.
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 $70.0 million to $80.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $80.0 million to $90.0 million;
•cash dividends aggregating approximately $66.4 million as discussed below in “Dividends;” and
•potential stock repurchases of up to $61.7 million, of which $11.7 million was repurchased subsequent to April 4, 2021 through May 5, 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.
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The table below summarizes our cash flows from operating, investing and financing activities for the first three months of 2021 and 2020:
| First Quarter | |||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 85.8 | $ | (19.4) | $ | 105.2 | |||||||||||
| Investing activities | (5.1) | (12.1) | 7.0 | ||||||||||||||
| Financing activities | (91.7) | 63.4 | (155.1) | ||||||||||||||
| Effect of exchange rate changes on cash | 0.9 | (5.1) | 6.0 | ||||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (10.1) | $ | 26.8 | $ | (36.9) | |||||||||||
Operating Activities
Cash provided by (used in) 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 (used in) operating activities was $85.8 million and $(19.4) million in the first quarter of 2021 and 2020, respectively. The change 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, (4) the timing of receipt of vendor incentives and (5) a decrease in payments for incentive compensation for the 2020 fiscal year paid in 2021. These changes were partially offset by the timing of payments for marketing expenses of the national advertising funds.
Investing Activities
Cash used in investing activities was $5.1 million and $12.1 million in the first quarter of 2021 and 2020, respectively. The change was primarily due to (1) 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 (2) a decrease in capital expenditures of $2.3 million.
Financing Activities
Cash (used in) provided by financing activities was $(91.7) million and $63.4 million in the first quarter of 2021 and 2020, respectively. The change was primarily due to (1) the impact of the draw downs under the 2019-1 Class A-1 Notes and the Company’s other lines of credit in the first quarter of 2020 of $153.3 million and (2) an increase in repurchases of common stock of $10.5 million. These changes were partially offset by a decrease in dividends of $6.6 million.
Long-Term Debt, Including Current Portion
Except as described below, 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 April 4, 2021. See Note 7 of the Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations.
A Canadian subsidiary of Wendy’s has a revolving credit facility of C$6.0 million. In March 2020, the Company drew down C$5.5 million under the revolving credit facility, which the Company fully repaid through repayments of C$3.0 million in the fourth quarter of 2020 and C$2.5 million in the first quarter of 2021. As a result, as of April 4, 2021, the Company had no outstanding borrowings under the Canadian revolving credit facility.
Dividends
On March 15, 2021, the Company paid quarterly cash dividends per share of $.09, aggregating $20.2 million. On May 12, 2021, the Company announced a dividend of $.10 per share to be paid on June 15, 2021 to stockholders of record as of June 1, 2021. If the Company pays regular quarterly cash dividends for the remainder of 2021 at the same rate as declared in the second quarter of 2021, the Company’s total cash requirement for dividends for the remainder of 2021 will be approximately $66.4 million based on the number of shares of its common stock outstanding at May 5, 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.
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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. 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. During the three months ended April 4, 2021, the Company repurchased 2.8 million shares under the February 2020 repurchase authorization with an aggregate purchase price of $56.0 million, of which $1.2 million was accrued at April 4, 2021, and excluding commissions. As of April 4, 2021, the Company had $11.7 million of availability remaining under its February 2020 authorization. Subsequent to April 4, 2021 through May 5, 2021, the Company repurchased 0.5 million shares under the February 2020 authorization with an aggregate purchase price of $11.7 million, excluding commissions. In addition, in May 2021, the Board of Directors approved an increase of $50.0 million to the February 2020 authorization, resulting in an aggregate authorization of $150.0 million that continues to expire on February 28, 2022. The Company has $50.0 million of availability remaining under the authorization as of May 12, 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.
As of April 4, 2021, there were no material changes from the information contained in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in the Form 10-K.
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 April 4, 2021. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer concluded that as of April 4, 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 first quarter of 2021 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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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 realignment and reorganization 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 and 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 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 continuing operations 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 first 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) | ||||||||||
| January 4, 2021 through February 7, 2021 | 316,850 | $21.06 | 311,848 | $61,156,053 | ||||||||||
| February 8, 2021 through March 7, 2021 | 930,756 | $19.66 | 830,748 | $44,906,009 | ||||||||||
| March 8, 2021 through April 4, 2021 | 1,655,839 | $20.53 | 1,620,161 | $11,669,970 | ||||||||||
| Total | 2,903,445 | $20.31 | 2,762,757 | $11,669,970 | ||||||||||
(1)Includes 140,688 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.
Subsequent to April 4, 2021 through May 5, 2021, the Company repurchased 0.5 million shares under the February 2020 authorization with an aggregate purchase price of $11.7 million, excluding commissions. In addition, in May 2021, the Board of Directors approved an increase of $50.0 million to the February 2020 authorization, resulting in an aggregate authorization of $150.0 million that continues to expire on February 28, 2022.
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Item 6. Exhibits.
| EXHIBIT NO. | DESCRIPTION | ||||
| 10.1 | |||||
| 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 April 4, 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 April 4, 2021, formatted in Inline XBRL and contained in Exhibit 101. | ||||
____________________
| * | Filed herewith. | ||||
| ** | Identifies a management contract or compensatory plan or arrangement. | ||||
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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: May 12, 2021 | By: /s/ Gunther Plosch | ||||
| Gunther Plosch | |||||
| Chief Financial Officer | |||||
| (On behalf of the registrant) | |||||
| Date: May 12, 2021 | By: /s/ Leigh A. Burnside | ||||
| Leigh A. Burnside | |||||
| Senior Vice President, Finance and | |||||
| Chief Accounting Officer | |||||
| (Principal Accounting Officer) | |||||
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